ACFE CFE - Financial Transactions and Fraud Schemes Practice Test Questions, Exam Dumps

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CFE - Financial Transactions and Fraud Schemes ACFE Practice Test Questions and Exam Dumps

Question 1

Which of the following is a red flag that might indicate the existence of a need recognition scheme?

A. The purchasing entity’s materials are being ordered at the optimal reorder point.
B. The purchasing entity has a large list of backup suppliers.
C. The purchasing entity has unusually high requirements for stock and inventory levels.
D. The purchasing entity has few surplus items written off as scrap.

Correct Answer : C

Explanation:

In the context of procurement and supply chain management, a need recognition scheme is a scenario where a company might be artificially inflating its demand or requirements for materials, often for reasons like securing more favorable pricing, fulfilling internal quotas, or engaging in other manipulative practices. Identifying a red flag for such behavior is crucial to ensure that purchasing decisions are made based on real needs rather than inflated or unnecessary demands.

Let’s break down each option to determine which is the best indicator of a need recognition scheme:

A. The purchasing entity’s materials are being ordered at the optimal reorder point
This is not a red flag. Ordering materials at the optimal reorder point is a standard practice in inventory management. The reorder point is typically based on factors like lead time and demand variability. It indicates good inventory management, not a need recognition scheme. This option suggests that the purchasing entity is effectively managing stock levels, which is a positive indicator of sound practices.
B. The purchasing entity has a large list of backup suppliers
This is not necessarily a red flag. While having a list of backup suppliers can sometimes raise questions about vendor loyalty or the security of the supply chain, it’s generally a good practice to have backup suppliers in case of disruptions. A large list may just indicate due diligence or an effort to ensure business continuity. Without additional context, this is not an obvious sign of a need recognition scheme.
C. The purchasing entity has unusually high requirements for stock and inventory levels
This is a red flag. If a company maintains unusually high inventory levels or stock requirements, it could indicate that the company is artificially inflating demand. This might be done to ensure higher order volumes for discounts or rebates, or to disguise inefficiencies in inventory management. Excessive inventory levels may point to a need recognition scheme, where the entity's actual needs do not align with the inflated stock levels.
D. The purchasing entity has few surplus items written off as scrap
This is not a red flag. Having few surplus items written off as scrap could simply indicate good inventory management or a high level of precision in forecasting. In fact, fewer scrap items may suggest that the company is managing its stock more effectively, making better use of its materials, and avoiding waste. It does not suggest any manipulation of the need recognition process.

The most significant red flag in this scenario is unusually high stock and inventory levels, which may indicate that the purchasing entity is inflating its demands or needs for some internal reason, such as securing bulk discounts or other benefits. Such behavior would be typical of a need recognition scheme, where the company may not have a legitimate need for such high levels of inventory.

Therefore, the correct answer is: C.

Question 2

Which of the following is NOT a distinguishing feature of a Ponzi scheme?

A. Participants attempt to recruit as many new members as possible.
B. Previous investors are paid with money from new members.
C. Participants believe that they are making a legitimate investment.
D. Promoters of Ponzi schemes engage in little or no valid commerce or investments.

Correct Answer : A

Explanation:

A Ponzi scheme is a fraudulent investment scheme where returns are paid to earlier investors using the capital of newer investors, rather than from legitimate profits or investments. Ponzi schemes rely on the continuous recruitment of new participants to provide funds to the earlier investors. However, not all features listed in the options are specific to Ponzi schemes. Let’s analyze each option to determine the correct answer:

A. Participants attempt to recruit as many new members as possible
This is not necessarily a distinguishing feature of a Ponzi scheme. While recruitment of new members is common in many Ponzi schemes to maintain the flow of money, it is not an inherent characteristic of a Ponzi scheme itself. Ponzi schemes can operate without explicitly relying on recruitment strategies like multi-level marketing schemes (MLMs) or pyramid schemes, where recruitment is often the focus. In fact, some Ponzi schemes operate more silently and may not actively push for new participants to recruit. Thus, this is not a key characteristic of Ponzi schemes and is the correct answer to the question.
B. Previous investors are paid with money from new members
This is a key feature of a Ponzi scheme. The hallmark of a Ponzi scheme is that the returns to earlier investors are paid using the capital of new investors, rather than from legitimate profits or business activities. This creates the illusion of a profitable venture, while in reality, the scheme relies on an ever-growing base of new investors to sustain itself.
C. Participants believe that they are making a legitimate investment
This is also a distinguishing feature of a Ponzi scheme. Participants in Ponzi schemes are often misled into believing that they are investing in a legitimate opportunity, typically by being promised high returns with little risk. The fraud lies in the fact that there are no real investments, and the returns are simply paid from new investors’ money. This deceptive aspect is a defining characteristic of Ponzi schemes.
D. Promoters of Ponzi schemes engage in little or no valid commerce or investments
This is a key feature of a Ponzi scheme. The promoters of Ponzi schemes typically engage in little or no legitimate business or investment activities. Instead, they use the incoming funds from new investors to pay returns to earlier investors, creating the illusion of a profitable investment. The lack of legitimate commerce or investments is a hallmark of the fraud.

The distinguishing feature that is not necessarily part of a Ponzi scheme is the recruitment of new members. While it may be a common tactic used to keep the scheme going, it is not inherent to the definition of a Ponzi scheme itself. Ponzi schemes can exist without a heavy emphasis on recruitment, as long as there is an influx of new capital to pay returns to earlier investors.

Therefore, the correct answer is: A.

Question 3

Geoffrey, a homeowner, has decided to add a patio to the back of his house. Geoffrey hires a contractor who insists on receiving payment up front so that he can pay for the materials required to complete the construction. The following week, Geoffrey is surprised to learn that the contractor has not arrived and is not answering his phone calls.

Geoffrey has MOST LIKELY been victimized by which of the following frauds?

A. Deposit scheme
B. Scavenger scheme
C. Block hustle scheme
D. Advance-fee scheme

Correct Answer : D

Explanation:

In this scenario, Geoffrey is dealing with a contractor who insists on receiving payment upfront for materials and work that has not yet been completed. However, after receiving the payment, the contractor fails to deliver on their promises and becomes unresponsive. This type of situation is commonly associated with a specific form of fraud where the fraudster collects money upfront for services or goods that they never intend to provide. Let’s examine the possible fraud types listed:

A. Deposit scheme
A deposit scheme typically involves the collection of a deposit with the promise of goods or services, but with the intention of failing to deliver the goods or services. While it shares similarities with the situation Geoffrey is experiencing, the key factor in this case is that Geoffrey paid upfront for work to be done, not just a deposit for future work. Therefore, the deposit scheme is somewhat close but not the exact match for the situation described.
B. Scavenger scheme
A scavenger scheme is generally not associated with the type of fraud Geoffrey is experiencing. This type of fraud usually involves acquiring goods or services from various sources (sometimes legally, sometimes not), often with the goal of reselling them. It is not a typical scheme for contractors or service providers. Therefore, this is not the correct answer.
C. Block hustle scheme
A block hustle scheme is more related to scams involving fake investments or large-scale deceptive activities that block participants from taking action. These schemes often prey on people trying to invest in something profitable but end up with nothing in return. The situation Geoffrey is experiencing, however, is much more straightforward: he paid for a service that was never provided. Therefore, this scheme is also not the correct answer.
D. Advance-fee scheme
This is the correct answer. An advance-fee scheme occurs when a fraudster asks for money upfront (an "advance fee") for goods, services, or investments that are never delivered. In Geoffrey’s case, the contractor requested payment in advance for materials and labor, but after receiving the money, the contractor did not perform the work and became unresponsive. This is a textbook example of an advance-fee scheme, where the fraudster collects money with the intention of never providing the promised services.

Geoffrey’s situation closely aligns with the characteristics of an advance-fee scheme, where he paid upfront for work that was never performed, and the contractor disappeared after receiving the money. Therefore, the correct answer is D.

Question 4

Neil, a Certified Fraud Examiner (CFE), discovers that a borrower used the same property as a security, or guarantee, to obtain multiple loans from different financial institutions before they were recorded on his credit report.

Which type of loan fraud BEST describes the scheme Neil uncovered?

A. Single-family housing loan fraud
B. Linked financing
C. Double-pledging collateral
D. Reciprocal loan arrangements

Correct Answer : C

Explanation:

The situation described in the question involves a borrower who uses the same property as collateral for multiple loans from different financial institutions, before these loans are recorded on their credit report. This type of activity is fraudulent because the borrower is essentially offering the same property as security to multiple lenders, which increases the likelihood of the borrower defaulting on the loans. Let’s break down the options to determine which one best fits the situation:

A. Single-family housing loan fraud
This is not the best fit. Single-family housing loan fraud refers to fraudulent activities related to loans that are specifically secured by single-family homes. This could include a variety of fraudulent activities, such as misrepresentation of income or occupancy status. While the situation in the question involves a loan secured by property, it does not specifically involve single-family housing fraud, but rather a fraudulent use of the same property as collateral for multiple loans.
B. Linked financing
This is not the best fit either. Linked financing typically refers to transactions in which the financing of one transaction is tied or linked to another transaction, often involving the sale of goods or services. While this can involve fraud, it is not the term used to describe the fraudulent use of the same property as collateral for multiple loans.
C. Double-pledging collateral
This is the correct answer. Double-pledging collateral refers to the fraudulent practice of using the same property or asset as collateral for multiple loans, as the borrower did in this case. The borrower uses the property as security for several different loans, and these loans are not recorded on the credit report, which makes it more difficult for lenders to detect. This is a classic example of double-pledging collateral and fits the scenario described in the question perfectly.
D. Reciprocal loan arrangements
This is not the correct answer. Reciprocal loan arrangements typically involve two or more parties agreeing to lend money to each other in a way that benefits both parties, often for the purpose of improving each party’s financial standing or creditworthiness. It does not refer to the fraudulent practice of using the same collateral for multiple loans. Therefore, this option does not describe the scenario in the question.

The type of loan fraud described in the question, where a borrower uses the same property as collateral for multiple loans, is best described as double-pledging collateral. This type of fraud involves the illegal use of the same asset as security for multiple loans, which creates the risk of default and undermines the integrity of the lending system.

Therefore, the correct answer is: C.

Question 5

Which of the following is a common red flag of a bid tailoring scheme?

A. Changes in contract specifications from previous proposals are explained in detail.
B. The procuring entity rebids contracts because fewer than the minimum number of bids are received.
C. Numerous bidders respond to the procuring entity’s bid requests.
D. There are unusually broad specifications for the type of goods being procured.

Correct Answer : D

Explanation:

A bid tailoring scheme is a form of procurement fraud where the bid specifications or requirements are manipulated or adjusted to favor a particular bidder or group of bidders, often with the goal of securing the contract for a specific party. Identifying red flags in such schemes is critical to ensure that the bidding process remains fair and competitive. Let’s analyze each option to determine the most likely red flag indicating a bid tailoring scheme:

A. Changes in contract specifications from previous proposals are explained in detail
This is not necessarily a red flag. In legitimate procurement processes, changes to contract specifications can occur due to updated needs, market conditions, or feedback from previous bids. If these changes are clearly explained and justified, it doesn't indicate fraud. In fact, providing detailed explanations of changes to the specifications is a positive practice in maintaining transparency. This would not be considered a red flag for bid tailoring.
B. The procuring entity rebids contracts because fewer than the minimum number of bids are received
This is not necessarily indicative of a bid tailoring scheme either. In some cases, a lack of responses to a bid request can occur because of market conditions or other factors. Rebidding to ensure competition is a legitimate practice if the minimum number of bids isn’t met. It’s a way to encourage more participation and can be part of standard procurement practices, not a fraudulent tactic.
C. Numerous bidders respond to the procuring entity’s bid requests
This is not a red flag. A high number of bidders generally indicates a competitive bidding process and is actually a sign of healthy competition in procurement. If numerous bidders are responding, it shows that the bidding process is open and attractive to many potential suppliers. This would not indicate a bid tailoring scheme.
D. There are unusually broad specifications for the type of goods being procured
This is a red flag for a bid tailoring scheme. Unusually broad specifications are often used in bid tailoring schemes to allow a particular bidder to more easily meet the requirements of the contract. By leaving the specifications vague or overly flexible, the procuring entity could ensure that only one or a few suppliers can realistically meet the criteria, thus skewing the competition in favor of a specific bidder. This lack of specificity may be intentionally designed to exclude other suppliers or to make it easier for a favored bidder to win the contract.

The correct answer is D, as unusually broad specifications are a common tactic used in bid tailoring schemes to manipulate the process in favor of a particular bidder. Such broad specifications can make it easier for a pre-selected vendor to meet the criteria while excluding others from competing fairly.

Therefore, the correct answer is: D.

Question 6

Which of the following is FALSE concerning methods corporate spies generally use to steal information from other organizations?

A. Spies often create counterfeit employee badges to gain entrance into a target company.
B. Spies often gain direct access to a target company by obtaining employment as a security officer or a member of the janitorial crew.
C. When spies use technical surveillance to obtain information about target companies, they gather documentary evidence that can be found through open sources.
D. When spies use social engineering, they manipulate people into handing over secret information through the use of trickery, persuasion, threats, or cajolery.

Correct Answer : C

Explanation:

Corporate espionage involves the theft of trade secrets, proprietary information, and other confidential data from a target organization, often through unethical or illegal means. Corporate spies utilize a variety of techniques to gain access to valuable information, including physical infiltration, technical surveillance, and social engineering. Let’s break down each of the statements to understand which one is false:

A. Spies often create counterfeit employee badges to gain entrance into a target company
This is true. One common method corporate spies use is creating counterfeit employee badges to gain unauthorized access to secure areas of a target company. By impersonating an employee, they can enter the building, steal information, or plant surveillance devices. This method is often used in physical infiltration as part of corporate espionage.
B. Spies often gain direct access to a target company by obtaining employment as a security officer or a member of the janitorial crew
This is true. Corporate spies sometimes take low-profile jobs that give them physical access to the premises of a target organization, such as becoming a security officer or a member of the janitorial crew. These roles provide them with the opportunity to gain access to sensitive areas of the company and potentially gather confidential information unnoticed. This is known as insider access.
C. When spies use technical surveillance to obtain information about target companies, they gather documentary evidence that can be found through open sources
This is false. Technical surveillance involves using electronic means, such as wiretaps, cameras, or other monitoring devices, to eavesdrop on conversations, observe activities, or intercept communications within a target company. It does not generally involve gathering documentary evidence from open sources (which is more commonly associated with open-source intelligence or OSINT). Technical surveillance is specifically about accessing covert, non-public information, typically in a way that is hidden or undetected. Therefore, this statement is incorrect because it conflates technical surveillance with open-source intelligence gathering.
D. When spies use social engineering, they manipulate people into handing over secret information through the use of trickery, persuasion, threats, or cajolery
This is true. Social engineering is a technique where spies exploit human psychology to manipulate individuals into revealing confidential information. This can involve using trickery, persuasion, threats, or even flattery to gain access to sensitive information. Social engineering is often used to exploit weaknesses in human behavior rather than technical vulnerabilities.

The false statement is C, because technical surveillance involves covert methods of obtaining information, not the gathering of publicly available documentary evidence. Open-source intelligence gathering, not technical surveillance, deals with information that can be found through open sources.

Therefore, the correct answer is: C.

Question 7

Which of the following is an example of a cash larceny scheme?

A. Michael is a cashier at a clothing store. He rings up a fictitious return of a $50 sweater and takes $50 from the cash register.
B. Scott rings a “no sale” transaction at his cash register, opens the drawer, and takes a $100 bill.
C. Anne buys a $500 table from a resale shop. Olive, the cashier, rings up a $400 sale on the register and steals the excess $100.
D. Laura pretends to ring up a sale when Amy makes a purchase, but instead she pockets Amy’s cash and gives her the merchandise without recording the sale.

Correct Answer : B

Explanation:

Cash larceny schemes involve the theft of cash after it has been recorded in the cash register, but before it is properly deposited or accounted for. This type of theft occurs when employees steal cash after a transaction is completed and recorded but fail to deposit or report the stolen cash. Let’s review each of the provided options to determine which one best exemplifies a cash larceny scheme:

A. Michael is a cashier at a clothing store. He rings up a fictitious return of a $50 sweater and takes $50 from the cash register.
This is an example of a different type of fraud, known as a refund fraud scheme, not a cash larceny scheme. In this case, Michael is creating a false transaction (a fictitious return) in order to steal cash from the register. Although this involves stealing money, the critical difference is that Michael is falsifying the return transaction, rather than taking cash that is already recorded in the register. This would be classified as refund fraud, not cash larceny.
B. Scott rings a “no sale” transaction at his cash register, opens the drawer, and takes a $100 bill.
This is a classic example of a cash larceny scheme. Scott rings a “no sale” transaction, which means no actual sale is made, but it allows him to open the register drawer and steal $100 in cash. In this case, the cash is already in the register (as part of the normal operation) and Scott steals it after it is recorded, which fits the definition of a cash larceny scheme. No sale is processed, but the stolen money was already in the register, which is characteristic of cash larceny.
C. Anne buys a $500 table from a resale shop. Olive, the cashier, rings up a $400 sale on the register and steals the excess $100.
This is an example of sale skimming or under-ringing, not a cash larceny scheme. Olive is intentionally undercharging Anne by recording a sale for $400 instead of the actual price of $500, and then stealing the $100 difference. The theft occurs before the transaction is recorded accurately, meaning this case is not cash larceny but rather a case of stealing the difference by altering the transaction.
D. Laura pretends to ring up a sale when Amy makes a purchase, but instead she pockets Amy’s cash and gives her the merchandise without recording the sale.
This is a sale skimming scheme, not a cash larceny scheme. Laura fails to record the sale entirely and takes the cash directly from Amy. Since the sale was not recorded at all, this is not considered cash larceny, but rather skimming, where the thief takes the money before it is even entered into the register.

The correct answer is B because it involves a typical cash larceny scheme, where an employee opens the cash register and steals cash after a transaction is recorded (in this case, a "no sale" transaction), but the theft occurs after the money is already in the register. This directly fits the definition of cash larceny.

Therefore, the correct answer is: B.

Question 8

Which of the following is NOT one of the information security goals that should be achieved to secure an e-commerce system for users and account holders?

A. Availability of data
B. Materiality of data
C. Confidentiality of data
D. Integrity of data

Correct Answer : B

Explanation:

In information security, there are three primary goals known as the CIA triad: Confidentiality, Integrity, and Availability. These principles are essential for ensuring that data is protected in a secure environment, especially in e-commerce systems where sensitive information such as user accounts, personal details, and transaction data is often involved. Let’s review each option to identify which one is NOT part of the standard information security goals:

A. Availability of data
Availability is a core principle in information security. It ensures that data is accessible to authorized users when needed. In an e-commerce system, availability is crucial because users must be able to access their accounts, make purchases, and complete transactions at all times. If data is unavailable (e.g., due to server downtime or denial of service attacks), it can severely affect the user experience and business operations.
B. Materiality of data
Materiality is NOT a recognized principle in information security. It refers to the concept of relevance or importance of information in financial accounting or legal contexts, but it is not part of the CIA triad that governs information security practices. For e-commerce systems, the focus is on ensuring the confidentiality, integrity, and availability of data, rather than its materiality in the sense used in accounting or legal assessments.
C. Confidentiality of data
Confidentiality is another key principle in information security. It ensures that sensitive information such as personal details, passwords, and payment information is only accessible to authorized individuals or systems. In the context of an e-commerce system, ensuring confidentiality is vital for protecting users' privacy and preventing unauthorized access to their data.
D. Integrity of data
Integrity refers to the accuracy and trustworthiness of data. It ensures that data is not altered or tampered with during storage, transmission, or processing. For an e-commerce system, maintaining data integrity ensures that orders, payments, and other important transactions are recorded correctly and that users can trust the information presented to them.

The correct answer is B because materiality is not one of the traditional goals of information security. Instead, confidentiality, integrity, and availability are the three primary goals that are essential to securing an e-commerce system and ensuring the safety and privacy of users and account holders.

Therefore, the correct answer is: B.

Question 9

Jones is an accounts payable clerk at Smith Company. He intentionally sent the wrong vendor a check for some supplies. He then called the vendor, explained his “mistake,” and requested that the vendor mail back the check.

Jones then intercepted the returned check and deposited it in his own account. What type of scheme did he commit?

A. A shell company scheme
B. A pay and return scheme
C. An altered payee scheme
D. A pass-through scheme

Correct Answer : B

Explanation:

In this case, Jones engaged in a fraudulent scheme where he deliberately sent a payment to the wrong vendor and then intercepted the returned check once the vendor sent it back. This behavior is indicative of a pay and return scheme. Let’s break down each of the options:

A. A shell company scheme
A shell company scheme involves setting up a fake or non-existent company (often with a legitimate-sounding name) to divert funds from a business. This is typically used to defraud a company by having payments issued to a company that doesn't provide any goods or services. However, in Jones’s case, there is no mention of a fake company or non-existent vendor being used to defraud Smith Company. Therefore, this is not the correct answer.
B. A pay and return scheme
A pay and return scheme occurs when an employee intentionally overpays or issues a payment to the wrong party, then arranges for the payment to be returned, but intercepts the returned funds for personal gain. This is exactly what Jones did: he intentionally sent a check to the wrong vendor, got the vendor to return it, and then intercepted the returned check to deposit it into his own account. Therefore, this is the correct answer.
C. An altered payee scheme
An altered payee scheme involves an employee changing the payee information on a legitimate check to redirect the funds to themselves or another accomplice. While Jones did intercept the check, there is no indication in the scenario that he altered the payee information. The check was initially written to the wrong vendor, and the fraud was committed when Jones intercepted the returned check. This is not an altered payee scheme, so this is not the correct answer.
D. A pass-through scheme
A pass-through scheme involves a situation where an employee arranges for a payment to be sent to an intermediary, who then passes the funds on to a third party (often an accomplice). The employee typically receives a commission or a cut from the third party. There is no intermediary in this case; Jones directly intercepted the returned check for his personal gain. Therefore, this is not the correct answer.

Jones committed a pay and return scheme, where he manipulated the payment process to create a situation where he could intercept and keep the funds. The key characteristic is the intentional misdirection of funds, followed by intercepting the returned money. This makes B the correct answer.

Therefore, the correct answer is: B.

Question 10

Which of the following is the MOST ACCURATE statement about the different types of malware?

A. A worm is a type of software that, while not definitely malicious, has a suspicious or potentially unwanted aspect to it.
B. Ransomware is a malicious self-replicating computer program that penetrates operating systems to spread malicious code to other computers.
C. Spyware is software that collects and reports information about a computer user without the user’s knowledge or consent.
D. A Trojan horse is a software program that, while not definitely malicious, monitors and logs the keys pressed on a system’s keyboard.

Correct Answer : C

Explanation:

Let’s review the characteristics of each type of malware to determine which statement is the most accurate:

A. A worm is a type of software that, while not definitely malicious, has a suspicious or potentially unwanted aspect to it.
This statement is incorrect. A worm is a self-replicating piece of malicious software that spreads from one computer to another, often without any user interaction. It typically exploits vulnerabilities in operating systems or applications to propagate itself. Worms are definitely malicious, as their primary purpose is to spread and often cause damage, unlike potentially unwanted software. This makes option A inaccurate.
B. Ransomware is a malicious self-replicating computer program that penetrates operating systems to spread malicious code to other computers.
This statement is incorrect because ransomware is not a self-replicating program. Ransomware is malicious software that locks or encrypts the victim's data, demanding a ransom to restore access. While it is definitely malicious, it does not replicate or spread on its own like a worm or virus. Therefore, option B does not accurately describe ransomware.
C. Spyware is software that collects and reports information about a computer user without the user’s knowledge or consent.
This statement is accurate. Spyware is malicious software designed to monitor a user’s activities without their consent, often collecting sensitive information such as login credentials, browsing habits, or personal data. It typically works covertly in the background, making it a significant privacy and security concern. The description of spyware provided in option C is correct and aligns with its typical behavior.
D. A Trojan horse is a software program that, while not definitely malicious, monitors and logs the keys pressed on a system’s keyboard.
This statement is incorrect. A Trojan horse is definitely malicious and is usually disguised as legitimate software to deceive users into installing it. Its primary function is often to create a backdoor for unauthorized access to the system, steal sensitive data, or cause other harm. While it can certainly log keystrokes (a behavior known as a keylogger), the description does not fully capture the malicious intent and capabilities of a Trojan. Therefore, option D is not the most accurate.

The most accurate description is C, which correctly defines spyware as software that collects and reports information without the user’s knowledge or consent. This fits the typical characteristics of spyware and is the best answer among the options provided.

Therefore, the correct answer is: C.