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CFE - Fraud Prevention ACFE Practice Test Questions and Exam Dumps

Question 1
Which of the following describes a responsibility of the internal auditor related to fraud within an organization?

A. Overseeing management’s actions to manage fraud risks
B. Obtaining reasonable assurance that the organization’s financial statements are free of material misstatements caused by fraud
C. Evaluating indicators of fraud and deciding whether any further action is necessary or whether an investigation should be recommended
D. Establishing and maintaining effective anti-fraud controls at a reasonable cost

Correct Answer: C

Explanation:

The role of the internal auditor in relation to fraud is generally focused on evaluation, assessment, and recommendation, rather than on managing or implementing controls directly. Internal auditors are expected to possess sufficient knowledge to evaluate the risk of fraud and how it is managed by the organization. However, they are not responsible for overseeing fraud management, maintaining controls, or auditing financial statements to the level of providing assurance.

Option A is incorrect because overseeing management’s actions falls outside the auditor’s scope. While internal auditors do evaluate how well management handles fraud risk, the responsibility to oversee and directly manage fraud risk remains with senior management and the board.

Option B is also incorrect. Although internal auditors may assess the risk of fraud-related misstatements in financial records, it is not their role to provide reasonable assurance that the financial statements are free of material fraud. That responsibility typically lies with external auditors in the context of a financial statement audit.

Option C is the best answer. Internal auditors are responsible for being alert to the conditions and symptoms that may indicate fraud. If red flags are identified, internal auditors must determine whether further action, such as conducting a fraud investigation or recommending that management or a separate investigative unit take further steps, is appropriate. This responsibility aligns with the internal audit function’s purpose: to provide independent assurance and insight into risk management, internal controls, and governance.

Option D is incorrect because the design and implementation of effective anti-fraud controls are management’s responsibilities. Internal auditors evaluate the adequacy and effectiveness of these controls but do not establish or maintain them.

Therefore, among the options presented, the one that most accurately captures the internal auditor’s fraud-related responsibilities is evaluating fraud indicators and determining if further steps, such as an investigation or deeper inquiry, should be recommended. This aligns with the internal audit role as described in professional standards and guidance issued by organizations like the Institute of Internal Auditors (IIA).

Question 2
Which of the following is NOT included in the G20/OECD Principles of Corporate Governance?

A. A call for a corporate governance framework that protects the exercise of shareholders’ rights
B. An emphasis on the importance of timely, accurate, and transparent disclosure mechanisms
C. A request that governments have in place an appropriate framework to support good corporate governance practices
D. Support for establishing stronger protection for foreign shareholders than for domestic shareholders

Correct Answer: D

Explanation:

The G20/OECD Principles of Corporate Governance are a globally recognized benchmark for assessing and improving corporate governance frameworks. They aim to support transparent, accountable, and efficient corporate governance that fosters financial stability, business integrity, and sustainable economic growth. The principles are designed to apply to both publicly traded companies and, where appropriate, privately held firms.

Option A is consistent with the principles. The framework clearly stresses the importance of protecting shareholders’ rights, including the right to participate in key corporate decisions, vote on significant matters, and receive relevant information. The principles also call for equitable treatment of all shareholders, including minority and foreign shareholders.

Option B is also aligned with the principles. Transparency and disclosure are central themes of the G20/OECD guidelines. The principles recommend that companies disclose material information on a timely and accurate basis, particularly in regard to financial and operational performance, ownership structure, governance practices, and potential risk factors. Transparency is seen as essential for market confidence and investor protection.

Option C is in agreement with the G20/OECD guidance as well. The principles emphasize that governments play an essential role in developing a legal and regulatory framework that supports good corporate governance. This includes enforcing laws and regulations that foster accountability, transparency, and the equitable treatment of shareholders. The government’s role is to create an enabling environment, not to micromanage corporate governance at the enterprise level.

Option D, however, contradicts the core values of the G20/OECD Principles. The principles advocate for equal treatment of all shareholders, regardless of nationality or type. Providing stronger protection to foreign shareholders than to domestic shareholders would be inconsistent with the principle of fairness and equal treatment. Instead, the principles focus on protecting the rights of all shareholders, including foreign and minority shareholders, without giving preference to any group.

While the G20/OECD Principles support fairness, transparency, and regulatory frameworks that encourage good governance, they do not endorse giving preferential treatment to any shareholder category. The idea of offering stronger protection to foreign shareholders over domestic ones goes against the spirit of equal treatment and would not be part of the official guidance.

Question 3
In an external audit, if the audit team uncovers evidence that management has intentionally left out expenses to hide an asset misappropriation scheme, but the resulting misstatement is below the quantitative materiality threshold, 

Which of the following is TRUE?

A. The auditors should assume that all audit evidence collected previously is unreliable and withdraw from the audit engagement
B. The auditors can ignore the misstatement because the omitted amount is less than the quantitative materiality threshold and therefore immaterial to the audit
C. The auditors do not need to be concerned with this evidence, as asset misappropriation schemes are not considered relevant or material for external audit purposes
D. The auditors should assess the need to adjust the nature, timing, and extent of remaining audit procedures based on this evidence

Correct Answer: D

Explanation:

External auditors must evaluate not only the quantitative aspects of a misstatement but also the qualitative factors. In this scenario, although the misstatement may not be quantitatively material—meaning the dollar amount does not surpass the audit's pre-established threshold for financial misstatements—it is nonetheless intentional and part of an asset misappropriation scheme. These are both serious qualitative factors that significantly affect the audit.

Option A is incorrect because discovering a misstatement does not automatically require the auditors to assume that all previous evidence is unreliable or to withdraw from the engagement. Withdrawal is a last-resort action and typically follows after a thorough reassessment of the audit risk and communications with those charged with governance.

Option B is wrong because materiality is not solely a quantitative concept. According to auditing standards (such as ISA 320 and U.S. GAAS), even small misstatements can be material if they stem from fraudulent behavior, especially if perpetrated by management. The intentional nature of the misstatement and the scheme to conceal fraud are qualitatively material, regardless of dollar value.

Option C is also incorrect. Asset misappropriation is a recognized type of occupational fraud and is absolutely relevant to an external audit. While financial statement fraud may be of higher monetary value, asset misappropriation can still affect financial integrity and indicates potential weaknesses in internal controls. It also raises concerns about management integrity, a key aspect of assessing audit risk.

Option D is the correct response. Once the auditors discover this evidence, they are required to reassess audit risk and consider whether they need to change the audit approach. This might include adjusting the nature, timing, or extent of audit procedures—for example, adding more substantive testing, changing sampling strategies, or re-evaluating management representations. It may also necessitate discussions with senior audit firm personnel or governance authorities at the client.

In summary, although the dollar amount of the misstatement is not above the materiality threshold, the intentional concealment by management and the fact that it involves fraud make it qualitatively material. Professional auditing standards require auditors to respond to such red flags, not ignore them. The appropriate action is to reassess and potentially expand audit procedures, making D the best answer.

Question 4
When presenting the results of a fraud risk assessment, which of the following statements accurately reflects how the report should be communicated?

A. The fraud risk assessment report should be delivered in a style most suited to the language of the business
B. The fraud risk assessment report should contain a detailed, comprehensive list of every assessment finding
C. A fraud risk assessment report should reflect the assessment team’s subjective perspective regarding the risks identified
D. All of the above

Correct Answer: A

Explanation:

The purpose of reporting fraud risk assessment results is to effectively communicate risks, vulnerabilities, and areas for improvement to stakeholders, including management and possibly the board or audit committee. The reporting should be clear, actionable, and tailored to the intended audience, which is why option A is the most appropriate.

Option A is correct because one of the key principles in reporting fraud risk assessment findings is that the communication must be accessible and meaningful to its readers. Delivering the report in a style that matches the organization's culture and language—whether formal or informal, technical or high-level—ensures better understanding and increased likelihood of follow-up action. This approach promotes engagement and enables decision-makers to respond effectively to identified fraud risks.

Option B is incorrect. While it's important for the fraud risk assessment report to be comprehensive, it does not need to include a detailed list of every single finding. Including every minute detail can overwhelm the audience and dilute the report’s key messages. Instead, reports should prioritize and summarize findings, focusing on high-risk areas, significant vulnerabilities, and recommendations. The detail level should match the audience’s needs—executive summaries for leadership and more technical details for operational staff, if necessary.

Option C is also incorrect. A well-executed fraud risk assessment report should be based on objective analysis and a consistent evaluation methodology. It should rely on data, stakeholder input, risk ratings, and control assessments rather than subjective or personal perspectives. While some interpretation is involved, especially when identifying emerging risks, the reporting should strive for impartiality and avoid including unsupported opinions or assumptions.

Option D is incorrect because both B and C do not align with best practices for reporting fraud risk assessment results. Thus, it cannot be considered a true statement.

In summary, the fraud risk assessment report should aim to communicate findings effectively and facilitate action. It should be crafted in a way that resonates with its audience and promotes understanding without excessive technicality or irrelevant detail. Objectivity is also crucial to preserve the credibility of the assessment process. For these reasons, option A is the best and only correct answer in this case.

Question 5
When evaluating the types of fraud risks that may naturally exist in an organization’s environment, what areas should the fraud risk assessment team take into consideration during their discussions?

A. The organization's incentive programs
B. The possibility of management’s override of controls
C. Risks to the organization’s reputation
D. All of the above

Correct Answer: D

Explanation:

A fraud risk assessment is designed to help an organization identify vulnerabilities where fraud may occur, assess the potential impact, and determine the likelihood of occurrence. To ensure the assessment is comprehensive, the team conducting the assessment must consider a wide range of risk factors that could influence fraudulent activity. This includes both internal dynamics and external pressures.

Option A is valid because incentive programs are one of the key areas that can lead to fraud. When employees or management are under pressure to meet performance goals tied to bonuses, commissions, or sales targets, they may be tempted to manipulate financial results or engage in unethical behavior to meet those goals. Even well-intentioned incentive plans can create perverse incentives if not structured with proper controls and oversight. Thus, they are a critical area of focus in any fraud risk assessment.

Option B is also highly relevant. The potential for management override of controls is a significant inherent fraud risk in any organization. No matter how strong internal controls may be, if senior management has the ability and authority to bypass those controls, it can lead to undetected fraud. This is particularly concerning in cases of financial statement fraud or when senior leaders are motivated to misstate performance for personal gain, investor relations, or to cover up losses. Fraud risk assessments must always examine how controls could be overridden and whether proper governance exists to detect or prevent such actions.

Option C is equally important. Fraud can have consequences that go beyond financial losses. Reputational harm is often more damaging and longer lasting than the fraud event itself. Once a company loses the trust of its stakeholders—whether customers, investors, regulators, or the public—it can face declining business, falling stock prices, regulatory sanctions, or even long-term brand damage. Therefore, reputational risks tied to fraud must be assessed during the fraud risk assessment process.

Since all three of these areas—compensation structures, control overrides, and reputational harm—are essential elements in identifying inherent fraud risks, the most accurate and comprehensive answer is D. Fraud risk assessments must take a holistic view of risk, factoring in not just financial controls, but the culture, incentives, authority structures, and external perceptions that could expose the organization to fraudulent activity.

Question 6
According to the ACFE Code of Professional Ethics, which of the following actions is NOT explicitly forbidden?

A. Engaging in behavior that is against the law
B. Participating in conduct that could be considered unethical
C. Accepting assignments where there are undisclosed conflicts of interest
D. Giving opinions regarding technical matters

Correct Answer: D

Explanation:

The Association of Certified Fraud Examiners (ACFE) Code of Professional Ethics serves as a guide for ethical behavior for Certified Fraud Examiners (CFEs) and professionals engaged in fraud prevention, detection, and examination. It outlines conduct that professionals must adhere to in order to maintain the integrity, credibility, and trust associated with their role. This code explicitly prohibits several behaviors that compromise objectivity, legality, and professionalism.

Option A is explicitly prohibited. Engaging in illegal behavior, regardless of whether it relates directly to professional duties, violates both the spirit and letter of the ACFE Code of Professional Ethics. CFEs are expected to comply with the law at all times and uphold legal standards, both in their investigations and in their personal conduct. Violating the law undermines public trust and the authority of the profession.

Option B is also clearly prohibited. The ACFE Code states that CFEs must not engage in unethical conduct, including behavior that may bring discredit to the profession. The term “unethical conduct” is intentionally broad to encompass a wide range of actions that may fall short of legal violations but still breach professional integrity. CFEs are expected to act with honesty, fairness, and in a manner that upholds the standards of the profession.

Option C represents a serious violation as well. One of the foundational principles in the ACFE Code is transparency in professional relationships. CFEs are required to disclose any conflicts of interest—whether actual or perceived—before accepting engagements. Accepting an assignment while concealing a conflict of interest compromises objectivity and can result in biased outcomes, thereby violating the ethical standards laid out by the ACFE.

Option D, however, is not explicitly prohibited. CFEs are often called upon to offer professional opinions, particularly in technical or investigative matters. As long as their opinions are based on facts, evidence, and fall within their area of competence, they are permitted—and in many cases, expected—to provide professional judgments. The ACFE Code encourages CFEs to only express opinions that they are qualified to give and to avoid misrepresenting facts or overstating conclusions. Thus, giving technical opinions is allowed, provided it’s done ethically, accurately, and within the scope of the professional’s expertise.

Therefore, while options A, B, and C all represent behaviors that are directly prohibited by the ACFE Code of Professional Ethics, option D does not fall into that category. CFEs are allowed to give technical opinions if done responsibly and within their competence. Hence, D is the correct answer.

Question 7
While conducting a fraud risk assessment, the team wants to observe how a group of employees interact and share their thoughts about the organization's current fraud awareness training. 

Which method would best help the team gather this kind of insight?

A. Interviews
B. Focus groups
C. Surveys
D. Anonymous feedback mechanisms

Correct Answer: B

Explanation:

Fraud risk assessments are crucial for identifying areas of vulnerability within an organization and improving fraud prevention efforts. When gathering qualitative information—especially when the goal is to understand perceptions, awareness, or behaviors—selecting the right method for data collection is essential. In this case, the team wants to observe employee interactions, which suggests a need for a setting that encourages group discussion, exchange of ideas, and social dynamics. Among the options listed, only focus groups provide this setting effectively.

Option A, interviews, are typically one-on-one conversations that allow for deep dives into individual perspectives, feelings, or experiences. While interviews can be rich in detail and provide privacy for candid responses, they do not allow for observing group dynamics or employee interaction, which is what the team is aiming for in this situation.

Option B, focus groups, is the correct choice because they involve facilitated discussions with a group of participants, typically 6 to 12 people. In this setting, the fraud risk assessment team can observe how employees respond to one another, how knowledge is shared or challenged, and how group consensus or differences emerge. This makes focus groups ideal for assessing collective views, testing training effectiveness, and identifying knowledge gaps or resistance to anti-fraud initiatives. It also allows the facilitators to pose open-ended questions and guide the conversation toward key areas of concern.

Option C, surveys, are useful for collecting information from a large audience, often in a quantitative format. While surveys can measure attitudes and gather a wide range of responses, they do not allow for interaction between participants, nor do they offer insights into how employees discuss or react to each other’s opinions. Surveys are anonymous and static, and they lack the flexibility and real-time observation opportunity that a focus group provides.

Option D, anonymous feedback mechanisms, such as suggestion boxes or anonymous online forms, are valuable for encouraging candid, individual responses, especially when employees fear retaliation. However, similar to surveys, they don’t involve any form of employee interaction or dialogue. They are suitable for uncovering hidden concerns but not for studying the social and interactive aspect of how training is perceived or understood among peers.

In summary, since the fraud risk assessment team wants to observe interactions among multiple employees during a discussion about fraud awareness training, focus groups are clearly the most appropriate technique. They provide a structured yet flexible setting where group dynamics can be monitored, and where the team can gain insights into both individual and collective attitudes. Therefore, the best method in this context is B.

Question 8
Smith, a retail sales manager, wants to reduce discrepancies in cash register balances among his team. According to behaviorist theories, 

Which approach would best encourage employees to consistently balance their cash drawers?

A. Take away an hour of paid time off for each time the drawer is over or short
B. Publicly call out and criticize employees whose cash drawers are over or short
C. Offer a bonus to anyone whose drawer reconciles perfectly for sixty days
D. Demote employees who continue to have reconciliation discrepancies

Correct Answer: C

Explanation:

Behaviorist theories of motivation, particularly those developed by B.F. Skinner, emphasize the use of reinforcement and punishment to shape behavior. According to these theories, behaviors can be encouraged or discouraged through the consequences they produce. Positive reinforcement—rewarding desired behaviors to increase their recurrence—is often considered the most effective way to promote long-term behavioral change in a constructive and sustainable manner.

Option C is the correct answer because it applies positive reinforcement. By offering a bonus to employees who keep their cash drawers perfectly balanced for sixty days, Smith is providing a tangible reward for the desired behavior. This creates a clear incentive for employees to be more careful and accurate with their cash handling. Positive reinforcement encourages repetition of the correct behavior because it associates that behavior with a beneficial outcome. Employees are more likely to improve performance when they see that it leads to recognition or reward.

Option A involves negative punishment, which means removing something desirable (in this case, paid time off) as a consequence of undesirable behavior. While this can discourage certain actions, it often breeds resentment or anxiety rather than motivating long-term improvement. Moreover, this approach may not account for honest mistakes or operational issues that can contribute to discrepancies.

Option B reflects public criticism, a form of social punishment or negative reinforcement, which can be highly demoralizing. Publicly shaming employees can damage morale, lower trust in leadership, and increase workplace tension. While it may pressure some employees into compliance, it is likely to backfire, especially over the long term, by creating a hostile work environment.

Option D involves demotion, which is a severe form of punishment. While it might deter repeated infractions, it’s a very harsh response and should only be used in cases of proven negligence or misconduct—not for typical operational errors. Using demotion as a motivational tool is more likely to instill fear than promote improved behavior, especially if the discrepancies are unintentional.

In the context of behaviorist theory, the key principle is that rewarding desired behavior (positive reinforcement) is more effective than punishing undesired behavior. Offering a bonus, as described in option C, not only motivates the desired outcome but also promotes a positive workplace culture where employees feel recognized for their efforts. By aligning rewards with performance, managers can encourage sustained improvement and reduce the likelihood of future discrepancies. For these reasons, the best approach is option C.

Question 9
Glenda, an internal auditor, has had multiple disagreements with Bridgette, an accounts receivable clerk, over accounting procedures. Now that Glenda is leading the company's fraud risk assessment, 

How should she approach the situation professionally and ethically?

A. Confront Bridgette about the disagreements and discuss how they increase the department’s risk of fraud
B. Have someone else to perform the fraud risk assessment work related to the accounts receivable department’s activities
C. Include her disagreements with Bridgette as a factor when assessing the risk of fraud in the accounts receivable department
D. Automatically designate the accounts receivable department as a high-risk area

Correct Answer: B

Explanation:

Internal auditors are expected to maintain objectivity, independence, and professional skepticism, especially when conducting sensitive assignments such as fraud risk assessments. When personal bias or prior conflict exists—like in Glenda’s case—it becomes essential to recognize and manage any impairment to objectivity, whether real or perceived.

Option B is the most appropriate and professionally sound choice. If Glenda has had heated and ongoing disagreements with Bridgette, especially about accounting procedures (which directly relate to the area under assessment), she may not be able to evaluate the department's fraud risk objectively. To maintain the integrity of the audit process and avoid bias or even the appearance of bias, she should recuse herself from auditing the activities involving Bridgette or the accounts receivable department and delegate that portion of the fraud risk assessment to another qualified auditor. This is a common and accepted practice when impartiality is at risk and aligns with internal audit standards established by the Institute of Internal Auditors (IIA).

Option A, confronting Bridgette about the past disagreements during the fraud risk assessment, is inappropriate and unprofessional. Not only does it personalize what should be an objective process, but it also risks turning the assessment into a personal dispute. This could undermine the credibility of the audit and could also cause defensiveness or resistance within the department.

Option C is also problematic. While interpersonal conflict might warrant communication with management or human resources, including personal disagreements as a risk factor in a fraud assessment introduces subjective bias. Risk assessments should be based on objective data, control environments, past incidents, and known vulnerabilities—not on interpersonal disputes or personal feelings.

Option D, automatically labeling the accounts receivable department as high-risk solely due to personal conflict, is a clear violation of professional ethics and auditing standards. High-risk designations must be supported by data such as historical fraud activity, poor internal controls, or process vulnerabilities—not by an auditor’s prior disagreements with personnel.

Question 10
Which of the following statements best describes a key aspect of how an effective system of anti-fraud controls works?

A. It fully eliminates the risk of fraud by removing opportunities for misbehavior
B. It focuses more on preventive controls than detective controls
C. It prioritizes implementing detective controls over preventive controls
D. It deters fraudsters by increasing the perception that fraud will be detected

Correct Answer: D

Explanation:

An effective anti-fraud control system cannot entirely eliminate the possibility of fraud. Instead, it aims to minimize risk, reduce opportunities, and, importantly, deter potential fraudsters by making it clear that fraudulent acts are likely to be detected and punished. This psychological deterrent—increasing the perception of detection—is a critical component in discouraging fraudulent behavior, and that’s what makes option D the most accurate and complete statement.

Option D correctly emphasizes that a key function of a robust anti-fraud system is to increase the perceived likelihood of detection, which acts as a significant deterrent. According to the fraud triangle theory, individuals commit fraud when three conditions are present: pressure, opportunity, and rationalization. Effective controls specifically target the “opportunity” element. When a potential fraudster believes there is a high risk of being caught—whether through surveillance, audits, or whistleblower systems—they are less likely to commit fraud.

Option A is overly optimistic and unrealistic. No anti-fraud system, no matter how comprehensive, can fully eliminate the risk of fraud. Human behavior is unpredictable, and fraud schemes can evolve to bypass even the most advanced controls. Therefore, the goal of anti-fraud programs is risk reduction, not elimination.

Option B suggests that effective systems focus more on preventive controls, such as segregation of duties, access controls, or approval requirements. While prevention is essential, an overemphasis on preventive controls without sufficient detection mechanisms can leave organizations blind to fraud that still occurs. Additionally, preventive controls can be circumvented or manipulated.

Option C takes the opposite stance, favoring detective controls such as reconciliations, audits, and data analytics. However, detective controls are typically more reactive, identifying fraud after it has occurred. Relying solely or primarily on detection increases the time fraud is allowed to persist and potentially increases losses. The most effective systems use a balanced combination of preventive and detective controls, customized to the organization’s specific risks.

Ultimately, the perception that fraud will be uncovered is a powerful tool in any fraud risk management strategy. This is supported by findings from organizations such as the Association of Certified Fraud Examiners (ACFE), which routinely highlights in its reports that detection likelihood significantly impacts fraud prevention.

Therefore, the most accurate statement, which encapsulates the psychological and operational aspects of effective anti-fraud controls, is D.