CFE-Fraud-Prevention-and-Deterrence Certified Fraud Examiner - Fraud Prevention and Deterrence Exam Questions and Answers

This scenario is an example of punishment. Punishment involves introducing a consequence (in this case, the loss of responsibility for cross-departmental projects) to discourage undesirable behavior. The manager uses this approach to address Devon’s negative attitude and to promote better cooperation with other departments in the future.

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Findings from the 2020 Report to the Nations:

A. Complaints about management: Not the most common red flag; lifestyle changes, such as living beyond means, are more common.

B. Gender of fraudsters: The report consistently shows that men commit more occupational frauds than women.

C. Median losses by executives vs. staff: Losses caused by executives are significantly higher.

D. Past offenses: Most fraudsters do not have a prior fraud-related disciplinary history.

Conclusion:Option B aligns with the findings of the 2020 Report to the Nations.

References:2020 ACFE Report to the Nations​​.

COSO Definition of Internal Control:

COSO defines internal control as a process executed by an entity’s board, management, and personnel to provide reasonable assurance about achieving objectives in operations, reporting, and compliance.

Analysis of Options:

A. Corporate compliance: Corporate compliance focuses on adhering to laws and regulations, not the broader operational objectives.

B. Fraud risk management: This is a component of internal control, not its definition.

C. Risk assessment: This is a step within the internal control process but not the overarching process.

D. Internal control: Matches the COSO definition accurately.

Conclusion:Internal control is the correct answer as defined by COSO.

References:COSO Internal Control Framework documentation​​.

 ACFE Code of Professional Ethics:

CFEs must not make definitive statements about the absence of fraud, as such statements can mislead stakeholders and compromise professional integrity.

 Why A is Correct:

Jane cannot state the company is "free of fraud" because no examination can guarantee the complete absence of fraud, only that no evidence was found based on the scope of work.

 References:

ACFE ethical guidelines on reporting and assurance practices​​.

 Definition of Organizational Crime:

Organizational crime refers to illegal actions committed by a corporation or individuals acting on behalf of the organization to benefit the corporation or its leaders.

Examples include antitrust violations, environmental crimes, and fraudulent financial reporting.

 Why B is Correct:

A price-fixing scheme involves collusion among companies to manipulate prices, a clear example of organizational crime designed to benefit the involved corporations.

 Why Other Options are Incorrect:

Options A, C, and D represent individual crimes for personal gain, not organizational crimes​​.

Behaviorist Theories on Reinforcement:

Positive reinforcement is the most effective way to encourage desired behavior by providing rewards for compliance.

Analysis of Options:

B. Public criticism: May create resentment and decrease morale.

C. Loss of paid time off: A punitive measure that may not motivate improvement.

D. Demotion: Effective for extreme cases but harsh and potentially counterproductive for minor errors.

Conclusion:Offering a bonus for perfect reconciliation aligns with behaviorist principles of positive reinforcement.

References:ACFE behavioral insights and fraud prevention strategies​​.

Regulatory and Legal Misconduct:

This category includes practices that violate laws or regulations, such as anti-competitive behavior, insider trading, and conflicts of interest.

Why A is Correct:

Fraudulent customer payments are typically categorized under operational or financial fraud, not regulatory and legal misconduct.

Why Other Options are Incorrect:

B, C, and D: These practices involve violations of regulations or legal obligations, directly aligning with regulatory and legal misconduct​​.

References for All Questions:

ACFE Fraud Examination Guide and related professional standards​​.

International and jurisdictional auditing standards for public-sector auditors​​.

COSO and governance frameworks on fraud risk management​​.

 ACFE Code of Professional Ethics:

CFEs must act with integrity and report material fraud findings to the appropriate authority within the organization.

 Why A is Correct:

Informing the board of trustees ensures that those responsible for governance can take appropriate action. Reporting to law enforcement (option B) may breach contractual obligations unless legally required.

 Why Other Options are Incorrect:

B: Reporting to law enforcement may overstep Daniela’s authority as an independent investigator.

C: Not disclosing the information violates ethical responsibilities.

D: Resignation avoids responsibility and does not fulfill ethical obligations​​.

 Corporate Governance Framework Requirements:

A corporate governance framework must be dynamic, adapting to changes in regulations, markets, and corporate landscapes.

It must consider legal, ethical, cultural, and operational environments.

 Why B is Incorrect:

A static framework cannot accommodate evolving business risks, regulatory changes, and cultural shifts, leading to governance failures. Flexibility is critical for sustainability and resilience.

 References:

ACFE governance best practices and COSO framework guidance highlight the importance of adaptability in governance frameworks​​.

 Key Elements of Routine Activities Theory:

This criminological theory asserts that crime is likely when three conditions converge:

Availability of suitable targets.

Absence of capable guardians (e.g., security or oversight).

Presence of motivated offenders.

 Why C is Correct:

Routine activities theory focuses on the environmental and situational factors that facilitate crime, making it distinct from other criminological theories.

 Why Other Options are Incorrect:

A (Rational choice theory): Focuses on individual decision-making.

B (Differential association theory): Emphasizes learning criminal behavior through interaction.

D (Social control theory): Focuses on societal bonds preventing crime​​.

Reporting Fraud Risk Assessment Results:

Reports should align with the organization's operational language to ensure comprehension by management and stakeholders.

Why A is Correct:

Using business-appropriate language ensures effective communication of findings and recommendations.

Why Other Options are Incorrect:

B: Comprehensive details may overwhelm the audience; only key findings are usually reported.

C: Reports should reflect objective analysis, not subjective perspectives​​.

 Treadway Commission Recommendations:

The National Commission on Fraudulent Financial Reporting (Treadway Commission) issued guidelines to strengthen financial reporting integrity and reduce fraud risks.

One key recommendation was to ensure that the audit committee is well-resourced and has sufficient authority to oversee financial reporting processes effectively.

 Audit Committee Role:

An adequately empowered audit committee improves oversight, supports the internal audit function, and ensures proper implementation of controls to prevent and detect fraud.

 Why D is Correct:

This recommendation directly addresses the reduction of fraud probability by enhancing oversight capabilities​​.

Detective controls are designed to identify fraud or errors that have already occurred. Continuous audit techniques serve as a detective control by automatically monitoring transactions and flagging anomalies or irregularities for further investigation. On the other hand, preventive controls such as separation of duties, background checks, and hiring policies aim to stop fraud before it happens.

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Due Diligence for Large Orders on Credit:

Before extending credit, it is critical to assess the financial stability of the new customer to mitigate credit risk.

Examining net worth provides a direct measure of ABC’s ability to fulfill financial obligations.

Analysis of Other Options:

A. Corruption risk countries: Due diligence should be applied universally, not selectively.

B. No verification needed: Verification is essential, especially for new customers.

D. Same due diligence for all customers: While consistency is important, the level of due diligence may vary based on transaction specifics.

Conclusion:Examining ABC's net worth is a necessary step in the due diligence process.

References:ACFE guidelines on credit risk assessment and due diligence​​.

The ACFE has found that terminating the employee involved in fraud is the most common internal response to substantiated cases. While many fraud cases are handled internally without being referred to law enforcement, this is often due to concerns such as reputational damage or cost considerations rather than a lack of evidence.

 Definition of Professional Skepticism:

Professional skepticism requires maintaining a questioning mindset and critically assessing evidence throughout the fraud examination process.

 Why D is Correct:

Professional skepticism ensures that fraud examiners remain vigilant and rely on evidence to conclude whether fraud has occurred or not. It is dispelled only when sufficient evidence supports a clear conclusion.

 Why Other Options are Incorrect:

A: While skepticism is critical, it does not mean refusing to acknowledge credible evidence.

B: Assuming no fraud occurred contradicts the principle of skepticism.

C: Hypotheses should consider the nature of the assignment and available information​​.

Purpose of Anti-Fraud Education:

Education is most effective when employees understand the real consequences of fraud. Providing examples of prior incidents reinforces the importance of compliance.

Analysis of Other Options:

A. Include detection procedures: While this can increase awareness, it risks exposing sensitive controls.

C. Restricting to formal mechanisms: Education should be flexible and incorporate informal, ongoing messaging.

D. Executives and professionals only: While they play an essential role, education should engage employees at all levels.

Conclusion:Including examples of prior misconduct effectively conveys the seriousness of fraud prevention.

References:ACFE best practices for fraud education programs​​.

 Auditor's Responsibility Under ISA Standards:

ISA 265 requires auditors to communicate significant deficiencies in internal control to those charged with governance in writing.

This ensures proper corrective actions are taken and maintains transparency in the audit process.

 Why B is Correct:

Written communication to governance authorities is the appropriate course of action to address control deficiencies without breaching confidentiality or overstepping regulatory boundaries.

 References:

ISA 265, “Communicating Deficiencies in Internal Control,” supports this approach​​.

 Theory of Differential Association:

This theory suggests that criminal behavior is learned through interaction with others, primarily within intimate groups.

Principles of the theory include:

Learning through communication.

Acquiring criminal knowledge similarly to other forms of learning.

 Why A is Incorrect:

General needs and values, such as poverty or desire for wealth, do not directly explain criminal behavior under this theory. Instead, the behavior is attributed to learned influences from others.

 Clarification of Other Options:

B, C, and D accurately reflect the principles of differential association​​.

Integrity in Fraud Examination:

Integrity involves critical thinking, independence, and prioritizing ethical principles over personal gain. Healthy debate and differences of opinion are integral to maintaining objectivity.

Why Option D is Incorrect:

Avoiding differences of opinion contradicts the need for professional skepticism and robust analysis in fraud examination.

Conclusion:Integrity does not require the avoidance of differences of opinion, making D the correct answer.

References:ACFE Code of Professional Ethics and fraud examination standards​​.

 COSO Internal Control Framework Components:

The five components are:

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring Activities

 Why C is Correct:

Independent oversight, while important in governance, is not explicitly listed as one of the five COSO components. It may relate to broader governance structures but is not a core component of the internal control framework.

 References:

COSO Internal Control–Integrated Framework​​.

Key Elements of an Ethics Program:

An effective ethics program involves assessing existing issues, such as ethical leadership gaps, and designing policies and practices to address them.

Analysis of Other Options:

A. Restricted access: Ethics policies should be accessible to external parties, including stakeholders, to enhance transparency.

C. Written policy alone: A written policy is insufficient without ongoing communication, training, and leadership support.

D. All of the above: Incorrect because options A and C are not true.

Conclusion:Considering existing ethical leadership issues is critical when designing an effective ethics program.

References:ACFE materials on ethics program design and implementation​​.

 Internal Auditors' Role in Fraud Risk Management:

Internal auditors evaluate management’s commitment to overseeing and addressing fraud risks as part of their assurance role.

 Why A is Correct:

Oversight of fraud risk management is a management responsibility, and internal auditors assess whether this responsibility is effectively retained and executed.

 Why Other Options are Incorrect:

B: Reporting to regulators is not a core responsibility of internal auditors.

C: Internal auditors provide evaluation, not direct oversight.

D: Attesting financial statement accuracy is the responsibility of external auditors, not internal auditors​​.

Fraud Response Responsibilities:

Management is responsible for responding to fraud because they oversee the organization's operations, culture, and compliance frameworks.

Other parties, such as internal auditors and the audit committee, provide oversight and recommendations but do not directly implement responses.

Conclusion:Management has the ultimate responsibility for responding appropriately to fraud.

References:ACFE materials on fraud risk governance and management’s role​​.

 ACFE Code of Professional Ethics:

Fraud examiners must avoid expressing opinions about guilt or innocence. They are tasked with presenting evidence and findings objectively, leaving determinations of guilt to legal or regulatory authorities.

 Why A is Correct:

Maria’s statement that "Rita is guilty" constitutes a violation because it goes beyond the role of a fraud examiner.

 References:

ACFE standards emphasize objectivity and avoidance of subjective judgments in fraud reporting​​.

 Statistics on Fraud Prosecution:

Research indicates that many organizations prefer to handle fraud cases internally rather than involving law enforcement due to concerns over reputation, cost, and time.

 Why B is Correct:

Organizations often resolve fraud cases through internal disciplinary actions, such as termination or restitution, rather than pursuing criminal prosecution​​.

 Why Other Options are Incorrect:

While internal handling is common, other factors like fear of publicity and legal costs also influence the decision to avoid prosecution.

Understanding Conflicts of Interest:

The ACFE Code of Professional Ethics prohibits any engagements that impair the fraud examiner's objectivity, even with disclosure.

Ownership interests in a client organization create significant potential for bias, compromising the integrity of the evaluation.

Analysis of Other Options:

A. Secret infiltration: This is a clear ethical violation.

B. Engagements reducing employer duties: This constitutes a conflict of interest.

D. Representing both sides: Prohibited under the ACFE Code due to conflicting responsibilities.

Conclusion:Option C is a prohibited conflict of interest under the ACFE Code.

References:ACFE Code of Professional Ethics and conflicts of interest guidelines​​.

 Fraud Prevention Methods:

Prevention strategies often focus on education, awareness, and robust controls rather than covert methods. While covert audits can detect fraud, they are not primarily preventive.

 Why D is False:

Covert audits are reactive and focused on identifying existing fraud, not preventing it.

 Why Other Options are True:

A, B, and C accurately describe key aspects of fraud prevention, such as the importance of perception of detection and the challenges of detecting fraud​​.

Understanding the Factors of Economic Crime:The authors of Crimes of the Middle Classes identify factors contributing to economic crime:

A. Cultural pressures: Society's emphasis on material success creates incentives for unethical behavior.

B. Reliance on credit: A credit-based economy increases financial vulnerabilities and fraud opportunities.

D. Advancing technologies: These create new avenues for economic crime through sophisticated methods.

Analysis of Option C:

Increased regulatory constraints typically deter crime by establishing clear compliance requirements. They do not contribute to the rising problem of economic crime but instead act as a countermeasure.

Conclusion:Option C does not align with the factors discussed by the authors.

References:ACFE materials on cultural and technological influences on economic crime​​.

Impact of Reporting to Law Enforcement:

Reporting fraud incidents to law enforcement demonstrates a zero-tolerance approach, acting as a deterrent to potential fraudsters.

It also ensures that perpetrators face legal consequences, discouraging others from engaging in fraudulent activities.

Prevention Mechanism:

The public nature of such actions signals organizational commitment to ethics and integrity, enhancing its reputation and strengthening internal controls.

Supporting References:

ACFE guidelines advocate for reporting fraud to appropriate authorities as part of an effective fraud prevention strategy​​.

 Effectiveness of Consistent Punishment:

Consistent punishment demonstrates an organization's commitment to enforcing anti-fraud policies and serves as a deterrent to potential fraudsters.

 Why A is Correct:

When perpetrators are consistently punished, it sends a strong message about zero tolerance for fraud and reinforces the importance of compliance throughout the organization.

 References:

ACFE guidance on fraud deterrence emphasizes the role of consequences in preventing fraud​​.

Privilege of Fraud Examination Reports:

Reports prepared by fraud examiners are not inherently privileged. Privilege depends on the legal framework, the purpose of the report, and whether the attorney-client privilege or work-product doctrine applies.

Without specific legal protection, reports may be subject to disclosure.

Conclusion:Fraud examination reports are not automatically privileged.

References:ACFE standards on fraud reporting and legal considerations​​.

ACFE research consistently shows that tips are the most common method for detecting occupational fraud. Organizations often rely on whistleblowing mechanisms such as hotlines to encourage employees and other stakeholders to report suspected fraud, which makes tips the most effective fraud detection tool.

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Treadway Commission Recommendations:

Establishing an independent audit committee is essential for oversight and reducing fraud risk in financial reporting.

Audit committees play a critical role in ensuring the integrity of financial statements.

Analysis of Other Options:

A. Shareholder oversight of hotlines: Not a Treadway Commission recommendation.

B. Compensation committee resources: Not directly related to fraud prevention.

C. Management charter: Unrelated to the recommendations.

Conclusion:Mandatory independent audit committees are a key recommendation to reduce fraud risk.

References:Treadway Commission’s Report on Fraudulent Financial Reporting​​.

ACFE research indicates that asset misappropriation schemes, such as theft of cash or inventory, are the most common type of occupational fraud. While they are frequent, they typically result in lower financial losses compared to corruption or financial statement fraud, which are less common but can cause greater financial damage.

The G20/OECD Principles of Corporate Governance emphasize the importance of promoting transparent and fair markets and ensuring the efficient allocation of resources. These principles provide a framework applicable across various jurisdictions, aiming to enhance the integrity and functioning of financial markets globally.

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Purpose of a Code of Conduct:

A professional code of conduct serves as a guideline for ethical behavior, provides benchmarks for decision-making, and facilitates enforcement within the profession.

It does not replace the personal responsibility to exercise individual judgment and consult one's conscience.

Analysis of Other Options:

B, C, and D: These accurately describe the purposes of a professional code of conduct.

Conclusion:The code of conduct does not eliminate the need for personal ethical reflection, making Option A incorrect.

References:ACFE and other professional ethics codes​​.

Behaviorist Theories in Conditioning:

Positive reinforcement, such as offering bonuses, is more effective than punishment in encouraging adherence to policies and reducing deviations.

Employees are more likely to repeat behaviors that are rewarded.

Why C is Correct:

This approach aligns with behaviorist principles, fostering compliance through incentives rather than fear or criticism, which could negatively impact morale.

Why Other Options are Incorrect:

A and D: Punishments may lead to resentment and reduced motivation.

B: Public criticism can create a toxic work environment, discouraging open communication​​.

References for All Questions:

ACFE Code of Professional Ethics and Fraud Examination Guide​​.

ISA and GAAS requirements on unpredictability in audit procedures​​.

Behaviorist theories on employee motivation and conditioning​​.

Understanding Fraud Risk Management Responses:

Risk mitigation refers to implementing controls or measures to reduce the likelihood or impact of a risk.

In this case, by implementing additional internal controls, management aims to mitigate the identified fraud risk.

Definition of Other Options:

A. Assuming the risk: This refers to accepting the risk without taking action to mitigate it. This is generally done when the risk is deemed tolerable.

C. Avoiding the risk: This involves changing business practices or ceasing activities to eliminate the risk entirely.

D. Transferring the risk: This occurs when the responsibility for the risk is shifted to another party, such as through insurance.

Conclusion:The described response clearly aligns with risk mitigation, as it focuses on reducing the risk through internal control measures.

References:ACFE study materials on fraud risk assessment and management approaches​​.

Rational Choice Theory Overview:

This theory asserts that individuals make conscious decisions to commit crimes after weighing the costs (risk of detection and punishment) and benefits.

Why D is Correct:

Rational choice theory aligns with strategies to deter crime by reducing opportunities and increasing personal risks.

Why Other Options are Incorrect:

A (Differential association theory): Explains crime as learned behavior.

B (Routine activities theory): Focuses on environmental factors.

C (Justification of action theory): Not a recognized criminological theory​​.

References for All Questions:

ACFE Code of Professional Ethics and Fraud Examination Guide​​.

Criminological theories and governance frameworks in fraud prevention​​.

Case studies on indirect fraud costs and ethical decision-making​​.

onflicts of Interest Under the ACFE Code of Professional Ethics:

Fraud examiners must avoid situations that compromise their objectivity, independence, or professional duties.

Disclosure of ownership does not eliminate the conflict of interest if it could impair objectivity.

Analysis of Other Options:

A, C, and D: All are clear conflicts of interest explicitly prohibited under the ACFE Code.

Conclusion:Option B is not prohibited under the ACFE Code but remains problematic if disclosure does not adequately address independence concerns.

References:ACFE Code of Professional Ethics—conflict of interest provisions​​.

 ISSAI Standards:

The International Standards of Supreme Audit Institutions (ISSAI) require government auditors to consider fraud and abuse during financial audits. Abuse includes improper use of authority or resources, which may not always meet the legal threshold of fraud but still warrants attention.

 Expanded Audit Scope:

Unlike private-sector audits, public-sector audits often have broader objectives, requiring vigilance for misuse of public funds and resources.

 Why A is Correct:

Staying alert to abuse ensures comprehensive accountability, aligning with ISSAI's objectives​​.

According to the ISAs, auditors are required to communicate identified instances of fraud to those charged with governance of the organization. This ensures that the appropriate individuals within the organization are informed and can take necessary corrective actions. Reporting findings to the media or confronting individuals directly is not considered an appropriate course of action.

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Ethical Obligations Under ACFE Code:

CFEs are obligated to report material findings, including deficiencies that may facilitate fraud, even if no fraud is found.

Providing such insights aligns with the principles of due diligence and professional responsibility.

Professional Reporting Practices:

Including opinions on internal control deficiencies adds value to the examination and supports fraud prevention efforts.

Conclusion:White may include her opinion on control deficiencies in her report.

References:ACFE Code of Professional Ethics and fraud examination standards​​.

Understanding Behavioral Responses:

Positive reinforcement: Increases desired behavior by providing rewards.

Negative reinforcement: Increases desired behavior by removing an unfavorable condition.

Punishment: Reduces undesired behavior by introducing a negative consequence or removing a positive condition.

Application to the Scenario:

Demotion is a punitive action designed to discourage the employee’s poor performance, making it an example of punishment.

Conclusion:The manager’s action aligns with the concept of punishment.

References:ACFE guidance on behavioral theory and management practices​​.