Free CFE sample questions

Correct answer: Fraudulent statement

Fraudulent statement schemes involve the intentional misrepresentation or omission of material information in financial statements to deceive users of financial information. This type of fraud typically includes manipulation of accounting records, fictitious transactions, or improper asset valuations designed to present a false picture of an organization's financial performance and position. Unlike corruption which involves misuse of influence, and asset misappropriation which involves theft of company resources, fraudulent statements specifically target the integrity of financial reporting itself.

Correct answer: False packing slip

False packing slips are fraudulent documents that corrupt employees create to authorize improper delivery of inventory to themselves or accomplices without legitimate business justification. These fraudulent documents make it appear that goods were properly shipped to authorized recipients when they were actually diverted for personal gain. This scheme exploits the shipping and receiving process by creating fake documentation that circumvents normal inventory controls and authorization procedures.

Correct answer: False shipping slip

False shipping slips are commonly used to write off inventory and other assets fraudulently, making stolen items appear to have been legitimately shipped or disposed of according to proper business procedures. This scheme allows fraudsters to remove assets from accounting records either before or after the physical theft occurs, creating documentation that justifies the missing inventory. Unlike simple alterations or write-offs, false shipping slips create a complete fraudulent transaction that appears legitimate in the accounting system.

Correct answer: Single employee

Theft of incoming checks is most vulnerable when a single employee handles both mail opening and payment recording functions, creating a lack of segregation of duties that is fundamental to internal controls. When one person controls the entire cash receipt process, they can intercept checks, record false entries, or manipulate accounts receivable without detection. Having two or more employees involved in the process creates natural checks and balances that make such theft schemes much more difficult to execute and conceal.

Correct answer: Returns and allowances

Searching for unusually high incidence of returns and allowances is a key analytical procedure for detecting fraudulent schemes involving fictitious or inflated credits to customer accounts. High return rates may indicate employees are creating false returns to generate improper refunds or credits that benefit themselves or accomplices. This analysis helps identify patterns inconsistent with normal business operations and can reveal schemes where legitimate sales are being reversed fraudulently or fake returns are being processed.

Correct answer: Revenue and corresponding expenses

According to Generally Accepted Accounting Principles (GAAP), revenues and their corresponding expenses must be recorded in the same accounting period to comply with the matching principle, which ensures accurate measurement of periodic income. This principle requires that expenses incurred to generate specific revenues be recognized in the same period those revenues are recorded, providing a true representation of profitability. Violating the matching principle by recording revenue in one period and related expenses in another can artificially inflate or deflate periodic earnings, potentially misleading financial statement users about the organization's actual performance.

Correct answer: Inventory & Equipment

Physical assets including inventory and equipment are the most commonly misappropriated noncash assets according to fraud studies, as these items have inherent value and can be easily converted to personal use or resold for profit. Inventory schemes often involve theft of goods for personal use or sale, while equipment misappropriation includes unauthorized use or theft of company property such as tools, computers, or vehicles. These physical assets are particularly vulnerable because they exist in tangible form and may lack adequate security controls or monitoring compared to cash and financial instruments.

Correct answer: Misappropriations

Misappropriations represent atypical issues involving material fraud, as they constitute the deliberate theft or misuse of organizational assets by employees or management for personal gain. Asset misappropriation schemes often involve significant material amounts and can include inventory theft, cash skimming, expense reimbursement fraud, or unauthorized use of company resources. These fraudulent activities are considered material when they could influence the economic decisions of users of financial statements, making them a serious concern for auditors and fraud investigators.

Correct answer: Conservatism

The conservatism principle in accounting means that financial figures should be presented conservatively, ensuring that assets and revenues are not overstated while liabilities and expenses are not understated, with amounts being at least as much as reflected in the statements if not more. This principle requires accountants to choose the accounting method that is less likely to overstate assets and income when faced with uncertainty, thereby providing a more cautious and reliable representation of financial position. Conservatism helps protect investors and creditors by preventing overly optimistic financial reporting that could lead to poor economic decisions.

Correct answer: Quality control

Quality control is NOT a standard of Generally Accepted Accounting Principles (GAAP), as it relates to audit procedures and firm policies rather than financial reporting standards that govern how transactions are recorded and presented in financial statements. GAAP standards include principles such as revenue recognition, matching, materiality, consistency, and full disclosure that directly impact financial statement preparation. While quality control is essential for audit firms to ensure proper execution of audits, it operates as a professional practice standard rather than an accounting principle that affects financial statement content.