ACFE CFE-Financial-Transactions-and-Fraud-Schemes Certified Fraud Examiner - Financial Transactions and Fraud Schemes Exam Exam Practice Test

Detailed Explanation:

Rationale for Correct Answer:Corrupt payments are not always made directly in cash. According to the Fraud Examiners Manual (2020), one common method is disguising them as loans on favorable terms, which provide value to the recipient while appearing legitimate. This is recognized as a form of bribery or illegal gratuity.

Analysis of Incorrect Options:

B. Credit cards – Corrupt payments can be made via many channels, including credit, so this is incorrect.

C. Selling property above market value – Payments are typically disguised by undervaluing sales to recipients, not overvaluing.

D. Promises of favorable treatment – Promises alone can constitute bribery; this statement is false.

Key Concept: Methods of making corrupt payments.

Detailed Explanation:

Rationale for Correct Answer:The most basic skimming scheme is when an employee completes a legitimate sale, collects payment, but never records the transaction. The stolen cash is never entered in the books, making it an “off-book” fraud.

Analysis of Incorrect Options:

B & D – Describe purchasing scenarios, irrelevant to skimming.

C – Records the sale, meaning the transaction enters the books (not skimming).

Key Concept:Unrecorded Sales as the simplest form of skimming.

Detailed Explanation:

Rationale for Correct Answer:The “outside the accounting system” approach occurs when perpetrators simply fabricate financial statements without regard to actual accounting records. Fraudsters may create entirely false reports using external tools (typewriters, spreadsheets, word processors).

Analysis of Incorrect Options:

A. Organized accounting – Not a fraud classification.

B. Playing the accounting – Uses the real accounting system but manipulates entries.

C. Beating accounting – Refers to overriding controls but within the system.

D. Outside accounting system – Correct, as it involves entirely fabricated statements.

Key Concept:Outside-the-books fraud — fabricated financial reports not tied to accounting records.

Detailed Explanation:

Rationale for Correct Answer:According to the ACFE Fraud Tree, cash-related asset misappropriation schemes fall into three categories: Skimming (off-book theft), Cash Larceny (on-book theft), and Fraudulent Disbursements (bogus outflows such as billing, payroll, and check tampering).

Analysis of Incorrect Options:

B. Fraud analysis, skimming, and cash misappropriations – “Fraud analysis” and “cash misappropriations” are not fraud tree categories.

C. Cash larceny, cash distribution, and fraudulent disbursements – “Cash distribution” is not a fraud tree category.

D. Cash distribution, skimming, and fraud analysis – Includes non-fraud tree terms.

Key Concept:Fraud Tree — Cash Schemes: Skimming, Cash Larceny, Fraudulent Disbursements.

Rationale for Correct Answer:Traditional bribery laws historically applied only to government officials. When bribery occurs in the private sector (commercial setting), it is known as commercial bribery. Modern laws and internal company codes address this as well.

Key Concept:Commercial bribery vs. government bribery.

Detailed Explanation:

Rationale for Correct Answer: Otto’s act combines misappropriation of customer funds with concealment via false accounting entries. Per the Fraud Examiners Manual, concealment through altering records is a hallmark of accounting fraud schemes tied to asset misappropriation.

Analysis of Incorrect Options:

A – Unauthorized disbursement typically refers to fraudulent payments like check tampering, not customer withdrawals.

B – Dormant account fraud targets unused/inactive accounts; the victim here is an active but inattentive customer.

D – Unauthorized withdrawal is part of the theft, but the defining element is the falsified ledger concealment, making C more precise.

Key Concept: Asset misappropriation with concealment through false accounting.

Detailed Explanation:

Rationale for Correct Answer:Employees involved in bribery or corruption schemes often exhibit lifestyle red flags such as gambling habits, drug/alcohol addiction, or extravagant spending. These behaviors create financial pressures that may motivate or result from corrupt activity.

Analysis of Incorrect Options:

A, B, C individually – Each is a red flag, but the most accurate answer is all of the above.

Key Concept:Behavioral red flags in corruption cases.

Detailed Explanation:

Rationale for Correct Answer:Gross profit = Net sales – Cost of Goods Sold (COGS). This is the correct definition, as per standard accounting principles.

Analysis of Incorrect Options:

A. Gross revenue – Defined as total sales before deductions, not after.

B. Net profit – Net profit is after all expenses (operating, interest, taxes), not before.

D. Operating expenses – Appear after gross profit, not at the top.

Key Concept: Income statement structure and key definitions.

Detailed Explanation:

Rationale for Correct Answer:This is True. After the closing process, expense accounts are reset to zero for the new accounting period. They remain only as part of historical financial statements and supporting records. Because of this, expense accounts can be a target for fraud concealment (fraudulent disbursements), since closed accounts are rarely scrutinized again.

Analysis of Incorrect Options:

B. False – Incorrect, as the closing process does make expense accounts historical.

Key Concept:Expense accounts in fraud concealment — vulnerabilities due to being closed at period end.

Rationale for Correct Answer:Rationalization is the cognitive process by which fraud perpetrators justify their unethical conduct so they can commit fraud without feeling like criminals. A common way is to “invent a good reason” for their actions (e.g., “I deserve it,” “I’ll pay it back,” “Everyone else is doing it”). Thus, the correct completion is “one’s actions” or more precisely, Rationalization.

Analysis of Incorrect Options:Since this is a fill-in-the-blank, the distractors are implied. The only correct concept here is rationalization of one’s actions.

Key Concept:Rationalization — one leg of the fraud triangle.

Detailed Explanation:

Rationale for Correct Answer:Hollinger and Clark’s research emphasized that management policy should focus on: (1) developing a clear understanding of theft behavior and its causes, and (2) enforcing sanctions consistently. Both are necessary to reduce employee deviance and occupational fraud. Thus, C. Both A & B is correct.

Key Concept:Hollinger-Clark Study — policy implications for managing employee theft.

Detailed Explanation:

Rationale for Correct Answer:Irregular, low-value, or unpredictable revenue sources such as parking fees, late charges, or vending machine sales are prime skimming targets. Because they are difficult to estimate or reconcile precisely, theft of these funds is less likely to be detected quickly.

Analysis of Incorrect Options:

B. Recorded sales – These are already in the books and easier to reconcile.

C. Internal audits – A control mechanism, not a target.

D. Register manipulations – A method, not the revenue source itself.

Key Concept:Vulnerable revenue streams as skimming targets.

Detailed Explanation:

Rationale for Correct Answer:Prenumbering and controlling shipping documents is a strong preventive measure against inventory theft because it ensures all inventory leaving the warehouse is properly authorized and tracked.

Analysis of Incorrect Options:

A. Same person for requisition and receiving – Violates segregation of duties.

B. Purchasing supervisor counting inventory – Creates conflict; inventory should be counted by independent staff.

D. Same person for shipping and scrap – Increases fraud risk.

Key Concept: Inventory theft prevention — control over documentation.

Detailed Explanation:

Rationale for Correct Answer: The statement of cash flows has three standard sections:

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activitiesThus, option B is correct.

Analysis of Incorrect Options:

A – No section called “purchasing activities”; such outflows fall under investing or operating.

C – No section called “earnings activities”; related cash flows are operating.

D – “Strategic activities” is not a formal category in GAAP or IFRS.

Key Concept: Structure of the statement of cash flows.

Detailed Explanation:

Rationale for Correct Answer:Simply holding two jobs without disclosure is not inherently a conflict of interest unless the roles compete, overlap, or present divided loyalties. The other options all describe undisclosed financial or relational interests that conflict with the employer’s best interest.

Analysis of Incorrect Options:

A. Harriet’s stock ownership – Direct financial conflict.

C. Jennifer’s board positions – Competing loyalties between competitors.

D. Ernest hiring his brother – Nepotism without disclosure is a conflict.

Key Concept: Conflict of interest schemes in corruption.

Detailed Explanation:

Rationale for Correct Answer:Intangible assets are long-lived assets that lack physical substance and differ from property, plant, and equipment. Examples include goodwill, patents, trademarks, and copyrights. They provide long-term benefits but cannot be physically touched.

Analysis of Incorrect Options:

A. Tangible Assets – These have physical form (e.g., equipment, land).

C. Forced Assets – Not an accounting category.

D. None of the above – Incorrect since intangible assets match the definition.

Key Concept:Classification of Assets — tangible vs. intangible.

Detailed Explanation:

Rationale for Correct Answer: This is a false sale scheme, in which an employee processes fictitious transactions (such as false refunds, voids, or no-sales) to conceal theft of merchandise. Here, Brenda pretends to conduct a sale but records no payment.

Analysis of Incorrect Options:

A. Register disbursement scheme – Involves fraudulent refunds or disbursements of cash, not merchandise theft.

C. Purchasing and receiving scheme – Refers to inventory fraud during procurement, not point-of-sale theft.

D. Skimming scheme – Involves theft of cash before it enters accounting records, not merchandise theft.

Key Concept: Cash receipts and register manipulation schemes.

Detailed Explanation:

Rationale for Correct Answer:Bribery is specifically defined as offering, giving, receiving, or soliciting anything of value to influence an official act or business decision. It is one of the four primary corruption categories.

Analysis of Incorrect Options:

A. Corruption – Broader category; bribery is one part of it.

B. Diverting business to vendors – A conflict of interest scheme, not bribery.

D. Lacking approval authority – Refers to control weaknesses, not corruption.

Key Concept:Bribery definition and its role in corruption.

Detailed Explanation:

Rationale for Correct Answer:During the solicitation phase, corrupt employees may attempt to eliminate legitimate competitors by restricting the list of vendors invited to bid. This unfairly favors a particular supplier, often in exchange for bribes or kickbacks.

Analysis of Incorrect Options:

A. Need recognition – Involves creating false or unnecessary demand, not restricting bidders.

C. False specification – Relates to vague or tailored specifications, not bid solicitation.

D. Submission – Occurs after solicitation when vendors submit bids.

Key Concept:Solicitation phase schemes — restricting competition.

Detailed Explanation:

Rationale for Correct Answer:Materiality is most often associated with fraudulent financial statements because fraudsters may argue that misstatements are “immaterial.” However, deliberate misstatements of any size can be fraudulent. Materiality thus plays a critical role in assessing fraudulent statement cases.

Analysis of Incorrect Options:

B. Misappropriations – Involve theft, but materiality is less central than in reporting fraud.

C. Civil lawsuit – A possible outcome, not the core accounting issue.

D. Quality control – Not related to materiality in fraud.

Key Concept:Materiality in Financial Statement Fraud — even small misstatements may be fraudulent.

Detailed Explanation:

Rationale for Correct Answer:Perpetual inventory systems maintain a continuous, running balance of inventory on hand. They are updated with each purchase and sale, providing a theoretical count at all times. Discrepancies between perpetual and physical counts may indicate theft, errors, or fraud.

Analysis of Incorrect Options:

A. Altered inventory – Fraudulent manipulation, not a system.

C. Shrinking inventory – Refers to shrinkage, not the system.

D. Fictitious inventory – Fraudulent reporting, not a legitimate system.

Key Concept:Perpetual inventory systems as internal controls.

Detailed Explanation:

Rationale for Correct Answer:By definition, Equity (or net assets) represents the residual interest in the assets of an entity after deducting liabilities. This aligns with the basic accounting equation: Assets = Liabilities + Equity. Thus, the difference between assets and liabilities is Equity.

Analysis of Incorrect Options:

B. Expense – A cost incurred in earning revenue, not residual interest.

C. Revenue – Inflows from operations, not assets minus liabilities.

D. Income statement – A financial report, not a balance sheet component.

Key Concept:Equity as residual interest in the accounting equation.

Detailed Explanation:

Rationale for Correct Answer:According to ACFE’s Report to the Nations and the Fraud Examiners Manual, tips are the most common method of detecting corruption cases. Employees, vendors, or customers often report suspicious activity via hotlines or whistleblowing mechanisms.

Analysis of Incorrect Options:

A. Internal audits – Helpful but less common as the initial detection method.

B. Internal controls – Preventive, not the primary detection source.

D. By accident – Can occur, but far less common than tips.

Key Concept:Tips/whistleblowing as the primary detection method for corruption.

Detailed Explanation:

Rationale for Correct Answer:Larceny by fraud (often termed “theft by deception”) occurs when someone unlawfully obtains another’s property by deception rather than by direct taking. As defined in fraud examination principles, deception can involve: (1) creating or reinforcing a false impression, (2) failing to correct a false impression, or (3) failing to disclose material facts such as liens or adverse claims. Because all three scenarios represent deceptive means to unlawfully take property, the correct answer is D. All of the above.

Analysis of Incorrect Options:

A, B, C each describe valid examples of fraud by deception but individually do not fully capture the concept.

D encompasses the totality of recognized deceptive practices under larceny by fraud.

Key Concept:Fraud by deception as an element of theft and misappropriation.

Detailed Explanation:

Rationale for Correct Answer:Cash larceny involves the theft of incoming cash after it has been recorded. Strong segregation of duties is critical to prevent concealment. By separating cash deposit responsibilities from bank reconciliation duties, one employee cannot both steal funds and cover their tracks.

Analysis of Incorrect Options:

A. Restricting substitution – Weakens controls; job rotation and cross-training help prevent fraud.

C. Same register use – Reduces accountability, making theft harder to trace.

D. Surprise cash counts – Strong detective control, but not as preventive as segregation of duties.

Key Concept: Preventing cash larceny through segregation of duties.

Detailed Explanation:

Rationale for Correct Answer:Kickbacks are undisclosed payments made by vendors to employees of purchasing companies to secure favorable treatment. They are a classic form of bribery under the corruption classification of the Fraud Tree.

Analysis of Incorrect Options:

A. Bid-rigging – Involves collusion among bidders, not secret payments.

C. Presolicitation – A phase in procurement fraud, not the scheme itself.

D. None of the above – Incorrect, as kickbacks are the precise answer.

Key Concept:Kickbacks — secret vendor payments for favorable purchasing treatment.

Detailed Explanation:

Rationale for Correct Answer: Financial statement fraud typically involves overstating assets or revenues (e.g., inflating inventory, recognizing fictitious sales) and understating liabilities or expenses (e.g., hiding obligations, capitalizing expenses). This combination enhances profitability and net worth, misleading stakeholders.

Analysis of Incorrect Options:

A – Understating assets/revenue is rare since fraud usually aims to inflate results.

C – Overstating both assets and liabilities would not improve financial performance.

D – Understating both would reduce reported performance, contrary to typical fraud objectives.

Key Concept: Common patterns in financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer:This is a tech-support scam, in which fraudsters trick victims into believing their computers are infected and then charge fees for unnecessary or fake repairs. The scam often targets elderly victims.

Analysis of Incorrect Options:

A. Pharming – Redirects users to fake websites, not fake support calls.

B. Bait and switch – Advertising deception, not fraudulent computer support.

D. Smishing – Fraud via SMS text messages, not on-screen computer popups.

Key Concept: Consumer fraud schemes — tech-support scams.

Detailed Explanation:

Rationale for Correct Answer:A need recognition scheme occurs when an employee uses their influence to convince their employer to purchase unnecessary goods or services. This benefits the supplier (often paying kickbacks) but harms the employer.

Analysis of Incorrect Options:

A. Presolicitation scheme – General stage of procurement, not specific.

C. False sole-source scheme – Involves eliminating competition by claiming only one vendor can supply the good/service.

D. Submission scheme – Related to bid-rigging, not need recognition.

Key Concept:Need recognition schemes — corruption through unnecessary purchases.

Detailed Explanation:

Rationale for Correct Answer:This statement is True. Statistical sampling allows fraud examiners to make inferences about an entire population based on a representative sample. By calculating occurrence rates, they can estimate error rates and assess the likelihood of fraud in the larger dataset.

Analysis of Incorrect Options:

B. False – Incorrect because statistical sampling is explicitly designed to estimate population-level characteristics.

Key Concept:Sampling in fraud examination — predicting occurrence and error rates.

Detailed Explanation:

Rationale for Correct Answer:Per generally accepted accounting principles, changes in accounting principles must be disclosed in the financial statements to ensure comparability and transparency. The ACFE notes that disclosures are critical to prevent misleading users of financial statements.

Analysis of Incorrect Options:

A. Subsequent events – Material subsequent events must be disclosed; this statement is false.

B. Contingent losses – Only probable and reasonably estimable losses must be disclosed. If unlikely, no disclosure is required.

C. All information – Only material information requires disclosure.

Key Concept: Disclosure requirements in financial reporting.

Detailed Explanation:

Rationale for Correct Answer: This scheme is a business email compromise (BEC), also known as CEO fraud. Fraudsters impersonate high-ranking executives to trick employees into transferring money or disclosing confidential information.

Analysis of Incorrect Options:

A. Reverse social engineering – Involves the fraudster posing as a helper and then exploiting the victim, not impersonating executives.

B. Executive email attack – A generic term, but the ACFE recognizes BEC as the precise classification.

C. Electronic piggybacking – Refers to unauthorized access through another user’s session, not impersonation.

Key Concept: Social engineering and cyber-enabled fraud – BEC schemes.

Detailed Explanation:

Rationale for Correct Answer:This is True. Fraudulent financial reporting often involves manipulating depreciation. By lowering or delaying depreciation expense, companies can inflate profits and overstate asset values. This is a common method of financial statement fraud related to earnings management.

Analysis of Incorrect Options:

B. False – Incorrect, as understatement of depreciation clearly inflates reported profits.

Key Concept:Depreciation Manipulation in Financial Statement Fraud.

Detailed Explanation:

Rationale for Correct Answer: A disproportionate increase in COGS without a corresponding increase in sales is a red flag for inventory theft or misappropriation. Theft reduces ending inventory, which artificially inflates COGS, while sales remain unchanged or grow modestly.

Analysis of Incorrect Options:

A – Warranty liabilities affect expenses, not COGS.

B – Fewer sales would reduce both revenue and COGS proportionally, not cause a large disparity.

C – Sales returns reduce revenue, not inflate COGS.

Key Concept: Using analytical review to detect inventory theft via COGS anomalies.

Detailed Explanation:

Rationale for Correct Answer: Properly shredded documents using a cross-cut shredder are very difficult to reconstruct, making them not a common medium for information leaks. By contrast, shareholder reports, executive speeches, and workstation displays often contain sensitive data that can be exploited by competitors or fraudsters.

Analysis of Incorrect Options:

A – Shareholder reports can reveal strategy and financial vulnerabilities.

C – Executive speeches sometimes unintentionally disclose sensitive plans.

D – Information left visible at workstations is a known security risk.

Key Concept: Protection of proprietary information against espionage and fraud.

Detailed Explanation:

Rationale for Correct Answer:Journal entries record business activity, and credits increase equity (while debits reduce equity). Thus, journal entries and credits are the mechanisms that directly affect the equity account.

Analysis of Incorrect Options:

A. Journal Entries & Debit – Debits decrease equity, not increase.

B. Journal Entries & Transactions – Transactions are general; credits specify the effect.

D. None of all – Incorrect since option C is correct.

Key Concept:Equity changes recorded through journal entries and credits.

Detailed Explanation:

Rationale for Correct Answer:This is True. The net result of revenues and expenses (credits and debits) on the income statement flows into retained earnings, which is part of equity on the balance sheet. Therefore, excess credits (profits) increase equity, while excess debits (losses) decrease equity.

Analysis of Incorrect Options:

B. False – Incorrect, as the closing process of the accounting cycle directly affects equity.

Key Concept:Closing process and impact of net income on equity.

Detailed Explanation:

Rationale for Correct Answer: Smishing (SMS phishing) uses fraudulent text messages to trick victims into clicking malicious links or revealing credentials. This matches Cynthia’s scenario.

Analysis of Incorrect Options:

A. Vishing – Voice phishing by phone call, not text message.

C. Catfishing – Fake online persona in social contexts, not financial fraud via text.

D. Pharming – Redirecting users to fake websites via DNS manipulation, not text messages.

Key Concept: Social engineering methods—email (phishing), phone (vishing), text (smishing).

Detailed Explanation:

Rationale for Correct Answer: Human intelligence (HUMINT) involves gathering information directly from people, often through deception, elicitation, or impersonation. Georgina’s posing as a customer to obtain confidential details fits this method.

Analysis of Incorrect Options:

B. Baiting – A social engineering tactic using false promises (e.g., malware disguised as freebies).

C. Scavenging – Collecting discarded information (e.g., dumpster diving).

D. Open-source intelligence – Gathering data from public records, news, or websites, not through elicitation.

Key Concept: Methods of competitive intelligence and social engineering.

Detailed Explanation:

Rationale for Correct Answer:The conservatism principle in accounting means that financial statements should not overstate assets or income and should anticipate possible losses. Thus, the amounts shown should be at least as much as reflected, if not more. This ensures users are not misled by overly optimistic figures.

Analysis of Incorrect Options:

A. Fraudulent statement – Involves intentional misrepresentation, not a principle of accounting.

B. Misappropriations – Theft of assets, unrelated to valuation principles.

D. Matching – Refers to aligning expenses with related revenues, not conservatism.

Key Concept:Conservatism principle — caution in financial reporting.

Detailed Explanation:

Rationale for Correct Answer:The accounts receivable journal (also called the sales journal) records all sales transactions, whether on credit or cash. It provides a detailed subsidiary record of customer accounts and sales activity.

Analysis of Incorrect Options:

A. Disbursement journal – Records cash outflows, not sales.

C. Accounts payable journal – Records amounts owed to vendors, not sales.

D. General journal – Records miscellaneous entries not suited to specialized journals.

Key Concept:Special journals — sales activity recorded in the accounts receivable journal.

Detailed Explanation:

Rationale for Correct Answer: Best practices in preventing EFT fraud require mailing PINs and account information separately, never together. Sending them together creates a serious security risk if intercepted.

Analysis of Incorrect Options:

A – Correct preventive measure: immediately cancel and reissue stolen access devices.

B – Correct preventive measure: validating addresses helps detect fraudulent applications.

C – Correct preventive measure: segregation of duties reduces insider fraud risks.

Key Concept: EFT fraud prevention through layered security and separation of duties.

Detailed Explanation:

Rationale for Correct Answer:Ransomware is malware that encrypts or locks an operating system and prevents access to data until a ransom is paid. This definition is correct.

Analysis of Incorrect Options:

A. Spyware – Monitors user activity, keystrokes, or data, not a startup instruction program.

B. Trojan horse – Appears legitimate but contains malicious code; adware is different.

C. Worm – Self-replicating program spreading across networks; not a keystroke logger.

Key Concept: Cyber fraud and malware types.

Detailed Explanation:

Rationale for Correct Answer: One of the strongest internal controls against fraudulent billing schemes (such as shell companies, inflated invoices, and kickbacks) is to require competitive bidding. This ensures transparency, reduces favoritism, and makes it harder for employees and vendors to collude.

Analysis of Incorrect Options:

A – Fraud tips are valuable, but routing them only through supervisors may suppress reporting; hotlines are more effective.

B – Combining purchasing and payment increases fraud risk by reducing segregation of duties.

D – Outsourcing negotiations does not directly prevent billing fraud.

Key Concept: Internal controls and segregation of duties in preventing billing schemes.

Detailed Explanation:

Rationale for Correct Answer:Fraudulent financial statements (or “fraudulent statement”) refer to the intentional misrepresentation of financial condition, typically through overstating revenues, understating expenses, inflating assets, or concealing liabilities. The intent is to mislead stakeholders such as investors, creditors, or regulators.

Analysis of Incorrect Options:

B. Corruption – Refers to abuses of influence and conflicts of interest, not misreporting financial information.

C. Asset misappropriations – Involve theft of assets, not misrepresentation of reports.

D. None of the above – Incorrect since option A is correct.

Key Concept:Financial Statement Fraud — misrepresentation of organizational performance and position.

Detailed Explanation:

Rationale for Correct Answer:Fraudsters may solicit bids from fictitious suppliers (phony vendors) to create the illusion of competition. This ensures that the favored vendor wins while maintaining the appearance of a legitimate competitive bidding process.

Analysis of Incorrect Options:

B. Solicit transactions from fictitious vendors – Incorrect phrasing; bids, not transactions, are solicited.

C. Solicit bid-splitting… – Bid-splitting is a different fraud scheme, not part of solicitation.

D. None of the above – Incorrect, since A is accurate.

Key Concept:Phony bid solicitation as a corruption tactic in procurement.

Rationale for Correct Answer:The price-level adjusted historical cost method adjusts the original purchase price of an asset for inflation, providing a more current value while still tied to historical cost principles. It addresses one of the limitations of strict historical cost accounting.

Key Concept:Inflation adjustments in asset valuation.

Detailed Explanation:

Rationale for Correct Answer:The correct answer is A. Larceny. As defined in the Fraud Examiners Manual (2020 International Edition), larceny is the unlawful taking of another’s property with intent to permanently deprive the owner of its use or possession. Essential elements include: (1) the wrongful taking or carrying away of property, (2) without the consent of the owner, and (3) with felonious intent (i.e., intent to steal). This aligns directly with the definition provided in the question.

Analysis of Incorrect Options (Distractors):

B. Abuse – Abuse typically refers to the improper use of authority or resources (e.g., excessive expense claims, misuse of assets), but it is not a legal term describing theft by taking.

C. Fiduciary – Fiduciary describes a relationship of trust or duty to act for another’s benefit, not the act of theft.

D. None of the above – Incorrect because “larceny” precisely matches the elements described.

Key Concept:The definition and elements of larceny, which is a foundational legal concept for distinguishing among asset misappropriation schemes such as larceny vs. skimming.

Detailed Explanation:

Rationale for Correct Answer:Bribes to purchasing employees often aim to:

Ensure late bids are accepted,

Extend deadlines unfairly,

Or falsify bid logs.Bid-splitting, however, is a scheme performed to avoid approval thresholds and does not require bribery of purchasing employees.

Analysis of Incorrect Options:

A. Receipt of late bid – Real reason to bribe.

B. Extend opening date – Real reason to bribe.

D. Falsify bid log – Real reason to bribe.

C. Ensure bid-splitting – Not a bribery motivation.

Key Concept:Bribery motivations in procurement fraud.

Detailed Explanation:

Rationale for Correct Answer:Common skimming schemes include unrecorded sales, theft of incoming checks, and understating sales/receivables. “Fraud & Cost” is not a recognized skimming scheme and appears to be a distractor.

Analysis of Incorrect Options:

A. Unrecorded sales – A classic skimming method.

C. Theft of checks through the mail – Another recognized skimming approach (incoming receivables).

D. Understated sales and receivables – A concealment method within skimming schemes.

B. Fraud & Cost – Not a scheme classification.

Key Concept:Skimming schemes vs. unrelated distractors.

Detailed Explanation:

Rationale for Correct Answer: An air loan is a mortgage fraud scheme where the borrower and sometimes insiders create completely fictitious properties or borrowers. Here, the nonexistent property and loan proceeds being pocketed fits this definition.

Analysis of Incorrect Options:

A. Property flopping – Involves short sales and undervaluing distressed property.

C. Phantom lien – False liens filed to collect fraudulent claims on real estate.

D. Daisy chain – Involves multiple property transactions between conspirators to inflate value.

Key Concept: Loan fraud schemes – fictitious property loans (air loans).

Detailed Explanation:

Rationale for Correct Answer: Market division and allocation agreements are a classic bid-rigging scheme in which contractors collude to evade competition by assigning territories, customers, or project types among themselves. This undermines free and open competition.

Analysis of Incorrect Options:

B – Fake contracts are not a recognized collusion tactic in competitive bidding.

C – Publishing solicitations in different outlets does not evade competition.

D – Submitting false invoices is fraud, but it occurs after contract award, not during the bidding process.

Key Concept: Bid rigging and collusion in procurement fraud.

Rationale for Correct Answer:In occupational fraud, the primary culprit is generally the employee (insider) who abuses their position of trust. By definition, occupational fraud involves someone inside the organization exploiting their role.

Key Concept:Employee perpetrator as the primary fraud actor in occupational fraud schemes.

Detailed Explanation:

Rationale for Correct Answer:Liabilities are defined as obligations to transfer assets or provide services to other entities in the future as a result of past transactions. They represent what the organization owes, distinguishing them from assets.

Analysis of Incorrect Options:

A. Supplies – Assets consumed within a year, not obligations.

B. Expenses – Costs incurred, but not necessarily amounts owed.

C. Assets – Resources owned, not obligations.

Key Concept:Definition of Liabilities in accounting.

Detailed Explanation:

Rationale for Correct Answer:The term Employee deviance refers to conduct that is harmful both to the organization and to the employee engaging in it. This encompasses a broad set of behaviors, including fraud, theft, abuse, and violations of organizational norms. While employee theft and fraud are subsets, deviance is the umbrella concept.

Analysis of Incorrect Options:

B. Employee theft – Specific to stealing from the employer, not the broader definition of detrimental conduct.

C. Employee fraud – Specific to deceptive practices, not all deviant acts.

D. All of the above – Incorrect, since the definition most accurately matches “Employee deviance.”

Key Concept:Employee Deviance — broader behavioral category that includes fraud, theft, and other misconduct.

Detailed Explanation:

Rationale for Correct Answer:In the “playing the accounting system” approach, fraudsters manipulate legitimate accounting rules and entries to distort reported results. Examples include manipulating estimates, changing depreciation methods, or shifting expenses. They exploit the flexibility of GAAP to present misleading results while still appearing compliant.

Analysis of Incorrect Options:

A. Organized accounting – Not a recognized fraud approach.

C. Beating accounting – Refers to bypassing the system entirely, not using it as a tool.

D. All of the above – Incorrect because only option B is valid.

Key Concept:Playing the accounting system as a method of financial statement fraud.

Detailed Explanation:

Rationale for Correct Answer: A kickback scheme occurs when vendors make payments to employees of a purchasing organization in exchange for steering business their way. Here, Bob steered contracts to Oak Company and received a percentage of profits, a textbook kickback arrangement.

Analysis of Incorrect Options:

B. Illegal gratuity scheme – Involves rewards after a decision, without a prior agreement. Here, the agreement was prearranged.

C. Diversion scheme – Refers to diversion of assets, not procurement favoritism.

D. Economic extortion scheme – Involves coercion of the vendor; this was voluntary bribery.

Key Concept: Bribery and kickbacks as forms of corruption.

Detailed Explanation:

Rationale for Correct Answer:Skimming involves the theft of cash before it is recorded in the accounting system. Since sales are never recorded, reconciling sales to receipts will not detect skimming—it can only detect larceny (theft after recording).

Analysis of Incorrect Options:

A. True – Incorrect because no discrepancy exists in the records (the sale itself is omitted).

Key Concept: Distinction between skimming (off-book theft) and cash larceny (on-book theft).

Detailed Explanation:

Rationale for Correct Answer:Best practice is to minimize collection of sensitive data such as government identification numbers, only obtaining them when legally required. This reduces the risk of identity theft exposure in case of a breach.

Analysis of Incorrect Options:

A. Use government IDs as employee IDs – Increases risk of exposure, not prevention.

B. Audit information practices only when required – Insufficient; audits should be regular and proactive.

C. Use encryption only for external transfers – Encryption should always be applied, not selectively.

Key Concept: Identity theft prevention for businesses.

Detailed Explanation:

Rationale for Correct Answer:Revenue recognition requires that delivery has occurred or services have been rendered. If installation, testing, and customer acceptance have not occurred (A), or if a written order exists but with a right of return (B), delivery is not considered complete. Both scenarios prevent proper revenue recognition. Hence, the correct answer is C. Both A & B.

Analysis of Incorrect Options:

A – Correct condition, but incomplete.

B – Correct condition, but incomplete.

D. Neither A nor B – Incorrect, as both conditions do prevent recognition.

Key Concept:Revenue recognition fraud risks — recognizing revenue prematurely.

Detailed Explanation:

Rationale for Correct Answer: Cash larceny involves stealing cash after it has been recorded. Reconciling register totals against actual drawer cash can reveal shortages, making option C the best detection method.

Analysis of Incorrect Options:

A – Weakens segregation of duties and increases fraud risk.

B – Impractical; cross-training is often necessary.

D – Cashiers counting their own registers weakens independent verification and may conceal theft.

Key Concept: Detecting cash larceny through reconciliation controls.

Detailed Explanation:

Rationale for Correct Answer:The correct answer is A. Fiduciary Capacity. According to the Fraud Examiners Manual (2020 International Edition), a fiduciary relationship exists when a person is entrusted with the property or affairs of another and is obligated to act in the best interest of that person, rather than for their own benefit. Fiduciary capacity is a key legal concept in fraud examinations, particularly in cases involving breaches of trust, embezzlement, or misappropriation.

Analysis of Incorrect Options (Distractors):

B. Embezzlement – Embezzlement is the wrongful appropriation of assets by a person entrusted with them. While it often arises from a fiduciary relationship, it describes the act of theft, not the capacity in which the person acts.

C. Conversion – Conversion refers to the unauthorized use or control over another’s property, a civil wrong, but it does not describe the relationship of acting on another’s behalf.

D. None of the above – Incorrect, since “fiduciary capacity” directly fits the definition in the question.

Key Concept:Understanding fiduciary duty and fiduciary capacity, which form the legal foundation for identifying when a person has a duty to act on behalf of another, often forming the basis for fraud-related legal claims.

Detailed Explanation:

Rationale for Correct Answer:The word delude means to mislead the mind or judgment so completely that the truth is obscured. In fraud examination, this aligns with the ACFE definition of fraud as a “deliberate misrepresentation that causes another to act to their detriment.” Fraud is not merely a false statement; it involves concealment or suppression of the truth with the intent to induce reliance. Thus, delude most accurately represents the deeper essence of fraud.

Analysis of Incorrect Options (Distractors):

A. Deceive: While fraud does involve deception, this word does not fully convey the thoroughness of obscuring the truth that fraud entails.

C. Mislead: This implies causing error or leading astray but lacks the complete concealment aspect central to fraud.

D. Beguile: Often connotes charm or trickery rather than the intentional concealment that characterizes fraud.

Key Concept:This question tests the definition and essence of fraud — specifically that fraud is not only about deceiving but about deluding, or thoroughly misleading, in a way that obscures the truth.

Detailed Explanation:

Rationale for Correct Answer:Baiting is a social engineering tactic where fraudsters leave infected flash drives or storage media in public areas, hoping victims will plug them in, unknowingly installing malware. This is an accurate description.

Analysis of Incorrect Options:

A. Pharming – Involves redirecting users from legitimate websites to fraudulent ones, not mail redirection.

B. Dumpster diving – Searching physical trash for sensitive information, not computers from resellers.

C. Shoulder surfing – Observing someone’s screen or keystrokes, not access exploitation.

Key Concept: Identity theft techniques.

Detailed Explanation:

Rationale for Correct Answer:Weak or poor collection and recording procedures create opportunities for employees to skim. Without strong controls over cash receipts and documentation, employees can divert funds without detection.

Analysis of Incorrect Options:

A. Revenue sources and recording procedures – Too general; it is weak procedures that matter.

C. Internal audits and recording procedures – Audits help detect fraud, not enable it.

D. Register manipulations and recording procedures – Describes concealment, not the root cause.

Key Concept:Control weaknesses enable skimming.

Detailed Explanation:

Rationale for Correct Answer: Expenses appear on the income statement, not the balance sheet. The balance sheet includes assets, liabilities, and owners’ equity, representing the accounting equation.

Analysis of Incorrect Options:

A, B, D – All appear on the balance sheet.

Key Concept: Distinction between financial statements: balance sheet vs. income statement.

Detailed Explanation:

Rationale for Correct Answer:The Fraud Examiners Manual (2020) highlights document reviews, audit tracing, financial analysis, and inside witnesses as the primary methods of proving corrupt payments. Secret infiltration is not a standard fraud examination technique; it is more aligned with law enforcement undercover operations.

Analysis of Incorrect Options:

A. Taxation inquiries – A valid method to confirm payment sources.

C. Inside witness – Valuable evidence in corruption cases.

D. Tracing payments – Fundamental audit step in proving illicit payments.

Key Concept: Proving corrupt payments — standard audit and investigative methods.

Detailed Explanation:

Rationale for Correct Answer:Forced reconciliation occurs when fraudsters alter the perpetual inventory records to conceal shrinkage. By adjusting the records, they make the books appear consistent with the physical count, hiding theft or loss.

Analysis of Incorrect Options:

A – Too vague; does not specify perpetual records.

B – Incorrect; inventory is concealed, not shrinkage records.

D – Write-offs are a different concealment method.

Key Concept:Forced reconciliations as a concealment method in inventory fraud.

Comprehensive and Detailed Explanation From the ACFE Financial Transactions and Fraud Schemes Manual

The ACFE Fraud Examiners Manual (2020 International Edition), under the section on Information Security in Electronic Commerce Systems, describes the three primary security goals that must be achieved to protect users and account holders:

Confidentiality

Integrity

Availability

These three goals form the cornerstone of information system protection and are often referred to as the CIA triad.

1. Confidentiality

Confidentiality ensures that sensitive information is accessible only to authorized individuals. The Manual highlights that e-commerce systems must protect customers’ personal and financial data from unauthorized access.

2. Integrity

Integrity requires that the information in the system is accurate and has not been improperly altered. This prevents fraudulent manipulation of records, transactions, and account balances.

3. Availability

Availability ensures that systems and data are accessible to authorized users when needed. This includes preventing disruptions caused by system failures, denial-of-service attacks, or internal sabotage.

These three goals are explicitly documented in the ACFE Manual as essential security requirements for safeguarding electronic financial systems.

Why Option C is the Correct Answer

“Penetrability of data” is NOT an information security goal.

In fact, it is the opposite of what an information security framework seeks to achieve. No section of the ACFE Manual identifies "penetrability" as a required or legitimate objective. Instead, systems should be resistant to penetration attempts.

Thus, Option C does not belong to the CIA model or any ACFE-described security framework.

ACFE Manual Reference

These concepts are covered in the Financial Transactions and Fraud Schemes section discussing information security objectives for e-commerce environments, which identifies confidentiality, integrity, and availability as the foundational goals of secure systems.