Free ACFE CFE-Financial-Transactions-and-Fraud-Schemes Practice Exam with Questions & Answers | Set: 6

Detailed Explanation:

Rationale for Correct Answer: Economic extortion occurs when someone demands payment or benefit under threat of harm (explicit or implicit). A government official demanding money in exchange for awarding a contract is classic extortion.

Analysis of Incorrect Options:

A – This is a billing scheme (fraudulent disbursement), not extortion.

C – This is a kickback scheme (corruption).

D – This is an illegal gratuity scheme (reward after action).

Key Concept: Types of corruption—extortion vs. bribery vs. gratuities.

Detailed Explanation:

Rationale for Correct Answer:Address similarity reports are used to identify fraudulent disbursements by flagging payments sent to multiple vendors or payees at the same address. This helps detect fictitious payees or shell companies set up by fraudsters.

Analysis of Incorrect Options:

A. Duplicate payment lists – Detects duplicate disbursements, not necessarily fictitious payees.

C. Exception reports – Flag unusual transactions, but not specifically address similarities.

D. Electronic confirmations – Used to verify balances or transactions, not detect fictitious vendors.

Key Concept: Detection of fraudulent disbursements.

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: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: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:When a tangible asset is stolen (removed from the books), a debit entry would be missing its corresponding credit, leaving the books out-of-balance. Fraudsters often conceal this imbalance by falsifying entries (e.g., creating fictitious expenses or adjusting asset accounts).

Analysis of Incorrect Options:

A. Journal Entries – Too general; not the condition of the books.

C. False debits – A concealment method, but not the direct result.

D. None of all – Incorrect because “out-of-balance” is accurate.

Key Concept:Concealment of asset theft and impact on accounting records.

Detailed Explanation:

Rationale for Correct Answer: EFT fraud involves the unauthorized transfer of money from victims’ accounts using stolen access credentials. A hacker using stolen log-in details to redirect funds is the textbook example.

Analysis of Incorrect Options:

A – Describes identity theft/credit card fraud, not EFT fraud.

C – Describes skimming of card data, not EFT.

D – Describes payroll fraud, not EFT.

Key Concept: EFT fraud = unauthorized access to electronic banking/payment systems.

Comprehensive and Detailed Explanation (Based on the ACFE Fraud Examiners Manual – Financial Transactions and Fraud Schemes)

In the Identity Theft chapter of the Financial Transactions and Fraud Schemes section, the ACFE Manual explains that there are two primary methods of committing identity theft:

Traditional identity theft

Synthetic identity theft

These are listed under “Methods of Committing Identity Theft” (1.803), immediately followed by “Types of Identity Theft Schemes” (1.804) such as financial identity theft and criminal identity theft.

1. Why the correct answer is Traditional identity theft (Option B)

In traditional identity theft, the perpetrator uses the real, complete identity of another person—such as their name, government identification number, and birthdate—to impersonate that person for fraudulent purposes. This is exactly what is happening in the question:

The fraudster uses a real victim’s name, government identification number, and birthdate to open a credit card account in the victim’s name.

This matches the Manual’s categorization where traditional identity theft involves misuse of actual personal identifying information (PII) belonging to a real individual, rather than fabricating an identity. The Manual then explains that this stolen identity is often used in financial schemes, such as obtaining credit cards, loans, or other financial benefits, which falls under financial identity theft as a type of identity theft scheme.

So, in ACFE terms, the method is traditional identity theft, and the scheme type is financial identity theft (using another person’s identity to obtain credit or other financial benefits).

2. Why the other options are incorrect

Option A – New account identity theft

“New account identity theft” is a descriptive phrase sometimes used in practice to describe opening new credit accounts in another person’s name, but the ACFE Manual’s formal categorization focuses on:

Methods of committing identity theft:

Traditional identity theft

Synthetic identity theft

Types of identity theft schemes:

Financial identity theft

Criminal identity theft

Medical identity theft

Insurance identity theft

Tax identity theft

Employment identity theft

Business identity theft

“New account identity theft” is not one of the defined method categories in the Manual; the described conduct is captured under traditional identity theft (method) and financial identity theft (scheme type). Therefore, this option does not align with the ACFE’s terminology tested on the CFE exam.

Option C – Synthetic identity theft

The Manual distinguishes synthetic identity theft as a different method. Under “Methods of Committing Identity Theft” (1.803), it explains that synthetic identity theft involves combining real elements of identity (for example, a genuine government identification number) with fabricated or unrelated information (such as a made-up name, date of birth, or address) to create a partly fictitious identity.

In the question, the fraudster is not creating a hybrid or composite identity. They are using all of the real victim’s identifying information (name, government ID number, birthdate) and posing directly as that person. That is traditional, not synthetic.

Option D – Criminal identity theft

Under “Types of Identity Theft Schemes” (1.804–1.805), the Manual describes criminal identity theft as a scheme where a fraudster gives someone else’s identifying information to law enforcement or in criminal justice contexts, so that the victim’s identity is attached to the criminal record or charges.

Typical examples include:

Giving another person’s name and identification details when stopped or arrested

Causing warrants or criminal records to be issued in the victim’s name

In the question scenario, the fraudster is not interacting with law enforcement or shifting criminal records to the victim. Instead, they are opening a credit card account, which is a financial use of the stolen identity. Therefore, it fits financial identity theft as a scheme type, but traditional identity theft as the method.

Detailed Explanation:

Rationale for Correct Answer: The accounting framework a company must follow depends on the jurisdiction in which it is publicly traded. For example, U.S.-listed companies must follow GAAP, while companies in the EU must use IFRS. Some countries allow or require IFRS, others mandate local GAAP.

Analysis of Incorrect Options:

B – Incorrect; some jurisdictions have their own national GAAP not tied to U.S. GAAP or IFRS.

C – Incorrect; international operations do not mandate IFRS—jurisdictional rules apply.

D – Incorrect; U.S. GAAP is rules-based, IFRS is principles-based (the reverse of what’s stated).

Key Concept: Financial reporting standards are jurisdiction-driven.

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.