Free ACFE CFE-Fraud-Prevention-and-Deterrence Practice Exam with Questions & Answers | Set: 7

 Purpose of Fraud Risk Assessment:

Fraud risk assessment aims to identify vulnerabilities and evaluate the organization's exposure to fraud risks. It does not specifically provide an estimate of fraud losses.

 Why D is Correct:

Estimating fraud losses is not a standard objective of fraud risk assessments; rather, they focus on identifying and mitigating risks.

 Why Other Options are Correct:

A: Employee behavior is a critical factor in fraud risk.

B: Fraud awareness is a key outcome of the assessment.

C: High-risk designations indicate vulnerability, not confirmed fraud​​.

Corporate Governance Principles:

Transparency refers to disclosing material matters, enabling shareholders to make informed decisions.

This includes providing timely and accurate information about the company's financial performance, risks, and governance practices.

Analysis of Other Options:

B. Fairness:Involves equitable treatment of all shareholders.

C. Responsibility:Focuses on fulfilling legal and ethical obligations.

D. Accountability:Pertains to holding the board and management responsible for their actions.

Conclusion:Transparency ensures shareholders have the necessary information for decision-making.

Findings from the 2020 Report to the Nations:

Tips are the most common method of detecting fraud, accounting for over 40% of detected cases.

Whistleblower hotlines and other reporting mechanisms are vital for obtaining tips.

Analysis of Other Options:

A. Internal audit:While effective, it is less common than tips.

B. Confession:Rarely the initial method of detection.

D. External audit:Detects fraud in a smaller percentage of cases.

Conclusion:Tips are the most common method of fraud detection according to the 2020 Report to the Nations.

Effective Background Check Policies:

Verifying employment history involves more than just confirming dates. It includes understanding job roles, responsibilities, and performance. Solely asking for employment dates does not provide sufficient information to assess fraud risk.

Analysis of Other Options:

B. Background checks for cash-handling roles:This is critical for reducing fraud risks.

C. Background checks for promotions:This ensures that employees in sensitive positions have maintained integrity since hire.

D. Contacting references:Essential to gain insights into the candidate's character and reliability.

Conclusion:Option A is false because it suggests an overly simplistic approach to employment verification.

Findings from the 2020 Report to the Nations:

Asset misappropriation:Most common form of occupational fraud (e.g., theft of cash or inventory). It is frequent but less costly.

Financial statement fraud:Most costly, involving significant manipulation of financial data.

Analysis of Options:

A. Asset misappropriation; corruption:Corruption is less costly than financial statement fraud.

B. Corruption, asset misappropriation:Incorrect order and does not match the costliest scheme.

C. Financial statement fraud; corruption:Incorrect pairing.

Conclusion:Asset misappropriation is most common, and financial statement fraud is most costly.

Analysis of Each Scenario:

A. Rodrigo:Reporting unrelated findings without a clear mandate violates principles of focus and relevance under the ACFE Code.

B. Vivian:Overlooking evidence demonstrates a lack of due diligence and professionalism.

C. Tom:Complying with a court order is permissible, but failure to safeguard client confidentiality before receiving the order constitutes a breach.

Ethical Standards:

Each scenario demonstrates a failure to meet the ethical and professional responsibilities outlined in the ACFE Code.

Conclusion:All scenarios represent violations of the ACFE Code of Professional Ethics.

Integration of Fraud Risk Assessment in Audits:

The fraud risk assessment provides valuable input but does not replace the auditor’s independent responsibility to identify and assess fraud risks.

Why B is Correct:

Professional auditing standards require auditors to perform their own risk assessments, and the fraud risk assessment is only a tool to enhance this process.

Why Other Options are Correct:

A, C, and D reflect appropriate uses of fraud risk assessments in the audit process, such as increasing awareness and designing effective audit tests​​.

References for All Questions:

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

COSO frameworks for corporate governance and fraud risk management​​.

Standards for incorporating fraud risk assessments into the audit process​​.

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.