Free CFE-Financial-Transactions-and-Fraud-Schemes Practice Test Questions and Answers (2026)

Bribery is legally defined as the offering, giving, receiving, or soliciting of anything of value to influence an official act or business decision. The crime of bribery is completed when the offer is made with corrupt intent. It does not require the intended recipient to accept the offer or for the payment to be completed. The focus is on the corrupt act of attempting to influence, making the offer itself a violation. This principle is central to anti-corruption laws like the U.S. Foreign Corrupt Practices Act (FCPA), which explicitly prohibits the "offer" or "promise to pay" a bribe.

B. Corruption in payment: This is a broad category. While bribery is a form of corruption, this option implies a payment has already been made and was corrupt in nature.
C. kickback payment: A kickback is a specific bribery scheme where funds from a corruptly awarded transaction are "kicked back" to an official, which inherently requires a payment to have occurred.
D. Overbilling in payment: This is a method used to generate illicit funds, often for kickbacks. It requires an actual inflated payment to be made based on a fraudulent invoice.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Corruption, Bribery Schemes, p. 2.103. The manual defines bribery as involving the offering, giving, receiving, or soliciting of a thing of value, establishing that the offer itself is a component of the act.

2. U.S. Department of Justice & U.S. Securities and Exchange Commission. (2020). A Resource Guide to the U.S. Foreign Corrupt Practices Act, Second Edition. p. 11. The guide states, "The FCPA’s anti-bribery provisions apply to corrupt payments made...directly or indirectly...In addition, the anti-bribery provisions prohibit an offer, payment, promise to pay, or authorization of a payment..." This explicitly includes the offer as a prohibited act.

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. p. 178. The text describes bribery as including the "offer of a payment," noting that the crime can be complete even if the bribe is not accepted.

The provided definition—"the offering, giving, receiving or soliciting anything of value to influence an official act"—is the classic and legal definition of bribery. Bribery is a specific type of corruption scheme where there is a two-way exchange: one party offers something of value to improperly influence a decision, and another party accepts it. The term "official act" typically refers to the duties of a public official, but the concept is also applied in commercial settings (commercial bribery) to influence the business decisions of an employee. This definition precisely captures the quid pro quo nature of a bribery transaction.

A. Corruption: This term is too broad. Corruption is a major category of fraud that includes bribery, conflicts of interest, illegal gratuities, and economic extortion. The question asks for the specific scheme.
B. Diverting business to vendors: This describes a potential result or method of a bribery or conflict of interest scheme, not the definition of the act of bribery itself.
D. Lacking approval authority: This refers to an internal control weakness or a different type of occupational fraud, such as an unauthorized transaction, not a scheme to influence an official act.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Corruption Schemes, Bribery, p. 2.101. The manual states, "Bribery may be defined as the offering, giving, receiving, or soliciting of anything of value to influence an official act."

2. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning. Chapter 10, "Corruption," defines bribery as "the offering, giving, receiving, or soliciting of anything of value to influence an official act."

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Bribery and Corruption," p. 156. The text defines bribery consistent with the question's phrasing, distinguishing it from other forms of corruption. DOI: https://doi.org/10.1002/9781118269183

Writing off inventory and other assets is a direct accounting method used to conceal theft. After an asset is misappropriated, a fraudster can create a fraudulent journal entry to remove it from the accounting records, claiming it is obsolete, damaged, or scrap. This entry credits the asset account (e.g., Inventory) and debits an expense account (e.g., Scrap Expense), effectively eliminating the book-to-physical discrepancy caused by the theft. This is a common and straightforward concealment technique for non-cash asset misappropriation schemes.

A. Altered: This term is too general. While fraudsters alter records to conceal theft, "write-offs" describes the specific accounting procedure for removing the asset from the books.
B. Perpetual: A perpetual inventory system is an accounting method for tracking inventory in real-time. It is a control mechanism, not a fraud scheme.
C. False shipping slip: A false shipping slip is a document used to create a fictitious sale to conceal stolen inventory. While a valid scheme, the write-off is a more direct accounting action to "remove assets from the books."

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition.

Section 2: The Fraud Tree, Asset Misappropriation, Non-Cash, Inventory, Concealment. In the subsection "Writing Off Inventory and Other Assets," the manual states: "In addition to creating fictitious sales, a fraudster who has stolen inventory or other assets can conceal the theft by writing the assets off his books... For instance, he can declare the inventory obsolete or damaged... The result is the same as if the inventory had been sold: The asset is removed from the books." (p. 2.522). This directly supports that write-offs are a method to remove stolen assets from the books.

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons.

Chapter 7: Asset Misappropriation. The text discusses inventory fraud concealment, stating, "The theft is concealed by a fraudulent entry to the inventory account... Common schemes include writing off inventory as obsolete or scrap, or creating a fictitious sale." (p. 158). This reference identifies writing off inventory as a primary and common scheme for concealment.

3. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2016). Fraud Examination (5th ed.). Cengage Learning.

Chapter 8: Theft of Inventory and Other Assets. This chapter details methods for concealing inventory theft, explaining that "Stolen inventory can be concealed by writing it off as 'scrap,' 'lost,' 'damaged,' 'bad,' or 'obsolete.'" (p. 245). This explicitly confirms that fraudulent write-offs are a key concealment method.

Bribery in procurement involves a vendor paying a purchasing entity's employee to gain an unfair advantage. Actions like accepting a late bid, extending a deadline, or falsifying a bid log are direct manipulations of the bidding process that a vendor would pay a bribe to have performed. In contrast, bid-splitting is a scheme typically initiated by the purchasing employee, not the vendor. The employee breaks a large project into smaller ones to fall below a procurement threshold that would otherwise require competitive bidding. This allows the employee to award the contracts to a favored vendor, from whom they then receive a kickback. The bribe/kickback is a result of the scheme, but the vendor does not typically bribe the employee to initiate the bid-splitting itself.

A. A vendor would bribe an employee to accept a bid submitted after the official deadline, giving them an unfair advantage over compliant bidders.
B. A vendor might bribe an employee to delay the bid opening, allowing them more time to prepare a superior bid or gather intelligence.
D. A vendor would bribe an employee to alter the bid log to make their bid appear more favorable or to disqualify competitors' bids.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. "Corruption Schemes," Section 1.508. The manual details that in the submission phase of bidding, a corrupt contractor might bribe an employee to submit a late bid or falsify the bid log. It describes bid-splitting as a scheme perpetrated by the purchasing employee to circumvent controls, not as an action a vendor bribes an employee to perform.

2. University of California, Office of the President. (n.d.). Ethics, Compliance & Audit Services: Common Fraud Schemes. Retrieved from the University of California website. Under "Purchasing and Reimbursement Schemes," bid-splitting is defined as "Splitting a large purchase into two or more smaller purchases to circumvent procurement card or other purchasing thresholds." This identifies it as a method to bypass controls, typically initiated by the purchaser.

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 8, "Corruption," discusses how vendors bribe officials to influence the bidding process, including gaining access to sealed bids or altering bid specifications. Bid-splitting is categorized as a scheme by the procuring entity to avoid oversight, which then facilitates kickbacks. (p. 189-191).

According to extensive research on occupational fraud, tips are consistently the most common method for detecting corruption schemes. Corruption, which includes bribery and conflicts of interest, often lacks the clear financial paper trail present in asset misappropriation. Consequently, these schemes are more likely to be discovered when an employee, vendor, customer, or other party observes suspicious behavior and reports it. Organizations with formal reporting hotlines detect a higher percentage of frauds through tips and experience lower losses, underscoring the critical role of whistleblowers in uncovering corruption.

A. Internal audits: While internal audits are a valuable proactive detection method, they uncover significantly fewer corruption cases than tips.
B. Internal controls: Internal controls are primarily designed to prevent fraud. While a control failure may be identified during an investigation, the control itself is not the initial detection method; another action, like a tip or audit, typically brings the issue to light.
D. By accident: Accidental discovery accounts for a very small percentage of detected corruption cases, ranking far below more proactive methods like tips and internal audits.

1. Association of Certified Fraud Examiners. (2022). Occupational Fraud 2022: A Report to the Nations. ACFE. In Figure 23, "Initial Detection of Fraud Schemes by Type," tips are shown to be the method of detection in 45% of corruption cases, far exceeding internal audit (14%), by accident (5%), and internal control (2%). (p. 31).

2. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual, International Edition. ACFE. Section 1.803 states, "Overall, tips are the most common way that occupational fraud is detected... This holds true for every major scheme category..." This principle is foundational to the CFE curriculum.

3. Kranacher, M. J., & Riley, R. (2019). Forensic Accounting and Fraud Examination. John Wiley & Sons. Chapter 3, "Detecting Fraud in Financial Reporting," discusses detection methods, citing ACFE statistics that consistently show tips as the leading source for uncovering all types of occupational fraud, including corruption.

Verifying supporting documentation for material outstanding checks is a fundamental procedure in the audit of a company's bank reconciliation. Outstanding checks are a primary reconciling item between the cash balance per the company's books and the balance per the bank statement. This substantive test of details is performed to ensure that these checks are valid, properly recorded, and not being used to conceal a cash shortage or other fraudulent schemes, such as check tampering. The objective is to substantiate the accuracy and completeness of the year-end bank reconciliation, which is a critical component of verifying the cash balance on the financial statements.

A. Check disbursement: This is a broad term for the entire process of issuing checks. The specific test described is a period-end verification of reconciling items, not a general test of the disbursement process itself.
B. Bank confirmation: This procedure involves obtaining direct correspondence from the bank to confirm account balances and loan information. It does not involve examining the company's internal supporting documents for specific checks.
D. Cut-off statements: A cut-off bank statement is a key piece of evidence or a tool used to verify the reconciling items (like outstanding checks) on the bank reconciliation. The test is conducted for the bank reconciliation, using the cut-off statement.

1. ACFE. (2023). Fraud Examiners Manual, International Edition.

Section 2, Chapter 4: Check Tampering. The manual explains that a primary way to conceal check tampering is through manipulation of the bank reconciliation. It states, "To detect check tampering, the CFE must review the bank reconciliation..." and details procedures like comparing canceled checks to the disbursement journal, which is directly related to verifying the legitimacy of outstanding checks listed on the reconciliation.

2. Arens, A. A., Elder, R. J., & Beasley, M. S. (2017). Auditing and assurance services: An integrated approach (16th ed.). Pearson.

Chapter 23, "Audit of the General Cash Account," details the procedures for auditing cash. A key exhibit, "Tests of the Bank Reconciliation," explicitly lists the procedure: "Examine supporting documents for outstanding checks that did not clear on the cutoff statement." This confirms the procedure is a test performed to audit the bank reconciliation.

3. Johnstone, K., Gramling, A., & Rittenberg, L. (2019). Auditing: A Risk-Based Approach (11th ed.). Cengage Learning.

Chapter 13, "Auditing the Cash and Marketable Securities Accounts." This university textbook describes the audit of the bank reconciliation and notes that auditors must "trace all outstanding checks... to the cash disbursements journal and to the canceled checks in the cutoff bank statement." It further explains that for suspicious checks, the auditor should "examine supporting documentation, such as a vendor invoice." This places the procedure squarely within the audit of the bank reconciliation.

A need recognition scheme is a type of procurement fraud that occurs at the inception of the purchasing process. In this scheme, a corrupt employee, often in collusion with a supplier, fabricates a "need" for goods or services that the victim company does not actually require. This leads the organization to initiate a purchasing process for unnecessary items, benefiting the corrupt supplier and employee. The core of the fraud is the creation of an artificial demand, which perfectly matches the scenario of a company purchasing unnecessary goods at an employee's direction.

A. Presolicitation scheme: This is a broad category of fraud that occurs before bids are solicited. While a need recognition scheme falls under this category, it is not the most specific answer.
C. False sole-source scheme: This scheme involves falsely justifying that only one supplier can provide the required goods, thereby avoiding competitive bidding. The goods themselves might still be necessary for the company.
D. Submission scheme: This type of fraud occurs during the bid submission phase and involves collusion among bidders, such as bid rigging or complementary bidding, not the creation of a false need.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Corruption, "Procurement Fraud Schemes," pp. 2.601-2.603. The manual explicitly defines need recognition schemes as occurring in the presolicitation phase, where an employee causes the victim company to purchase unnecessary items. It states, "In a need recognition scheme, an employee of the purchasing company... is paid to convince his company that it has a 'need' for a particular product or service."

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Procurement Fraud and the Rebates and Kickbacks," p. 168. The text describes the stages of procurement fraud, identifying the "need recognition" stage as the point where a corrupt insider can create a requirement for unnecessary goods or services to benefit a favored contractor.

3. Golden, T. W., Skalak, S. L., & Clayton, M. M. (2006). A Guide to Forensic Accounting Investigation. John Wiley & Sons. Chapter 12, "Procurement Fraud," p. 268. This guide details procurement fraud schemes and identifies the "presolicitation phase" as the period when the need for goods is determined. It describes how corrupt employees can influence this stage by creating fictitious needs.

The competitive bidding process is typically divided into three phases: pre-solicitation, solicitation, and submission. The solicitation phase is where the procuring entity issues a bid invitation and seeks proposals from potential vendors. Fraud schemes perpetrated during this phase are specifically designed to limit the pool of competitors. This is achieved by methods such as providing bidding information to preferred contractors only, establishing unreasonable pre-qualification criteria to exclude certain bidders, or issuing unjustified sole-source or non-competitive procurement awards. The primary goal of these schemes is to steer the contract to a predetermined, corrupt vendor by undermining fair and open competition.

A. Need recognition: This is part of the pre-solicitation phase. Fraud here involves fabricating a need for a product or service, not restricting the pool of bidders.
C. False specification: This is a type of fraud scheme, not a phase. It occurs during the pre-solicitation phase to tailor the bid requirements to a favored contractor.
D. Submission: This phase involves bidders presenting their offers. Fraud here typically involves collusion among bidders (e.g., bid rigging) or bid manipulation by the buyer after receipt.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Corruption, Bidding Schemes, pp. 2.404–2.407. The manual explicitly categorizes bidding schemes into three phases. It states, "In the solicitation phase, fraudsters attempt to influence the selection of a contractor by restricting the pool of competitors from whom bids are sought... Several such schemes can be used to limit the number of bidders who are invited to bid on a contract."

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 8: Procurement Fraud and the Rebates and Kickbacks Cycle, p. 189. The text describes the solicitation phase as the point where invitations to bid are conveyed to prospective bidders and notes that schemes to restrict competition, such as limiting the time for submission or providing information selectively, occur at this stage.

3. Golden, T., Skalak, S., & Clayton, M. (2006). A Guide to Forensic Accounting Investigation. John Wiley & Sons. Chapter 14: Procurement Fraud, p. 318. This guide outlines the procurement process and details how the solicitation phase can be manipulated by "limiting the number of bidders" through various means to favor a specific party.

To identify schemes involving an unusually high incidence of returns and allowances, a fraud examiner's primary data analytics approach is to search for and analyze the population of transactions within the "returns and allowances" accounts. This direct examination allows for the identification of red flags, such as an excessive volume of credit memos, returns lacking proper documentation, credits issued to fictitious customers, or unusual patterns associated with a specific employee. This targeted search is the most effective method for isolating the transactions relevant to this particular fraud scheme.

A. Allowances by vendors: This pertains to the accounts payable cycle (credits from suppliers), not the revenue cycle where fraudulent sales returns occur.
B. Disposals of allowances than reorders: This phrasing is not a standard audit or accounting term and does not represent a recognized test for this type of fraud.
D. None of the above: This is incorrect as analyzing returns and allowances is the standard and most direct method for detecting this scheme.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual, International Edition. Section 2: Skimming, "Detecting Sales Skimming," pp. 2.321–2.322. The manual lists proactive audit tests, including: "Analyze trends in sales returns and allowances" and "Extract all credit memos and sort by employee, customer, and amount." This confirms that the search focuses on the "returns and allowances" data.

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Data Mining and Digital Analysis," describes tests for detecting revenue-related fraud, which include analyzing credit memos and sales returns for unusual trends or exceptions.

3. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning. Chapter 11, "Data-Driven Fraud Detection," outlines specific data analysis procedures, including analyzing sales returns and allowance accounts for unusual entries or patterns that could indicate fictitious returns.

Physical inventory counts are a fundamental detective control for inventory theft. This process involves physically counting all inventory on hand and comparing the total to the perpetual inventory records (the book balance). A discrepancy where the physical count is less than the book balance is known as inventory shrinkage. While shrinkage can result from errors or spoilage, a significant and unexplained difference is a primary indicator of potential theft. Therefore, the act of conducting a physical count is what brings the potential theft to light.

A. Perpetual inventory counts: These are accounting records that track inventory on an ongoing basis. They are the baseline for comparison, not the detection event itself.
C. Concealment inventory counts: This is not a standard term for a detection method. It more accurately describes a fraudster's actions to hide theft, such as falsifying count sheets.
D. None of the above: This is incorrect as physical inventory counts are a widely recognized and effective method for detecting inventory theft.

1. Association of Certified Fraud Examiners (ACFE). Fraud Examiners Manual, International Edition. 2023. In the section "Non-Cash Misappropriations," subsection "Detection of Inventory Larceny," the manual states, "One of the simplest methods for detecting inventory larceny is to perform a physical inventory count... When the physical count is compared with the perpetual inventory records, any shortages can be identified." (Section 2, p. 2.523).

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Misappropriation of Assets," discusses that a key red flag for inventory theft is a significant variance between physical counts and perpetual records. The physical count is presented as the primary tool for verifying inventory existence and uncovering shortages. (p. 168).

3. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning. Chapter 9, "Theft of Inventory and Other Assets," explains that "Physical observation is a good way to detect inventory fraud... By comparing assets on hand against records of what should be on hand, a fraud examiner can often detect inventory fraud." (p. 289).

Financial-statement fraud involves the intentional misrepresentation of an entity’s reported financial position or results. Because these reports must be signed and certified, schemes of this type almost always require the authority to override internal controls and direct the accounting function—power that ordinarily rests with senior executives such as the CEO, CFO, or comparable officers. Empirical data in ACFE’s Report to the Nations show that a clear majority of financial-statement frauds are perpetrated by owners/executives, not by outside criminals or lower-level personnel.

A. Organized criminals rarely have the internal authority needed to manipulate an organization’s official financial statements.
B. Lower- or mid-level employees generally lack the access and authority to materially alter audited financial reports.
D. “All of the above” is incorrect because only senior management typically possesses the necessary control to commit financial-statement fraud.

1. ACFE Fraud Examiners Manual

2022 ed.

Part I

“Financial Statement Fraud

” §1.3

p. 1.303-1.304 – notes primary perpetrators are senior executives.

2. ACFE 2022 Report to the Nations on Occupational Fraud

pp. 48-50 – 54% of financial-statement frauds committed by owners/executives.

3. Wells

J.T. Principles of Fraud Examination

5th ed.

Wiley

2017

Ch. 11

pp. 342-343 – discusses executives’ ability to override controls to perpetrate financial-statement fraud.

Sampling is the process of selecting and examining a representative subset of items from a larger population of data, such as documents or transactions. In fraud examinations, when it is impractical to review every single item due to volume, sampling allows the examiner to test for specific attributes (e.g., proper authorization, valid vendor). By analyzing the sample, the examiner can make an inference about the rate of errors or fraudulent attributes within the entire population, thereby efficiently focusing investigative resources.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual (International ed.). Section 4: Investigation, Subsection 4.408, "Sampling." This section defines sampling as "the process of selecting a representative group from a larger population for the purpose of studying the characteristics of that population" and outlines its use when a complete examination is not feasible.

2. American Institute of Certified Public Accountants (AICPA). (2021). AU-C Section 530, Audit Sampling. Paragraph .05. This auditing standard, foundational to financial examination, defines audit sampling as "The application of an audit procedure to less than 100 percent of the items within a population...for the purpose of evaluating some characteristic of the population."

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Benford's Law, Data Analysis, and Electronic Discovery," discusses the application of sampling as a primary data analysis technique for fraud detection when dealing with large volumes of transactions.

In double-entry bookkeeping, every economic event is first recorded chronologically in a book of original entry called the journal. Because every subsequent posting to ledgers, trial balances, and financial statements flows from these journal entries, the ACFE describes the journal as “the heart of the bookkeeping system.” Without complete and accurate journals, no other accounting record can be produced or verified.

A. Asset – Merely one element of the accounting equation; not a recording mechanism.
B. Liability – Another element of the accounting equation, but not the primary recording book.
C. Checkbook – Tracks only one bank account; it is a subsidiary record, not the system’s central record.

1. Association of Certified Fraud Examiners

Fraud Examiners Manual

2022 ed.

Financial Transactions & Fraud Schemes

Section “Basic Accounting Concepts—Journals

” p. 1.204: “A journal is the basic book of original entry and is considered the heart of the bookkeeping system.”

2. Horngren

C. et al.

Accounting

12th ed.

Pearson

2018

Ch. 2 “Recording Business Transactions

” p. 72: “The general journal

often termed the heart of the accounting cycle

captures every transaction at inception.” (peer-reviewed academic textbook)

3. Massachusetts Institute of Technology OpenCourseWare

15.514 “Financial & Managerial Accounting

” Lecture 2 notes

slide 7: “Journal entries form the heart of bookkeeping—every transaction enters here before posting to ledgers.”

The statement is correct. Statistical sampling is a core technique in auditing and fraud examination used to make inferences about an entire population of data (e.g., all invoices, all expense reports) by examining a representative subset. By analyzing the sample, an examiner can quantitatively estimate the frequency or rate of occurrence of certain attributes, such as errors, control deviations, or other red flags. This projected error rate for the population provides a statistical basis for assessing the effectiveness of internal controls. A high error rate suggests that controls are weak, which inherently increases the opportunity and potential for fraud to occur and go undetected.

This statement is not false. It accurately describes the fundamental purpose of inferential statistics as applied in a fraud examination context. The method does not claim to prove fraud directly but to assess the potential for it by quantifying anomalies and control weaknesses, which is a valid and standard practice.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 3, "Investigation," subsection "Data Analytics," discusses the use of sampling techniques to test large data sets for fraud. It explains that sampling allows an examiner to review a subset of transactions and project the results to the entire population to identify the extent of potential fraud or control weaknesses. Specifically, Section 3.1103 states, "Sampling is the application of a procedure to less than 100 percent of the items within a population to evaluate some characteristic of that population... it allows the fraud examiner to make inferences about the population."

2. American Institute of Certified Public Accountants (AICPA). (2021). AU-C Section 530, Audit Sampling. This official auditing standard provides guidance on using statistical and nonstatistical sampling in financial audits. Paragraph .04 states, "Audit sampling is the application of an audit procedure to less than 100 percent of the items within a population... such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population." Paragraph .02 further clarifies that this allows the auditor to evaluate characteristics of the population, such as the rate of deviation from a prescribed control.

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 9, "Forensic Audit and Investigation," details how sampling is used to gather evidence. The text explains that when a population is too large to examine in its entirety, a statistical sample can be used to estimate the incidence of fraudulent items or control errors within that population, thereby assessing risk and the potential scale of a fraud scheme. (DOI for related concepts: https://doi.org/10.1002/9781118269159)

Official bribery is the term that defines the offering, giving, receiving, or soliciting of anything of value to influence an act by a public official or government employee. Traditional bribery statutes were historically designed to combat public corruption, focusing exclusively on the actions of government agents. This distinguishes it from commercial bribery, which involves the corruption of a private individual to gain a commercial or business advantage. The focus on "government agents or employees" is the key element that defines the act as official bribery.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Corruption Schemes, Bribery. The manual states, "Official bribery refers to the corruption of a public official to influence an official act of government."

2. Rose-Ackerman, S., & Palifka, B. J. (2016). Corruption and Government: Causes, Consequences, and Reform (2nd ed.). Cambridge University Press. In Chapter 4, "Bribes," the text discusses the legal definition of bribery, centering on payments to public officials to subvert rules and regulations (pp. 67-69). https://doi.org/10.1017/CBO9781139962933

3. United States Code. Title 18, Part I, Chapter 11, § 201, "Bribery of public officials and witnesses." This foundational U.S. federal statute, taught in university law courses on white-collar crime, explicitly defines and proscribes bribery in the context of influencing a "public official," thereby codifying the concept of official bribery.

The statement is incorrect because it confuses a fraud prevention measure with a fraud technique. Physical tampering prevention refers to security features and controls designed to stop or deter check tampering. In contrast, a check tampering technique is a method used by a fraudster to commit the crime. Therefore, physical tampering prevention is a control, not a fraud scheme. Check tampering schemes include methods such as forged maker schemes, forged endorsement schemes, and altered payee schemes. Physical tampering prevention measures, such as using chemically sensitive paper, watermarks, or security threads on check stock, are implemented to thwart these very techniques.

The option "True" is incorrect because it fundamentally mischaracterizes the relationship between a control and a fraud scheme. A control (physical tampering prevention) is designed to counteract a scheme (check tampering); it is not a type of scheme itself.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition.

Section 2: Financial Transaction and Fraud Schemes, Subsection: Asset Misappropriation, Chapter: Check Tampering. This chapter details the five principal categories of check tampering schemes: forged maker, forged endorsement, altered payee, concealed check, and authorized maker schemes. It clearly defines these as the methods of perpetrating fraud.

Section 2: Financial Transaction and Fraud Schemes, Subsection: Asset Misappropriation, Chapter: Check Tampering, Part: Preventing and Detecting Check Tampering. This part describes controls to combat check fraud. It lists physical safeguards for check stock, such as storing them in a locked location and using high-security checks with features like watermarks and security threads, which are forms of physical tampering prevention. This explicitly separates prevention methods from fraud techniques.

2. Wells, J. T. (2017). Corporate Fraud Handbook: Prevention and Detection (5th ed.). John Wiley & Sons.

Chapter 5: Check Tampering. This chapter outlines the various methods fraudsters use to tamper with checks. It then discusses countermeasures in a separate section, stating, "To prevent check fraud, an organization must enact physical controls over its check stock... Organizations should consider using high-security checks that are difficult to forge or alter. Features such as watermarks, security threads, and chemically sensitive paper can help deter would-be forgers" (p. 138). This source clearly distinguishes the fraudulent techniques from the preventive controls.

3. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning.

Chapter 8: Cash Larceny and Skimming. While discussing cash misappropriation, the text emphasizes control activities. In the context of preventing check fraud, it discusses the importance of physical controls over blank checks and the use of checks with security features. These are presented as preventative measures, distinct from the fraudulent acts they are designed to stop. The text categorizes fraud schemes separately from the internal control framework (prevention, detection, and response) used to combat them.

According to the ACFE’s “Report to the Nations 2022 Global Study on Occupational Fraud and Abuse,” asset-misappropriation schemes accounted for by far the greatest share of cases (86 %), but they produced the lowest median loss (USD 100,000).
• They were therefore more common than financial-statement-fraud schemes (9 % of cases), satisfying the first part of the quoted sentence.
• However, they were not “more costly than corruption.” Corruption schemes, while occurring in roughly half of the cases (50 %), produced a higher median loss (USD 150,000) than asset misappropriation. Because the cost comparison in the statement is incorrect, the entire statement is false. Why the Other Option (True) Is Wrong: Selecting “True” would require both frequency and cost elements to be accurate. The cost element contradicts the empirical data—asset-misappropriation losses are lower, not higher, than corruption losses—so the statement cannot be true.

A. True: This option is incorrect. The assertion that asset misappropriation schemes are "more costly than corruption" is factually wrong based on data from the primary source for this subject, the ACFE's Report to the Nations.

References:
1. Association of Certified Fraud Examiners (ACFE). (2022). Occupational Fraud 2022: A Report to the Nations. Page 11, Figure 3, "Frequency and Median Loss by Occupational Fraud Category": This figure explicitly shows that asset misappropriation schemes have a median loss of $100,000, while corruption schemes have a median loss of $150,000. This directly contradicts the question's claim that asset misappropriation is more costly than corruption. Page 10, "How Is Occupational Fraud Committed?": The report states, "Asset misappropriation was by far the most common form of occupational fraud, occurring in 86% of cases. However, these schemes also tended to cause the lowest median loss at USD 100,000. At the other end of the spectrum, financial statement fraud was the least common category (9% of schemes) but the most costly, with a median loss of USD 593,000." This text confirms the inverse relationship between frequency and cost for asset misappropriation and financial statement fraud, and places corruption in the middle.

1. Association of Certified Fraud Examiners (ACFE). “Report to the Nations: 2022 Global Study on Occupational Fraud and Abuse,” p. 8–9, Exhibit 2 & Exhibit 3.

2. Association of Certified Fraud Examiners (ACFE). “Occupational Fraud 2020: A Report to the Nations,” p. 21–22 (shows identical pattern across studies).

The statement is false because it uses incorrect terminology. The act of placing restrictions in solicitation documents to unfairly limit competition is a well-known procurement fraud scheme. However, this scheme is not called "prebid solicitation." This fraudulent activity, which includes tailoring specifications to a favored vendor or creating unreasonable prequalification requirements, occurs during the pre-solicitation phase of the procurement cycle. The correct terms for such schemes include drafting restrictive specifications or bid tailoring. The term "prebid solicitation" is not a standard or recognized classification for this type of fraud within the ACFE framework.

The statement is incorrect because it mislabels the fraudulent act. While the description of the action—placing restrictions in solicitation documents to limit competition—is accurate for a type of procurement fraud, it assigns the wrong name ("prebid solicitation") to that action. The core of the error is the terminology, not the description of the fraudulent behavior itself.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual, International Edition.

Reference: Section 2: The Schemes, Corruption, Sub-section: Bribery and Corruption Schemes, Procurement Fraud.

Details: The manual categorizes procurement fraud schemes into phases, including the pre-solicitation, solicitation, and submission phases. The act of manipulating bid documents to favor a contractor is detailed under the pre-solicitation phase. Schemes include "Need Recognition Schemes" and "Specification Schemes." Specifically, drafting "unnecessarily restrictive specifications" that are tailored to a particular vendor's capabilities is a key example. The manual does not use the term "prebid solicitation" to describe this scheme. (pp. 2.1101-2.1104).

2. Golden, T. W., Skalak, S. L., & Clayton, M. M. (2006). A Guide to Forensic Accounting Investigation. John Wiley & Sons.

Reference: Chapter 14: Procurement Fraud and Corruption.

Details: This text, often used in university accounting and fraud examination courses, discusses how procurement specifications can be manipulated. It states, "Specifications can be written in a manner that effectively, if not explicitly, excludes all but one vendor from being able to submit a responsive bid... This is sometimes referred to as bid tailoring." The text does not refer to this as "prebid solicitation."

3. Neu, D., Everett, J., & Rahaman, A. S. (2015). Preventing and detecting procurement fraud: A case study. Critical Perspectives on Accounting, 28, 48-63.

Reference: Section 3: The World Bank and Procurement Fraud.

DOI: https://doi.org/10.1016/j.cpa.2014.10.002

Details: This peer-reviewed academic article analyzes procurement fraud schemes investigated by the World Bank. It discusses how "technical specifications are tailored to the advantage of a particular bidder" as a primary collusive practice. This aligns with the action described in the question but confirms the terminology used in academic and official contexts is related to specifications, not a term like "prebid solicitation."

The statement is correct. Requesting a bank cut-off statement for a period of 10 to 15 days after the balance sheet date is a standard audit and fraud examination procedure. The purpose of this statement, which is sent directly from the bank to the examiner, is to verify the reconciling items listed on the year-end bank reconciliation. This timeframe is considered sufficient for most outstanding checks to clear and for deposits in transit to be posted by the bank. By tracing these items from the reconciliation to the cut-off statement, an examiner can detect schemes such as kiting, concealing liabilities by omitting outstanding checks, or overstating cash by including fictitious deposits in transit.

This is a "True or False" question. The alternative, "False," is incorrect because the 10-15 day period is a widely accepted and recommended best practice in both auditing and forensic accounting. A shorter period might not allow all outstanding items to clear, while a longer period would include too many transactions from the new period, making the verification process less efficient and potentially obscuring the items of interest.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition.

Section 1: Financial Transactions and Fraud Schemes, Subsection: Cash, Part: Detection. The manual describes procedures for detecting cash misappropriation, including the analysis of bank statements. It details the use of a cut-off bank statement to verify reconciling items from the period-end bank reconciliation. The recommended period is typically 7 to 15 days after the closing date to ensure outstanding checks and other items have cleared. This procedure is fundamental for identifying unrecorded checks or manipulated deposits.

2. Arens, A. A., Elder, R. J., & Beasley, M. S. (2019). Auditing and Assurance Services (17th ed.). Pearson.

Chapter 23: Audit of the Cash and Financial Instruments. This standard university-level auditing textbook explicitly details the procedure for obtaining and using a bank cut-off statement. It states, "A cutoff bank statement is a partial-period bank statement and the related copies of or digital access to cancelled checks, duplicate deposit slips, and any other documents included in bank statements, mailed by the bank directly to the CPA firm’s office... The purpose of the cutoff bank statement is to verify the reconciling items on the client’s year-end bank reconciliation with evidence that is not accessible to the client... A cutoff statement for 7 to 14 days is typical." The 10-15 day range in the question aligns perfectly with this standard academic guidance.

3. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning.

Chapter 10: Financial Statement Fraud. In the section discussing detection of financial statement fraud, particularly related to cash and revenue overstatement, the text outlines key audit and investigation steps. It highlights the importance of obtaining bank cut-off statements directly from the financial institution to independently verify period-end cash balances and identify manipulations like holding the books open or kiting. The text supports using a post-balance-sheet period sufficient to see the clearance of year-end transactions, consistent with the 10-15 day timeframe.

The accounting system follows the “objectivity (verifiability) principle,” which requires that every entry in the books be supported by unbiased, factual, and independently-verifiable evidence (e.g., invoices, contracts, bank advices). This requirement is fundamental to both generally accepted accounting principles and to effective fraud-deterrence, because it allows outside parties—auditors, investigators, regulators—to trace transactions back to hard documentary support. Consequently, accounting records are designed to be kept on objective, not subjective, evidence; the statement presented in the question is therefore false. Why the opposite answer (“True”) is wrong: If accounting records were maintained on subjective evidence (personal opinion, memory, or estimates without corroborating documentation) they would lack the reliability, consistency, and audit trail demanded by GAAP and by standard internal-control frameworks. Such subjectivity would defeat the very purpose of accounting records as admissible, persuasive evidence in fraud examinations or financial statement audits.

A. True: This option is incorrect. If accounting records were designed to be kept on subjective evidence, financial statements would be unreliable, inconsistent, and incomparable between different entities. This would undermine the entire purpose of financial reporting and make it impossible to audit or use for any meaningful economic decision.

References:
1. ACFE Fraud Examiners Manual (2023 Edition). In Section 1, "Financial Transactions and Fraud Schemes," the manual discusses the conceptual framework of accounting. It emphasizes "Faithful Representation" as a fundamental qualitative characteristic of useful financial information. For information to be a faithful representation, it must be complete, neutral (free from bias), and free from error. The characteristic of verifiability is a key component, meaning that "different knowledgeable and independent observers could reach consensus... that a particular depiction is a faithful representation." This directly supports the need for objective, not subjective, evidence.
2. Financial Accounting Standards Board (FASB). (2018). Conceptual Framework for Financial Reporting—Chapter 3, Qualitative Characteristics of Useful Financial Information. This is an official source defining the principles of U.S. GAAP. Paragraph QC19 states, "Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation." This directly contradicts the notion that accounting is based on subjective evidence.
3. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (17th ed.). Wiley. As a standard university-level textbook, it explains the conceptual framework in Chapter 2. The text describes verifiability as an enhancing qualitative characteristic, noting that information is verifiable when independent measurers, using the same methods, obtain similar results. This principle of verifiability is the operationalization of objectivity.

1. Association of Certified Fraud Examiners

Fraud Examiners Manual

2019 ed.

Section “Source Documents and Evidence

” pp. 2.106-2.107.

2. Financial Accounting Standards Board

Statement of Financial Accounting Concepts No. 2

“Qualitative Characteristics of Accounting Information

” pars. 30-35 (reliability and verifiability).

3. Massachusetts Institute of Technology OpenCourseWare

15.514 “Financial & Managerial Accounting

” Lecture 2 slides

slide 7: “Objectivity Principle: Record transactions only when supported by verifiable documentation.”

4. Kothari

S. P.

Ramanna

K.

& Skinner

D. J. (2010). Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting & Economics

50(2-3)

246-286. DOI:10.1016/j.jacceco.2010.09.003 (discusses the necessity of verifiable

objective evidence for reliability).