FORENSIC ACCOUNTING AND FRAUD
EXAMINATION ACTUAL TEST QUESTIONS
AND SOLUTIONS COMPREHENSIVE
REVIEW PACKAGE
●● 6-1. Describe how a discount might be used to conceal a corrupt act
(involving missing cash).
Answer: There are several ways that a discount might be used to conceal
a corrupt act. Fundamentally, a corrupt act involving missing cash (a
lower cash balance than expected), results in the cash balance in the
bank account being less than expected without the corrupt act. As such, a
discount (a debit to a contra-revenue or an expense account) has a debit
balance and the offsetting credit lowers (reduces) the general ledger cash
balance. As such, the discount brings the cash balance from the bank in
line (equal or reconciled to) with the cash balance in the general ledger
account. Because a discount is a common feature associated with
collection of accounts receivables, it would not alert auditors to
malfeasance, especially when the bank balance equals or reconciles to
the general ledger cash balance.
●● What are the different types of corruption schemes?
Answer: Corruption schemes in ACFE studies are broken down into four
classifications:
Bribery - the offering, giving, receiving, or soliciting anything of value
to influence an official act
,Illegal gratuities - similar to bribery schemes, except that something of
value is given to an employee to reward a decision rather than influence
it
Economic extortion - when one person demands payment from another
with the implication that refusal to pay the extorter will result in some
harm, such as a loss of business
Conflicts of interest - when an employee, manager, or executive has an
undisclosed economic or personal interest in a transaction that adversely
affects the company
●● 6-1. How do bribery and illegal gratuities differ?
Answer: Bribery occurs before the decision is made to influence the
outcome, and an illegal gratuity is given after the decision as a reward.
●● What is meant by a conflict of interest?
Answer: The crux of a conflict case is that the fraudster takes advantage
of his employer; the victim organization is unaware that its employee
has divided loyalties that may adversely affect the employer.
●● What is defined as "something of value?"
Answer: There are several ways for a vendor to "pay" an employee; the
most common is money. In the most basic bribery scheme, the vendor
simply gives the employee currency.
,Instead of cash payments, some employees accept promises of future
employment as bribes. As with money, the promise of employment
might be intended to benefit a third party rather than the corrupt
employee.
A corrupt individual may also divert a major purchase commitment to a
supplier in return for a percent of ownership in the supplier's business.
Gifts of all kinds may also be used to corrupt an employee. The types of
gifts used to sway an employee's influence can include free liquor and
meals, free travel and accommodations, cars, other merchandise, and
even sexual favors.
Other inducements include the paying off of a corrupt employee's loans
or credit card bills, the offering of loans on very favorable terms, and
transfers of property at substantially below market value. These are just
a few examples of the things that can be given to an employee in return
for the exercise of his influence.
●● How can conflicts of interest be prevented and detected?
Answer: The prevention of conflicts of interest can be difficult. The
primary resource for heading off this complex act is a company ethics
policy that specifically addresses the problems and illegalities associated
with conflicts of interest and related offenses. The purpose of the policy
is to make the position of the company absolutely clear, to define what
constitutes a conflict or an improper relationship, and to express in no
uncertain terms that conflicts are not appropriate and will not be
, tolerated. The absence of a clear policy leaves an opportunity for a
perpetrator to rationalize his behavior or to claim ignorance of any
wrongdoing.
A policy requiring employees to complete an annual disclosure
statement is also an excellent proactive approach to preventing conflicts
of interest. Comparing the disclosed names and addresses with the
vendor list may reveal real conflicts of interest and the appearance of
such. Communication with employees regarding their other business
interests is also advisable.
In order to detect conflicts of interest, organizations should concentrate
on establishing an anonymous reporting mechanism to receive tips and
complaints. This is how most conflict of interest cases are detected.
Complaints typically come from employees who are aware of a co-
worker's self-dealing, or from vendors who have knowledge that a
competing vendor with ties to an employee of the organization is being
favored.
Another detection method that can be helpful is to periodically run
comparisons between vendor and employee addresses and phone
numbers. Obviously, if a vendor is owned or run by an employee of the
organization without that fact having been disclosed, this would
constitute a conflict of interest.
●● What is a kickback scheme and how is it committed
EXAMINATION ACTUAL TEST QUESTIONS
AND SOLUTIONS COMPREHENSIVE
REVIEW PACKAGE
●● 6-1. Describe how a discount might be used to conceal a corrupt act
(involving missing cash).
Answer: There are several ways that a discount might be used to conceal
a corrupt act. Fundamentally, a corrupt act involving missing cash (a
lower cash balance than expected), results in the cash balance in the
bank account being less than expected without the corrupt act. As such, a
discount (a debit to a contra-revenue or an expense account) has a debit
balance and the offsetting credit lowers (reduces) the general ledger cash
balance. As such, the discount brings the cash balance from the bank in
line (equal or reconciled to) with the cash balance in the general ledger
account. Because a discount is a common feature associated with
collection of accounts receivables, it would not alert auditors to
malfeasance, especially when the bank balance equals or reconciles to
the general ledger cash balance.
●● What are the different types of corruption schemes?
Answer: Corruption schemes in ACFE studies are broken down into four
classifications:
Bribery - the offering, giving, receiving, or soliciting anything of value
to influence an official act
,Illegal gratuities - similar to bribery schemes, except that something of
value is given to an employee to reward a decision rather than influence
it
Economic extortion - when one person demands payment from another
with the implication that refusal to pay the extorter will result in some
harm, such as a loss of business
Conflicts of interest - when an employee, manager, or executive has an
undisclosed economic or personal interest in a transaction that adversely
affects the company
●● 6-1. How do bribery and illegal gratuities differ?
Answer: Bribery occurs before the decision is made to influence the
outcome, and an illegal gratuity is given after the decision as a reward.
●● What is meant by a conflict of interest?
Answer: The crux of a conflict case is that the fraudster takes advantage
of his employer; the victim organization is unaware that its employee
has divided loyalties that may adversely affect the employer.
●● What is defined as "something of value?"
Answer: There are several ways for a vendor to "pay" an employee; the
most common is money. In the most basic bribery scheme, the vendor
simply gives the employee currency.
,Instead of cash payments, some employees accept promises of future
employment as bribes. As with money, the promise of employment
might be intended to benefit a third party rather than the corrupt
employee.
A corrupt individual may also divert a major purchase commitment to a
supplier in return for a percent of ownership in the supplier's business.
Gifts of all kinds may also be used to corrupt an employee. The types of
gifts used to sway an employee's influence can include free liquor and
meals, free travel and accommodations, cars, other merchandise, and
even sexual favors.
Other inducements include the paying off of a corrupt employee's loans
or credit card bills, the offering of loans on very favorable terms, and
transfers of property at substantially below market value. These are just
a few examples of the things that can be given to an employee in return
for the exercise of his influence.
●● How can conflicts of interest be prevented and detected?
Answer: The prevention of conflicts of interest can be difficult. The
primary resource for heading off this complex act is a company ethics
policy that specifically addresses the problems and illegalities associated
with conflicts of interest and related offenses. The purpose of the policy
is to make the position of the company absolutely clear, to define what
constitutes a conflict or an improper relationship, and to express in no
uncertain terms that conflicts are not appropriate and will not be
, tolerated. The absence of a clear policy leaves an opportunity for a
perpetrator to rationalize his behavior or to claim ignorance of any
wrongdoing.
A policy requiring employees to complete an annual disclosure
statement is also an excellent proactive approach to preventing conflicts
of interest. Comparing the disclosed names and addresses with the
vendor list may reveal real conflicts of interest and the appearance of
such. Communication with employees regarding their other business
interests is also advisable.
In order to detect conflicts of interest, organizations should concentrate
on establishing an anonymous reporting mechanism to receive tips and
complaints. This is how most conflict of interest cases are detected.
Complaints typically come from employees who are aware of a co-
worker's self-dealing, or from vendors who have knowledge that a
competing vendor with ties to an employee of the organization is being
favored.
Another detection method that can be helpful is to periodically run
comparisons between vendor and employee addresses and phone
numbers. Obviously, if a vendor is owned or run by an employee of the
organization without that fact having been disclosed, this would
constitute a conflict of interest.
●● What is a kickback scheme and how is it committed
