CFE Exam; Financial Transactions and
Fraud Schemes fully solved
Shell Companies - correct answer ✔✔ Fictitious entities created for the sole purpose of
committing fraud; usually involve an employee making fraudulent payments to the dummy
company. Most shell company schemes involve the purchase of services rather than goods. The
primary reason for this is that services are not tangible. If an employee sets up a shell company
to make fictitious sales of goods to their employer, these goods will obviously never arrive. By
comparing its purchases to its inventory levels, the victim organization might detect the fraud. It
is much more difficult for the victim organization to verify that the services were never
rendered. For this reason, many employees involved in shell company schemes bill their
employers for things like "consulting services."
New account fraud - correct answer ✔✔ Fraud that occurs on an account within the first ninety
days that it is open; often, perpetrators open these accounts with the sole intent of committing
fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts.
Some of the more common red flags of potential new account schemes are:
* Customer residence outside the bank's trade area
* Dress and/or actions inconsistent or inappropriate for the customer's stated age, occupation,
or income level
* New account holder requesting immediate cash withdrawal upon deposit
* Request for large quantity of temporary checks
* Services included with the account that do not match the customer's purpose
* Missing or inaccurate customer application information
* Invalid phone numbers or addresses in customer account information
* Use of a mail drop address (a service where a non-affiliated party collects and distributes mail
for individuals or entities)
* Large check or automated teller machine (ATM) deposits followed by rapid withdrawal or
transfer of funds (a pass-through account)
,* Business accounts without standard business transactions, such as payroll or transactions that
would be expected in that business
* Transactions without a clear purpose in jurisdictions known for high levels of corruption
* Opening deposit that is a nominal cash amount
* Rare customer ID type
* Applicants over the age of 25 with no credit history
* Customers who cannot remember basic application information (i.e., phone number, address)
Markey Division - correct answer ✔✔ (or market allocation) schemes involve agreements
among competitors to divide and allocate markets and to refrain from competing in each
other's designated portion of the market.
Ratio Analysis - correct answer ✔✔ a means of measuring the relationship between any two
different financial statement amounts. The relationship and comparison are the keys to the
analysis, which allows for internal evaluations using financial statement data. Traditionally,
financial statement ratios are used in comparisons to an entity's industry average. They can be
very useful in detecting red flags for a fraud examination.
Separation of Duties - correct answer ✔✔ The primary means of preventing cash fraud;
Whenever one individual has control over the entire accounting transaction (e.g., authorization,
recording, and custody), the opportunity is present for cash fraud. Each of the following
duties/responsibilities should be separated:
- Cash receipts
- Bank deposits
- Bank reconciliation
- Cash disbursements
If one person has the authority to collect the cash, deposit the receipts, record that collection,
and disburse company funds, the risk of fraud is high.
Entries to the left side of an account are referred to as: - correct answer ✔✔ Debits
, Entries on the right side of the account are: - correct answer ✔✔ Credits
3 basic ways to prove corrupt payments - correct answer ✔✔ 1) Turn an inside witness.
2) Secretly infiltrate or record ongoing transactions.
3) Identify and trace the corrupt payments through audit steps.
Pay-and-return scheme - correct answer ✔✔ an employee intentionally mishandles payments
that are owed to legitimate vendors. One way to do this is to purposely double pay an invoice.
For instance, a clerk might intentionally pay an invoice twice and then call the vendor to request
that one of the checks be returned. The clerk then intercepts the returned check.
Ponzi Scheme - correct answer ✔✔ an illegal business practice in which new investors' money is
used to make payments to earlier investors. The investment opportunity is typically presented
with the promise of uncommonly high returns. While the scam is presented as a legitimate
investment, there is little or no actual commerce involved. When an enterprise promotes an
investment opportunity that invests little or none of the participants' money and uses new
investments to make dividend payments, the enterprise is running this.
Human Intelligence - correct answer ✔✔ gathered from subject-matter experts and informed
individuals. Such efforts typically target individuals who can provide the most valuable
information.
This approach exploits two weaknesses of corporate culture: (1) all salespeople want to make a
sale and (2) many salespeople will do almost anything to make a sale. Other approaches
include:
- Employment interviews (real and fake)
- False licensing negotiations
- False acquisition or merger negotiations
- Hiring an employee away from a target entity
- Planting an agent in a target organization
Fraud Schemes fully solved
Shell Companies - correct answer ✔✔ Fictitious entities created for the sole purpose of
committing fraud; usually involve an employee making fraudulent payments to the dummy
company. Most shell company schemes involve the purchase of services rather than goods. The
primary reason for this is that services are not tangible. If an employee sets up a shell company
to make fictitious sales of goods to their employer, these goods will obviously never arrive. By
comparing its purchases to its inventory levels, the victim organization might detect the fraud. It
is much more difficult for the victim organization to verify that the services were never
rendered. For this reason, many employees involved in shell company schemes bill their
employers for things like "consulting services."
New account fraud - correct answer ✔✔ Fraud that occurs on an account within the first ninety
days that it is open; often, perpetrators open these accounts with the sole intent of committing
fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts.
Some of the more common red flags of potential new account schemes are:
* Customer residence outside the bank's trade area
* Dress and/or actions inconsistent or inappropriate for the customer's stated age, occupation,
or income level
* New account holder requesting immediate cash withdrawal upon deposit
* Request for large quantity of temporary checks
* Services included with the account that do not match the customer's purpose
* Missing or inaccurate customer application information
* Invalid phone numbers or addresses in customer account information
* Use of a mail drop address (a service where a non-affiliated party collects and distributes mail
for individuals or entities)
* Large check or automated teller machine (ATM) deposits followed by rapid withdrawal or
transfer of funds (a pass-through account)
,* Business accounts without standard business transactions, such as payroll or transactions that
would be expected in that business
* Transactions without a clear purpose in jurisdictions known for high levels of corruption
* Opening deposit that is a nominal cash amount
* Rare customer ID type
* Applicants over the age of 25 with no credit history
* Customers who cannot remember basic application information (i.e., phone number, address)
Markey Division - correct answer ✔✔ (or market allocation) schemes involve agreements
among competitors to divide and allocate markets and to refrain from competing in each
other's designated portion of the market.
Ratio Analysis - correct answer ✔✔ a means of measuring the relationship between any two
different financial statement amounts. The relationship and comparison are the keys to the
analysis, which allows for internal evaluations using financial statement data. Traditionally,
financial statement ratios are used in comparisons to an entity's industry average. They can be
very useful in detecting red flags for a fraud examination.
Separation of Duties - correct answer ✔✔ The primary means of preventing cash fraud;
Whenever one individual has control over the entire accounting transaction (e.g., authorization,
recording, and custody), the opportunity is present for cash fraud. Each of the following
duties/responsibilities should be separated:
- Cash receipts
- Bank deposits
- Bank reconciliation
- Cash disbursements
If one person has the authority to collect the cash, deposit the receipts, record that collection,
and disburse company funds, the risk of fraud is high.
Entries to the left side of an account are referred to as: - correct answer ✔✔ Debits
, Entries on the right side of the account are: - correct answer ✔✔ Credits
3 basic ways to prove corrupt payments - correct answer ✔✔ 1) Turn an inside witness.
2) Secretly infiltrate or record ongoing transactions.
3) Identify and trace the corrupt payments through audit steps.
Pay-and-return scheme - correct answer ✔✔ an employee intentionally mishandles payments
that are owed to legitimate vendors. One way to do this is to purposely double pay an invoice.
For instance, a clerk might intentionally pay an invoice twice and then call the vendor to request
that one of the checks be returned. The clerk then intercepts the returned check.
Ponzi Scheme - correct answer ✔✔ an illegal business practice in which new investors' money is
used to make payments to earlier investors. The investment opportunity is typically presented
with the promise of uncommonly high returns. While the scam is presented as a legitimate
investment, there is little or no actual commerce involved. When an enterprise promotes an
investment opportunity that invests little or none of the participants' money and uses new
investments to make dividend payments, the enterprise is running this.
Human Intelligence - correct answer ✔✔ gathered from subject-matter experts and informed
individuals. Such efforts typically target individuals who can provide the most valuable
information.
This approach exploits two weaknesses of corporate culture: (1) all salespeople want to make a
sale and (2) many salespeople will do almost anything to make a sale. Other approaches
include:
- Employment interviews (real and fake)
- False licensing negotiations
- False acquisition or merger negotiations
- Hiring an employee away from a target entity
- Planting an agent in a target organization
