CFE-Fraud-Prevention-and-Deterrence Certified Fraud Examiner - Fraud Prevention and Deterrence Exam Questions and Answers

This scenario is an example of punishment. Punishment involves introducing a consequence (in this case, the loss of responsibility for cross-departmental projects) to discourage undesirable behavior. The manager uses this approach to address Devon’s negative attitude and to promote better cooperation with other departments in the future.

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Understanding Behaviorism and Punishment:

Behaviorists like B. F. Skinner argue that punishment temporarily suppresses undesired behaviors rather than eliminating them.

Once the punitive stimulus is removed, the behavior is likely to reappear unless it is replaced with a more desirable behavior through reinforcement.

Analysis of Options:

B. Permanently suppressed: This contradicts the principles of behaviorism, as punishment alone does not permanently modify behavior.

C. Occur more frequently: Punishment typically decreases behavior temporarily.

D. Not affected by punishment: Punishment impacts behavior, but the effect is often temporary.

Conclusion:The most likely outcome is that the behavior will return once the punishment ceases.

References:ACFE resources on behavioral psychology and fraud prevention strategies​​.

 Definition of Professional Skepticism:

Professional skepticism requires maintaining a questioning mindset and critically assessing evidence throughout the fraud examination process.

 Why D is Correct:

Professional skepticism ensures that fraud examiners remain vigilant and rely on evidence to conclude whether fraud has occurred or not. It is dispelled only when sufficient evidence supports a clear conclusion.

 Why Other Options are Incorrect:

A: While skepticism is critical, it does not mean refusing to acknowledge credible evidence.

B: Assuming no fraud occurred contradicts the principle of skepticism.

C: Hypotheses should consider the nature of the assignment and available information​​.

G20/OECD Principles Overview:

The G20/OECD Principles of Corporate Governance are international guidelines aimed at enhancing economic efficiency and promoting stable financial systems.

Equitable Treatment of Shareholders:

The principles stress fairness and the protection of all shareholders' rights, particularly minority shareholders, ensuring they are treated equally.

Why D is Correct:

Equitable treatment is a fundamental tenet of the Principles, which strive to maintain trust and integrity in governance practices across jurisdictions​​.

References for All Questions:

ACFE Fraud Examination Standards​​.

ISA Standards and International Corporate Governance Best Practices​​.

G20/OECD Principles of Corporate Governance​.

 Effectiveness of Consistent Punishment:

Consistent punishment demonstrates an organization's commitment to enforcing anti-fraud policies and serves as a deterrent to potential fraudsters.

 Why A is Correct:

When perpetrators are consistently punished, it sends a strong message about zero tolerance for fraud and reinforces the importance of compliance throughout the organization.

 References:

ACFE guidance on fraud deterrence emphasizes the role of consequences in preventing fraud​​.

Components of COSO’s Enterprise Risk Management Framework:

D. Review and revision: Ensures continuous improvement and adaptation of risk management practices to align with changing circumstances.

A. Event avoidance: Not explicitly listed as a component but is part of broader risk responses.

B. Risk tolerance: An element within risk management but not a separate component.

C. Compliance: A goal of ERM but not a framework component.

Conclusion:Review and revision is a core component of COSO's ERM framework.

References:COSO Enterprise Risk Management Framework—Integrating with Strategy and Performance​​.

Due Diligence for Large Orders on Credit:

Before extending credit, it is critical to assess the financial stability of the new customer to mitigate credit risk.

Examining net worth provides a direct measure of ABC’s ability to fulfill financial obligations.

Analysis of Other Options:

A. Corruption risk countries: Due diligence should be applied universally, not selectively.

B. No verification needed: Verification is essential, especially for new customers.

D. Same due diligence for all customers: While consistency is important, the level of due diligence may vary based on transaction specifics.

Conclusion:Examining ABC's net worth is a necessary step in the due diligence process.

References:ACFE guidelines on credit risk assessment and due diligence​​.

Ethical Obligations Under ACFE Code:

CFEs are obligated to report material findings, including deficiencies that may facilitate fraud, even if no fraud is found.

Providing such insights aligns with the principles of due diligence and professional responsibility.

Professional Reporting Practices:

Including opinions on internal control deficiencies adds value to the examination and supports fraud prevention efforts.

Conclusion:White may include her opinion on control deficiencies in her report.

References:ACFE Code of Professional Ethics and fraud examination standards​​.

 Statistics on Fraud Prosecution:

Research indicates that many organizations prefer to handle fraud cases internally rather than involving law enforcement due to concerns over reputation, cost, and time.

 Why B is Correct:

Organizations often resolve fraud cases through internal disciplinary actions, such as termination or restitution, rather than pursuing criminal prosecution​​.

 Why Other Options are Incorrect:

While internal handling is common, other factors like fear of publicity and legal costs also influence the decision to avoid prosecution.

Understanding Compliance Theory:

Compliance theory emphasizes preventing crime through incentives for voluntary adherence to laws and proactive administrative measures.

By addressing potential violations early, compliance theory aims to deter criminal behavior before it occurs.

Application of the Theory:

Examples include economic benefits for following regulations and monitoring mechanisms to identify early signs of noncompliance.

Conclusion:The statement accurately describes compliance theory.

References:Criminological theories as outlined in ACFE study materials​​.

 Diane Vaughan's Theory on Organizational Crime:

Vaughan argued that organizational environments prone to crime exhibit a "normalization of deviance," often influenced by management decisions that misalign employee incentives with organizational objectives.

 Why C is Correct:

Misaligned goals create conflicting priorities, increasing the likelihood of unethical behavior to meet individual or team objectives.

 Why Other Options are Incorrect:

A: Challenging the status quo promotes innovation and ethical accountability.

B: Social functions fostering loyalty do not inherently encourage crime​​.

Management is ultimately responsible for ensuring the effectiveness of the organization’s anti-fraud program. They set the tone at the top, establish internal controls, and ensure that the necessary resources and oversight mechanisms are in place to prevent and detect fraud. Other stakeholders, such as auditors and compliance officers, provide support but do not bear ultimate responsibility.

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 Corruption and Fraud Risks:

Corruption involves abuse of power for personal or organizational gain and includes bribery, kickbacks, and aiding vendor fraud.

 Why B is Correct:

Espionage by competitors is not typically classified as corruption, as it does not directly involve abuse of internal authority or a relationship of trust. It is instead an external threat.

 Other Options:

A, C, and D are classical examples of corruption-related fraud risks​​.

The G20/OECD Principles of Corporate Governance emphasize the importance of promoting transparent and fair markets and ensuring the efficient allocation of resources. These principles provide a framework applicable across various jurisdictions, aiming to enhance the integrity and functioning of financial markets globally.

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ACFE research consistently shows that tips are the most common method for detecting occupational fraud. Organizations often rely on whistleblowing mechanisms such as hotlines to encourage employees and other stakeholders to report suspected fraud, which makes tips the most effective fraud detection tool.

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Steve Albrecht's Research on Fraud Motivation:

Personal factors like "living beyond their means" are commonly cited as a driver of fraudulent behavior.

Organizational factors, such as excessive trust in key employees, create opportunities for fraud by reducing oversight and enabling unethical behavior.

Analysis of Options:

A. High personal debt: This can be a motivator, but it is less common than "living beyond their means."

B. Revenge: Rarely a primary driver of fraud.

D. Desire for recognition: This may motivate some individuals, but it is not as prevalent as financial pressure and opportunity.

Conclusion:Option C reflects the most common personal and organizational factors motivating fraudsters.

References:ACFE's Fraud Triangle and findings from Albrecht's research on fraud motivation​​.

Ethical Responsibilities of a CFE:

Under the ACFE Code of Professional Ethics, a Certified Fraud Examiner has the responsibility to report all relevant findings honestly and comprehensively, even if no fraud is identified.

Rule 2 states that CFEs must "perform all professional engagements with due diligence" and report any material findings.

Expressing Opinions on Deficient Controls:

CFEs are expected to provide constructive recommendations, including noting control deficiencies that could lead to fraud or operational risks.

Failing to express an opinion on deficiencies would not align with professional standards of diligence and full disclosure.

Conclusion:Black is permitted, and indeed encouraged, to express his professional opinion on the deficient controls as part of his ethical obligations.

References:ACFE Code of Professional Ethics, specifically rules related to diligence and full disclosure​​.

Social Control Theory Overview:

This theory posits that individuals consider social and personal relationships when deciding whether to commit a crime. They reflect on the potential consequences of their actions on their relationships and social standing.

Application to the Scenario:

The question of "What will my spouse think?" aligns directly with social control theory, as it involves weighing personal consequences within a social context.

Analysis of Other Options:

B. Operant theory: Focuses on behavior modification through rewards and punishments.

C. Cognitive theory: Centers on thought processes and decision-making patterns.

D. Behavioral theory: Examines the external influences on behavior, not personal social relationships.

Conclusion:Social control theory best explains the scenario.

References:Criminological theories referenced in ACFE study materials​​.

Government auditors, like their private-sector counterparts, must adhere to International Standard on Auditing (ISA) 240, which provides guidance on the auditor’s responsibilities related to fraud. This standard applies to both private- and public-sector audits, emphasizing the importance of addressing risks of material misstatement due to fraud. Alicia must carefully evaluate fraud risks and incorporate relevant procedures, as mandated by ISA 240, ensuring a comprehensive audit approach.

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Behavioral Studies by B.F. Skinner:

Punishment may temporarily suppress undesired behavior but does not address the root cause or provide alternative positive behaviors.

Once punishment ceases, the behavior often resurfaces.

Analysis of Options:

A. Increase in behavior: This contradicts findings; punishment reduces behavior temporarily.

B. No effect: Punishment does affect behavior but typically in the short term.

D. Permanent suppression: Rarely achieved without reinforcement of alternative behaviors.

Conclusion:Punishment results in temporary suppression of undesired behavior.

References:ACFE guidance on behavioral psychology and its application to fraud prevention​​.

 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​​.

Fraud Response Responsibilities:

Management is responsible for responding to fraud because they oversee the organization's operations, culture, and compliance frameworks.

Other parties, such as internal auditors and the audit committee, provide oversight and recommendations but do not directly implement responses.

Conclusion:Management has the ultimate responsibility for responding appropriately to fraud.

References:ACFE materials on fraud risk governance and management’s role​​.

Focus of Risk Management:

Risk management seeks to balance the organization's risk appetite (the level of risk it is willing to accept) with its ability to achieve objectives.

Why D is Correct:

Effective risk management aligns the organization's risk tolerance with its strategic and operational goals to ensure sustainability and success.

Why Other Options are Incorrect:

A, B, and C: While internal controls, regulatory requirements, and resources are critical, the primary balance is between risk appetite and objectives​​.

References for All Questions:

ACFE Fraud Examination Guide and Risk Management Best Practices​​.

COSO frameworks for internal controls and fraud risk management​​.

Industry guidance on effective deterrence and governance practices​​.

 Treadway Commission Recommendations:

The National Commission on Fraudulent Financial Reporting (Treadway Commission) issued guidelines to strengthen financial reporting integrity and reduce fraud risks.

One key recommendation was to ensure that the audit committee is well-resourced and has sufficient authority to oversee financial reporting processes effectively.

 Audit Committee Role:

An adequately empowered audit committee improves oversight, supports the internal audit function, and ensures proper implementation of controls to prevent and detect fraud.

 Why D is Correct:

This recommendation directly addresses the reduction of fraud probability by enhancing oversight capabilities​​.

onflicts of Interest Under the ACFE Code of Professional Ethics:

Fraud examiners must avoid situations that compromise their objectivity, independence, or professional duties.

Disclosure of ownership does not eliminate the conflict of interest if it could impair objectivity.

Analysis of Other Options:

A, C, and D: All are clear conflicts of interest explicitly prohibited under the ACFE Code.

Conclusion:Option B is not prohibited under the ACFE Code but remains problematic if disclosure does not adequately address independence concerns.

References:ACFE Code of Professional Ethics—conflict of interest provisions​​.

 ACFE Code of Professional Ethics:

The ACFE Code of Ethics prohibits fraud examiners from making absolute statements about the absence of fraud. Fraud cannot be definitively ruled out based on an examination's findings.

 Why B is Correct:

Stevens cannot state that the organization is "free of fraud," as fraud detection is inherently limited by the scope and methods of the examination. Such a statement could mislead stakeholders and compromise ethical standards​​.

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.

References:ACFE's guidance on employee screening and background checks​​.

 Auditor's Responsibility Under ISA Standards:

ISA 265 requires auditors to communicate significant deficiencies in internal control to those charged with governance in writing.

This ensures proper corrective actions are taken and maintains transparency in the audit process.

 Why B is Correct:

Written communication to governance authorities is the appropriate course of action to address control deficiencies without breaching confidentiality or overstepping regulatory boundaries.

 References:

ISA 265, “Communicating Deficiencies in Internal Control,” supports this approach​​.

Step by Step Comprehensive Detailed Explanation with All References:

Proactive Fraud Auditing:

Proactive fraud audit procedures aim to prevent and detect fraud before it escalates. Implementing these procedures signals to employees and stakeholders that fraud will not be tolerated.

Such actions align with creating a strong anti-fraud culture within the organization.

Examples of Proactive Fraud Audits:

Surprise audits, continuous monitoring, and analytical procedures identify discrepancies and potential fraud risks.

Fraud prevention and deterrence are enhanced through consistent implementation.

Effectiveness and Prevention:

Unlike reactive measures, proactive approaches demonstrate an organization’s commitment to maintaining integrity and ethical standards​​.

 Board Responsibilities in Fraud Risk Management:

The board plays a critical role in overseeing the organization's fraud risk management activities to ensure accountability and effective governance.

 Why A is Correct:

The board provides high-level oversight but does not typically involve itself in the design or implementation of the fraud risk management program.

 Why Other Options are Incorrect:

B and D: Design and implementation are management responsibilities.

C: Punishment of fraud perpetrators is not directly within the board's purview​​.

Diane Vaughan’s Research:

Vaughan highlights that linking employee performance goals with company goals can create undue pressure, fostering an environment where unethical behavior becomes rationalized.

Analysis of Other Options:

A. Diversity in hiring: Encourages broader perspectives and does not inherently lead to crime.

B. Rewarding challenges to the status quo: Promotes innovation and integrity, reducing crime risk.

Conclusion:Management’s linking of performance goals with company goals is the factor most associated with increased crime inclination.

References:ACFE criminological studies and Diane Vaughan’s findings​​.

Risks Associated with Specialized Departments:

While specialization improves efficiency, it can create silos that hinder communication, coordination, and oversight, increasing fraud risk.

Isolated departments may lack cross-functional checks and balances.

Conclusion:Specialized departments often increase fraud risk if not managed with proper controls and oversight.

References:ACFE materials on fraud risk management and departmental structures​​.

Understanding Behavioral Responses:

Punishment: Involves removing a privilege or applying a negative consequence to decrease undesired behavior.

Removing the ability to work from home penalizes the employee for failing to meet deadlines.

Analysis of Other Options:

A. Positive reinforcement: Adds a reward for desired behavior.

B. Negative reinforcement: Removes an unfavorable condition to encourage behavior.

D. None of the above: Incorrect, as this is clearly punishment.

Conclusion:The manager's action is an example of punishment.

References:ACFE materials on behavioral psychology and management practices​​.

Corporate Governance in Multinational Corporations:

Multinational corporations must adhere to the legal, regulatory, and governance frameworks of each jurisdiction in which they operate. These frameworks may vary significantly across countries.

Why Other Options are Incorrect:

B: There is no Universal Corporate Governance Act applicable globally.

C: G20/OECD Principles provide guidelines but are not mandatory compliance requirements.

D: Operating in multiple jurisdictions increases governance complexity, but does not exempt corporations from compliance.

Why A is Correct:

It reflects the reality of multinational operations, where governance compliance must align with local laws and regulations​​.

References for All Questions:

ACFE and Treadway Commission fraud prevention guidelines​​.

ISSAI standards and international governance principles​​.

COSO framework and legal requirements for multinational corporations​​.

Hierarchy of Ethical Guidance Sources:

A. Contract law: Provides legal guidance on business agreements.

C. ACFE Code of Professional Ethics: Offers specific ethical standards for fraud examiners.

D. Philosophical principles: Offer foundational guidance on ethics.

B. Family and friends: While valuable for personal advice, they are the lowest reference point in determining professional ethics.

Conclusion:Guidance from family and friends is the lowest level of reference for determining ethical actions.

References:ACFE standards on ethical decision-making​​.

Internal Audit Reporting Responsibilities:

Internal audit must maintain open communication with senior management and the board to ensure appropriate handling of fraud-related issues.

Establishing reporting protocols in advance ensures timely and consistent responses when fraud occurs.

Analysis of Other Options:

B. Periodic reporting is optional: Reporting fraud risks is a required responsibility.

C. Non-disclosure: Fails to fulfill the role of internal audit in governance and accountability.

D. No communication with the board: Misrepresents the internal audit's role in fraud oversight.

Conclusion:Discussing reporting protocols proactively with senior management and the board is the correct approach.

References:ACFE guidelines and internal audit reporting standards​​.

 COSO Internal Control Framework Components:

The five components are:

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring Activities

 Why C is Correct:

Independent oversight, while important in governance, is not explicitly listed as one of the five COSO components. It may relate to broader governance structures but is not a core component of the internal control framework.

 References:

COSO Internal Control–Integrated Framework​​.

Fraud Triangle Components:

The fraud triangle consists of perceived opportunity, rationalization, and perceived financial need.

Perceived non-shareable financial need refers to personal pressures, such as debt or addiction, that motivate fraudulent behavior.

Why D is Correct:

Jenny's actions are driven by her inability to share her financial struggles (her husband’s gambling debts) with others, aligning with the perceived financial need leg of the fraud triangle​​.

Why Other Options are Incorrect:

A. Rationalization: Describes justifying fraud, not financial need.

B. Perceived opportunity: Refers to access to resources to commit fraud.

C. Perceived acquiescence: Not part of the fraud triangle.

References for All Questions:

ACFE Fraud Examination Guide and related case studies​​.

International Standards on Auditing (ISA) guidelines, particularly ISA 240​​.

Criminological research on organizational fraud influences and fraud triangle applications​​.

 Due Diligence in High-Corruption Risk Transactions:

When operating in high-risk environments, enhanced due diligence is critical. This includes evaluating payment methods, transaction patterns, and the customer's reputation.

 Why A is Correct:

Analyzing purchasing patterns and payment methods helps identify red flags such as unusual payment terms or volumes inconsistent with Green’s business profile.

 Why Other Options are Incorrect:

B: Due diligence is necessary regardless of payment terms.

C: Enhanced due diligence for high-risk countries does not constitute discrimination.

D: Ignoring due diligence poses significant compliance and reputational risks.

 References:

ACFE guidance on due diligence and anti-corruption practices in global commerce​​.

Best Practices for Protecting Whistleblowers:

Ensuring a safe environment for whistleblowers is critical to fostering an ethical organizational culture.

Establishing formal consequences for retaliation protects whistleblowers and promotes trust.

Analysis of Options:

A. Rules only for lower-level employees: Whistleblower protections must apply to all employees, regardless of rank.

B. Listing every type of misconduct: Comprehensive policies are good, but they do not need to enumerate all past misconduct.

C. Internal communication only: Communicating whistleblower procedures to external stakeholders (e.g., regulators) can be critical.

D. Formal consequences for retaliation: This is essential to discourage retaliatory actions and ensure fairness.

Conclusion:Establishing formal consequences for retaliation is the most accurate and aligned with best practices.

References:ACFE guidelines on whistleblower protections and ethical policies​​.

Detective controls are designed to identify fraud or errors that have already occurred. Continuous audit techniques serve as a detective control by automatically monitoring transactions and flagging anomalies or irregularities for further investigation. On the other hand, preventive controls such as separation of duties, background checks, and hiring policies aim to stop fraud before it happens.

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Purpose of a Code of Conduct:

A professional code of conduct serves as a guideline for ethical behavior, provides benchmarks for decision-making, and facilitates enforcement within the profession.

It does not replace the personal responsibility to exercise individual judgment and consult one's conscience.

Analysis of Other Options:

B, C, and D: These accurately describe the purposes of a professional code of conduct.

Conclusion:The code of conduct does not eliminate the need for personal ethical reflection, making Option A incorrect.

References:ACFE and other professional ethics codes​​.

Principles in the Fraud Risk Management Guide (COSO and ACFE):

Communicating expectations regarding fraud risk management.

Conducting comprehensive fraud risk assessments.

Implementing preventive and detective controls.

Monitoring and reporting the program’s effectiveness.

Analysis of Option D:

Fraud risk management requires ongoing evaluations, not one-time assessments, to adapt to evolving risks.

Conclusion:Option D is not included in the principles described in the Fraud Risk Management Guide.

References:COSO-ACFE Fraud Risk Management Guide​​.

Fraud Discovered During an Audit:

Under ISAs, auditors must communicate findings of fraud to the appropriate governance body, such as the audit committee or board of directors.

This ensures accountability and allows the organization to take appropriate remedial action.

Analysis of Other Options:

A. Confront management: This could compromise the investigation and is not the auditor's role.

B. Report to regulators: Not immediately required unless legal reporting obligations apply.

D. Confidentiality: Confidentiality rules allow communication with governance bodies as part of the audit process.

Conclusion:Reporting findings to the audit committee aligns with ISA requirements and best practices.

References:International Standards on Auditing (ISA) 240: Auditor's Responsibilities Relating to Fraud​​.

Understanding the ACFE Code of Professional Ethics:The ACFE Code of Professional Ethics requires Certified Fraud Examiners to demonstrate competence and due care in their professional services. Specifically:

Rule 2 states that CFEs must "perform all professional engagements with due diligence."

Rule 4 emphasizes that CFEs must "avoid conduct that discredits the profession or the Association."

Competence and Due Care:

Benjamin, despite his attendance at a seminar on money laundering, lacks the requisite expertise or experience in investigating complex money laundering cases. Accepting an engagement of this nature without possessing adequate training, knowledge, or resources indicates a failure to exercise due care.

The Code emphasizes the importance of competence, meaning professionals must decline engagements that exceed their expertise unless they involve qualified individuals or teams.

Violation Assessment:

By choosing to conduct the investigation alone, Benjamin disregards the ethical requirement to ensure competence and quality in professional work. This likely jeopardizes the investigation's integrity and results.

This conduct could lead to suboptimal outcomes, legal liabilities, and reputational harm, which discredit the profession, violating the ACFE ethical framework.

Conclusion:Benjamin's decision is a breach of the ACFE Code of Professional Ethics because he failed to ensure adequate preparation, skills, and resources for the engagement.

References:

ACFE Code of Professional Ethics: Sections on Competence and Due Care​​.

Relevant standards and case studies from "Auditor Essentials" and "Excel for Auditors," emphasizing ethical adherence in engagements​​.