Free CFE-FINANCIAL-TRANSACTIONS-FRAUD-SCHEMES Practice Test

According to the ACFE Fraud Tree, the three primary categories of billing schemes are shell company schemes, non-accomplice vendor schemes, and personal purchases schemes. "Invoicing via accomplice companies" is not classified as a distinct type of billing scheme. Instead, it is a variation of a non-accomplice vendor scheme where the vendor knowingly colludes with the employee to defraud the company. The fundamental scheme remains a fraudulent vendor payment, but the vendor's status changes from non-accomplice to accomplice. Therefore, it describes a characteristic of a scheme rather than being a separate classification.

A. Invoicing via shell companies: This is incorrect because creating a fictitious "shell" company to submit false invoices is a primary and well-defined category of billing scheme.
B. Invoicing via non-accomplice companies: This is incorrect because using invoices from legitimate but unknowing vendors to generate fraudulent payments is a recognized type of billing scheme.
D. Personal purchases with company funds: This is incorrect because making personal purchases and charging them to the company through the accounts payable system is a specific category of billing scheme.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2, "Financial Transactions and Fraud Schemes," Subsection "Billing Schemes." The manual explicitly categorizes billing schemes into (1) Shell Company Schemes, (2) Non-Accomplice Vendor Schemes, and (3) Personal Purchases Schemes. It discusses accomplice vendors within the context of vendor schemes, not as a separate category.

2. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 6, "Fraudulent Disbursements," pp. 133-142. This text, often used in university fraud examination courses, aligns with the ACFE's classification, detailing shell companies, pass-throughs, non-accomplice vendors, and personal purchases as the main billing schemes.

3. Wells, J. T. (2011). Corporate Fraud Handbook: Prevention and Detection (3rd ed.). John Wiley & Sons. DOI: https://doi.org/10.1002/9781118269139. In Chapter 4, "Billing Schemes," Wells outlines the three principal types of billing schemes consistent with the ACFE Fraud Tree, confirming that options A, B, and D are established categories.

Skimming is the theft of cash “off-the-books”—before the receipt is recorded in the accounting system. The simplest, most frequently cited form is sales skimming: an employee makes a legitimate sale or provides a service, accepts the customer’s cash, and deliberately fails to prepare a sales ticket or otherwise record the transaction, pocketing the money. Because nothing is entered, the missing cash is difficult to detect, making this the prototypical, “most basic” skimming scheme.

B. Describes an unrecorded purchase; skimming concerns unrecorded sales, not buying activity.
C. Recording the sale puts cash in the books; any theft would require later manipulation (e.g., lapping), not skimming.
D. Records the purchase and involves outgoing, not incoming, funds; does not fit skimming definition.

1. ACFE Fraud Examiner’s Manual

2023 ed.

Financial Transactions & Fraud Schemes

“Cash Receipts—Skimming

” pp. 1.205-1.206: defines sales skimming as unrecorded sales with cash pocketed.

2. Wells

J. T. Principles of Fraud Examination

5th ed.

Wiley

2019

Chapter 3 “Cash Receipts Schemes

” pp. 101-102

DOI:10.1002/9781119691406: discusses basic sales-skimming scenario.

3. University of Texas at Austin

ACC 383 Fraud Examination course notes

Lecture 7 “Skimming

” slide 16: identifies “employee takes customer payment and never records sale” as the classic skimming method.

Fiduciary capacity exists when one party, the fiduciary, possesses and controls money, property, or decision-making authority for the benefit of another. The essence of the relationship is the obligation to act solely in the beneficiary’s interest; the assets or business handled are therefore not for the fiduciary’s personal gain. ACFE identifies “fiduciary capacity” as the prerequisite element in frauds such as embezzlement and conversion, because the fiduciary’s control originates from a position of trust rather than ownership.

B. Embezzlement – Describes the fraudulent appropriation of property already in the perpetrator’s lawful possession; it is a crime, not the capacity itself.
C. Conversion – Refers to the wrongful exercise of dominion over another’s property; again, it is an act, not the relational capacity.
D. None of the above – Option A correctly fits the definition, so “none” is false.

1. ACFE Fraud Examiners Manual

2022 ed.

Financial Transactions & Fraud Schemes

Ch. 1

§1.3 “Fiduciary Capacity

” p. 1.201-1.202.

2. Frankel

T. (2005) “Fiduciary Law

” 71 Fordham L. Rev. 1241

1244-1246 (defines fiduciary holding of property for another). https://doi.org/10.2139/ssrn.620922

3. United States v. Sayklay

542 F.2d 942

944 (5th Cir. 1976) (legal definition of fiduciary capacity distinguishing it from embezzlement).

Within ACFE’s Fraud Examiner’s Manual discussion of fraud terminology, the verb “delude” is singled out as the form of deceit in which the perpetrator hides or obscures the truth so completely that the victim forms a false belief. The key nuance is total obscuration of reality, which the other verbs do not intrinsically require. Therefore, “delude” best fits the description in the question.

A. Deceive – generic term; does not necessarily involve complete obscuration of the truth.
C. Mislead – implies guiding to a wrong conclusion, but truth may still be partially evident.
D. Beguile – stresses charm or enchantment in deception, not the thorough concealment of truth.

1. Association of Certified Fraud Examiners. Fraud Examiner’s Manual

2023 Edition. Section 1.1 “Definition of Fraud”

pp. 1-9 – 1-10: list of fraud-related synonyms; definition of “delude” as “to deceive so thoroughly as to obscure the truth.”

2. West Virginia University

College of Business & Economics. Course: “Fraud Examination” (ACCT 456)

Module 1 lecture notes

slide 6: semantic distinctions among “deceive

mislead

delude

beguile.”

The matching principle is a fundamental concept in accrual basis accounting under Generally Accepted Accounting Principles (GAAP). It mandates that all expenses incurred to generate specific revenues must be recognized and recorded in the same accounting period as those revenues. This process of "matching" costs with revenues ensures that the income statement provides an accurate representation of a company's profitability for a given period. Failing to adhere to this principle can result in the overstatement of income in one period and its understatement in another, thereby distorting the financial results.

B. The income statement is the financial report that presents revenues and expenses; revenue is a component of the statement, not an item to be matched with it.
C. An income statement is a summary report of financial performance, not an economic event to be matched with a long-term contract under this principle.
D. Capitalized expenses are treated as assets, and liabilities are obligations. The matching principle links expenses to revenues, not assets to liabilities.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual, International Edition. Section 1: Financial Transactions and Fraud Schemes, Subsection: Accounting Concepts, pp. 1.103-1.104. The manual states, "The matching principle requires that the books and records match revenues with the expenses incurred to generate those revenues."

2. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Financial Accounting (11th ed.). Wiley. In Chapter 3, "Adjusting the Accounts," the expense recognition principle (often referred to as the matching principle) is defined: "Efforts (expenses) be matched with results (revenues). It dictates that expenses be matched with revenues in the period in which efforts are made to generate revenue." (p. 104).

3. Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2020). Intermediate Accounting (10th ed.). McGraw-Hill Education. Chapter 2, "The Conceptual Framework Underlying Financial Accounting," discusses the expense recognition principle, noting that expenses are recognized in the same period as the related revenues. (p. 67).

Skimming removes incoming cash before it is recorded, leaving no audit trail against which routine controls or audits can be applied. Consequently, these schemes are most frequently uncovered only when something unforeseen happens—a customer complaint, an observation by another employee, or some other accidental event that exposes cash that should have been recorded but was not.

A. Internal audits compare recorded amounts; because skimming keeps transactions off‐books, auditors usually have nothing to test against and detect few cases.
C. Internal controls relying on recorded data (reconciliations, approval chains) are bypassed when the sale is never entered; preventive controls may deter but seldom reveal existing skimming.
D. “Occupational frauds” is a fraud category, not a detection mechanism, and thus does not answer the question asked.

1. ACFE Fraud Examiners Manual

2022 ed.

Section II – Financial Transactions & Fraud Schemes

“Skimming

” Detection subsection

pp. 2.304-2.305: “Because the transaction is never recorded… skimming schemes are commonly discovered by accident or customer complaint.”

2. Wells

J. T. Principles of Fraud Examination

5th ed.

2019

Chap. 11 “Skimming

” p. 332: “Skimming is extremely hard to detect; many schemes are uncovered purely by chance.”

3. ACFE Report to the Nations 2022

Appendix A

Detection Method by Scheme

p. 96: skimming shows the lowest detection by formal controls

reinforcing accidental discovery prevalence.

The ACFE Occupational Fraud Classification System (“Fraud Tree”) places all cash-related asset-misappropriation schemes into three mutually exclusive categories:
1) Skimming (theft of cash before it is recorded),
2) Cash larceny (theft of cash after it is recorded), and
3) Fraudulent disbursements (theft accomplished by causing a payment for an improper purpose). These are the only three branches shown under “Cash” in the Fraud Tree; no other terms such as “cash distribution,” “fraud analysis,” or general “cash misappropriations” appear.

B: “Fraud analysis” and “cash misappropriations” are not Fraud Tree cash categories; skimming alone is insufficient. C: “Cash distribution” is not a Fraud Tree category; omission of skimming makes it incomplete. D: Includes non-existent “cash distribution” and “fraud analysis,” omits cash larceny and fraudulent disbursements.

1. Association of Certified Fraud Examiners (ACFE). Fraud Examiners Manual

2022 ed.

Section II: “Occupational Fraud and Abuse

” Fig. 2-1 Fraud Tree – Cash (pp. 2.102-2.103).

2. ACFE. Report to the Nations: 2022 Global Study on Occupational Fraud and Abuse

Appendix A “Occupational Fraud Classification System

” p. 80.

3. Wells

Joseph T. “Principles of Fraud Examination

” 5th ed.

Wiley

2019

Ch. 4

pp. 120-121.

Skimming is an “off-book” cash-receipts scheme in which an employee removes incoming cash before the organization records the transaction. Because the funds never reach the accounting records, there is no direct audit trail and detection is difficult. Thus the essence of skimming is the theft of cash prior to its initial entry in any accounting or information system.

B. Skimming involves theft, not addition, of cash; adding funds would increase rather than steal assets.
C. Theft occurring after the cash is recorded is classified as cash larceny, not skimming.
D. Option A accurately states the formal definition, so “None of above” is incorrect.

1. Association of Certified Fraud Examiners

Fraud Examiners Manual

2022 ed.

Part I: Financial Transactions & Fraud Schemes

§1.407 “Skimming—Definition

” pp. 1.407-1.408.

2. Kranacher

Riley & Wells

Forensic Accounting and Fraud Examination

2nd ed.

Wiley

2019

Chap. 6 “Cash-Receipt Schemes

” pp. 192-193 (explains skimming as theft of cash before recording).

3. Albrecht

W.S.

“Identifying Fraudulent Financial Transactions

” Journal of Forensic & Investigative Accounting

Vol. 5 No. 2

2013

pp. 67-70 (discusses skimming as off-book cash theft).

Based on the fundamental principle of double-entry accounting, every transaction, whether legitimate or fraudulent, must have equal debits and credits to keep the accounting equation (Assets = Liabilities + Equity) in balance. To conceal a fraudulent act and prevent immediate detection from an imbalanced system, the perpetrator must create an entry that affects a minimum of two accounts. For example, to create fictitious revenue, a fraudster would debit an asset account (e.g., Accounts Receivable) and credit a revenue account (e.g., Sales). While complex schemes can involve more than two accounts (a compound entry), the absolute minimum is two.

A. One: An entry affecting only one account would violate the double-entry principle, causing the general ledger to be out of balance and immediately flagging the transaction.
C. More than two: This is not a requirement. Many fraudulent entries are simple, affecting exactly two accounts. This option incorrectly excludes the most common form of a fraudulent entry.
D. None of above: This is incorrect because option B accurately states the minimum number of accounts affected by any accounting entry, including a fraudulent one.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual, International Edition. Section 2, "Financial Statement Fraud Schemes," under the subsection "Basic Accounting Concepts," explains the double-entry system. It details how every journal entry must have equal debits and credits, which inherently means at least two accounts are always involved in any recorded transaction.

2. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning. Chapter 10, "Financial Statement Fraud," provides numerous examples of fraudulent journal entries. For instance, Exhibit 10.10 illustrates how to conceal liabilities or expenses by debiting an asset and crediting a liability, a transaction that explicitly affects two accounts.

3. Rezaee, Z. (2002). Financial Statement Fraud: Prevention and Detection. John Wiley & Sons. Chapter 4, "Common Financial Statement Fraud Schemes," describes the mechanics of various frauds. For example, the section on fictitious revenues explains the required journal entry is a debit to accounts receivable and a credit to sales, demonstrating the necessity of manipulating at least two accounts. (See pages 85-87).

The provided definition accurately describes corruption. Corruption is broadly defined as the abuse of an entrusted position or power for private gain. This encompasses any act where an official or fiduciary, who has a duty to act in the best interest of others (e.g., the public or an employer), wrongfully uses their influence or station to obtain a personal benefit. This act is inherently contrary to their duty and the rights of those they are supposed to serve. The other options represent more specific concepts that fall under or are related to this broader category.

A. Conflict of interest: This is a situation where an individual's personal interests could compromise their professional judgment, not necessarily the act of abuse itself.
C. Bribery: This is a specific type of corruption involving the offering or accepting of something of value to influence an official act, making it too narrow for the general definition.
D. Overbilling: This is a specific asset misappropriation scheme related to fraudulent disbursements, not a general abuse of an official or fiduciary position.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Financial Transactions and Fraud Schemes, Part II: The Fraud Tree, Chapter 5: Corruption. The manual defines corruption as "the wrongful use of influence to procure a benefit for the actor or another person, contrary to the duty or the rights of others." This definition is a direct match for the scenario described in the question.

2. Wells, J. T. (2011). Corporate Fraud Handbook: Prevention and Detection. John Wiley & Sons. Chapter 6, "Corruption," defines corruption schemes as those in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit.

3. Golden, T. W., Skalak, S. L., & Clayton, M. M. (2006). A Guide to Forensic Accounting Investigation. John Wiley & Sons. Chapter 10, "Corruption," discusses how corruption includes the wrongful use of influence in a business transaction to procure some benefit for oneself or another person, contrary to the individual's duty to their employer or the rights of another.