Free CFE Practice Test

In accounting, liabilities are defined as a company's financial debts or obligations that arise during the course of its business operations. They represent amounts owed to other entities (creditors) and are settled over time through the transfer of economic benefits, including money, goods, or services. Liabilities are a critical component of the fundamental accounting equation: Assets = Liabilities + Equity. Common examples include accounts payable, loans, and accrued expenses.

A. Supplies: These are current assets, representing items a company owns and will use in its near-term operations, not amounts it owes to others.
B. Expenses: These are the costs incurred to generate revenue. While an unpaid expense creates a liability, the term "expense" itself refers to the cost, not the obligation.
C. Assets: These are economic resources owned by the entity with future economic value, which is the opposite of liabilities (amounts owed).

1. ACFE. (2023). Fraud Examiners Manual

International Edition. Section 1

"Financial Transactions and Fraud Schemes

" Subsection "Accounting Concepts." The manual defines liabilities as obligations to transfer assets or provide services to other entities in the future as a result of past transactions.

2. Franklin

M.

Graybeal

P.

& Cooper

D. (2020). Principles of Accounting

Volume 1: Financial Accounting. OpenStax

Rice University. Chapter 2

Section 2.1

"Describe the Fundamental Accounting Equation and Define Its Components." This text states

"Liabilities are a company’s debts or obligations that are owed to other entities."

3. Financial Accounting Standards Board (FASB). (1985). Statement of Financial Accounting Concepts No. 6

Elements of Financial Statements. Paragraph 35. This foundational document defines liabilities as "probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events."

Embossed pearlescent numbering is a security feature used on checks where the numbers appear as a white or light-colored imprint. This feature is designed to be tamper-evident. When a colored highlighter is applied over the numbers, the original, darker number underneath is revealed, allowing for easy verification of the check's authenticity and confirming that the numbering has not been altered. This technique is specifically designed to react to common alteration methods, such as using highlighters to obscure information.

A. Microline numbering: This involves printing very small text (microprinting) on the signature line or border, which appears as a solid line to the naked eye and becomes illegible when photocopied.
B. Holographic safety border: This is a three-dimensional, reflective image embedded into the check stock, which is difficult to reproduce with standard printing or copying equipment.
D. None of the above: This option is incorrect because Embossed pearlescent numbering accurately describes the technique mentioned in the question. ---

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition. Section 2: Financial Transactions and Fraud Schemes

Subsection: Check and Payment Card Fraud

Chapter: Check Fraud Schemes. (This section details various check security features

including descriptions of microprinting

holograms

and specialized numbering techniques like pearlescent numbering).

2. Wells

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

"Check Tampering

" discusses various security features designed to prevent check fraud

aligning with the descriptions provided in the ACFE manual.

Competitive bidding is a formal procurement process designed to ensure fairness, transparency, and value for money. Its fundamental principle is to create a level playing field where all potential suppliers are provided with the same information and are required to bid based on the exact same terms, conditions, and specifications. This method is intended to prevent favoritism, collusion, and other forms of corruption by awarding the contract to the bidder who offers the best value, typically determined by the lowest price that meets the specified requirements. Schemes like bid-rigging and kickbacks are illegal acts that directly subvert this principle of equality.

A. Bid-rigging is a collusive fraud where competitors illegally agree in advance who will win a contract, undermining the principle of equality.
B. Kickbacks are illicit payments made to an employee of the purchasing entity to secure a contract, which corrupts the fairness of the process.
D. Bid solicitation is merely the step of inviting bids; it is part of the competitive bidding process but not the entire process that guarantees equality.

1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2, Chapter 10: Bidding Schemes. The manual states, "The competitive bidding process is founded on the principle that all sellers are placed on the same plane of equality, bidding on the same terms and conditions." This section contrasts the legitimate process with fraudulent bidding schemes.

2. Singleton, T. L., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 8, "Procurement Fraud and the Vendor Master File," discusses competitive bidding as the standard procedure to ensure fairness and prevent fraud, which is circumvented by schemes like bid-rigging.

3. The World Bank. (2020). Procurement Regulations for IPF Borrowers. Section 5.2. The document outlines the core procurement principles, stating that the process should provide all eligible bidders with timely and adequate notification and an equal opportunity to bid for the required goods, works, and services.

The question, while awkwardly phrased, asks to identify a fraudulent activity that can serve as an illicit criterion during the bid solicitation process. Allowing a purchaser to discuss possible employment with a contractor creates a severe conflict of interest, which is a form of corruption. In such a scheme, the promise of future employment becomes an unstated, corrupt "criterion" used by the purchasing agent to evaluate bids and influence the contract award. This action undermines the fairness and integrity of the competitive bidding process by favoring a specific contractor for personal gain rather than on the merits of their bid.

A. Containing false statements: This is a fraudulent act committed by a bidder to misrepresent their qualifications or capabilities, not a selection criterion used by the purchasing entity.
C. To withdraw low bids: This is a collusive tactic used by bidders in a bid-rigging scheme to ensure a pre-selected contractor wins, not a criterion for the solicitation itself.
D. To falsify the bid log: This is an act of concealment performed to cover up a fraudulent bidding scheme after the decision has been made, not a criterion used during the selection process.

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

International Edition.

Section 1.403

Conflicts of Interest: This section details how conflicts of interest arise when an employee has an undisclosed personal or economic interest in a transaction. A promise of future employment from a vendor is a classic example of such a conflict

which can improperly influence the employee's decisions in awarding a contract. The employee uses this personal benefit as an illicit criterion.

Section 1.304

Bribery: This section defines bribery as offering

giving

receiving

or soliciting anything of value to influence an official act. A promise of employment is a "thing of value" used to corruptly influence the bid award decision.

Section 1.506

Bid-Rigging Schemes: This section describes the withdrawal of bids as a tactic in bid suppression schemes

where bidders collude among themselves. This distinguishes it as a collusive action by bidders rather than a decision criterion used by the purchaser.

Journal entries are the fundamental method for recording financial transactions in double-entry bookkeeping. The equity account, which represents the owners' stake in the company, has a normal credit balance. To increase the equity account (e.g., through owner investment or revenue), a credit is recorded. To decrease the equity account (e.g., through owner withdrawals or expenses), a debit is recorded. The question asks what is used to "increase (or decrease)" the account. While both debits and credits are used, Option C provides the two components for the primary action of increasing the account, which aligns with its normal balance. Option B is too general; a "transaction" is an economic event, not the specific accounting mechanism (debit/credit) used within the journal entry to effect the change.

A. Journal Entries & Debit: A debit is used to decrease an equity account, not increase it. This option is incomplete as it only addresses one part of the account's behavior.
B. Journal Entries & transactions: A transaction is the underlying economic event, not the accounting entry itself. The journal entry records the transaction using debits and credits. This option is procedurally correct but lacks mechanical precision.
D. None of all: Option C provides a correct, albeit specific, description of the accounting mechanics for increasing the equity account, making this choice incorrect. ---

1. ACFE. (2023). Fraud Examiners Manual

International Edition.

Section 2

"Financial Transactions and Fraud Schemes

" pages 2.13-2.14

explains the rules of debits and credits. It states

"To increase an equity account

the account is credited. To decrease an equity account

the account is debited." This confirms that credits increase equity.

2. Weygandt

J. J.

Kimmel

P. D.

& Kieso

D. E. (2018). Financial Accounting (10th ed.). Wiley.

Chapter 2

"The Recording Process

" details the relationship between journal entries

debits

credits

and account balances. It explicitly states that owner's capital

a primary equity account

is increased by credits and decreased by debits.

3. MIT OpenCourseWare. (2004). 15.511 Financial Accounting

Fall 2004. Massachusetts Institute of Technology.

Lecture Notes

"Session 3: The Accounting Cycle

" outlines that transactions are recorded in journals and that for equity accounts

credits represent increases and debits represent decreases. This supports that "Journal Entries" and "Credit" are the tools used to increase the account.

A conflict of interest arises when an individual's personal interests or loyalties clash with their professional obligations to an organization. The core of this fraudulent act is the presence of an undisclosed economic or personal stake in a transaction that negatively impacts the employer. The employee's duty of loyalty is compromised because their actions are influenced by personal gain rather than the best interests of the organization. This definition precisely matches the scenario described in the question.

B. Illegal sale: This is a specific type of transaction that may or may not involve a conflict of interest. The defining element in the question is the undisclosed interest, not the legality of the sale itself.
C. Unauthorized purchase: This refers to a procurement made without proper approval. While a conflict of interest might lead to such a purchase, the root cause is the conflicting interest, not just the lack of authorization.
D. Financial disclosure: This is a control measure intended to prevent conflicts of interest by making personal financial interests transparent. The problem described is the lack of disclosure, not the disclosure itself.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition. Section 1: Financial Transactions and Fraud Schemes

Part III: Corruption

Chapter 11: Conflicts of Interest

p. 1.503. The manual states

"A conflict of interest occurs when an employee

manager

or executive has an undisclosed economic or personal interest in a transaction that adversely affects the company." This is a direct definition matching the question.

2. Wells

J. T. (2011). Corporate Fraud Handbook: Prevention and Detection. John Wiley & Sons. Chapter 6

"Conflicts of Interest

" discusses how these schemes involve an employee having a hidden financial interest in a transaction that causes a loss to the victim company.

3. Singleton

T. W.

& Singleton

A. J. (2010). Fraud Auditing and Forensic Accounting. John Wiley & Sons. Chapter 5

"Corruption and the Law

" p. 112. The text defines conflicts of interest as situations where an employee has an undisclosed personal or economic interest in a transaction that harms the employer.

In the context of fraud examination, an "absconder" is a specific type of offender characterized by committing a fraudulent act and then promptly disappearing to evade capture. These individuals often have a non-traditional background for the position they hold, are not well-known within the organization, and their crime is typically a single, significant act of theft. Their primary method of avoiding detection is flight, hence the description "take the money and run away." This contrasts with offenders who remain in their positions and commit fraud over extended periods.

B. Long-term violators: These offenders are typically trusted employees who embezzle smaller amounts repeatedly over a long period, rather than committing a single act and fleeing.
C. Offender types: This is a general category that encompasses various classifications of perpetrators; it is not a specific type of offender as described in the question.
D. None of the above: This option is incorrect because "Absconders" is the precise term for the behavior described.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition. Section 2: Criminology and Ethics

pp. 2.301-2.302. The manual distinguishes between two general types of employee thieves: those who are "absconders" and those who are "long-term violators." It defines absconders as individuals who take the money and run

often being new employees who commit a one-time

large-scale theft.

2. Albrecht

W. S.

Albrecht

C. O.

Albrecht

C. C.

& Zimbelman

M. F. (2019). Fraud Examination (6th ed.). Cengage Learning. Chapter 4

"Why People Commit Fraud

" discusses perpetrator profiles

aligning with the ACFE's distinction. The profile of an absconder is described as someone who commits fraud and flees

contrasting with long-term embezzlers who abuse trust over time.

Inventory larceny is the theft of inventory that has already been recorded on the victim organization's books. The scenario describes assets that were "intentionally purchased," meaning they were legitimately acquired and would have been entered into the company's accounting system and inventory records. The subsequent misappropriation by the fraudster is a theft of an on-book asset, which is the definition of larceny. This distinguishes it from schemes where assets are stolen before being recorded (skimming) or schemes involving the fraudulent purchase process itself.

B. Asset receiving scheme: This involves stealing assets as they are delivered, before they are officially recorded on the company's books, often by falsifying receiving reports.
C. Fraudulent purchase: This involves causing the company to buy goods for the fraudster's personal use or from a shell company, where the fraud is in the purchase transaction itself.
D. Falsify shipping: This is a method used to conceal inventory theft by creating fraudulent shipping documents to make it appear the missing goods were sold and shipped.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual. Section 2: Asset Misappropriation

Subsection: Inventory and Other Assets. The manual defines larceny of non-cash assets as the theft of items that have already been recorded in the company's accounting records

distinguishing it from skimming

which is the theft of off-book assets. The described scenario fits the definition of larceny.

2. Singleton

T. W.

& Singleton

A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. In Chapter 7

"Asset Misappropriation

" the authors differentiate inventory larceny as the theft of inventory already on hand from other schemes like stealing incoming goods at the receiving dock.

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

" explicitly states that larceny schemes involve the theft of assets that are already on the books

contrasting them with skimming schemes where assets are stolen before being recorded.

Intangible assets are defined as long-lived assets that lack physical substance. They are distinct from tangible, long-lived assets such as property, plant, and equipment (PP&E). While both are recorded on the balance sheet and provide future economic benefit, the defining characteristic of intangible assets is their non-physical nature. Examples include patents, copyrights, trademarks, goodwill, and brand recognition. The question's description of assets that are long-lived but different from PP&E perfectly aligns with the accounting definition of intangible assets.

A. Tangible Assets: This is incorrect because the question explicitly excludes property, plant, and equipment, which are the primary examples of long-lived tangible assets.
C. Forced Assets: This is not a recognized asset classification in generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).
D. None of above: This is incorrect as "Intangible Assets" is the precise term for the assets described in the question.

1. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition. Section 2: Financial Statement Fraud

"Asset Overstatement Schemes

" pp. 2.601-2.603. The manual distinguishes between tangible assets (like PP&E) and intangible assets

defining the latter as long-lived assets lacking physical substance.

2. Kieso

D. E.

Weygandt

J. J.

& Warfield

T. D. (2019). Intermediate Accounting (17th ed.). Wiley. Chapter 12

"Intangible Assets

" provides a standard university-level definition

stating that intangible assets are characterized by a lack of physical substance and are not financial instruments.

3. Spiceland

J. D.

Nelson

M. W.

& Thomas

W. B. (2020). Intermediate Accounting (10th ed.). McGraw-Hill Education. Chapter 10

"Property

Plant

and Equipment and Intangible Assets: Acquisition and Disposition

" differentiates intangible assets from PP&E based on their lack of physical substance. This is common courseware in reputable university accounting programs.