Free Practice Questions for ACFE CFE-Fraud-Schemes-and-Financial-Crimes Exam

The ACFE Fraud Examiners Manual includes a specific subsection titled “Departures from Generally Accepted Accounting Principles” within Accounting Concepts .

Under the Manual’s discussion of GAAP, the focus is on proper financial reporting so that transactions are recorded in their appropriate classifications and reported fairly in the financial statements. The Manual explains that GAAP are the standardized financial reporting practices used to ensure accurate and reliable reporting.

Based on this framework, a departure from GAAP can be justified only in limited circumstances, such as when strict compliance would make the financial statements misleading or when a different treatment is necessary to better reflect the substance of the transaction rather than only its form. Likewise, avoiding the overstatement of assets or income is consistent with fair presentation and conservative reporting principles. These are accounting-based justifications tied to faithful financial reporting.

By contrast, cost is not a valid reason to depart from GAAP. The fact that reporting a transaction in a GAAP-compliant manner would be more expensive does not justify noncompliance. Financial statements must be prepared in accordance with the applicable standards, not according to whichever treatment is cheaper or easier for management. Therefore, this option is the one that is NOT justifiable.

Why the other options are not the correct choice

A. To avoid overstating assets and/or income

This is consistent with fair presentation. The Manual’s discussion of GAAP is aimed at proper classification and reporting of transactions so that financial statements are not distorted.

C. To better reflect the substance of a transaction

This is a recognized accounting rationale. Financial reporting should reflect the economic reality of a transaction, not merely its legal form. This is consistent with the Manual’s discussion of proper reporting under GAAP.

D. Following GAAP would produce misleading results on financial statements

This is one of the classic reasons a departure can be justified, because the objective of financial reporting is fair presentation rather than mechanical compliance that misleads users.

References

ACFE Fraud Examiners Manual, 2020 International Edition

Accounting Concepts — Generally Accepted Accounting Principles

Accounting Concepts — Departures from Generally Accepted Accounting Principles (1.122)

The correct answer is B. A request to send payment to a country different from where the third party conducts business is a significant red flag in corruption and bribery schemes. Such payment instructions can indicate attempts to conceal beneficial ownership, route funds through offshore accounts, disguise improper commissions, or make corrupt payments difficult to trace. Option A is not necessarily suspicious because many legitimate vendors use one business address and phone number. Option C can reflect legitimate competitive strength if the vendor truly provides superior services. Option D is also not inherently suspicious because lower prices may result from efficiency or market strategy. Fraud examiners should treat unusual third-party payment destinations as high-risk indicators requiring enhanced due diligence and documentation review.

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Detailed Explanation:

Rationale for Correct Answer: Upcoding occurs when a provider bills for a higher level of service than what was actually provided. Billing a 15-minute visit as a 60-minute visit is a classic upcoding scheme.

Analysis of Incorrect Options:

A. Name brand prescription – Not upcoding; this is prescribing choice, not billing fraud.

B. Multiple codes instead of one – This is unbundling , not upcoding.

D. Changing service date – This is falsifying service dates , not upcoding.

Key Concept: Health care billing fraud — upcoding vs. unbundling.

Detailed Explanation:

Rationale for Correct Answer: Shrinkage refers to discrepancies between physical inventory counts and perpetual inventory records. Causes include theft, errors, waste, or fraud. It is one of the most common indicators of asset misappropriation.

Analysis of Incorrect Options:

A. Altered inventory – Not a recognized accounting term.

B. Account receivable – Unrelated to inventory.

D. Write-offs – A corrective accounting entry, not the variance itself.

Key Concept: Inventory shrinkage as a red flag for fraud.

The correct answer is D. The balance sheet is based on the fundamental accounting equation: Assets = Liabilities + Owners’ Equity. Assets represent resources owned or controlled by the entity. Liabilities represent obligations owed to creditors, while owners’ equity represents the owners’ residual interest after liabilities are deducted from assets. Because every accounting transaction affects at least two accounts, the equation must remain in balance. Revenues, expenses, cost of goods sold, and gross profit are primarily income statement elements, not the two main components that balance against assets on the statement of financial position. Understanding this equation is essential for fraud examiners because improper entries, concealed liabilities, overstated assets, and equity manipulation can distort financial statements.

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The best answer is B. A consumer approached by a contractor should independently verify the contractor’s license or registration with the proper licensing agency before agreeing to work. Home repair and contractor scams often involve unsolicited offers, false claims of urgent repairs, inflated prices, poor workmanship, or unlicensed contractors. Oral agreements are risky because they provide little evidence of the work, price, warranties, or rights of cancellation. References can be useful, but a phone number supplied by the contractor might be fake or controlled by an accomplice. Asking about experience is also insufficient because the contractor can misrepresent it. Independent verification with the licensing authority is stronger because it confirms whether the contractor meets professional and regulatory requirements.

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Detailed Explanation:

Rationale for Correct Answer: Cash larceny involves stealing cash after it has been recorded. Reconciling register totals against actual drawer cash can reveal shortages, making option C the best detection method.

Analysis of Incorrect Options:

A – Weakens segregation of duties and increases fraud risk.

B – Impractical; cross-training is often necessary.

D – Cashiers counting their own registers weakens independent verification and may conceal theft.

Key Concept: Detecting cash larceny through reconciliation controls.

Detailed Explanation:

Rationale for Correct Answer: The key goals of information security (the CIA triad plus authentication and non-repudiation ) are confidentiality, integrity, availability, authentication, and non-repudiation . While accuracy of data is important, it is not formally one of the core security goals.

Analysis of Incorrect Options:

A. Availability – Ensures users can access data when needed.

C. Authentication – Confirms identities before granting access.

D. Non-repudiation – Prevents denial of legitimate transactions.

Key Concept: Information security objectives for fraud prevention.

Detailed Explanation:

Rationale for Correct Answer: Ransomware is malware that encrypts or locks an operating system and prevents access to data until a ransom is paid. This definition is correct.

Analysis of Incorrect Options:

A. Spyware – Monitors user activity, keystrokes, or data, not a startup instruction program.

B. Trojan horse – Appears legitimate but contains malicious code; adware is different.

C. Worm – Self-replicating program spreading across networks; not a keystroke logger.

Key Concept: Cyber fraud and malware types .

Detailed Explanation:

Rationale for Correct Answer: Fraudulent schemes involving returns and allowances can be detected by analyzing accounts for unusually high transactions in these categories. This is a common red flag for concealment of theft or manipulation of sales.

Analysis of Incorrect Options:

A. Allowances by vendors – Too narrow, not a standard analytic test.

B. Disposals of allowances than reorders – Not a recognized search method.

D. None of the above – Incorrect, since option C is valid.

Key Concept: Returns and allowances analysis for fraud detection.