Certified Fraud Examiner (CFE) Accounting and Forensic Concepts Syllabus

At which stage of the accounting cycle do fraudulent journal entries most often enter?

At the journalizing and adjusting-entry stages, especially top-side adjusting entries made at period-end with little oversight.

What is a 'top-side' journal entry and why is it a fraud risk?

An entry made at the corporate/consolidation level after subledgers close; it bypasses normal controls and is a common vehicle for financial statement fraud.

What is the purpose of a trial balance and what fraud limitation does it have?

It verifies that total debits equal total credits; however, it will not detect fraud where equal debits and credits are both falsified or where transactions are simply omitted.

Name common red flags in journal entries that fraud examiners look for.

Round-dollar amounts, entries posted to seldom-used or suspense accounts, entries made by unauthorized personnel, end-of-period timing, entries lacking support/description, and entries just below approval thresholds.

What are the three elements of the Fraud Triangle?

Pressure (incentive/motivation), Opportunity, and Rationalization.

Who developed the Fraud Triangle and from what research?

Donald Cressey, based on his study of embezzlers ('trust violators').

In the Fraud Triangle, what is meant by 'opportunity'?

The perceived ability to commit and conceal the fraud without being caught, usually arising from weak internal controls or override of controls.

In the Fraud Triangle, what types of 'pressure' commonly drive fraud?

Financial pressures (debt, lifestyle, addictions), work-related pressure (meeting targets), and other non-shareable problems the person cannot resolve legitimately.

What is 'rationalization' in the Fraud Triangle?

The fraudster's justification that the act is acceptable—e.g., 'I'm only borrowing it,' 'I'm underpaid,' or 'the company can afford it.'

What does the Fraud Diamond add to the Fraud Triangle?

A fourth element—Capability—the personal traits and abilities (position, intelligence, confidence, stress tolerance) needed to actually carry out the fraud.

What are the three major categories of occupational fraud in the ACFE Fraud Tree?

Asset misappropriation, corruption, and financial statement fraud.

Which category of occupational fraud is most common but least costly per the ACFE?

Asset misappropriation—most frequent (about 86% of cases) but lowest median loss.

Which category of occupational fraud is least common but most costly?

Financial statement fraud—least frequent but the highest median loss.

What are the two main subtypes of asset misappropriation?

Cash schemes (skimming, larceny, fraudulent disbursements) and non-cash (inventory and other assets) schemes.

What are the four main schemes classified under corruption in the Fraud Tree?

Conflicts of interest, bribery, illegal gratuities, and economic extortion.

Distinguish skimming from cash larceny.

Skimming is theft of cash before it is recorded in the books (off-book); cash larceny is theft of cash after it has been recorded (on-book).

What distinguishes financial statement fraud from asset misappropriation in intent?

Financial statement fraud aims to deceive users by misstating the financials (often to inflate results), whereas asset misappropriation directly steals organizational resources for personal gain.

According to the ACFE Report to the Nations, roughly what percentage of annual revenue do organizations lose to fraud?

Organizations are estimated to lose about 5% of their annual revenues to occupational fraud.

What is the most common detection method for occupational fraud per the ACFE?

Tips—by a wide margin—followed by internal audit and management review.

How does fraud scheme duration relate to loss?

The longer a fraud goes undetected, the greater the loss; schemes typically run a median of around 12 months before detection.

Beyond direct dollar losses, what indirect costs result from fraud?

Reputational damage, loss of customer/investor confidence, legal and investigation costs, regulatory penalties, lower employee morale, and increased financing/insurance costs.

What is horizontal (comparative) analysis?

Comparison of financial statement line items across two or more periods, expressing changes in dollar amounts and percentages to reveal trends.

What is vertical analysis (common-size analysis)?

Expressing each line item as a percentage of a base figure—income statement items as a % of net sales, balance sheet items as a % of total assets—to compare structure across periods or companies.

How is the percentage change in a line item computed for horizontal analysis?

(Current period amount − Base period amount) / Base period amount × 100.

In trend analysis for fraud, what kind of relationships raise red flags?

Items moving inconsistently with related items—e.g., revenue rising while cash flow falls, or sales growing far faster than the industry—suggesting possible manipulation.

What is the current ratio and what does it measure?

Current Assets / Current Liabilities; it measures short-term liquidity—ability to pay current obligations.

What is the quick (acid-test) ratio and how does it differ from the current ratio?

(Current Assets − Inventory) / Current Liabilities; it excludes inventory to give a stricter liquidity measure. A sudden change can signal manipulation of inventory or receivables.

How is inventory turnover calculated and what fraud might a declining ratio suggest?

Cost of Goods Sold / Average Inventory. A declining ratio may indicate overstated/fictitious inventory used to inflate assets and earnings.

What is the Beneish M-Score model used for?

It is a quantitative model using eight financial ratios to estimate the likelihood that a company has manipulated its earnings; scores above roughly −2.22 flag probable manipulators.

What does Benford's Law state and how is it applied in fraud detection?

In many natural data sets the leading digit 1 appears about 30% of the time, with frequency decreasing for higher digits; deviations from this expected digit distribution in financial data can flag fabricated or altered numbers.