Certified Fraud Examiner (CFE) Financial Transactions and Fraud Schemes Flashcards

24 sample cards from the Financial Transactions and Fraud Schemes deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is a conflict of interest in occupational fraud, and what element distinguishes it from bribery?

   A conflict of interest occurs when an employee has an undisclosed economic or personal interest in a transaction that harms the employer. Unlike bribery, no external payment to influence is needed—the key element is the undisclosed personal interest.

2. Name the two main categories of conflict-of-interest schemes.

   Purchasing schemes (employee has hidden interest in a vendor and approves overpayments) and sales schemes (employee causes the company to sell goods/services below market to a related party).

3. What are typical red flags of corruption/kickback schemes?

   Vendors that win contracts despite higher prices, unexplained employee wealth or lifestyle changes, close socializing between buyer and vendor, sole-source contracts, and a buyer who insists on a particular vendor.

4. Define financial statement fraud and name its five general methods.

   Financial statement fraud is the deliberate misrepresentation of an entity's financial condition. The five methods are fictitious/improper revenues, understated/overstated liabilities and expenses, improper asset valuations, improper disclosures, and timing differences.

5. What is a revenue recognition scheme, and give two common examples?

   Improperly recording revenue to inflate income. Examples: recording fictitious/sham sales, premature recognition before earned (e.g., bill-and-hold or channel stuffing), and recording conditional sales as final.

6. What is "channel stuffing"?

   Inducing distributors to buy more product than they can sell (often with return rights) near period-end to inflate current-period revenue, which typically reverses with later returns.

7. How do fraudsters misstate assets and liabilities to manipulate financials?

   Overstating assets (inventory, receivables, fixed assets via inflated valuations or fictitious items) and understating/omitting liabilities and expenses (failing to record payables, accruals, warranty obligations) to boost net income and equity.

8. What are "improper disclosure" frauds in financial statements?

   Failing to disclose material information—such as liabilities, related-party transactions, significant events, accounting changes, or fraud—so that the statements (and footnotes) are misleading.

9. What are "timing difference" (cut-off) schemes in financial statement fraud?

   Recording revenues or expenses in improper periods (early or late) to shift income between periods—e.g., holding books open past period-end or deferring expenses—even though totals may eventually be correct.

10. Which financial ratios are commonly used to detect financial statement fraud?

    Vertical/horizontal analysis, the gross margin and current ratio, days sales in receivables, inventory turnover, and the Beneish M-Score; sudden unexplained changes flag manipulation.

11. What does the days-sales-in-receivables (DSO) ratio reveal about possible fraud?

    DSO = (Receivables / Sales) × number of days. A sudden increase suggests fictitious or prematurely recorded sales, uncollectible/aged receivables, or revenue recognition fraud.

12. What is the fraud triangle?

    The three conditions generally present when fraud occurs: (1) pressure/incentive (motive), (2) opportunity (weak controls), and (3) rationalization (justifying the act). Used to assess fraud risk in financial statement audits.

13. What are the two principal types of bankruptcy fraud schemes?

    Concealment of assets (hiding assets from creditors/the trustee) and the "bust-out" scheme (building credit then disappearing with the goods/cash, leaving debts unpaid).

14. What is a "bust-out" scheme?

    A planned bankruptcy fraud in which a business establishes good credit, orders large amounts of goods on credit, sells or hides them, then files bankruptcy (or vanishes) without paying suppliers.

15. Distinguish tax evasion from tax avoidance.

    Tax evasion is the illegal, willful nonpayment or underpayment of tax (a crime). Tax avoidance is the legal arrangement of affairs to minimize tax liability within the law.

16. Define money laundering and name its three stages.

    Money laundering disguises the proceeds of crime to make them appear legitimate. Its three stages are placement (introducing cash into the system), layering (moving funds through transactions to obscure origin), and integration (returning funds as apparently legitimate).

17. What is "structuring" (smurfing) in money laundering?

    Breaking large cash amounts into smaller deposits below reporting thresholds (e.g., under $10,000) to evade currency transaction reporting requirements.

18. What U.S. report must financial institutions file for cash transactions over $10,000, and what is a SAR?

    A Currency Transaction Report (CTR) is required for cash transactions exceeding $10,000. A Suspicious Activity Report (SAR) is filed when a transaction appears suspicious of illegal activity, regardless of amount.

19. What is a Ponzi scheme and how does it differ from a pyramid scheme?

    A Ponzi scheme pays earlier investors with later investors' funds, claiming returns from fictitious investments controlled centrally. A pyramid scheme requires participants to recruit new members, with returns driven by recruitment rather than a central operator.

20. What is "churning" in securities fraud?

    A broker excessively trades a client's account—not to benefit the client but to generate commissions—breaching fiduciary duty.

21. Name two common consumer fraud schemes a CFE should recognize.

    Advance-fee fraud (paying upfront for a benefit/loan that never materializes) and identity theft; others include telemarketing/charity scams and merchandising/pyramid schemes.

22. What are the principal procurement fraud schemes related to the bidding process?

    Bid rigging (collusion to control awards), need recognition schemes, bid tailoring/specification manipulation, bid suppression, complementary (cover) bidding, and bid rotation among colluding vendors.

23. Name three common insurance fraud schemes.

    Premium diversion/fraud (agent steals premiums), fictitious or staged claims, and inflated/padded claims; also includes fake death ("ghosting") and rate evasion schemes.

24. What is the difference between bid rigging by "complementary bidding" and "bid rotation"?

    Complementary (cover) bidding: competitors submit intentionally high or non-competitive bids so a designated vendor wins. Bid rotation: colluding vendors take turns being the low bidder so each wins a share of contracts over time.

What this deck covers

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