CFE-Fraud-Schemes-and-Financial-Crimes ACFE Certified Fraud Examiner -Fraud Schemes and Financial Crimes Free Practice Exam Questions (2026 Updated)

Detailed Explanation:

Rationale for Correct Answer: Liabilities are defined as obligations to transfer assets or provide services to other entities in the future as a result of past transactions. They represent what the organization owes, distinguishing them from assets.

Analysis of Incorrect Options:

A. Supplies – Assets consumed within a year, not obligations.

B. Expenses – Costs incurred, but not necessarily amounts owed.

C. Assets – Resources owned, not obligations.

Key Concept: Definition of Liabilities in accounting.

Detailed Explanation:

Rationale for Correct Answer: Insurer health care fraud occurs when the insurance company itself engages in deception for financial gain. Submitting inflated cost data to regulators in order to justify rate increases is a direct example of insurer fraud.

Analysis of Incorrect Options:

A. Intermediary verifying claims – Proper procedure, not fraud.

C. Passing on negotiated rates – Legitimate practice.

D. Denying incomplete claims – May be harsh, but not fraudulent.

Key Concept: Insurer fraud vs. provider or claimant fraud .

Detailed Explanation:

Rationale for Correct Answer: In a need recognition scheme , an employee creates or exaggerates a need for goods or services to benefit a favored supplier. One red flag is that materials are ordered prematurely or not at the optimal reorder point , suggesting that purchases are being manipulated to benefit a corrupt vendor rather than based on actual business needs.

Analysis of Incorrect Options:

A – A large list of suppliers suggests competition, not fraud.

C – A need met by various suppliers does not indicate fraud.

D – Low requirements for stock may reflect lean inventory management, not fraud.

Key Concept: Corruption – need recognition schemes and red flags.

Detailed Explanation:

Rationale for Correct Answer: The statement is false . Cressey’s fraud triangle and Albrecht’s fraud scale both emphasize that fraud is more likely when pressures are high, opportunities are present, and integrity is low . Conversely, when pressure and opportunity are low and integrity is high, the likelihood of fraud is greatly reduced.

Analysis of Incorrect Options:

A. True – Incorrect, it directly contradicts the fraud triangle and fraud scale models.

B. False – Correct, because under the conditions stated, fraud occurrence is less likely.

Key Concept: Fraud Scale Variables — Pressure, Opportunity, Integrity.

The correct answer is A because the accounting equation is Assets = Liabilities + Owners’ Equity. If a fraudster removes a liability from the books, total liabilities decrease. To keep the equation balanced without drawing attention to the improper removal, the fraudster could increase another liability account. This offsets the decrease and keeps total liabilities from appearing reduced. Decreasing owners’ equity or creating a fictitious expense would further reduce the right side of the equation and would not conceal the removal in the same way. Increasing an asset would increase the left side, worsening the imbalance unless another entry were also made. The ACFE accounting concepts materials explain that understanding debit-credit relationships and the accounting equation is essential in detecting concealment entries.

The correct answer is C because the World Bank Principles recommend that a bankruptcy administrator have broad powers, including the right to cancel fraudulent contracts or transactions entered into by the debtor. The ACFE material states that administrators, trustees, receivers, examiners, or similar insolvency representatives may be granted powers to collect, preserve, and dispose of debtor property, interfere with contracts when necessary to meet insolvency objectives, and compel relevant information from the debtor or other knowledgeable parties. Therefore, options A, B, and D incorrectly restrict the administrator’s recommended authority. Madison’s power is not limited to collection only, and she may compel information or intervene in contracts where the insolvency process requires it.

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Comprehensive and Detailed Explanation

Why the correct answer is: False accounting entry

According to the ACFE Fraud Examiners Manual – Financial Transactions and Fraud Schemes , under Financial Institution Fraud → Types of Embezzlement Schemes , the Manual provides explicit descriptions of relevant banking fraud schemes, including false accounting entries .

The Manual lists False Accounting Entries as a form of embezzlement in which an employee manipulates general ledger accounts or other accounting records to conceal a theft or unauthorized activity :

“False Accounting Entries” are specifically categorized as a type of embezzlement scheme used by dishonest bank employees to hide misappropriated funds.

In this question, the accountant:

Adjusted the bank’s general ledger

With the intent to conceal the theft of customer funds

This aligns exactly with the ACFE definition of false accounting entries , which involve altering legitimate financial records to hide fraudulent actions.

Therefore, the best ACFE-defined description of the scheme is:

→ False accounting entry (Option B)

Why the other options are incorrect

A. Unauthorized withdrawal

The Manual separately defines Unauthorized Withdrawals as a type of embezzlement in which a bank employee directly removes funds from accounts without permission:

“Unauthorized Withdrawals” are listed as a distinct embezzlement scheme involving unapproved removal of customer funds.

However, in this scenario, the defining act is manipulating ledger records , not simply withdrawing funds. The nature of the concealment technique makes false accounting entry the correct classification.

C. Moving money from inactive accounts

The Manual defines:

“Moving Money from Customers’ Dormant or Inactive Accounts” as a scheme in which employees transfer funds from inactive accounts to themselves.

In this question, the stolen funds come from an active customer account , so this option does not apply.

D. Unauthorized disbursement of funds

The Manual includes:

“Unauthorized Disbursement of Funds to Outsiders” as another type of financial institution fraud.

This refers to payments made to external parties without authorization—not to ledger manipulation to hide theft.

Again, the defining characteristic in the scenario is the use of false ledger entries , which makes Option B the most accurate according to ACFE terminology.

Detailed Explanation:

Rationale for Correct Answer: Expense reimbursement schemes are a common type of fraudulent disbursement. Requiring employees to submit receipts electronically improves controls by ensuring legibility, reducing the chance of altered or duplicate submissions, and creating a digital audit trail. This measure is recommended in the Fraud Examiners Manual as part of strengthening internal controls over reimbursement processes.

Analysis of Incorrect Option:

B. False – Incorrect because electronic receipt submission is indeed a recognized anti-fraud measure.

Key Concept: Fraudulent disbursements prevention through documentation controls.

The correct answer is A. Holograms are specifically designed as anti-counterfeiting features and are among the most difficult physical card features for fraudsters to reproduce accurately. Counterfeit payment card schemes usually involve stolen account information being encoded or printed onto altered, blank, or counterfeit cards. Option B is incorrect because these schemes generally involve fraudsters, organized groups, or dishonest merchants, not collusion between card issuers and merchants. Option C is too absolute because modern technology allows counterfeit cards to be produced without traditional professional printing facilities. Option D is inaccurate because counterfeit cards usually rely on stolen or compromised active account data, not merely expired card numbers. The ACFE payment fraud materials emphasize card security features, counterfeit card production, and card-scrutiny controls.

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Detailed Explanation:

Rationale for Correct Answer: Cash larceny involves the theft of incoming cash after it has been recorded. Strong segregation of duties is critical to prevent concealment. By separating cash deposit responsibilities from bank reconciliation duties , one employee cannot both steal funds and cover their tracks.

Analysis of Incorrect Options:

A. Restricting substitution – Weakens controls; job rotation and cross-training help prevent fraud.

C. Same register use – Reduces accountability, making theft harder to trace.

D. Surprise cash counts – Strong detective control, but not as preventive as segregation of duties.

Key Concept: Preventing cash larceny through segregation of duties .

Detailed Explanation:

Rationale for Correct Answer: Fair value is defined as the price an asset would fetch in an orderly transaction between willing market participants. It reflects current market conditions, not historical cost.

Analysis of Incorrect Options:

A. Absolute value – Mathematical concept, not accounting.

C. Cost value – Historical cost, not current market.

D. Material value – Not a recognized accounting term.

Key Concept: Fair Value Measurement under GAAP/IFRS.

Detailed Explanation:

Rationale for Correct Answer: The “outside the accounting system” approach occurs when perpetrators simply fabricate financial statements without regard to actual accounting records. Fraudsters may create entirely false reports using external tools (typewriters, spreadsheets, word processors).

Analysis of Incorrect Options:

A. Organized accounting – Not a fraud classification.

B. Playing the accounting – Uses the real accounting system but manipulates entries.

C. Beating accounting – Refers to overriding controls but within the system.

D. Outside accounting system – Correct, as it involves entirely fabricated statements.

Key Concept: Outside-the-books fraud — fabricated financial reports not tied to accounting records.

Detailed Explanation:

Rationale for Correct Answer: Fraudulent financial statements (or “fraudulent statement”) refer to the intentional misrepresentation of financial condition, typically through overstating revenues, understating expenses, inflating assets, or concealing liabilities. The intent is to mislead stakeholders such as investors, creditors, or regulators.

Analysis of Incorrect Options:

B. Corruption – Refers to abuses of influence and conflicts of interest, not misreporting financial information.

C. Asset misappropriations – Involve theft of assets, not misrepresentation of reports.

D. None of the above – Incorrect since option A is correct.

Key Concept: Financial Statement Fraud — misrepresentation of organizational performance and position.

The correct answer is B. A Ponzi scheme is a fraudulent investment arrangement in which funds from new investors are used to make payments to earlier investors. The payments create an appearance that the investment is legitimate and profitable, even though little or no genuine business activity or investment return exists. This artificial success helps the promoter attract more investors and delay detection. Option A describes a characteristic more closely associated with pyramid schemes, where compensation depends heavily on recruiting participants. Option C is incomplete because Ponzi schemes usually promise high returns with low or no stated risk, not openly high-risk investments. Option D also reflects pyramid-style recruitment structures rather than the defining feature of a Ponzi scheme.

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The correct answer is A. David is committing a lapping scheme. Lapping occurs when an employee steals one customer’s payment and conceals the theft by applying a later payment from another customer to the first customer’s account. The employee must then continue shifting later payments to earlier accounts to keep the shortage hidden. This creates a rolling concealment pattern that can continue until discovered through customer complaints, account confirmations, delayed postings, or independent reconciliation. Padding, substitution, and duplication are not the standard ACFE classifications for this receivables concealment method. Because David is using later customer payments to cover earlier stolen receipts, his conduct fits the classic definition of lapping under cash receipts fraud schemes.

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Detailed Explanation:

Rationale for Correct Answer: The accounting cycle is the complete process of recording transactions, adjusting the books, preparing trial balances, and producing financial statements. Journal entries are part of the process, but the entire structured sequence is called the accounting cycle.

Analysis of Incorrect Options:

A. Journal Entries – Steps within the cycle, not the entire process.

C. Financial statement – Output of the cycle, not the process itself.

D. None of all – Incorrect since the accounting cycle is the correct term.

Key Concept: Accounting Cycle — structured process of recording and adjusting transactions.

Detailed Explanation:

Rationale for Correct Answer: Physical inventory counts involve actually counting items on hand and comparing them to book records. These counts can reveal theft, errors, or shrinkage when discrepancies are identified.

Analysis of Incorrect Options:

A. Perpetual inventory counts – The system tracks expected balances but cannot independently confirm theft.

C. Concealment inventory counts – Not a recognized term.

D. None of the above – Incorrect, since physical counts do aid detection.

Key Concept: Physical inventory counts as a fraud detection tool.

Detailed Explanation:

Rationale for Correct Answer: The journal is the core of the bookkeeping system because it provides a chronological record of all business transactions. Each transaction is recorded as a journal entry before posting to the ledger.

Analysis of Incorrect Options:

A. Asset – A resource, not a recording system.

B. Liability – An obligation, not the recording medium.

C. Checkbook – Tracks cash disbursements, but not all transactions.

Key Concept: Journal as the primary book of original entry.