ACFE CFE - Fraud Prevention Exam Dumps & Practice Test Questions

Question 1:

What is the internal auditor's primary role in relation to addressing fraud risks within an organization?

A. Taking charge of management’s fraud risk mitigation activities
B. Ensuring financial statements are free from material fraud-related errors
C. Assessing signs of potential fraud and determining whether further investigation or escalation is warranted
D. Designing and managing cost-effective anti-fraud control systems

Correct Answer: C

Explanation:

An internal auditor plays a supportive and evaluative role when it comes to fraud management within an organization. While fraud prevention and detection are critical components of overall risk management, the responsibility for managing and controlling fraud risks primarily lies with management and the board of directors. The internal auditor's responsibility is to assess how effectively those risks are being addressed—not to directly manage them.

Let’s explore each option to understand why option C is the most accurate:

Option A is incorrect because internal auditors are not responsible for directly managing or overseeing fraud risk mitigation activities. That is the responsibility of management, particularly those in executive or operational roles. Internal auditors can evaluate how well management handles fraud risks, but they don’t implement fraud strategies themselves.

Option B is also not suitable. Providing reasonable assurance that financial statements are free from material misstatements due to fraud is typically the role of the external auditor, especially in financial audits. While internal auditors may assess controls that impact financial reporting, their focus is broader and not primarily centered on certifying the integrity of financial statements.

Option C is correct and accurately reflects the internal audit function’s duties. Internal auditors are expected to be vigilant and responsive to fraud indicators. They assess symptoms or red flags of fraudulent activity and, based on professional judgment, determine if further actions such as launching a formal investigation or notifying management are appropriate. This aligns with the internal audit standards established by professional bodies like the Institute of Internal Auditors (IIA), which state that internal auditors should be able to evaluate fraud risks and recommend further steps when necessary.

Option D is incorrect because the responsibility for establishing and maintaining anti-fraud controls lies with management. Internal auditors evaluate the adequacy and effectiveness of these controls but do not develop or own them.

In summary, internal auditors support the organization’s anti-fraud efforts by assessing fraud risk management, staying alert to fraud indicators, and recommending additional investigation when appropriate. They serve in an advisory and assurance capacity rather than an operational or managerial one. Therefore, option C best describes the internal auditor's responsibilities concerning fraud.

Question 2:

Which of the following is not aligned with the core principles found in the G20/OECD Principles of Corporate Governance?

A. Advocating for a corporate governance system that upholds shareholders’ rights
B. Emphasizing the need for accurate, timely, and transparent disclosures
C. Recommending that governments create legal frameworks to foster corporate governance
D. Promoting enhanced protection for foreign shareholders over domestic shareholders

Correct Answer: D

Explanation:

The G20/OECD Principles of Corporate Governance serve as a globally recognized set of standards that promote effective governance in corporations. These principles focus on protecting shareholders, ensuring transparency, promoting accountability, and fostering sustainable financial and economic development. Their guidance applies primarily to publicly traded companies but can also influence private firms and policy reforms.

Let’s evaluate the provided options to determine which one is not part of the principles:

Option A aligns directly with the G20/OECD Principles. The framework explicitly calls for protecting shareholders' rights, including their ability to participate in key decisions, access relevant information, and vote in shareholder meetings. It promotes equitable treatment, including that of minority and foreign shareholders.

Option B is also correct and consistent with the principles. A central tenet of the G20/OECD guidelines is transparency and disclosure. Companies are encouraged to provide material information on their performance, governance structures, ownership, and risk exposure in a timely and accessible manner. This promotes investor confidence and informed decision-making.

Option C is in line with the guidance as well. The principles emphasize that governments must create and uphold a robust legal and regulatory framework to support good corporate governance practices. This includes the enforcement of rules that ensure fairness, accountability, and investor protection. However, governments are not expected to micromanage corporations but rather to create a conducive environment for governance excellence.

Option D is the only choice that contradicts the G20/OECD standards. The principles emphasize equal treatment of all shareholders, regardless of whether they are domestic or foreign. Recommending stronger protections for foreign shareholders over domestic ones would violate the foundational idea of fairness and non-discrimination. The framework encourages companies and policymakers to avoid preferential treatment and to uphold the rights of all shareholders equitably.

In summary, while the G20/OECD Principles strongly advocate for shareholder rights, transparency, and supportive governance frameworks, they do not support unequal treatment among shareholder groups. Therefore, option D misrepresents the principles and is the correct answer to this question.

Question 3:

During an external audit, the auditors find evidence that management has deliberately excluded certain expenses in an attempt to cover up an asset misappropriation scheme. 

The monetary impact of this omission is below the audit's set materiality threshold. What should the auditors do in response?

A. Conclude that prior audit evidence is compromised and withdraw from the engagement
B. Disregard the issue since the amount involved is immaterial
C. Ignore the matter because asset misappropriation is not material for external audits
D. Reevaluate the audit plan, adjusting procedures based on the new evidence

Correct Answer: D

Explanation:

In auditing, materiality is evaluated not just by quantitative metrics—such as dollar thresholds—but also by qualitative factors that may signal a deeper issue within the organization's financial reporting or internal controls. In this case, even though the uncovered misstatement falls below the predefined numerical materiality threshold, the intentional nature of the action and its connection to fraudulent activity by management elevate its importance.

Fraud, especially when deliberately concealed by management, is always taken seriously, regardless of the amount involved. Auditing standards, such as ISA 320 (Materiality in Planning and Performing an Audit) and U.S. Generally Accepted Auditing Standards (GAAS), clearly state that a small misstatement can be considered material if it reflects dishonest behavior, compromises the integrity of financial statements, or undermines trust in management.

Option A is incorrect because auditors don’t immediately assume all previously gathered audit evidence is unreliable or withdraw from the audit. Withdrawal is a drastic step, usually taken after serious deliberation and communication with the client’s governance bodies.

Option B is incorrect because this line of thinking ignores the qualitative materiality principle. Even small misstatements, if they involve intentional fraud, must be addressed.

Option C is also incorrect. Asset misappropriation is recognized as a serious form of occupational fraud and is highly relevant to external audits. Such incidents often indicate weak internal controls and raise red flags about the reliability of financial reporting.

Option D is the correct approach. Upon identifying such evidence, auditors must reassess their audit risk and consider adjusting the audit strategy. This could involve modifying the nature, timing, or extent of procedures—such as performing more detailed testing, increasing sample sizes, or re-evaluating previously accepted assumptions. The auditors may also need to discuss the findings with senior audit firm personnel and report the matter to those charged with governance.

In summary, despite being below the quantitative materiality threshold, the intentional concealment and fraudulent nature of the misstatement render it qualitatively material. The proper course of action is to reassess and adapt the audit plan accordingly.

Question 4:

When preparing a report to present the results of a fraud risk assessment, which approach best reflects effective communication practices?

A. Format the report using language and style that align with the organization’s culture
B. Include an exhaustive list of every issue uncovered during the assessment
C. Base the report on the assessment team’s personal opinions and interpretations
D. All of the above

Correct Answer: A

Explanation:

A fraud risk assessment report is a vital communication tool intended to inform stakeholders—such as executive management, internal audit, compliance teams, or the board—about the risks of fraud within the organization and the effectiveness of current controls. The report's main objective is to facilitate understanding and action, which is why clarity, relevance, and audience alignment are crucial.

Option A is correct because tailoring the communication style to suit the organization’s culture and communication norms significantly improves the report’s impact. Whether the business favors formal language or informal summaries, the report should mirror that tone. This increases readability, ensures the message resonates with stakeholders, and encourages the proper follow-up action.

Option B is incorrect. While it’s important for the report to be comprehensive, listing every single finding in exhaustive detail can dilute the message, overwhelm readers, and obscure critical insights. Best practices suggest prioritizing significant risks, focusing on root causes, control weaknesses, and actionable recommendations. Supplementary findings can be included in appendices or technical annexes if needed.

Option C is also incorrect. Reports should be grounded in objective analysis based on data, risk scoring models, interviews, and observed control gaps—not subjective interpretations. While some professional judgment is necessary, the goal is to present evidence-based findings rather than opinions. Maintaining objectivity enhances credibility and ensures the report can withstand scrutiny.

Option D is incorrect because both B and C contradict established best practices in reporting. Therefore, it cannot be considered a true statement.

In conclusion, a high-quality fraud risk assessment report must be strategic, objective, and tailored to its audience. The best practice is to communicate in the language of the business (Option A), which supports clarity, encourages meaningful dialogue, and promotes proactive risk management.

Question 5:

When conducting a fraud risk assessment, which of the following elements should the team carefully evaluate as potential sources of inherent fraud risk within the organization’s environment?

A. The company’s performance-based incentive programs
B. The likelihood of management overriding internal controls
C. The risk of reputational harm to the organization
D. All of the above

Correct Answer: D

Explanation:

A fraud risk assessment is a structured process that organizations use to identify and evaluate areas where fraud may occur. It helps companies anticipate vulnerabilities, assess potential consequences, and develop effective prevention and detection strategies. A thorough risk assessment involves understanding not just financial controls, but also broader environmental factors that could enable or conceal fraud. This includes organizational culture, governance, and external pressures.

Option A focuses on incentive programs, which are a well-documented source of fraud risk. When bonuses or commissions are tied to sales targets, revenue, or other performance indicators, employees may feel compelled to manipulate financial data or misrepresent facts to meet targets. These incentive structures—especially when aggressive or poorly monitored—can encourage unethical behavior. Fraud risk assessments must analyze whether such programs are pushing employees toward behavior that crosses ethical or legal lines.

Option B highlights the threat of management override of controls. This is considered one of the most dangerous risks in fraud scenarios. Even the best-designed internal control systems are ineffective if those in leadership positions can bypass or disable them. Senior executives may override controls to commit financial statement fraud, hide losses, or meet stakeholder expectations. Therefore, the assessment team must evaluate how susceptible the organization is to such overrides and whether adequate governance and audit mechanisms exist to detect and prevent this behavior.

Option C refers to reputational risk, which often accompanies fraud incidents. The consequences of fraud extend beyond financial loss; they can erode stakeholder trust, damage the brand, affect customer loyalty, and draw unwanted regulatory attention. Even a relatively minor fraud event can significantly harm a company's public image. Thus, fraud risk assessments must take into account the broader implications of fraud-related events, including how they might damage public perception and long-term viability.

Taken together, these three areas—incentive structures, executive power over controls, and brand reputation—represent essential considerations in identifying inherent fraud risks. Ignoring any of these elements can leave significant gaps in the organization's risk profile.

Therefore, the best and most complete answer is D, as it includes all critical areas that must be addressed in a well-rounded fraud risk assessment.

Question 6:

Which of the following actions is NOT specifically prohibited by the ACFE Code of Professional Ethics?

A. Engaging in illegal conduct
B. Involvement in actions considered unethical
C. Accepting work despite a conflict of interest not being disclosed
D. Providing professional opinions in areas of technical expertise

Correct Answer: D

Explanation:

The ACFE (Association of Certified Fraud Examiners) Code of Professional Ethics establishes clear guidelines for ethical conduct among fraud examiners. These standards are meant to preserve the integrity, professionalism, and public trust associated with the profession. The Code outlines what CFEs must not do, focusing on legality, impartiality, and transparency.

Option A, engaging in illegal conduct, is directly prohibited by the ACFE Code. Whether in personal or professional contexts, CFEs are expected to maintain compliance with the law. Illegal actions, regardless of their relevance to a fraud investigation, reflect poorly on the profession and may compromise an individual’s ability to work as a trusted investigator.

Option B, which refers to unethical conduct, is also strictly forbidden. The ACFE Code expects CFEs to behave in ways that reflect integrity and professionalism. Even if an action is technically legal, it can still be unethical—such as exploiting loopholes, misusing authority, or manipulating facts. Unethical behavior erodes credibility and undermines public confidence in the profession.

Option C, accepting assignments when there is an undisclosed conflict of interest, is a serious violation. One of the cornerstones of ethical conduct in the fraud examination field is objectivity. If a CFE has any personal or financial relationship that could influence their work, it must be fully disclosed. Taking on work without revealing such conflicts can bias investigations and invalidate findings.

Option D, however, is not prohibited. In fact, CFEs are often expected to give technical opinions, especially in investigations or legal proceedings. Providing expert insights—such as analyzing data, interpreting financial documents, or identifying red flags—is a normal part of the role. The key requirement is that these opinions must be within the CFE’s realm of expertise and based on verified facts. The Code does warn against exaggeration or misrepresentation, but it does not prohibit giving technical opinions altogether.

In summary, while Options A, B, and C reflect behaviors that violate the ACFE’s ethical standards, Option D is a legitimate professional responsibility. Therefore, the correct answer is D.

Question 7:

A fraud risk assessment team wants to understand how a group of employees perceive and interact around the organization’s fraud awareness training. 

Which method is best suited for observing real-time group dynamics and collecting meaningful insights?

A. Interviews
B. Focus groups
C. Surveys
D. Anonymous feedback mechanisms

Correct Answer: B

Explanation:

When a fraud risk assessment team is trying to gain insight into how employees think, communicate, and react to fraud awareness training, the ideal data collection method should facilitate real-time interaction among participants. This not only provides access to individual opinions but also reveals social behaviors, such as group consensus, disagreement, or influence. Among the options provided, focus groups stand out as the most effective strategy for this purpose.

A focus group is a moderated, in-person or virtual discussion with a small group—usually between 6 and 12 people. Unlike individual interviews or anonymous tools, focus groups allow facilitators to observe how participants engage with one another. This group dynamic is valuable for understanding how fraud awareness is perceived collectively, which messages resonate, and where confusion or resistance may lie. Participants often build on each other’s ideas or challenge certain points, revealing nuances that other methods may overlook.

Let’s look at the alternatives:

• A. Interviews: These are excellent for gaining detailed, personal insights, but they are conducted one-on-one. They don’t allow for observation of group interaction, which is crucial to the team’s goal of seeing how employees engage with one another on the subject of fraud training.

• C. Surveys: Surveys can reach a broad audience and provide useful statistical data. However, they lack the depth of dialogue and do not facilitate interaction. They’re great for measuring awareness but fall short when trying to observe group behavior.

• D. Anonymous feedback mechanisms: These tools encourage candid input, especially when trust is an issue, but they also do not provide any visibility into how employees interact or discuss fraud awareness topics among themselves. These are better suited for identifying hidden concerns or cultural issues, not for assessing interactive dynamics.

In summary, because the team specifically wants to observe how employees interact, the method must support dialogue and interpersonal exchange. Focus groups provide the opportunity to observe real-time discussions, understand collective perceptions, and identify group-based behavioral trends. This makes option B the best choice for this scenario.

Question 8:

Smith, a retail manager, is concerned about frequent mismatches in cash register balances. 

Based on behaviorist motivation theories, which strategy would most effectively encourage employees to consistently balance their drawers?

A. Reduce an employee’s paid time off for each discrepancy
B. Publicly reprimand staff members for overages or shortages
C. Offer a reward to employees who maintain perfect balances for 60 days
D. Demote employees who repeatedly show discrepancies

Correct Answer: C

Explanation:

Behaviorist motivation theories, most notably developed by B.F. Skinner, focus on the idea that behavior is shaped by its consequences. This theory differentiates between positive reinforcement (rewarding good behavior to increase its occurrence) and punishment (applying negative consequences to reduce unwanted behavior). When the goal is to promote consistent, accurate behavior—such as balancing a cash register—the most effective and sustainable approach is positive reinforcement.

Option C suggests offering a bonus to employees who consistently maintain perfectly balanced cash drawers over a 60-day period. This approach applies positive reinforcement, encouraging the desired behavior by associating it with a tangible and appealing reward. Employees are more likely to improve and maintain good habits when they see that their efforts are recognized and appreciated. It also fosters a workplace culture based on encouragement rather than fear or punishment.

Now let’s consider why the other options are less effective:

• A. Deducting paid time off represents negative punishment—taking something away when a mistake occurs. While it may reduce unwanted behavior, it can also lead to frustration, fear, or resentment. Over time, this approach may reduce morale and even increase turnover, especially if discrepancies are caused by system issues rather than negligence.

• B. Public criticism introduces social punishment, which can embarrass employees and create a toxic work environment. Publicly shaming employees tends to harm trust in management and can increase workplace anxiety rather than fostering improvement.

• D. Demotion is an extreme form of punishment. While it may deter repeat offenders, using demotion as a routine motivational tool is inappropriate. It's demoralizing, potentially unjust if discrepancies are unintentional, and could discourage honest reporting of errors.

Behaviorist theory emphasizes that rewarding desired behavior is generally more effective than punishing mistakes. It promotes accountability and consistency by encouraging staff to work toward a clear, positive outcome. Therefore, the most effective approach is to offer a performance-based bonus, making Option C the best choice.

Question 9:

Glenda, an internal auditor, has experienced ongoing disagreements with Bridgette, a clerk in accounts receivable, regarding accounting practices. Now that Glenda is responsible for leading the company’s fraud risk assessment,

What is the most ethical and professional way for her to handle this situation?

A. Directly address the past disagreements with Bridgette and highlight them as indicators of potential fraud.
B. Reassign the fraud risk assessment related to the accounts receivable department to another auditor.
C. Use her prior disagreements with Bridgette as a reason to assess higher fraud risk in that department.
D. Automatically classify the accounts receivable area as high risk based on her past issues with Bridgette.

Correct Answer: B

Explanation:

Internal auditors are held to high standards of objectivity, integrity, and professional skepticism. When a prior personal conflict exists, particularly one related to core duties like financial processes, it becomes essential to assess whether an auditor’s independence or impartiality may be impaired—either in reality or appearance.

In Glenda’s case, prior disputes with Bridgette could impact her ability to fairly and objectively evaluate the department’s fraud risk. The most ethical and professionally responsible action she can take is to recuse herself from evaluating areas involving Bridgette or accounts receivable. Instead, she should delegate that portion of the fraud risk assessment to another qualified auditor who can conduct it without any real or perceived bias. This action aligns with best practices outlined by the Institute of Internal Auditors (IIA) and supports transparency, fairness, and audit quality.

Option A is inappropriate because addressing past disagreements in the context of a risk assessment personalizes what should be an impartial process. It risks damaging relationships and compromising audit credibility.

Option C is also flawed. While all relevant risk indicators should be considered, using personal conflict as a justification for higher fraud risk is subjective and does not align with recognized risk assessment methodologies, which should be data-driven and based on control weaknesses, error history, or fraud red flags—not interpersonal history.

Option D, which proposes automatically flagging the department as high-risk, would violate ethical standards. Risk assessments must be supported by evidence—such as weak controls or audit findings—not personal perceptions.

Ultimately, Option B ensures that the audit function remains independent, professional, and free from bias, thereby maintaining the trustworthiness of both the auditor and the audit results.

Question 10:

Which of the following statements best reflects a fundamental principle behind effective anti-fraud control systems?

A. They eliminate fraud risk entirely by closing all gaps.
B. They rely more on preventive measures than detection strategies.
C. They prioritize detection mechanisms over prevention techniques.
D. They reduce fraud risk by increasing the perceived likelihood of detection.

Correct Answer: D

Explanation:

An effective anti-fraud control system does not guarantee the complete elimination of fraud. Rather, its success hinges on a combination of preventive and detective controls, along with the psychological impact it has on potential fraudsters. Among the most influential components is the perception of being caught. When individuals believe that fraudulent actions are likely to be discovered and punished, they are far less likely to commit those acts.

Option D correctly captures this concept. It acknowledges that raising the perceived risk of detection—through audits, monitoring, whistleblower mechanisms, and analytic tools—acts as a powerful deterrent. This aligns with the Fraud Triangle Theory, which identifies three components contributing to fraudulent behavior: pressure, opportunity, and rationalization. Strong internal controls primarily target the “opportunity” element by increasing the chances that fraud will be spotted.

On the other hand, Option A is unrealistic. No system can fully eliminate the risk of fraud due to the complexity of human behavior and the evolving nature of fraud techniques. Even the best control frameworks have limitations.

Option B, which emphasizes prevention over detection, represents an imbalanced approach. While preventive measures—like access restrictions or segregation of duties—are crucial, they must be complemented by detective controls to catch what prevention misses. Relying solely on prevention can leave an organization vulnerable to sophisticated or insider schemes.

Option C, which focuses on detection above prevention, is similarly unbalanced. Detection often occurs after the fraud has happened, which may reduce future risk but doesn’t prevent losses. Therefore, an ideal anti-fraud strategy employs both preventive and detective measures in tandem, with an overarching goal of deterrence through visibility and accountability.

In summary, fraud deterrence is most effective when fraudsters are convinced that they will be caught, making Option D the most accurate representation of how anti-fraud controls should function.