CFE cheat sheet

Fraud triangle: pressure/incentive, opportunity, rationalization; all three are generally present in occupational fraud.

Fraud scale: pressure, opportunity, integrity; integrity is measured on a continuum rather than as a binary rationalization.

Opportunity is the fraud-triangle element most directly reduced by internal controls; pressure and rationalization are less controllable by the organization.

Residual fraud risk = inherent risk after considering control design and operating effectiveness; use the same likelihood and impact scales for both.

Segregation of duties separates authorization, custody, and recordkeeping; collusion can defeat the control.

Three lines model: first line = operational management; second line = risk/compliance; third line = internal audit.

Deterrence increases when perceived detection certainty and perceived consequence severity increase; hotlines and surprise audits raise perceived detection.

Fraud risk assessment sequence: identify fraud risks, assess likelihood and impact, map controls, compute residual risk, prioritize remediation.

Tone at the top and a written code of conduct are preventive controls; their effectiveness depends on consistent enforcement.

Asset misappropriation splits into cash theft (skimming, larceny, register disbursements) and theft of inventory or other assets.

Skimming occurs before recording; cash larceny occurs after recording; register disbursements use false refunds or voided sales.

Check kiting exploits bank float by moving funds between accounts; indicators include frequent transfers, overdrafts, and unusual check clearing patterns.

Payroll schemes include ghost employees, falsified hours, commission manipulation, and workers' compensation claims.

Expense reimbursement schemes include mischaracterized, overstated, fictitious, and multiple reimbursements.

Corruption schemes include bribery, conflict of interest, and extortion; conflict of interest requires an undisclosed economic interest.

Financial statement fraud categories: fictitious revenue, timing differences, concealed liabilities, improper valuation, improper disclosure, and earnings management.

Fictitious revenue overstates sales and receivables; timing differences shift revenue or expenses between periods without creating fictitious customers.

Red flags for financial statement fraud include rapid growth, unusual journal entries, related-party transactions, and aggressive accounting estimates.

Fraud examination is reactive and allegation-driven; the audit function is generally forward-looking and expresses an opinion on financial statements.

Predication is the basis for initiating a fraud examination; it can be an allegation, anomaly, tip, or red flag.

Evidence categories: testimonial, documentary, physical, and demonstrative; each requires relevance and authenticity.

Chain of custody records collection, transfer, and storage; unbroken custody supports reliability and admissibility.

Interview sequence: cooperative non-subject witnesses first, then other witnesses, then the subject last after evidence is secured.

Question progression: open-ended questions early, closed questions to pin down facts, leading questions only when appropriate; admission-seeking occurs at the end.

Data analysis tests include Benford's law, duplicate payments, gap detection, outlier analysis, and trend analysis; results identify anomalies, not proof.

Investigation report: scope, methodology, evidence, findings, conclusion, and recommendations; working papers support the report.

Privilege and confidentiality: attorney-directed investigations may create work-product protection; shared materials can waive privilege.

Civil fraud elements: false representation of material fact, knowledge of falsity, intent to deceive, justifiable reliance, and damages.

Criminal fraud requires actus reus and mens rea; the prosecution must prove each element beyond a reasonable doubt.

Civil burden is preponderance of the evidence; criminal burden is beyond a reasonable doubt.

Contract elements: offer, acceptance, consideration, capacity, and legality; fraud can make a contract voidable.

Wire fraud elements: a scheme to defraud, intent, and use of interstate wire communications; mail fraud substitutes mail.

FCPA prohibits bribery of foreign officials and requires accurate books and records and effective internal accounting controls.

Hearsay is an out-of-court statement offered for truth; business records and certain public records are common exceptions.

Bankruptcy: fraudulent transfers and preferential transfers can be avoided; fraud debts may be nondischargeable.

Statutes of limitations set filing deadlines; discovery rules can delay accrual when fraud is concealed.