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Certified Internal Auditor (IIA) · Part 1 · Internal Audit Fundamentals

CIA P1 Fraud Risks: practice questions with answers

6 free exam-style questions on Fraud Risks for CIA P1 Part 1 · Internal Audit Fundamentals. Try each one, then open the answer to read the explanation. Fincora has 76 original questions on this syllabus area.

Question 1

Corinne, an accounts receivable clerk at Halvey Supplies, has large personal debts. She alone opens the mail, records customer receipts and prepares the bank deposit. Which element of the fraud triangle can Halvey most directly reduce through its internal controls?

  1. A Pressure
  2. B Opportunity
  3. C Rationalization
  4. D Capability
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Answer: B. The fraud triangle has three elements: pressure (incentive), opportunity and rationalization. Organizations have the most direct influence over opportunity, through controls such as segregation of duties, independent reconciliations and supervision. Separating mail opening, recording and depositing would sharply reduce Corinne's opportunity.

Question 2

A maintenance manager at Glaister Paper tells a long-standing lubricants supplier that its contract 'will not be renewed' unless the supplier pays him $3,000 a quarter. Fearing the loss of the business, the supplier pays. How is the manager's scheme best classified under the ACFE fraud tree?

  1. A Corruption: an illegal gratuity
  2. B Billing scheme: a shell company
  3. C Corruption: bid rigging
  4. D Corruption: economic extortion
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Answer: D. In the ACFE fraud tree, corruption includes conflicts of interest, bribery, illegal gratuities and economic extortion. Economic extortion occurs when an employee demands a payment from a vendor or other party and threatens to take action against them, such as cancelling their business, if they do not pay. Here the manager initiates the demand and the supplier pays to avoid losing the contract. A bribe would be offered by the supplier to win influence, an illegal gratuity is an after-the-fact reward, and bid rigging concerns tender processes.

Question 3

An internal auditor at Brackwater Foods is planning an operational engagement on the efficiency of its fleet of 140 delivery vans. When the audit manager asks how fraud risk has been considered, she replies that fraud is outside the scope because 'this is an efficiency engagement, not a fraud audit'. Which response is most appropriate?

  1. A She is right, because fraud risk needs to be considered only in engagements whose objectives specifically include fraud
  2. B She is wrong, because every engagement must include detailed testing designed to detect any fraud in the area reviewed
  3. C She is right, provided that the engagement report states clearly that fraud was excluded from the scope of the work
  4. D She is wrong, because the probability of significant fraud, such as fuel card misuse, should be considered in planning
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Answer: D. Standard 4.2 lists among the matters internal auditors assess in exercising due professional care the probability of significant errors, fraud, noncompliance and other risks. A fleet engagement has obvious fraud risks, such as fuel card misuse, private use of vehicles, fictitious repair invoices and kickbacks from maintenance suppliers, which can also affect efficiency. The auditor should identify these when assessing engagement risks and decide how far the procedures should respond to them. Due care does not require every engagement to search for all possible fraud, and a scope disclaimer does not remove the need to consider it.

Question 4

An internal auditor at Lorrimer Health applies Benford's Law to 5,000 supplier invoice amounts. Under Benford's Law, approximately how many of these invoices would be expected to have a leading (first) digit of 1?

  1. A 229
  2. B 500
  3. C 556
  4. D 1,505
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Answer: D. Benford's Law gives the expected probability of leading digit d as log10(1 + 1/d).

For d = 1: log10(2) = 0.30103, so about 30.1% of amounts should begin with 1.

Expected count = 5,000 x 0.30103 = 1,505 (rounded).

A large deviation from the expected pattern (for example, too many amounts starting with 4 just below a $5,000 approval limit) can point to invented or manipulated figures and is a reason for further investigation, not proof of fraud.

Question 5

Imogen, an office manager at Larch Dental, uses her company purchasing card to buy a $2,300 television for her own home and codes the charge as "office equipment - waiting room". The card provider is paid directly by Larch. How is this scheme best classified?

  1. A An overstated expense reimbursement scheme
  2. B Skimming of incoming receipts
  3. C A billing scheme (personal purchases)
  4. D Check tampering
Show the answer

Answer: C. The ACFE fraud tree groups fraudulent disbursements by the mechanism used. Billing schemes include shell company schemes, non-accomplice vendor schemes and personal purchases with company funds, such as personal items bought with a company purchasing card or on a company account. Here the company pays for the television directly, and the false coding conceals the purchase. Controls include independent review of card statements against receipts and business purpose, merchant category blocks and data analytics on unusual purchases.

Question 6

The audit committee of Brennor Chemicals wants to deter occupational fraud more effectively. Which factor is generally regarded as the most effective deterrent?

  1. A The severity of the punishment imposed on those who are caught
  2. B Employees' perception that fraud is likely to be detected
  3. C Paying employees above the market rate for their roles
  4. D Requiring employees to sign an annual statement that they have read the code of conduct
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Answer: B. Fraud deterrence is about discouraging people from attempting fraud. Research and practice consistently identify the perception of detection as the most powerful deterrent: if employees believe fraud will be found, they are less likely to try. Organizations raise this perception through well-publicized hotlines, surprise audits, proactive data analytics, job rotation and mandatory leave, and by making it known that detected frauds lead to consequences.

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