An accounts receivable clerk intercepts a customer payment of $5,000 before it's ever recorded. To hide the theft, she processes a credit memo for "damaged goods" to write off the customer's balance. Is this cash larceny or skimming? The answer is skimming. If you hesitated or chose larceny, you've found the single most common trap in this section of the CFE exam. The key isn't just that cash was stolen; it's when it was stolen relative to the books.
These free CFE practice questions for Section 1 (Financial Transactions & Fraud Schemes) test your ability to classify occupational fraud using the ACFE Fraud Tree. The scenarios cover asset misappropriation like skimming and larceny, corruption, and financial statement fraud, mirroring the format and difficulty of the official exam.
Key facts
- Exam Section
- Financial Transactions & Fraud Schemes
- Focus
- Identifying and categorizing the full spectrum of occupational fraud schemes.
- Blueprint Weight
- This section is foundational, as its concepts are referenced in all other parts of the exam.
- Pass Rate
- The ACFE does not publicly disclose official pass rates for the CFE exam.
- Official Body
- Association of Certified Fraud Examiners (ACFE)
- Study Hours
- Candidates report a wide range of 80-150+ hours for the entire exam, depending heavily on their accounting and legal background.
What Do These CFE Section 1 Practice Questions Cover?
These questions are designed to test your judgment, not just your memory. They reflect the scenarios you will face in the Financial Transactions & Fraud Schemes section of the CFE exam, which requires you to identify, categorize, and understand the mechanics of hundreds of fraud schemes.
You will find questions of varying difficulty, all aligned with the ACFE's blueprint. They focus on the three primary branches of the Occupational Fraud Tree:
- Asset Misappropriation: The theft or misuse of an organization's assets, like cash or inventory.
- Corruption: An employee's use of their influence in business transactions for personal benefit, such as bribery or conflicts of interest.
- Financial Statement Fraud: The intentional misstatement or omission of material information in financial reports.
Use this as a diagnostic. Your goal is not just to get the right answer but to understand precisely why it's right and why the distractors are tempting but wrong. If you're ready to see where you stand, let's begin. For a larger set of adaptive questions, you can try VoraPrep's CFE course with a free trial.
Studying for CFE? Benchmark your score in 5 minutes.
Get an instant weak-spot assessment and a custom 12-week study plan PDF generated for your exam window.
Section 1: Financial Transactions & Fraud Schemes Practice Questions
Read each question carefully. Choose the best answer, then review the detailed explanation to see how an expert fraud examiner dissects the problem.
Question 1: Classification of Theft
A cashier at a retail store accepts a cash payment from a customer for a $100 item. The cashier does not ring up the sale and pockets the money. To make his register drawer balance at the end of his shift, he voids a $100 sale that was correctly processed by another cashier earlier in the day. Which of the following best describes this scheme?
Correct Answer: B) Skimming Explanation: The defining characteristic of skimming is the theft of cash before it is recorded in the company's accounting system. The cashier took the customer's money and never created a record of the sale. This is a classic "off-book" fraud.
The secondary action, voiding a different sale, is a concealment method used to cover the cash shortage in the register drawer. Many candidates confuse the concealment method with the underlying fraud.
Why the Wrong Answers are Tempting:- A) Cash Larceny: This is the most common incorrect answer. Cash larceny is the theft of cash after it has been recorded. If the cashier had rung up the sale and then stolen $100 from the register drawer later, it would be larceny. The timing of the theft relative to the accounting entry is the critical factor.
- C) Billing Scheme: This involves creating fake invoices to generate fraudulent payments and does not fit this cash-based scenario.
- D) Fraudulent Voids: While a fraudulent void was used here, it was the concealment method. The primary fraud, the actual theft of the money, was skimming. The exam requires you to identify the core scheme.
Question 2: Financial Statement Fraud Ratios
An analyst is reviewing the financial statements of Apex Manufacturing. They note the following changes from the prior year:
- Sales increased by 5%
- Cost of Goods Sold increased by 3%
- Accounts Receivable increased by 40%
Which of the following fraud schemes is most likely indicated by this pattern?
Correct Answer: B) Fictitious Revenues Explanation: A massive 40% increase in Accounts Receivable while sales only grew by 5% is a significant red flag. This disproportionate growth strongly suggests the company is recording sales that are not collectible. These are likely fictitious sales created to inflate revenue. Because the "cash" from these sales never arrives, the Accounts Receivable balance balloons. Why the Wrong Answers are Tempting:
- A) Unrecorded Liabilities: This scheme would impact liabilities and expenses, but it wouldn't cause a large, unexplained spike in accounts receivable.
- C) Improper Asset Valuation: This typically relates to inventory or fixed assets. While failing to write off bad debt is a form of improper valuation, the sheer scale of the A/R increase points more directly to the creation of fake sales in the first place.
- D) Timing Differences: This involves improperly shifting revenue from one period to another. While possible, the extreme divergence between sales growth and A/R growth makes completely fictitious sales a more probable cause than just accelerating real sales.
- Year 1: Sales = $1,000,000; A/R = $100,000. The Days' Sales in Receivables (DSR) is ($100,000 ÷ $1,000,000) × 365 = 36.5 days.
- Year 2: Sales = $1,050,000 (up 5%); A/R = $140,000 (up 40%). The DSR is now ($140,000 ÷ $1,050,000) × 365 = 48.7 days.
The time it takes to collect cash from customers has jumped by over 12 days. This signals that a large portion of the company's reported sales are not turning into cash, a classic symptom of a fictitious revenue scheme.
Question 3: Corruption Schemes
A purchasing manager for a large construction company owns a significant, undisclosed stake in a small supplier of raw materials. The manager consistently approves contracts with this supplier, even when their bids are 10% higher than competitors. What type of fraud is this?
Correct Answer: D) Conflict of Interest Explanation: A conflict of interest occurs when an employee has an undisclosed personal economic interest in a transaction that could adversely affect their employer. The manager's hidden ownership in the supplier means he profits personally from a decision (overpaying for materials) that harms his employer. The core of the fraud is this undisclosed dual interest. Why the Wrong Answers are Tempting:
- A) Bribery: Bribery involves a third party offering something of value to influence a decision. If the supplier had paid the manager a kickback, it would be bribery. Here, the corrupting influence is the manager's own financial stake, not an external payment.
- B) Economic Extortion: This is the opposite of bribery, where a fraudster demands payment under threat of harm (e.g., "Pay me, or your company will be blacklisted"). That is not happening here.
- C) A Shell Company Scheme: This is a type of billing scheme where an employee creates a fake company to bill their employer. In this scenario, the supplier is a real, operating company; the fraud lies in the manager's conflicted relationship with it.
Question 4: Inventory Fraud
During a physical inventory count, an auditor notices several large boxes marked "Hold for Shipping - Order #7895." The warehouse manager explains that the goods were sold on the last day of the fiscal year but the customer has not yet arranged for pickup. The auditor confirms the sale was booked. What should be the auditor's primary concern?
Correct Answer: B) The company may be engaging in a bill-and-hold scheme. Explanation: A "bill-and-hold" scheme is a technique to prematurely recognize revenue. A company records a sale but retains physical possession of the inventory. For such a sale to be legitimate under accounting standards, strict criteria must be met: the customer must have requested the arrangement, there must be a fixed delivery schedule, and the goods must be segregated from the seller's other inventory. The fact pattern, especially occurring on the last day of the year, is highly suspicious of a scheme to fraudulently inflate revenue. Why the Wrong Answers are Tempting:
- A) The goods may be obsolete: While inventory obsolescence is a valid audit concern, it doesn't directly address the red flag of goods "sold" but still physically present at year-end.
- C) The inventory may have been stolen: The physical presence of the inventory argues against theft. The likely fraud here is in the accounting records (financial statement fraud), not a physical loss of assets.
- D) The shipping documents are missing: This is a symptom or piece of evidence supporting the bill-and-hold theory, but it is not the name of the scheme itself. The core issue is the improper revenue recognition.
Question 5: Check Tampering
An accounts payable clerk identifies a legitimate invoice from "Smith Co." Instead of preparing a check to the real vendor, she prepares a check for the same amount payable to "T. Smith," a fraudulent entity she controls. She includes the check in a large batch of legitimate checks for an executive to sign. The executive signs the check, and the clerk intercepts it and deposits it. This is an example of what type of check tampering?
Correct Answer: D) Concealed Check Scheme Explanation: This is a classic Concealed Check Scheme, which falls under the "authorized maker" category of check tampering. The fraudster prepares a fraudulent check but does not forge the signature. Instead, they conceal the check's fraudulent nature (by making the payee look similar to a real vendor or hiding it in a stack of legitimate payments) and submit it to an authorized signer for approval. The signature is genuine, but the signer is deceived. Why the Wrong Answers are Tempting:
- A) Forged Maker Scheme: This is incorrect because the maker's signature was authentic. The executive who signed the check was authorized to do so; they were simply tricked.
- B) Forged Endorsement Scheme: This involves intercepting a check made out to a legitimate payee and forging that payee's signature on the back. Here, the check was never intended for a legitimate payee.
- C) Altered Payee Scheme: This is the most tempting distractor. However, an altered payee scheme involves physically changing the payee's name on a check after it has been legitimately created and signed. In this scenario, the fraudulent payee name ("T. Smith") was on the check from the very beginning.
To learn more about the critical differences between these schemes, see our CFE Section 1 Playbook: Skimming vs Larceny, Billing Schemes & Financial Statement Fraud.
Question 6: Lapping
An accounts receivable clerk steals Customer A's payment. To hide the theft, the clerk applies Customer B's subsequent payment to Customer A's account. Then, Customer C's payment is applied to Customer B's account. This fraudulent practice is known as:
Correct Answer: C) Lapping Explanation: Lapping is an accounts receivable fraud that involves using subsequent receipts to conceal an earlier theft of funds. It's often called "robbing Peter to pay Paul." The scheme requires constant management by the fraudster, as accounts continuously age, and it can be detected by comparing the names and amounts on payment remittances to how the payments were actually posted in the A/R subledger. Why the Wrong Answers are Tempting:
- A) Kiting: Check kiting is a different type of fraud that involves creating fictitious bank balances by exploiting the "float" time between multiple bank accounts. It does not involve accounts receivable.
- B) Floating: This is a general banking term for the time it takes for a check to clear. It is the mechanism that enables kiting, but it is not a fraud scheme itself.
- D) A Ponzi Scheme: A Ponzi scheme is an investment fraud that pays returns to early investors using capital from new investors. While it has a similar "robbing Peter to pay Paul" structure, it applies to investment fraud, not the concealment of stolen customer payments.
Calculate Your CFE Score & Study Hours by Domain
Adjust your practice scores across official CFE blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
How Did You Score?
Think about the questions you missed. Was it a specific category, or was it the subtle distinctions between similar schemes?
- Scored 5-6 Correct: You have a solid grasp of the Fraud Tree. Your focus should be on speed, consistency, and tackling more complex scenarios in a full practice environment like the VoraPrep question bank.
- Scored 3-4 Correct: You know the basics but are likely getting caught by the fine details, like the timing difference between skimming and larceny. This is a common hurdle. The solution is targeted practice on these specific distinctions.
- Scored 0-2 Correct: This is a valuable discovery. It means you need to solidify your understanding of the main branches of the Fraud Tree before moving to individual schemes. Start with the foundational material in a structured course. Our CFE Section 1: Financial Transactions & Fraud Schemes (CFE-FST): Complete Blueprint Study Guide (2026) is the perfect place to build that foundation.
Identifying your weak spots now is the entire point of practice. If financial statement ratios were confusing, that's your cue to drill down on that topic. If check tampering felt like a shell game, that's where you need to focus your energy.
Get More CFE Practice on VoraPrep
A few practice questions can highlight your weaknesses, but a comprehensive study plan builds the expert judgment needed to pass. You must be able to analyze any scenario the exam presents.
This is why VoraPrep built a complete CFE course, not just a question bank. We teach you to think like an examiner. Instead of forcing you through 100+ hours of passive video lectures that cost thousands, VoraPrep provides a modern, interactive course built on six pillars.
| Feature | VoraPrep's Interactive Course | Legacy Video Courses |
|---|---|---|
| Lessons | Textbook-grade interactive lessons with active recall | Passive, non-engaging video lectures |
| Practice | 2,000+ adaptive questions with deep rationales | Static question banks with basic answers |
| Simulations | 1:1 timed exam simulators | Limited or no realistic mock exams |
| Review | FSRS Spaced-repetition flashcards | Printable, static flashcards |
| Guidance | Personalized daily study plan & readiness score | Generic "one-size-fits-all" advice |
| Support | Vory, your 24/7 personal tutor for any question | Email support with a 2-day wait time |
Our adaptive learning engine finds your specific weak areas and serves you targeted questions until you achieve mastery. If you're stuck on a concept, ask Vory, your 24/7 tutor, for a step-by-step explanation without leaving the question.
See a full breakdown of how VoraPrep compares by reading our guide to the Best CFE Review Courses (2026): An Honest, Objective Comparison.