CHAPTER 3

Question 1

pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concepts of right and wrong

Answer 1

Ethics

Question 2

Four areas of ethical issues in business

Answer 2

equity, rights, honesty and the exercise of corporate power

Question 3

The benefit from a decision must outweigh the risks. Furthermore, there must be no alternative decision that provides the same or greater benefit with less risk.

Answer 3

PROPORTIONALITY

Question 4

The benefits of the decision should be distributed fairly to those who share the risks. Those who do not benefit should not carry the burden of risk

Answer 4

Justice

Question 5

Even if judged acceptable by the principles, the decision should be implemented so as to minimize all of the risks and avoid any unnecessary risks.

Answer 5

Minimize risk

Question 6

the analysis of the nature and social impact of computer technology and the corresponding formulation and justification of policies for the ethical use of such technology

Answer 6

Computer ethics

Question 7

the most significant securities law since the Securities and Exchange Commission (SEC)

Answer 7

Sarbanes-Oxley Act (SOX)

Question 8

denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment.

Answer 8

Fraud

Question 9

generally designed to directly convert cash or other assets to the employee’s personal benefit.

Answer 9

Employee fraud, or fraud by nonmanagement employees

Question 10

is more insidious than employee fraud because it often escapes detection until the
organization has suffered irreparable damage or loss

Answer 10

Management fraud

Question 11

3 factors of fraud triangle

Answer 11

rationalization, opportunity, ethics

Question 12

empowered to set auditing, quality control, and ethics standards; to inspect registered accounting firms; to conduct investigations; and to take disciplinary actions

Answer 12

Public Company Accounting Oversight Board

Question 13

involves an executive, manager, or employee of the organization in collusion with an outsider

Answer 13

Corruption

Question 14

involves giving, offering, soliciting, or receiving things of value to influence an official in the performance of his or her lawful duties.

Answer 14

Bribery

Question 15

involves giving, receiving, offering, or soliciting something of value because of an official act that has been taken. This is similar to a bribe, but the transaction occurs after the fact

Answer 15

illegal gratuity

Question 16

occurs when an employee acts on behalf of a third party during the discharge of his or her duties or has self-interest in the activity being performed.

Answer 16

conflict of interest

Question 17

is the use (or threat) of force (including economic sanctions) by an individual or organization to obtain something of value.

Answer 17

Economic extortion

Question 18

involves stealing cash from an organization before it is recorded on the organization’s books and records.

Answer 18

Skimming

Question 19

an employee opening the mail steals a customer’s check and destroys the associated remittance advice.

Answer 19

mail room fraud

Question 20

involves schemes in which cash receipts are stolen from an organization after they have
been recorded in the organization’s books and records.

Answer 20

Cash larceny

Question 21

are perpetrated by employees who causes their employer to issue a payment to a false supplier or vendor by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases

Answer 21

Billing schemes, also known as vendor fraud

Question 22

requires that the perpetrator establish a false supplier on the books of the victim company. The fraudster then manufactures false purchase orders, receiving reports, and invoices in the name of the vendor and submits them to the accounting system, which creates the allusion of a legitimate transaction

Answer 22

shell company fraud

Question 23

is similar to the shell company fraud with the exception that a transaction actually takes place.

Answer 23

pass through fraud

Question 24

is a third form of vendor fraud. This typically involves a clerk with check writing authority who pays a vendor twice for the same products (inventory or supplies) received.

Answer 24

pay-and-return scheme

Question 25

involves forging or changing in some material way a check that the organization has written to a legitimate payee

Answer 25

Check tampering

Question 26

is the distribution of fraudulent paychecks to existent and/or nonexistent employees

Answer 26

Payroll fraud

Question 27

are schemes in which an employee makes a claim for reimbursement of fictitious or inflated business expenses.

Answer 27

Expense reimbursement frauds

Question 28

are schemes that involve the direct theft of cash on hand in the organization

Answer 28

Thefts of cash

Question 29

involve the theft or misuse of the victim organization’s non-cash assets.

Answer 29

Non-cash fraud schemes

Question 30

This concept holds that the establishment and maintenance of a system of internal control is a

Answer 30

management responsibility

Question 31

The internal control system should provide ______ that the four broad objectives of internal control are met in a cost-effective manner.

Answer 31

reasonable assurance

Question 32

are passive techniques designed to reduce the frequency of occurrence of undesirable events.

Answer 32

Preventive controls

Question 33

form the second line of defense. These are devices, techniques, and procedures designed to identify and expose undesirable events that elude preventive controls

Answer 33

Detective controls

Question 34

are actions taken to reverse the effects of errors detected in the previous step.

Answer 34

Corrective controls

Question 35

Five components of COSO framework

Answer 35

Control Environment Risk Assessment Information and Communication Monitoring Control Activities

Question 36

is the foundation for the other four control components, sets the tone for the organization and influences the control awareness of its management and employees.

Answer 36

control environment

Question 37

Organizations must perform a ______ to identify, analyze, and manage risks relevant to financial reporting.

Answer 37

risk assessment

Question 38

is the process by which the quality of internal control design and operation can be assessed.

Answer 38

Monitoring

Question 39

are the policies and procedures used to ensure that appropriate actions are taken to deal with the organization’s identified risks.

Answer 39

Control activities

Question 40

pertain to entity-wide concerns such as controls over the data center, organization databases, systems development, and program maintenance.

Answer 40

General controls

Question 41

ensure the integrity of specific systems such as sales order processing, accounts payable, and payroll applications

Answer 41

Application controls

Question 42

This class of controls relates primarily to the human activities employed in accounting systems.

Answer 42

PHYSICAL CONTROLS

Question 43

ensure that all material transactions processed by the information system are valid and in accordance with management’s objectives.

Answer 43

transaction authorization

Question 44

can take many forms, depending on the specific duties to be controlled

Answer 44

Segregation of duties

Question 45

consist of source documents, journals, and ledgers

Answer 45

accounting records

Question 46

ensure that only authorized personnel have access to the firm’s assets.

Answer 46

access controls

Question 47

are independent checks of the accounting system to identify errors and misrepresentations.

Answer 47

Verification procedures