FPD Flashcards
For analytical review procedures performed during a F/S audit to be most effective in uncovering fraud, the scheme must materially impact the F/S.
True
Who can potentiallybind a Corp through their own misconduct? BOD EO Managers/Suo Low level employees Independent contractors
TBD
Karl finds a residential property with a non-resident owner. He then forges contractual property documents showing that the owner is transferring ownership of the property completely to Karl, such as would normally happen during a property sale. The property owner is unaware that Karl has created and filed the documents. Later, Karl takes the falsified documents to a lender and borrows money against the property. Which of the following best describes Karl’s scheme?
A. Unauthorized draw on home equity line of credit
B. Fraudulent sale
C. Air loan
D. Property flipping
Fraudulent sale
Fraudulent sale scams are particularly harmful because they involve the fraudulent acquisition of real estate by filing a fraudulent deed or respective real estate document that makes it appear that the property legally belongs to the criminal. This scam does not happen at the origination of the loan, but rather might occur without the homeowner’s knowledge decades after the property was originally sold.
The perpetrator identifies a property—typically belonging to an estate or non-resident owner—that is owned free and clear. He then creates fictitious property transfer documents that purport to grant all rights and title on the property to the fraudster. The true owner’s signature is forged on the documents, and the scammer files them in the jurisdiction’s real property records. Once the ownership documents are filed, he applies for and executes a loan on the property (using a straw borrower). Often, the value is inflated. He absconds with 100 percent of the loan proceeds.
Baker, the managing partner in a small law firm, is the authorized signer on all company checks. When his personal phone bill arrived last month, Baker prepared and signed a company check to pay the bill. He did not disclose this payment to his partners. Baker committed:
A. A mischaracterized expense scheme B. A false billing scheme
C. A forged maker scheme
D. An authorized maker scheme
An authorized maker scheme
An authorized maker scheme is a type of check tampering fraud in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker. The most common example occurs when a majority owner or sole shareholder uses his company to pay personal expenses directly out of company accounts. Baker’s scheme is not a billing scheme because he wrote the check himself and there is no indication that he submitted the phone bill to the firm’s regular payment cycle.
In a construction loan, developer overhead is a ripe area for abuse. The purpose of developer overhead is to provide: A. Profit margin B. Labor reimbursements C. Budget shortfall D. Operating capital
Operating capital
It is not uncommon in construction financing to have a budget line item for developer overhead. This is a ripe area for abuse. The purpose of developer overhead is to supply the developer with operating capital while the project is under construction. This overhead allocation should not include a profit percentage, as the developer realizes profit upon completion.
Which of the following is NOT considered to be a red flag of a Ponzi scheme?
A. A financial manager who puts an unusual amount of pressure on investors to act immediately
B. A financial manager who manages, administers, and retains custody of the investment funds
C. An investment that has a history of inconsistent returns coinciding with fluctuations in financial markets
D. An investment that promises extremely high or short-term returns with little risk involved
An investment that has a history of inconsistent returns coinciding with fluctuations in financial markets
Several red flags can help investigators uncover Ponzi schemes:
• Sounds too good to be true: If an investment sounds too good to be true, it probably is.
• Promises of low risk or high rewards: Promoters of Ponzi schemes typically promise implausibly high or quick returns with little risk. As all legitimate investments include some degree of risk, any guarantee that an investment will perform in a certain way is a clear signal that it might be part of a Ponzi scheme.
• History of consistent returns: Any firm that generates remarkably consistent returns regardless of market conditions should raise suspicions.
• High-pressure sales tactics: Reputable investment firms and agents do not push potential investors to act immediately, and legitimate investment opportunities are rarely that time sensitive.
• Pressure to reinvest: Often, fraudsters keep Ponzi schemes alive by convincing investors to reinvest their profits rather than take a payout.
• Complex trading strategies: Legitimate agents should be able to provide clear explanations about their investment strategies. For obvious reasons, Ponzi-scheme boosters purposefully employ complicated strategies that confound unsophisticated investors.
• Lack of transparency or access: Secrecy surrounding the operations of a financial company should be an immediate warning sign. Ponzi operators are often unlicensed and their supposed investments are typically unregistered. Additionally, a lack of access to regular statements or an online account should trigger alarm.
• Lack of segregation of duties: Investors should be wary of any financial manager who manages, administers, and retains custody of the fund in question.
In a managed care environment, insured fraud might be reduced, but provider fraud is still very common.
True
In a managed care environment, fraud is not eliminated. Insured fraud might be substantially reduced, but provider fraud remains common. In addition to billing for fraudulent services, managed care has an additional incentive for fraud. Because the providers share in the financial risk of a patient, there is the potential to provide fewer services to a patient since a fixed capitation rate allows the patient unlimited visits to the provider.
How does vertical analysis differ from horizontal analysis?
A. Vertical analysis expresses the percentage of component items to a specific base item, while horizontal analysis analyzes the percentage change in individual financial statement items from one year to the next.
B. Vertical analysis is a means of measuring the relationship between any two different financial statement amounts, whereas horizontal analysis examines the relationship between specific financial statement ratios.
C. Vertical analysis compares items on one financial statement to items on a different financial statement, while horizontal analysis compares items on the same financial statement.
D. Vertical analysis compares the performance of a parent company to its subsidiary, while horizontal analysis compares different companies across an industry.
Vertical analysis expresses the percentage of component items to a specific base item, while horizontal analysis analyzes the percentage change in individual financial statement items from one year to the next.
Vertical analysis is the expression of the relationship or percentage of component items to a specific base item on the income statement or balance sheet. Horizontal analysis is a technique for analyzing the percentage change in individual financial statement items from one year to the next. Ratio analysis is a means of measuring the relationship between any two different financial statement amounts. The relationship and comparison are the keys to any of these types of financial analyses.
Which of the following is an information security goal that an e-commerce system should endeavor to meet for its users and asset holders? A. Exactness B. Non-repudiation C. Systems reliability D. Access authority
Non-repudiation
Non-repudiation is an information security goal that an e-commerce system should strive to provide its users and asset holders. It refers to a method used to guarantee that the parties involved in an e-commerce transaction cannot repudiate (deny) participation in that transaction. Non-repudiation is obtained through the use of digital signatures, confirmation services, and timestamps.
Additional information security goals that should be achieved to ensure the security of information systems for users and account holders include: •Confidentiality of data •Integrity of data •Availability of data •Authentication
Which of the following statements is TRUE regarding a fictitious refund scheme?
A. Inventory is returned to the store
B. The victim company’s inventory is understated
C. The amount of cash in the register balances with the register log
D. All of the above
The amount of cash in the register balances with the register log
In a fictitious refund scheme, an employee processes a transaction as if a customer were returning merchandise, even though no actual return takes place. The register log balances with the amount of cash in the register because the money that was taken by the fraudster is supposed to have been removed and given to the customer as a refund. Instead, however, the employee keeps this cash.
When preparing a room for an admission-seeking interview, the suspect’s chair should be:
A. Behind a desk or table
B. As comfortable as possible
C. Within full view of the fraud examiner
D. Higher than the interviewer’s chair
Within full view of the fraud examiner
When preparing a room for an admission-seeking interview, chairs should be placed about four to six feet apart, and the accused should not be permitted to sit behind any physical barriers, such as chairs, tables, or desks. This is to prevent a physical barrier from becoming a psychological barrier that might inhibit responses from the accused.
Which of the following is an appropriate moral excuse clause to include in a signed confession? A. “I didn’t mean to do it." B. “I didn’t do it on purpose." C. “I didn’t mean to hurt anyone." D. "I didn't know it was illegal."
“I didn’t mean to hurt anyone.”
The signed statement should include the confessor’s moral excuse, but the fraud examiner should ensure that the wording of the excuse clause does not diminish legal responsibility. Instead of using language like “I didn’t mean to do it,” which implies lack of intent, the interviewer should focus on an excuse that provides only a moral explanation for the misconduct.
A(n) \_\_\_\_\_\_\_\_\_\_\_ is a writing, usually a signature, prepared by carefully copying or tracing a model example of another person’s writings. A. Indented writing B. Autoforgery C. Simulated forgery D. Anachronism
A simulated or traced forgery is a writing, usually a signature, prepared by carefully copying or tracing a model example of another person’s writings. Although identifiable as a forgery, a simulated, or traced signature, forgery often does not contain enough of the forger’s normal handwriting characteristics to permit expert identification.
Which of the following facts would best support the defense of a law enforcement officer against an allegation of entrapment?
A. The officer acted without malice
B. The officer acted based on his suspicion of fraud
C. The officer acted based on a tip from a reliable source
D. All of the above
The officer acted based on a tip from a reliable source
Many jurisdictions recognize the legal defense of entrapment. Entrapment occurs when law enforcement officers or government agents induce a person to commit a crime that he is not previously disposed to commit. Entrapment also poses a legal problem in covert operations, particularly in undercover operations, because the defendant might not be found liable if it appears that he was improperly induced to commit the crime. Therefore, it is imperative that the operation be properly predicated. The law enforcement officer or government agent must act based on more than mere suspicion. For example, if the officer received a reliable tip that a suspect committed fraud, then that could serve as adequate predication. Covert operations must not be used for aimless searches for information performed without notions of what might be uncovered.
Which of the following is TRUE regarding fraud risks?
A. Risks that are present before the effect of internal controls are described as residual risks.
B. The objective of anti-fraud controls is to make the inherent fraud risk significantly smaller than the residual fraud risk.
C. The objective of anti-fraud controls is to make the residual fraud risk significantly smaller than the inherent fraud risk.
D. The objective of anti-fraud controls is to completely eliminate residual fraud risks.
The objective of anti-fraud controls is to make the residual fraud risk significantly smaller than the inherent fraud risk.
When considering the fraud risks faced by an organization, it is helpful to analyze how significant a risk is before and after risk response. Risks that are present before the effect of internal controls are described as inherent risks. The risks that remain after the effect of internal controls are described as residual risks.
For example, there is an inherent risk that the employee in charge of receiving customer payments at a small company might embezzle incoming cash. Controls, such as segregation of duties and oversight from the company owner, can be implemented to help mitigate this risk; however, even with such controls in place, some residual risk will likely remain that the bookkeeper might still manage to embezzle funds. The objective of the controls is to make the residual risk significantly smaller than the inherent risk.
What is the objective of a fraud risk assessment?
A. To help an organization identify what makes it most vulnerable to fraud
B. To provide an estimate of an organization’s fraud losses
C. To assess the design and effectiveness of an organization’s internal controls over financial reporting
D. To establish the guilt or innocence of an employee suspected of committing fraud
To help an organization identify what makes it most vulnerable to fraud
In the simplest terms, the objective of a fraud risk assessment is to help an organization identify what makes it most vulnerable to fraud. Through a fraud risk assessment, the organization is able to identify where fraud is most likely to occur, enabling proactive measures to be considered and implemented to reduce the chance that it could happen
Of the following parties, who is responsible for the oversight of the organization’s financial, accounting, and audit matters? A. The internal auditors B. The external auditors C. The CFO D. The audit committee
The audit committee
As a sub-group of the board of directors, the audit committee is often delegated oversight of the organization’s financial, accounting, and audit matters and reports to the full board. As part of this responsibility, the committee must take an active role in overseeing the assessment and monitoring of the organization’s fraud risks. This involves:
•Receiving regular reports on the status of reported or alleged fraud
•Being aware of fraud risks that are common in the organization’s industry
•Meeting regularly with key internal parties (such as the chief audit executive or other senior financial persons) to discuss identified fraud risks and the steps being taken to prevent and detect fraud
•Understanding how internal and external audit strategies address fraud risk
•Providing external auditors with evidence that the audit committee is dedicated to effective fraud risk management
•Engaging in open conversations with external auditors about any known or suspected fraud
•Seeking advice of legal counsel whenever it deals with allegations of fraud
Which of the following is a principle pertaining to the information and communication component of COSO’s Internal Control—Integrated Framework?
A. The organization communicates with external parties regarding matters affecting the functioning of internal control
B. The organization obtains or generates and uses relevant, quality information to support the functioning of internal control
C. The organization internally communicates information—including objectives and responsibilities for internal control—necessary to support the functioning of internal control
D. All of the above
The information and communication component of COSO’s Internal Control—Integrated Framework relates to the exchange of information in a way that allows employees to carry out their internal control responsibilities and achieve the organization’s objectives. According to COSO, the following principles pertain to this component:
•The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.
•The organization internally communicates information—including objectives and responsibilities for internal control—necessary to support the functioning of internal control.
•The organization communicates with external parties regarding matters affecting the functioning of internal control.
Which of the following is INCORRECT regarding the code of ethics requirements under the Sarbanes-Oxley Act?
A. Public U.S. companies must make publicly available the portions of their code of ethics that address the ethical considerations that apply to senior financial officers.
B. Public U.S. companies must disclose in their annual report whether they have adopted a code of ethics for senior financial officers, and if they have not, they must explain their reasoning.
C. The SEC has laid out specific language that must be included in all public U.S. companies’ code of ethics for senior financial officers.
D. The SEC believes that determining the particular sanctions for violations of the code of ethics is best left to the discretion of the company.
The SEC has laid out specific language that must be included in all public U.S. companies’ code of ethics for senior financial officers.
As required by the Sarbanes-Oxley Act, public U.S. companies must disclose in their annual report whether they have adopted a code of ethics for senior financial officers, and if they have not, they must explain their reasoning. The SEC believes that the establishment of the detailed provisions of the code of ethics is best left to the discretion of the company. Therefore, the rules do not specify any detailed requirements, particular language, compliance procedures, or sanctions for violations that must be included in the code of ethics. The SEC does, however, encourage the adoption of codes that are broader and more comprehensive than necessary to meet the disclosure requirements.
In addition to the disclosure of the existence of the code of ethics in the annual report, the rules require that companies make publicly available the portions of their code of ethics that address the ethical considerations contained within the definition of code of ethics that apply to the senior financial officers.
During an admission-seeking interview of a fraud suspect, Gary, a Certified Fraud Examiner, accuses the suspect of having committed a fraud. Gary’s accusation violates the ACFE Code of Professional Ethics.
A. True
B. False
False
Article V of the ACFE Code of Professional Ethics states: “An ACFE member, in conducting an examination, will obtain evidence or other documentation to establish a reasonable basis for any opinion rendered. No opinion shall be expressed regarding the guilt or innocence of any person or party.” Although it does not specifically state such, Article V really applies to statements of opinion made to third parties. If the fraud examiner was interviewing a suspect whose guilt was highly probable, the Code would not prohibit the fraud examiner from making accusations. The admission-seeking process, used extensively by fraud examiners, requires that accusations be made of the probable guilty party. As long as these accusations are not communicated to third parties, the fraud examiner would not be in violation of the Code.
The purpose of corporate governance is to:
A. Provide reasonable assurance regarding the organization’s compliance with applicable laws and regulations.
B. Prevent and detect financial misstatements, whether caused by errors or fraud.
C. Ensure the accuracy and reliability of the organization’s financial reports.
D. Encourage the efficient use of resources and require accountability for the stewardship of those resources.
Encourage the efficient use of resources and require accountability for the stewardship of those resources.
Sir Adrian Cadbury, chairman of the committee that developed the foundational corporate governance guidance The Cadbury Report, stated that the purpose of corporate governance is “to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.”
According to the 2016 Report to the Nations, which of the three major categories of occupational fraud is the most common? A. Asset misappropriations B. Identity theft C. Financial statement fraud D. Corruption
Asset misappropriations (Key word OCCUPATIONAL) All occupational frauds fall into one of three major categories: asset misappropriation, corruption, or financial statement fraud. In the 2016 Report to the Nations, asset misappropriation schemes were both the most commonly reported—occurring in more than 83 percent of cases—and the least costly of the three major categories of occupational fraud. Financial statement fraud, on the other hand, was the least commonly reported type of occupational fraud, occurring in less than 10 percent of cases reported, but these schemes caused considerably more damage than frauds in the other two categories. Corruption schemes fell in the middle of the spectrum in terms of frequency and cost
When deciding on techniques to use as part of a fraud risk assessment, the assessment team should consider what methods are already commonly and effectively used throughout the organization.
A. True
B. False
True
There are many ways to go about conducting the fraud risk assessment. Picking a method or combination of methods that is culturally right for the organization will help to ensure its success. The assessment team should also consider the best ways to gather candid, truthful information from people throughout all levels of the organization, starting by understanding what techniques are commonly and effectively used throughout the organization.
According to a study conducted by Dr. Steve Albrecht, college graduates are more likely than non-college graduates to spend the proceeds of an occupational crime on luxuries, such as extravagant vacations or expensive automobiles.
False
According to Dr. Steve Albrecht, perpetrators who were interested primarily in “beating the system” committed larger frauds. However, perpetrators who believed their pay was not adequate committed primarily small frauds. Lack of segregation of responsibilities, placing undeserved trust in key employees, imposing unrealistic goals, and operating on a crisis basis were all pressures or weaknesses associated with large frauds. College graduates were less likely to spend their illegal income on extravagant vacations, recreational property, extramarital relationships, and expensive automobiles. Finally, those with lower salaries were more likely to have a prior criminal record.
