Mid-term

Question 1

It is the_____ and _____of existing controls, not the _____of controls, that allows most frauds to be perpetrated.

Answer 1

overriding, ignoring, lack

Question 2

Which of the following is not a proactive way for a company to eliminate fraud opportunities?
a. Severely punishing fraud perpetrators.
b. Implementing appropriate preventive and detective controls.
c. Creating widespread monitoring of employees.
d. Assessing risks.

Answer 2

a. Severely punishing fraud perpetrators.

Question 3

“Predication of fraud” is defined as:

Answer 3

c. Reasonable belief that fraud has occurred or is occurring.

Question 4

Which of the following is not a common type of fraud?
a. Direct employee embezzlement.
b. Executives embezzling from petty cash.
c. Investment scams.
d. Employee bribes.

Answer 4

b. Executives embezzling from petty cash.

Question 5

Civil law performs which of the following functions?
a. Monetary fines for federal damages.
b. Remedy for violations against society as a whole.
c. Punishment for guilt “beyond reasonable doubt.”
d. Remedy for violation of private rights.

Answer 5

d. Remedy for violation of private rights.

Question 6

Which of the following is an example of legitimate power?
a. Your boss tells you to do something.
b. The offer of valuable stock options.
c. You do something because your colleague is more knowledgeable than you are in that particular subject matter.
d. A decision to participate in fraud based upon fear.

Answer 6

a. Your boss tells you to do something.

Question 7

Which of the following is not a common vice that motivates people to commit fraud?
a. Gambling.
b. Drugs.
c. Expensive extramarital relationships.
d. Alcohol.
e. All of these are vices that motivate people to commit fraud.

Answer 7

e. All of these are vices that motivate people to commit fraud.

Question 8

Fraud fighting can include which of the following type(s) of careers?
a. Professors.
b. Lawyers.
c. CPA firms.
d. All of these.

Answer 8

d. All of these.

Question 9

Which of the following is not one of the three elements of the fraud triangle?
a. Rationalization.
b. Perceived pressure.
c. Intelligence.
d. Perceived opportunity.

Answer 9

Intelligence

Question 10

Because of the ability to override internal controls, it is usually most difficult to prevent which type of fraud?

Answer 10

b. Fraud committed by a company president.

Question 11

Who generally has the highest risk of becoming a fraud victim?
a. Businessperson.
b. College students.
c. None of the above.
d. Older, less educated people.

Answer 11

d. Older, less educated people.

Question 12

“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” is the definition of which of the following types of fraud?
a. Employee embezzlement or occupational fraud.
b. Vendor fraud.
c. Investment scams.
d. Management fraud

Answer 12

a. Employee embezzlement or occupational fraud.

Question 13

Drawbacks to establishing a hotline for employees to report fraud include all of the following except:
a. This method for finding fraud is outdated.
b. Some symptoms reported are caused by non-fraud factors.
c. Many incidents reported are hoaxes motivated by grudges and other non-fraud reasons.
d. The expense of having a hotline.

Answer 13

a. This method for finding fraud is outdated.

Question 14

The best argument for taking legal action against fraud perpetrators is:
a. Prosecution of perpetrators is a way to keep lawyers busy.
b. Prosecution of perpetrators discourages future occurrences of fraud.
c. Legal action usually results in positive publicity for the company.
d. Huge cash settlements from prosecuting fraud are an excellent source of revenue.
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Answer 14

b. Prosecution of perpetrators discourages future occurrences of fraud.

Question 15

Which of the following is the least reliable resource for fraud statistics?
a. Fraud perpetrators.
b. Health agencies.
c. FBI agencies.
d. Insurance organizations.

Answer 15

a. Fraud perpetrators.

Question 16

Factors that are usually associated with high levels of employee fraud include all of the following except:
a. Perceived inequalities in an organization.
b. Negative feedback and lack of recognition of job performance.
c. High turnover and absenteeism.
d. Long and difficult hours shared equally by everyone in the organization.

Answer 16

d. Long and difficult hours shared equally by everyone in the organization.

Question 17

Opportunities to commit fraud can be eliminated by identifying sources of fraud, by implementing controls, and through independent checks. One other effective way of eliminating opportunities is:
a. Terminating and punishing employees who commit fraud.
b. Failing to terminate or punish employees who commit fraud.
c. Identifying indicators of fraud or red flags.
d. Teaching employees to monitor and report fraud.

Answer 17

d. Teaching employees to monitor and report fraud.

Question 18

Future careers in fraud will most likely be:
a. In low demand.
b. In moderate demand.
c. Low paying.
d. In high demand and financially rewarding.

Answer 18

d. In high demand and financially rewarding.

Question 19

On what element of the fraud triangle do most fraud-fighters usually focus all or most of their fraud preventive efforts?
a. Perceived opportunity.
b. Power structure.
c. Rationalization.
d. Perceived pressure.

Answer 19

a. Perceived opportunity.

Question 20

Which of the following is not an internal control activity (procedure)?
a. System of authorizations.
b. Appropriate hiring procedures.
c. Independent checks.
d. Documents and records.
e. All of the above are internal control activities.

Answer 20

b. Appropriate hiring procedures.

Question 21

According to the text, when one Fortune 500 company changed its stance on fraud from “The CEO is to be informed when someone is prosecuted for fraud” to “The CEO is to be informed when someone who commits fraud is not prosecuted,” the number of frauds in the company decreased significantly.

Fraud research has consistently shown that legal action has been taken against perpetrators who commit fraud against organizations in more than 90 percent of fraud cases.

Answer 21

False

Question 22

Nancy is the receptionist and office manager at a local doctor’s office where you are working as a doctor’s assistant. The doctor leaves Nancy to handle all office duties, including collecting cash receipts, billing patients, depositing checks, and the monthly bank reconciliation. The doctor doesn’t have any training in accounting or collecting insurance payments and wants to be able to focus on treating his patients. Because the work in the office doesn’t require an additional employee, Nancy has been given all office managing responsibility. The receptionist could share the office managing duties, but she is too busy greeting patients, pulling charts, and answering phone calls. Nancy is also a single mother of four. She likes to give her children the best possible care and enjoys having the finer things of life to the extent that she can afford them. Nancy also works a second job because her job as office manager “just never seems to pay the bills.”

Most patients visiting the doctor have insurance and are only required to pay a co-payment for the services that they receive. As you are filling out some patient information during a routine visit, you overhear the patient say to her husband. “Honey, do you have any cash with you today? This office prefers the copayment to be paid in cash and I have forgotten to stop by the ATM this morning.” You thought that this was an interesting comment because you had never heard of the office having a cash co-payment preference. In addition, you haven’t seen a written sign or ever heard that the doctor prefers cash co-payments. You are aware that in addition to a co-payment, Nancy bills the entire remaining cost of service. The remaining amount is then billed directly to the patient. As you have been filing patient records, you have often heard Nancy complain that “full payment cannot be collected from yet another patient.” You are aware that several accounts are written off each month due to the high amount of uncollectible accounts. A high percentage of bad debts seems to be a common and expected occurrence in the physician/ patient business. You are currently taking a fraud class and realize that several opportunities for fraud exist.

Which of the following control activities or procedures would be most effective in reducing the risk of fraud in this situation?

a. Documents and records.
b. System of authorizations.
c. Segregation of duties.
d. Physical safeguards.

Answer 22

c. Segregation of duties.

Question 23

You are the owner of a local department store in a small town. Many of your employees have worked for your company for years, and you know them and their families very well. Because your business is relatively small, and because you know your employees so well, you haven’t worried about establishing many internal controls. You do set a good example for how you wish your employees to work, you are actively involved in the business, and you provide adequate training to new employees. One day, you become suspicious about an employee at a checkout desk. You fear that he may be stealing from the company by altering the day’s totals at his register. He has worked for you for 15 years, and he has always been honest and reliable. After several weeks of investigation, you discover that your fears are correct—he is stealing from the company. You confront him with the evidence, and he admits to stealing $25,000 over several years. He explains that, at first, he stole mainly to pay for small gifts for his wife and young children, not for himself. But then last year, his wife lost her job, they had another child, and he wasn’t sure how to pay all of the bills, so he took more money, which he intended to repay.

What elements of fraud are present in this case?

a. Opportunity and pressure.	
b. Pressure, motivation, and opportunity.	
c. Opportunity and rationalization.	
d. Pressure, opportunity, and rationalization.

Answer 23

d. Pressure, opportunity, and rationalization.

Question 24

Peter Jones, a senior accountant, and Mary Miller, a junior accountant, were the only accountants for XYZ Company, a medium-sized business. Peter had been with the company for over four years and was responsible for the Purchasing Department. Mary had been working at the company for a little over five years, and she had neither applied for a vacation nor taken any days off in the last three years. She was responsible for cash receipts and disbursements. She also collected the cash from the cash register, counted it and matched it with cash register receipts, made a record of daily receipts, and then put the money in the safe. Once a week, she would take the paperwork to her supervisor, Susan Lowe, one of the managers, who would check it. Mary later resigned from the company. At the time of her resignation, Peter was asked to handle Mary’s responsibilities while the company looked for a person to replace her. Peter soon realized that there had been some manipulation of accounting records and embezzlement of funds. Investigations revealed that approximately $30,000 had been stolen.

What could the management of XYZ Company have done to prevent Mary’s embezzlement or to detect the fraud earlier?

a. Require Mary to take vacation time each year.	
b. Implement appropriate preventive and detective controls.	
c. Communicate to employees what behavior is expected of them and the consequence of committing fraud.	
d. All of these actions could have been taken to prevent Mary's fraud.

Answer 24

d. All of these actions could have been taken to prevent Mary’s fraud.

Question 25

You have recently graduated from college with an MBA. Upon graduation, you start working for Roosevelt Power Plant. The boss, Mr. Jones, invites you into his office. Mr. Jones describes to you a large fraud that has recently taken place in the company. He asks you what actions should be taken to ensure that fraud does not occur again. After analyzing the company, you compile a list of actions that will be needed to prevent fraud from occurring again. Upon presenting the necessary steps and controls to be taken, Mr. Jones notices your suggestion: "Create a culture of honesty and create a positive work environment for employees." Mr. Jones is enraged and wants to know what a positive work environment has to do with the prevention and detection of fraud. Which of the following factors detracts from a positive work environment? a. Organizational focus on long-term market share. b. Vertical communication within an organization. c. Lack of clear organizational responsibilities. d. Highly detailed budget expectations.

Answer 25

c. Lack of clear organizational responsibilities.

Question 26

The chapter stressed that fraud prevention, fraud detection, and investigation are approaches used by organizations to mitigate losses from fraud. Fraud prevention is more cost effective than fraud detection or investigation.

Answer 26

True

Question 27

"But I intended to pay it all back, I really did," Joseph Swankie said as he talked to his manager. How did I ever get into this situation, he thought. Two years ago, Joe received the promotion for which he had been working so hard. In addition, Joe's new manager told him that Joe had a very promising future at the company. Joe and his wife Janae quickly purchased a new home. Not long after, Joe and Janae had their fourth child, and life was great. After having their fourth child, Janae quit work to spend more time with her kids. Suddenly, things started to turn upside down. The economy took a downturn and had a negative impact on Joe's company. His pay, which was based on commission, was reduced nearly 50 percent. Joe still worked hard but thought he should be paid more. Unable to find another job, Joe resentfully decided he would stay with the company even with the lower pay. Not long after he started receiving lower commissions, Joe noticed that the internal controls over the petty cash fund weren't very strong. The records were not reviewed very often, and small shortages were usually written off. One week, Joe took $50. When questioned by his wife, Joe said he had found a few odd jobs after work. Joe continued this habit of taking small amounts for a couple of weeks. After realizing that no one had noticed the shortage, he started to take up to $100 a week. One day, another employee noticed Joe taking some cash from the fund and putting it in his wallet. When questioned, he simply stated that it was a reimbursement the company owed him for supplies. An investigation began, and Joe's fraud was discovered. Two of the three elements of fraud are present in this scenario.

Answer 27

False - only opportunity and pressure

Question 28

You are a new summer intern working for a major professional services firm. During your lunch break each day, you and a fellow intern Bob eat at a local sandwich shop. One day, Bob's girlfriend joins you for lunch. When the bill arrives, Bob pays with a company credit card and writes the meal off as a business expense. Bob and his girlfriend continue to be "treated" to lunch for a number of days. You know Bob is well aware of a recent memo that came down from management stating casual lunches are not valid business expenses. When you ask Bob about the charges, he replies, "Hey, we're interns. Those memos don't apply to us. We can expense anything we want. " Which of the following statements regarding Bob's use of the company credit card is not true? a. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud. b. Bob's use of the credit card is a form of asset misappropriation. c. You should encourage Bob to change his behavior and correct the fraudulent charges. d. Bob is committing occupational fraud.

Answer 28

a. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud.

Question 29

You are a student at ABC University. You recently read in the school's daily newspaper about a terrific investment opportunity that promises to pay you a 44 percent annual return on your investment. Although you don't understand the complicated nature of the investment, several of your friends are investing money. You have an extra $5,000 that you earned last summer that you would like to invest, but you are a bit skeptical about the unusually high rate of return. An annual return of 44 percent is higher than average, but not unusual for investments that are highly complicated, suggesting that this probably is a good investment opportunity.

Answer 29

False

Question 30

Predication refers to circumstances that would lead a reasonable professional to believe that fraud has occurred. You should not conduct a fraud investigation without predication.

Answer 30

True

Question 31

People will often be dishonest if they are placed in an environment of: a. Poor controls. b. High pressure. c. Low integrity. d. Loose accountability. e. All of these.

Answer 31

e. All of these.

Question 32

Not prosecuting fraud perpetrators is cost-effective both in the short run and the long run.

Answer 32

False

Question 33

Which of the following is usually the most effective tool in preventing and detecting fraud? a. Effective investigations of fraud symptoms. b. Creating an expectation of punishment in the company. c. Having a good system of internal controls. d. Discouraging collusion between employees and customers or vendors.

Answer 33

c. Having a good system of internal controls.

Question 34

A company's control environment includes: a. The tone that management establishes toward what is honest and acceptable behavior. b. Corporate hiring practices. c. Having an internal audit department. d. All of these.

Answer 34

d. All of these.

Question 35

A good internal control system within a company can ensure the absence of fraud.

Answer 35

False

Question 36

Even a good system of internal controls will often not be completely effective because of fallibilities of the people applying and enforcing the controls.

Answer 36

True

Question 37

Two of the three elements in creating a positive work environment include assistance and honesty.

Answer 37

True

Question 38

Which of the following is not a recognized method of eliminating fraud opportunities? a. Creating an expectation of punishment. b. Engendering employee goodwill by having lax rules. c. Having good internal controls. d. Monitoring employees.

Answer 38

b. Engendering employee goodwill by having lax rules.

Question 39

Studies show that a positive and honest work culture in a company does little to prevent fraud.

Answer 39

False

Question 40

When fraud is committed, the problem is often not a lack of controls, but the overriding of existing controls by management and others.

Answer 40

True

Question 41

Which of the following is the typical fraud model that describes most firms? a. Fraud incident, investigation, action, resolution. b. Fraud incident, assessing risk, investigation, reporting. c. Assessing risk, fraud incident, investigation, resolution. d. Assessing risk, investigation, implementing a fraud program, reporting.

Answer 41

a. Fraud incident, investigation, action, resolution.

Question 42

Which of the following factors contribute to creating a corporate culture of honesty and openness? a. Hiring honest people. b. Performing criminal background checks. c. Not having an open-door policy. d. Having a well-understood and respected code of ethics. e. Both hiring honest people and having a well-understood and respected code. f. All of these.

Answer 42

e. Both hiring honest people and having a well-understood and respected code.

Question 43

The major role of employee assistance programs is to help employees recover from the damaging psychological effects of fraud.

Answer 43

False

Question 44

Which of the following factors generally results in a high-fraud environment? a. Hiring honest people. b. Providing an EAP. c. Autocratic management. d. Both hiring honest people and providing an EAP.

Answer 44

c. Autocratic management.

Question 45

An important factor in creating a culture of honesty, openness, and assistance in the workplace is maintaining an employee assistance program.

Answer 45

True

Question 46

Alerting vendors and contractors to company policies often results in: a. Discovery of current frauds and the prevention of future frauds. b. Loss of interest in the organization by vendors. c. Strained vendor/purchaser relationships. d. Heightened incidence of recurrent reverse vendor fraud.

Answer 46

a. Discovery of current frauds and the prevention of future frauds.

Question 47

The single most effective tool in preventing and detecting fraud is usually: a. Having a well-written company code of ethics. b. Following strict hiring procedures. c. Having a good system of internal controls. d. Monitoring employees.

Answer 47

c. Having a good system of internal controls.

Question 48

Creating an expectation of punishment causes firm morale to deteriorate and often results in lower productivity.

Answer 48

False

Question 49

Which of the following methods of fighting fraud usually results in the largest savings? a. Fraud investigation. b. Fraud prevention. c. It is impossible to tell. d. Fraud detection.

Answer 49

b. Fraud prevention.

Question 50

Not all possible controls should be implemented; rather, one must assess a control's cost and benefits before implementation.

Answer 50

True

Question 51

Karen, a friend of yours, recently started her own business, The Bike and Boulder Company (B&B). B&B specializes in the sales of mountain bikes and rock-climbing equipment. Karen is putting the finishing touches on her company policies and procedures. She knows you are taking a fraud class and asks you to review what she has completed thus far. You quickly notice that Karen has neglected to address fraud and fraud prevention in her policies and procedures. What policies and procedures would you suggest Karen implement to prevent and detect fraud at B&B? Which of the following fraud prevention policies or procedures would you recommend to Karen with respect to hiring employees? a. Require all applicants to certify that they have never committed employee fraud. b. Verify all information on each applicant's resume and/or application. c. Train those involved in the hiring process to conduct thorough background checks. d. Implement procedures to prevent hiring any applicant with an arrest record. e. You should recommend all of these.

Answer 51

c. Train those involved in the hiring process to conduct thorough background checks. (maybe?)

Question 52

Robert was the chief teller in a large New York bank. Over a period of three years, he embezzled $1.5 million. He took the money by manipulating dormant accounts. Robert was responsible both for handling dormant accounts and for dealing with complaints from customers. When a customer would complain about his account, Robert was always the one to explain the discrepancy. He usually used the excuse that "it's a computer error." Which of the following control activities would most likely have prevented this fraud? a. Physical safeguards over customer accounts. b. Segregation of duties. c. Documents and records. d. Proper authorizations.

Answer 52

b. Segregation of duties.

Question 53

Nellie works for a large manufacturing company. She heads the information systems department and works closely with the accounting department. Nellie knows a lot about the company's database systems and accounting practices. Her responsibilities include working with the company's vendors to create data communication lines. The company works with many vendors, including a large number of new vendors that have been added due to the company's rapid growth. Recently, Nellie has become concerned about the effectiveness of the internal controls in ensuring the integrity of the purchasing function. She expressed her concerns to senior management and has been asked to recommend proactive steps the company can take to prevent fraud from collusion between employees and vendors. A periodic letter to vendors explaining an organization's policy of not allowing employees to accept gifts or gratuities is an effective tool for both preventing and uncovering collusive frauds.

Answer 53

True

Question 54

Because ABC Company suffered large losses from fraud last year, senior management has decided to be more proactive in implementing a fraud prevention environment. In interviewing employees, they found that many employees were unclear about which behaviors were ethical and which were not. Management is considering ways to better educate employees about ethical behavior. ABC Company's human resources staff should develop a code of ethics to be read and signed by each employee having supervisory responsibilities.

Answer 54

False

Question 55

Once in a while, someone commits fraud or another crime and does not feel stress. Such people are referred to as:

Answer 55

Psychopathic

Question 56

Once a buyer starts accepting kickbacks from a supplier: a. Prices often increase. b. Purchases from other vendors often decrease. c. The supplier usually takes control of the purchasing relationship. d. All of these.

Answer 56

d. All of these.

Question 57

Data-driven fraud detection: a. Determines the cost of fraud. b. Identifies possible fraud suspects. c. Looks for anomalies in databases. d. All of these.

Answer 57

c. Looks for anomalies in databases.

Question 58

Which of the following is not a fraud symptom related to source documents? a. Duplicate payments. b. Photocopied documents. c. Missing documents. d. A tip from an employee.

Answer 58

d. A tip from an employee.

Question 59

When conducting financial statement analysis, which ratio will be the most useful in determining whether a company has erroneously inflated accounts receivable? a. Profit margin. b. Accounts receivable turnover. c. Debt percentage. d. Current ratio.

Answer 59

b. Accounts receivable turnover.

Question 60

If a search reveals that an employee and a vendor have the same telephone number, this result may indicate that: a. Employees may be establishing dummy vendors. b. A vendor is receiving kickbacks or other favors. c. Contractors are billing at the wrong rates. d. Vendors are overcharging for goods purchased.

Answer 60

a. Employees may be establishing dummy vendors.

Question 61

In the three elements of fraud (theft act, concealment, conversion), who is usually in the best position to detect the fraud?

Answer 61

b. Co-workers and managers.

Question 62

Which element is not a common element of fraud? a. Concealment. b. Coercion. c. Conversion. d. Theft act. e. All of these are common elements of fraud.

Answer 62

Coercion

Question 63

Horizontal analysis is different from vertical analysis in that: a. Key ratios are compared from one period to the next. b. Horizontal analysis converts balances in a single period to percentages, while vertical analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next. c. There is no difference between horizontal and vertical analysis. d. Horizontal analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next, while vertical analysis converts balances in a single period to percentages.

Answer 63

d. Horizontal analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next, while vertical analysis converts balances in a single period to percentages.

Question 64

Which of the following is not a reason why people are hesitant to come forward with knowledge or suspicions of fraud? a. They fear reprisal for being a whistle-blower. b. People who report fraud are not rewarded monetarily. c. It is usually impossible to know for sure that a fraud is taking place. d. They often think that squealing on someone is wrong.

Answer 64

b. People who report fraud are not rewarded monetarily.

Question 65

From a symptom perspective, which is true of fraud? a. Fraud symptoms are most often spread throughout a dataset. b. Fraud symptoms are best found through reactive approaches. c. Fraud symptoms are often found in very few transactions. d. Fraud symptoms are caused by sampling anomalies.

Answer 65

c. Fraud symptoms are often found in very few transactions.

Question 66

A letter is most likely to be fraudulent if: a. It is addressed to an individual, rather than a department. b. It is written on outdated company letterhead. c. It is a photocopy of an original letter. d. It is signed by only one person.

Answer 66

c. It is a photocopy of an original letter.

Question 67

Which of the following is NOT a question when identifying possible frauds that could exist? a. How do competitors' processes compare? b. How could vendors or customers acting alone commit fraud? c. How do insiders and outsiders interact? d. How could employees or management acting alone commit fraud?

Answer 67

a. How do competitors' processes compare?

Question 68

Which of the following is a fraud symptom related to an internal control weakness? a. Lack of proper authorization. b. Lack of independent checks. c. Inadequate accounting system. d. Lack of physical safeguards. e. All of these are fraud symptoms related to internal controls.

Answer 68

e. All of these are fraud symptoms related to internal controls.

Question 69

Embezzlement of assets reduces the left side of the accounting equation. To conceal the theft, the embezzler must find a way to reduce the right side of the accounting equation. A perpetrator would most likely reduce the right side of the equation by: a. Paying dividends. b. Altering stock accounts. c. Increasing expenses. d. Reducing accounts payable.

Answer 69

c. Increasing expenses.

Question 70

When a person commits a crime: a. He or she usually becomes friendly and nice. b. He or she will experience no changes in behavior. c. He or she usually becomes engulfed by emotions of fear and guilt. d. He or she experiences a lower stress level.

Answer 70

c. He or she usually becomes engulfed by emotions of fear and guilt.

Question 71

Profit margin, return on assets, and return on equity are all examples of: a. Vertical analysis. b. Key financial statement ratios. c. Horizontal analysis. d. None of these.

Answer 71

b. Key financial statement ratios.

Question 72

Which of the following is true regarding fraud? a. Many witnesses are usually available when fraud occurs. b. It is easily identified. c. When a fraud occurs, there is no question whether or not a crime has been committed. d. It is seldom observed.

Answer 72

d. It is seldom observed.

Question 73

When trying to identify outliers, what is one of the best statistical approaches? a. The z-score calculation. b. Time trending using the high-low slope method. c. Stratification of cases by value. d. A pie graph indicating the relative amounts.

Answer 73

a. The z-score calculation.

Question 74

Benford's Law: a. Is usually unsuccessful as a fraud detection tool. b. Predicts that the first digit of random number sets will begin with a 1 more often than a 2, a 2 more often than a 3, and so on. c. Applies to personal ID numbers. d. All of these.

Answer 74

b. Predicts that the first digit of random number sets will begin with a 1 more often than a 2, a 2 more often than a 3, and so on.

Question 75

As CEO of your company, you've been going over your financial statements and have noticed something disturbing. You perform a horizontal analysis and find that sales have been increasing at a rate of 3 percent per year, while inventory has risen at a rate of 29 percent per year. Because the gap between sales growth and growth of inventory is so large, the CEO should assume fraud has occurred and proceed accordingly.

Answer 75

False

Question 76

John Adams is the manager at a local store. The store opened four years ago and has been doing very well. With current business growing, John decided to hire Peter O'Riley to work as an accountant. When Peter started working at the store, he found several things that appeared unusual. For example, six receiving documents have been lost, the general ledger is out of balance, one customer has complained that he is continually being overcharged, and another customer complained that he does not receive timely service. John lives in an expensive house and has several beautiful sports cars. Discuss whether fraud could be occurring. Does evidence of fraud exist, or are only fraud symptoms present? John's lifestyle, combined with the other factors present in this case, provide evidence that fraud has occurred.

Answer 76

False

Question 77

A large manufacturing business has hired you as a fraud detection specialist. The first day on the job your boss tells you she has heard about something called Benford's Law that is used to detect fraud, and she wants to know more about it. She has asked you to explain what Benford's Law is and how it is applied. Benford's Law can be applied effectively to any large financial data set.

Answer 77

False

Question 78

James Davis owns a small Internet service provider business. Recently, customers have been complaining that they are overcharged and are not receiving timely customer service. Billing rates seem to increase without notice. Five years ago, James used funding from several different investors in order to start his Internet service. Currently, he has 17 outstanding bills to be paid, all with late charges. Five of the bills include notices stating that lawsuits are pending. Also, he has not paid dividends to investors in two years. Every day, James drives either his Mercedes-Benz or his new Lexus to work. Before starting the business, James drove only one car, a Suzuki Samurai. James now lives in a palatial home and owns very expensive furniture. Employees constantly ask James for new equipment, but the "boss" refuses to update the old equipment. Two weeks ago, James was irate and fired one of his accounting clerks for not depositing some checks on time. James is known for losing his temper. Which of the following is a symptom of fraud that is not evident in this case based on the information provided? a. Analytical anomalies. b. Extravagant lifestyle. c. Unusual behavior. d. Tips and complaints. e. All of these fraud symptoms are evident in this case.

Answer 78

a. Analytical anomalies.

Question 79

The text states that many frauds are detected when an employee, a friend, a manager, a customer, or another person provides a tip or complaint that something is wrong. One large company, for example, which uncovered more than 500 individual frauds, discovered 43 percent of the frauds based on customer complaints or employee tips. Tips and complaints are not evidence of actual fraud but instead should only be considered fraud symptoms.

Answer 79

True

Question 80

You have been hired by a small firm to analyze its accounts receivable department and assess how susceptible it is to fraud. The company operates a table manufacturing facility. The only employee in accounts receivable is Joanne, an employee of 10 years. Joanne opens all cash receipts, credits the clients' accounts, and deposits the money at the bank. The lack of proper authorization is a control weakness that poses the greatest fraud-related risk for this company.

Answer 80

False

Question 81

By ordering unnecessary products at inflated prices, the purchasing manager of XYZ Company defrauded his employer of more than $40,000 over a two-year period. Which of the following data analysis procedures could have been used to detect this fraud? a. Search for employees with the same address or telephone numbers as vendors. b. Sort purchases by vendor and purchase volume. c. Chart price increases and purchase volumes of different products over time. d. All of these procedures could have been used to detect this fraud.

Answer 81

d. All of these procedures could have been used to detect this fraud.

Question 82

Which of the following is not a theft act investigation method? a. Surveillance and covert operations. b. Honesty testing. c. Seizing and searching computers. d. Invigilation.

Answer 82

b. Honesty testing.

Question 83

Fixed-point, or stationary, observations can be conducted by: a. Company personnel. b. Certified fraud examiners. c. Private investigators. d. Anyone, if conducted properly.

Answer 83

d. Anyone, if conducted properly.

Question 84

Which of the following methods of gathering documents is based primarily on luck? a. Hard-to-get private documents that are subpoenaed. b. Documents discovered through searching public sources. c. Documents discovered during audits. d. Documents provided by tipsters.

Answer 84

d. Documents provided by tipsters.

Question 85

Which of the following is a characteristic of a good interview? a. Friendly interviewees appear very helpful, but they may have hidden motives and may provide bad information. b. Make the interview as concise as possible. c. The interviewer should announce his or her bias at the outset, because the interviewee will cooperate better when the interviewee knows the type of information the interviewer is seeking. d. It is important to schedule interviews ahead of time, especially if you are planning to interview a potentially hostile interviewee.

Answer 85

either b. Make the interview as concise as possible. or c. The interviewer should announce his or her bias at the outset, because the interviewee will cooperate better when the interviewee knows the type of information the interviewer is seeking.

Question 86

What can a fraud examiner conclude if his or her tests confirm that no instances of fraud are present in a sample taken from a population? a. Only that no fraud is present in that particular sample. b. The sample is most likely not representative of the population as a whole. c. There is virtually no risk that fraud exists in the population. d. The population contains no fraud.

Answer 86

a. Only that no fraud is present in that particular sample.

Question 87

Which of the following is not true regarding document experts? a. They can usually determine whether a document was written by the person whose signature the document bears. b. They can usually determine whether a document has been forged. c. They can usually determine whether the date the document bears is the date the document was written. d. All of these are true statements.

Answer 87

d. All of these are true statements.

Question 88

Which of the following traits do polygraphs not measure when testing for stress? a. Pulse rate. b. Blood pressure. c. Galvanic skin response. d. Respiration. e. All of these are traits measured during a polygraph test.

Answer 88

e. All of these are traits measured during a polygraph test.

Question 89

Which source could be used to access valuable financial information in a fraud investigation? a. Financial institutions. b. Internet sites. c. The former spouse of a suspected fraud perpetrator. d. Trash. e. All of these.

Answer 89

e. All of these.

Question 90

When conducting interviews during an investigation, which of the following words should usually be avoided? a. Audit. b. Record examination. c. Inquiry. d. Investigation.

Answer 90

d. Investigation.

Question 91

Which of the following is true of graphologists? a. They study handwriting as a way to interpret and identify personalities. b. They perform the same type of work as forensic document experts. c. They are required to be members of the ABFDE organization. d. They can only perform their work in laboratory settings.

Answer 91

a. They study handwriting as a way to interpret and identify personalities.

Question 92

Which of the following investigation methods often raise concerns about employees' privacy at work? a. Electronic surveillance. b. Invigilation. c. Interviewing and interrogation. d. Forensic accounting.

Answer 92

a. Electronic surveillance.

Question 93

Confrontational interviews should usually be conducted when: a. Police decide that the suspect is guilty. b. The examiner is starting the investigation. c. All other investigative procedures have been completed. d. The investigation is taking too long.

Answer 93

c. All other investigative procedures have been completed.

Question 94

A database of criminal records maintained by the FBI is: a. The CIA. b. The III. c. The NCIC. d. Both the CIA and the NCIC. e. Both the III and the NCIC.

Answer 94

e. Both the III and the NCIC.

Question 95

Which of the following honesty testing techniques deals with the study of handwriting for the purpose of character analysis? a. Polygraph. b. Graphology. c. Pencil-and-paper test. d. Voice stress. e. None of these.

Answer 95

b. Graphology.

Question 96

Evidence gathered from public records can be useful in: a. Identifying with the suspect. b. Obtaining a confession. c. Making the suspect feel at ease. d. None of these.

Answer 96

b. Obtaining a confession.

Question 97

When deciding whether or not to investigate, which of the following factors should an organization not consider? a. Possible cost of the investigation. b. Perceived strength of the predication. c. Possible public exposure resulting because of the investigation. d. All of these should be considered.

Answer 97

d. All of these should be considered.

Question 98

What can a fraud examiner conclude if one or more instances of fraud are found in a sample taken from a population? a. The sample may not have been randomly selected, and thus no conclusions can be drawn. b. The population contains fraud. c. There is a slight risk that fraud exists in the population. d. The sample is most likely not representative of the population as a whole.

Answer 98

b. The population contains fraud.

Question 99

People in the rationalization stage of reaction to a fraud: a. Make great interviewees because they want to punish the suspect. b. Want to give the suspect one more chance. c. Believe without a doubt that the suspect is guilty. d. Have no sympathy for the suspect.

Answer 99

b. Want to give the suspect one more chance.

Question 100

The net worth method of analyzing financial information can help to determine: a. Possible perpetrators of the fraud. b. The suspect's feelings about the organization. c. The suspect's personality characteristics. d. The amount of embezzled funds.

Answer 100

d. The amount of embezzled funds.

Question 101

Most conversion investigations involve searching public records and other sources to trace: a. Purchases of assets. b. Payments of liabilities. c. Changes in lifestyle. d. Net worth. e. All of these.

Answer 101

e. All of these.

Question 102

Enron, one of the largest corporations to ever file for bankruptcy protection, was number 7 on the Fortune 500 list of the largest companies in America as ranked by revenues at the time of its bankruptcy. It was alleged that Enron executives were involved in questionable accounting practices and financial statement fraud, the disclosure of which led to the downward spiral in Enron's stock price and the financial ruin of thousands of employees and investors. In addition to Enron's internal accounting problems, it is alleged that its auditor, one of the large accounting firms, instructed employees to destroy documents related to its work for Enron. Based on your understanding of the role of documentary evidence in fraud investigations, which of the following statements is not true? a. The best way to obtain documentary evidence is through computer-based queries of accounting and other databases. b. Concealment is generally accomplished by manipulating documentary evidence. c. Documentary evidence generally is not considered by fraud examiners to be as persuasive or reliable as eyewitness testimony. d. Documents make up a significant portion of the evidence in most fraud cases.

Answer 102

c. Documentary evidence generally is not considered by fraud examiners to be as persuasive or reliable as eyewitness testimony.

Question 103

In the oil theft case discussed in this chapter, the fraud investigators conducted a week-long invigilation. The results from this period were compared to the results taken during the weeks immediately before and immediately after the invigilation. The use of detailed record keeping before, during, and after invigilation is key to using this investigative method.

Answer 103

True

Question 104

You receive an anonymous tip that your controller is embezzling assets from your company. You begin your investigation by interviewing several employees in the accounting department, who report no unusual behavior or sudden changes in the suspect's standard of living. One interviewee does report that the controller has gone on a number of extravagant vacations. You perform a net worth analysis, based on a search of public records, and find the following information: Unknown Income - 2K Y1 3K Y2 Based on the evidence gathered in your search, you should terminate the investigation due to the very low estimate of unknown income.

Answer 104

False

Question 105

Assume that you have selected a random sample of 15 checks from a population of 800 checks. The checks you have selected are the following numbers: 664, 789, 650, 136, 365, 538, 800, 657, 110, 136, 398, 645, 214, 544, and 777. You have determined that no fraud exists in the sample of 15 checks you evaluated. Based on this sample of 15 randomly selected checks, you may conclude that no fraud exists in the population.

Answer 105

False

Question 106

Jim has been a faithful employee of Daddy's Denture, Inc. (DD) for four years. He has held various positions where he handles receipts, credit memos, and other accounting records. Along with recently added responsibilities, Jim has discovered more opportunity to commit fraud. Over the past three months, Jim figured out that he can create fictitious vendors and write checks from DD to these fictitious vendors and deposit the checks in a new bank account he opened under a false name. Jim put this plan into action and has so far stolen $7,000 from DD. One day, Jim had to call in sick. A co-worker, Judd, assumed Jim's responsibilities for the day. As Judd reconciled cashed checks, he noticed that Jim endorsed many of them himself. Judd doesn't believe what he sees. In fact, he leaves the reconciling for Jim to finish when he returns to work. When Jim returns to work, everything seems normal at first. However, it eventually dawns on Judd that he caught Jim in the act of stealing. Judd becomes angry and confronts Jim. When Judd mentions the endorsements, Jim is dumbfounded and denies being dishonest. After Judd leaves, Jim gets angry, thinking, "What right did he have to take over my duties?" and "I'll be fired for sure!" Back in his office, Judd continues to think about Jim's dishonesty. He decides that Jim is just human, and that he let himself slip this once. Judd decides he should let the issue pass and just hope that Jim realizes his gig is up. Judd believes that Jim is a basically good guy and will probably reconcile his misdoings and return to honest ways. Later that night, Judd feels sad knowing that his good friend, Jim, has done such a bad thing. Meanwhile, Jim decides he shouldn't be angry with Judd. Judd is, after all, only doing what he's been told to do by his superiors. Jim feels horrible about what he has done, not to mention the fact that he got caught. He decides to fess up and let his boss know what he has been doing before he gets into any more trouble. Both Judd and Jim proceeded through each of the five reactions to crises.

Answer 106

True

Question 107

A man in San Rafael County was suspected of committing workers' compensation fraud. An anonymous tipster reported that the man had been working at an automobile auction while he was receiving disability benefits. An investigator for the Bureau of Workers' Compensation interviewed the owner of the auction and found that the man was being paid $200 per week in cash for washing vehicles and performing other shop tasks that involved carrying 25-pound bags of pet food and loading boxes. Based on the anonymous tip and the auction owner's interview, the investigator decides there is predication for fraud and decides to pursue the matter further. Which of the following investigative methods would be appropriate for gathering evidence in this case? a. Searching public records. b. Surveillance. c. Invigilation. d. All of these methods would be appropriate.

Answer 107

Surveillance

Question 108

You are investigating a suspected fraud and as part of the investigation, you have gathered the following information about a potential suspect. What is the amount of income from unknown sources in Year 2 and in Year 3?

Answer 108

Asset + Liabilities = Net Worth CY NW - PY NW = Change in NW Change in NW + CY Expenses = Income Income - Known Income = Unknown Income

Question 109

While auditing a client, the CEO asks you to look carefully at cash flows. You notice that cash flows have decreased every year. Upon learning of your findings, the CEO remarks, "I seem to bring in more customers every year, but the cash is not there." You tell him that fraud may be occurring, and he asks you to investigate. The two of you agree that the most likely place for a fraud to be occurring is cash collections, and the CEO provides the names of three employees involved in the cash collection process. The CEO then asks how you plan to begin the investigation. Investigations should usually begin by interviewing the prime suspect or suspects, in this case the three employees who handle cash collections.

Answer 109

False

Question 110

Marlin Company has suspected something "fishy" for several months. It has noticed that its profits have been slowly decreasing, while revenues have been increasing. After consulting with you, a fraud expert, the company has decided to investigate the purchasing patterns of its three purchasing agents—Curly, Larry, and Moe. You decide that a good method for investigation into the matter is examining a random sample of purchase invoices and verifying their accuracy and validity. Curly's invoices are numbered 0001 through 0999, Larry's are 1000 through 1999, and Moe's are 2000 through 2999. When you approach Curly, Larry, and Moe, they seem somewhat defensive. They begin to harass one another, blaming each other for the mess in which they are involved. Moe even twitches their noses and slaps their heads. Curly attempts to retaliate by poking Moe in the eye, but misses and hits Larry instead. When the three were done, the CFO, Mr. Rutin-Tutin, exclaimed, "Would you three stooges quit fooling around and produce the invoices immediately?" The three shuffled off to their offices, grumbling all the way. They returned a couple of hours later with photocopies of their invoices. When Mr. Rutin-Tutin asked where the original invoices were, they explained that they always copy and destroy the originals for easier storing purposes. Rather annoyed and fed up with the three morons, Mr. Rutin-Tutin directs them to return to their offices. He then asks if you think fraud is occurring, and you reply that there does appear to be something wrong. First of all, they could only produce photocopies of the invoices, which is not acceptable. The fact that it took them a couple of hours to produce these documents also causes suspicion. Mr. Rutin-Tutin hands you the stacks of photocopied invoices and tells you to do your thing. You decide to use discovery sampling as a first step in your examination of the invoices. The results of the sample will provide a basis for making inferences from the sample to the population. Although discovery sampling allows inferences to be made about the population, there is still the possibility that the sample will not be representative of the population; this is labeled sampling risk. Generally, this risk is greater when the fraudulent records relate to a limited number of transactions and/or the fraud occurs at irregular intervals in the dataset.

Answer 110

True

Question 111

Bill James is being investigated for embezzling over $700,000 from ABC Capital Management, for whom Bill has worked for nearly 10 years. When co-workers noticed the new "toys" Bill was buying, they jokingly asked him to tell them his stock picks as they wanted in too! Bill told them that they better adopt some rich relatives. "My Uncle Eddie didn't have any kids, so he left a chunk of his money to each of his nephews." As a fraud expert, you would perform net worth calculations to assess the validity of Bill's claim of a recent inheritance.

Answer 111

False