Topic 5 Data Driven Fraud Detection

Question 1

Fraud is best detected through financial statements by focusing on:
a. Unexplained changes in financial statement balances.
b. Consistencies.
c. Intuition.
d. Management’s behavior when financial state-ments are released.

Answer 1

a)

Question 2

A detection method that focuses on the kinds of frauds that can occur and then uses technology to determine whether those frauds actually exist is called:
a. Fishing fraud detection.
b. Data mining.
c. Data-driven fraud detection.
d. Benford’s Law.
7

Answer 2

c)

Question 3

When vertical analysis is performed:
a. Ratios are used to detect fraud.
b. Changes in significant balance totals are examined.
c. Financial statement balances are converted to percentages.
d. Total revenues are compared to total expenses

Answer 3

c)

Question 4

Which of the following ratios can be used to assess a company’s solvency?
a. Current ratio
b. Return on assets’
c. Times-interest-earned ratio
d. Inventory turnover

Answer 4

C)

Question 5

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 pur-chasing relationship.
d. All of the above.

Answer 5

d)

Question 6

Kickbacks from vendors to buyers might
generate which one of the following
symptoms?
a. Buyer not relating well to other
buyers and vendors
b. Decreasing purchases from favored
vendorI
c. Increasing purchases from other
vendors
d. Decreasing prices and increasing quality

Answer 6

a)

Question 7

Which of the following is the most important step in data analysis?
a. Gathering the right data in the right format in the right time period
b. Understanding the available data
c. Learning the basics of table structure and field types
d. Learning the basics of key relationships and query syntax

Answer 7

A)

Question 8

T or F: Digital analysis using Benford’s Law can be per-formed on databases of any size.

Answer 8

True

Question 9

T or F: When using Benford’s Law, potential suspects are less likely to know you are trying to detect fraud than if you use more direct detection techniques.

Answer 9

True

Question 10

Which of the following is true of most accounting errors?
a. They are primarily caused by lack of training.
b. They represent intentional sabotage of controls.
c. They are problems caused by failures in systems, procedures, and policies.
d. They represent fraud.

Answer 10

c)

Question 11

______ are at wo-dimensional view with cases in one dimension and the calculations in the other.
a. N-grams
b. Z-scores
c. Pivot tables
d. Soundex algorithms

Answer 11

C)

Question 12

Specific implementations of delimited text are called TSV. What does TSV stand for?
a. toxicity screening value
b. time segmented volume
c. tab separated values
d. tactical secure voice

Answer 12

C)

Question 13

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

Answer 13

b)

Question 14

Which of the following is similar to ACL and is ACL’s primary competitor?
a. Picalo
b. IDEA
c. MicrosoftOffice + ActiveData
d. Z-score

Answer 14

B)

Question 15

Which of the following statements is NOT true?
a. Accounting errors are usually spread evenly throughout a data set.
b. Traditional auditing methods are more suited to finding errors than fraud.
c. Accounting anomalies indicate fraud has occurred or is occurring.
d. Fraud investigation involves determining who committed the fraud, the schemes used, and how much money or assets were taken.

Answer 15

c)

Question 16

While using n-grams, a match percentage of ________ or ________ generally indicates very similar values.
a. 10 percent, smaller
b. 20 percent, greater
c. 5 percent, smaller
d. 40 percent, greater

Answer 16

b)

Question 17

T or F: Data-driven analysis uses the company’s database to search for normal relationships between numbers.

Answer 17

False: CFE’s are looking for unusual numbers and patterns

Question 18

Which of the following is an advantage of using data analysis software to detect fraud?
a. It is a static approach, and results cannot be recombined in different ways.
b. Data analysis software can only be used to analyze small data sets.
c. Data analysis software can analyze entire populations rather than just samples.
d. Significant numbers of hits can occur, requiring iterative refinement of analyses.

Answer 18

c)

Question 19

A red flag search to detect kickbacks would include:
a. invoices without valid purchase order.
b. employee and vendor telephone numbers are the same.
c. purchase orders with zero dollar amounts by buyer.
d. price increases greater than 20% for several consecutive years

Answer 19

D)

Question 20

The proactive method of fraud detection is a six-step process . Which of the following is the correct process
sequence?
a. Identify possible frauds that could exist; catalog possible fraud symptoms; understand the business ;use technology to gather data about symptoms; automotive detection procedures ; analyzeresults; and investigate symptoms
b. Catalog possible fraud symptoms; understand the business; identify possible frauds that could exist; analyze
results; use technology to gather data about symptoms; and investigate symptoms
c. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; investigate
symptoms; use technology to gather data about symptoms; and analyze results
d. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; use
technology to gather data about symptoms; analyze results; and investigate symptoms

Answer 20

d)

Question 21

Which of the following statements is true about ODBC?
a. It allows use of the powerful SQL language for searching and filtering data.
b. It is generally slower and less robust than text files.
c.IT departments are very comfortable in giving out ODBC connections.
d. It is an application level setting rather than a system-wide setting.

Answer 21

A)

Question 22

From the select balance sheet items
below, calculate the quick ratio.
Item Amount Item Amount
Cash $20,000 Accounts payable
$11,000
Notes receivable 15,000 Wages payable 5,000
Stock 5,000 Retained earnings 20,000
Inventory 6,000 Notes payable
8,000
a. 0.83
b. 1.25
c. 1.63
d. 1.08

Answer 22

B)

Question 23

The most obvious disadvantage of the data-driven approach is:
a. Databases are very large and often cannot be analyzed using analysis packages like ACL, IDEA, or ActiveData.
b. High cost.
c. The decrease in employee morale.
d. None of the above.

Answer 23

b)

Question 24

When deciding which detection method to use, it is important to:
a. Determine the advantages and disadvantages of each approach.
b. Identify the costs involved.
c. Determine which method will meet the client’s
objectives.
d. All of the above.

Answer 24

d)

Question 25

T or F: Data-driven fraud detection can pay large dividends and is an effective way to reduce the cost of fraud in any organization.

Answer 25

True

Question 26

For enhanced data analysis, which of the following is a good option for users who want a familiar interface and a less expensive alternative to ACL and IDEA? a. ActiveData b. Pearl c. DataSource d. Excel

Answer 26

a)

Question 27

T or F: Vertical analysis is a useful detection technique because percentages are easily understood.

Answer 27

True

Question 28

Which  of  the  following  records  data  for  each  case  in  a  graph  and  analyzes  the  slope? a.  summarization  analysis b.  time  trend  analysis c.  fuzzy  matching  method d.  cross  tables  method

Answer 28

B)

Question 29

According  to  Benford's  Law,  the  first  digit  of  random  data  sets  will  most  often  begin  with  which  number? a.  7 b.  1 c.  3 d.  4

Answer 29

B)

Question 30

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

Answer 30

c)

Question 31

T or F: Unusual patterns always indicate the existence of fraud.

Answer 31

False: ususual patterns might be caused by non fraud factors

Question 32

One of the most common errors investigators make when analyzing time trends is: a. incorrect data preparation. b. focusing only on one variable, time (the x -axis if graphed). V c. not monitoring the time taken. d. not standardizing for time.

Answer 32

D)

Question 33

Benford's  Law  can  help  detect  fraud  by: a.  establishing  weaknesses  in  the  accounting  control  system. b.  identifying  accounting  anomalies. c.  focusing  on  unexplained  changes. d.  identifying  possible  attempts  by  fraudsters  to  make  stolen  amounts  look  random

Answer 33

D)

Question 34

Identify  the  true  statement  about  detecting  fraud  using  financial  statement  reports. a.  Performing  horizontal  analysis  requires  converting  the  income  statement  balances  into  percentages  of  gross sales. b.  Vertical  analysis  is  the  most  direct  method  of  focusing  on  changes  from  period  to  period. c.  Before  performing  any  data-driven  analysis  that  targets  fraud  and  corruption  in  financial  statements,  the numbers  in  all  three  types  of  financial  statements  need  to  be  converted  to  percentages. d.  Small  frauds  may  not  affect  the  summarized  financial  statements  significantly  enough  to  be  detected.

Answer 34

D)

Question 35

Horizontal  analysis  is  performed  when: a.  total  assets  are  set  at  100%  and  all  other  balances  are  shown  as  a  percentage  of  total  assets. b.  financial  statement  data  are  shown  for  two  periods  with  the  amount  and  percentage  of  change  for  each  line item. c.  there  is  a  need  to  calculate  and  compare  key  ratios  from  period  to  period. d.  income  statement  amounts  are  shown  as  a  percentage  of  total  sales.

Answer 35

B)

Question 36

_____  has  been  adopted  by  most  major  accounting  firms  and  is  a  powerful  platform  for  data  analysis. a.  ACL  Audit  Analytics b.  CaseWare’s  IDEA c.  Microsoft  Office  +  Active Data d.  SAS

Answer 36

a)

Question 37

Which  statistical  approach  is  one  of  the  most  powerful  and  yet  simple  methods  for  identifying  outliers? a.  N-grams b.  Z-score c.  Time-trend  analysis d.  Soundex  algorithm

Answer 37

B)

Question 38

Which  of  the  following  proactive  fraud  detection  methods  use  Benford's  Law  to  detect  fraud? a.  Vertical  analysis b.  Digital  analysis c.  Real-time  analysis d.  Time  trend  analysis

Answer 38

b)

Question 39

T or F: Unexplained changes are common in financial statements.

Answer 39

False

Question 40

One  of  the  disadvantages  of  Benford's  Law  in  detecting  fraud  is: a.  potential  suspects  are  more  likely  to  know  you  are  trying  to  detect  fraud  than  if  you  didn’t  use  such  detection techniques. b.  users  must  be  thoroughly  trained  in  its  complexities  to  implement  and  use. c.  that  those  cases  with  the  lowest  probabilities  do  not  match  Benford's  Law  and  may  need  further  investigation. d.  it  only  broadly  identifies  the  possible  existence  of  fraud;  it  fails  to  narrow  possibilities  to  a  manageable  field  of promising  leads.

Answer 40

D)

Question 41

T or F: A single symptom (red flag) is almost always enough information to identify the type of fraud scheme occurring.

Answer 41

False

Question 42

Identify  the  formula  used  to  calculate  z- score. a.  (Mean  −  Value)/Standard  Deviation b.  (Mean  −  Value)/(Mean  +  Value) c.  (Value  −  Mean)/ Standard  Deviation) d.  (Value  −  Mean)/Median)

Answer 42

C)

Question 43

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 the above.

Answer 43

b)

Question 44

While  methods   like  high-low  slope,  average  slope,  handshaking,  and  Box-Jenkins  exist,  one  of  the  most  popular techniques  for  summarizing  the  slope  of  a  graph i s: a.  summarization. b.  stratification. c.  statistical  regression. d.  arithmetic  progression.

Answer 44

C)

Question 45

T or F: The z-score calculation is the best way to stratify data.

Answer 45

False

Question 46

____  is  the  splitting  of  complex  data  sets  into  case-specific  tables. a.  Deviation b.  Stratification c.  Data  mining d.  Soundex

Answer 46

B)

Question 47

The Soundex algorithm: a. Uses consonants but ignores vowels. b. Creates a numerical score representing how a word sounds. c. Is useful when fuzzy matching values. d. All of the above.

Answer 47

d)

Question 48

An advantage of using ODBC to import data into a data warehouse is that: a. ODBC doesn’t require the use of corporate database servers. b. ODBC compresses data when stored on a CD or DVD. c. ODBC automatically retrieves column names and types from the database. d. ODBC keeps the investigator from dealing with the difficult SQL language.

Answer 48

c)

Question 49

Which of the following financial statements can be used to answer the question, "Where did the cash come from to pay dividends?" a. Income statement b. Balance sheet c. Statement of cash flows d. Trial balance

Answer 49

C)

Question 50

Which  of  the  following  is  a  true  statement  regarding  the  United  States  Social  Security  Administration  (SSA)? a.  The  SSA  publishes  a  monthly  list  of  newly  issued  Social  Security  numbers. b.  The  SSA  publishes  a  monthly  list  of  Social  Security  numbers  that  are  no  longer  in  use. c.  The  SSA  database  of  valid  numbers  can  be  accessed  by  interested  parties. d.  The  SSA  database  can  be  used  to  create  mailing  lists

Answer 50

B)

Question 51

According  to  Benford's  Law ,  5  will  be  the  first  digit  of  a  random  number  set: a.  more  often  than  1. b.  less  often  than  4. c.  about  the  same  as  6. d.  more  often  than  3.

Answer 51

B)

Question 52

Benford's  Law: a.  applies to  numbers  that  have  built-in l imits. b.  is  most  effectively  used  with  assigned  numbers. c.  applies  best  to  numbers  that  occur  naturally. d.  uses  ratios  to  detect  fraud.

Answer 52

C)

Question 53

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

Answer 53

d)

Question 54

While  using  financial  statement  analysis,  which  ratio  will  be  most  useful  in  assessing  the  company's  operational efficiency? a.  Current  ratio b.  Quick  ratio c.  Cost  of  goods  sold  percentage d.  Inventory  turnover

Answer 54

D)

Question 55

Which  of  the  following  is  an  extension  of  stratification? a.  Matosas  matrix b.  A  pivot  table c.  Summarization d.  Soundex

Answer 55

C)

Question 56

T or F: Vertical analysis is a more direct method than horizontal analysis in focusing on changes in financial statements from one period to another.

Answer 56

False

Question 57

One  way  to  view  the  results  of  multiple  indicators  is  to  use  a  chart  called  a: a.  Soundex  algorithm. b.  summarization  chart. c.  Pareto  chart. d.  Matosas  matrix

Answer 57

D)

Question 58

What  is  the  primary  drawback  of  the  data-driven  approach? a.  It  is  more  expensive  and  time  intensive  than  the  traditional  approach. b.  It  requires  tips  and  other  indicators  to  become  glaring  before  the  approach  can  be  used. c.  It  cannot  highlight  frauds  while  they  are  still  small. d.  The  investigator  loses  control  of  the  fraud  investigation  process.

Answer 58

a)

Question 59

T or F: According to Benford’s Law, the first digit of natural sets of numbers will begin with a 9 more often than with an 8.

Answer 59

False

Question 60

Which  of  the  following  may  result  from  a  careful  review  of  a  Matosas  matrix? a.  This  action  identifies  indicators  that  have  been  circumvented. b.  This  action  identifies  indicator  information  that  has  been  incorrectly  input. c. This  helps  investigators  improve  the  set  of  indicators  utilized. d.  This  helps  investigators  identify  fraud  perpetrators.

Answer 60

C)

Question 61

Which  of  the  following  is  least  effective  while  searching  for  anomalies? a.  Comparing  account  balances  in  the  statements  from  one  period  to  the  next. b.  Calculating  key  ratios  and  comparing  them  from  one  period  to  the  next. c.  Performing  horizontal  analysis. d.  Performing  vertical  analysis.

Answer 61

A)

Question 62

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 the above.

Answer 62

b)

Question 63

T or F: Understanding the kinds of frauds that can occur is not important when using a data-driven detection method.

Answer 63

False

Question 64

In a Matosas matrix, there is a ___ for each indicator , and there may be as as many as _____. a. row; 50 rows b. column; 10 columns- c. column; 100 columns d. row; 1,000 rows

Answer 64

C)

Question 65

The  red  flag  that  is  generally  identified  when  employee  and  vendor  telephone  numbers  are  the  same  is: a.  dummy  vendors. b.  employees  purchasing  goods  for  personal  use. c.  billing  more  than  once  for  the  same  purchase. d.  providing  poor-quality  goods.

Answer 65

A)

Question 66

Digital  analysis  is: a.  the  art  of  analyzing  the  digits  that  make  up  number  sets  like  invoice  amounts,  reported  hours,  and  costs. b.  a  technique  which  calculates  the  average  probability  for  each  grouping  of  data. c.  the  searching  for  expected  relationships  between  numbers. d.  the  use  of  numeric  values  for  decision  making.

Answer 66

A)

Question 67

Which  of  the  following  is  true? a.  Stratification  is  the  splitting  of  data  into  case-specific  tables. b.  Stratification  is  an  extension  of  summarization. c.  Summarization  provides  detail  for  each  grouping  into  tables. d.  Stratification  is  utilized  to  create  a  z-score  across  data  sets.

Answer 67

A)

Question 68

When detecting fraud, it is important that fraud investigators: a. Remain objective and neutral. b. Assume guilt. c. Assume innocence. d. None of the above.

Answer 68

A)

Question 69

What is the primary advantage of the data-driven approach? a. The investigator makes hypotheses and tests to see if each one holds true. b. It is less expensive and time intensive than the traditional approach. c. The investigator takes charge of the fraud investigation process. d. Data--driven fraud detection is proactive in nature.

Answer 69

C

Question 70

Which  of  the  following  statements  regarding  ODBC  is  NOT  accurate? a.  ODBC  stands  for  Open  Database  Communications. b.  ODBC  is  a  standard  method  of  querying  data  from  corporate  relational  databases. c.  ODBC  is  a  connector  between  the  front- end  analysis  and  the  back-end  corporate  database. d.  ODBC  is  already i ncluded  with  most  operating  systems.

Answer 70

D)

Question 71

Horizontal analysis is different from vertical analy-sis in that: a. There is no difference between horizontal and vertical analysis. b. 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. c. 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. d. Key ratios are compared from one period to the next.

Answer 71

b)

Question 72

Most software packages have functions for generating _____ about columns of data, which include statistical summaries like control totals, mean, maximum, minimum, standard deviation, number of zero values, number of empty records, and so on. a. captions b. histograms c. headings d. descriptives

Answer 72

D)

Question 73

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

Answer 73

c)

Question 74

Which  approach  converts  financial  statement  numbers  to  percentages  of  total  assets  or  total  sales? a.  Horizontal  analysis b.  Vertical  analysis c.  Ratio  analysis d.  Variance  analysis

Answer 74

B)

Question 75

Benford’s Law is: a. The most expensive of all the digital analysis methods b. The most effective way to identify actual frauds. c. A method that uses vertical financial statement analysis. d. An effective way to identify errors in data sets.

Answer 75

d)

Question 76

Which  of  the  following  is  the  most  direct  method  of  focusing  on  changes  in  the  company's  balance  sheet  and  income statement? a.  Calculating  key  ratios  and  comparing  them  from  period  to  period b.  Comparing  account  balances  in  the  statements  from  one  period  to  the  next c.  Performing  a  vertical  analysis d.  Performing  a  horizontal  analysis

Answer 76

d)

Question 77

Which  of  the  following  is  an  analytical  symptom  of  kickbacks? a.  Decreasing  purchases  from  other  vendors b.  Charging  normal  price  for  goods  supplied c.  Providing  better-quality  goods d.  Smaller  purchase  quantities  and  more  frequent  orders

Answer 77

a)

Question 78

Which  of  the  following  statements  is  true  about  the  characteristics  of  real-time  analysis? a.  With  real time  analysis  in  place,  there  is  no  need  for  continual  improvement  and  updating  of  indicators. b.  It  is  a  distinct  technique  because  it  specifically  analyzes  each  transaction  for  correctness  rather  than  for  fraud. c.  Effective  real-time  analysis  allows  real-time  modification  and  deletion  of  less-effective  indicators. d.  The  most  effective  real time  analysis  uses  indicators  that  are  hard coded  into  the  system.

Answer 78

C)

Question 79

T or F ODBC is the best approach to import because it achieves a direct, rich connection to the source database.

Answer 79

True

Question 80

T or F: Balance sheets must be converted to change statements before they can be used in detecting fraud.

Answer 80

True

Question 81

The most effective way to convert balance sheets and income statements from position and period statements to change statements is to: a. Compare balances in the statements from one period to the next. b. Calculate key ratios and compare them from period to period. c. Perform horizontal and vertical analyses. d. All of the above.

Answer 81

c)

Question 82

A ______  is  a  financial  statement  that  reflects  account  balances  at  a specific  point  in  time  like  a  snapshot. a.  periodic  statement b.  position  statement c.  change  statement d.  static  statement

Answer 82

b)