acctg 505 midterm

The interview should always take place at the interviewee's place of work.

False This statement is true with friendly and neutral witnesses, but it is not true if the person being interviewed is an adverse witness or a suspect.

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.

False {Although fraud could be occurring, the CEO should not jump to conclusions. There may be other reasons why inventory has risen much more than sales, such as poor buying policies, increased prices, obsolete inventory, stockpiling of inventory, or an overstatement of inventory. Examining purchasing records or recounting inventory could help determine if fraud is being perpetrated.}

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

False {Horizontal analysis is a more direct method of focusing on changes.}

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

False {Normally, multiple indicators or red flags are required to determine that a specific scheme is occurring.}

Photocopies are always preferable to original documents as evidence.

False {Original documents are always preferable to photocopies as documentary evidence.}

According to Benford's Law, the first digit of natural sets of numbers will begin with a 9 more often than with an 8.

False {The first digit of random data sets begins with a 1 more often than a 2, a 2 more often than a 3, and so on.}

The formula to calculate funds from unknown sources is:

a. Assets - Liabilities - Prior Year's Net Worth + Living Expenses - Funds from Known Sources.

Which of the following reactions frequently involves appearing temporarily stunned, insisting there is some mistake, or not comprehending what has been said?

Denial Denial takes many forms: People appear temporarily stunned or dazed, refuse to accept new information, insist that there is a mistake, or fail to comprehend what has been said.

Unusual patterns always indicate the existence of fraud.

False

Checks are excellent sources of physical evidence.

False Checks are documentary evidence.

Counties and other local agencies that contain records are usually not very useful in fraud investigation.

False Counties and other local agencies contain records that are among the most useful in fraud investigations, including property records and records containing personal information.

Fraud reports should only list findings that do not negatively impact the company.

False Fraud reports should list all findings. The goal is to state what happened, regardless of the outcome.

Paper-and-pencil honesty tests are most frequently used to determine whether someone has committed a crime.

False Many honesty tests are not used to determine whether someone has committed a crime but rather what their level of honesty is.

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.

False Net worth calculations would not be useful at this point, because they would not shed light on the validity of Bill's claim of an inheritance. Fraud perpetrators often justify their extravagant lifestyles by claiming to have inherited money. Such claims can be validated or dismissed from information contained in wills, which become public information upon the death of the testator through a legal process called probate. Therefore, a visit to the county courthouse would provide access to a copy of Uncle Eddie's will, containing information about beneficiaries and the amounts of bequests. The most difficult challenge may be finding out Uncle Eddie's full name and the state and county in which he lived. This information could be discovered by interviewing Bill's known relatives or by searching genealogical databases. You might conduct a death notice or obituary search in a periodicals database, such as LexisNexis, National Automated Accounting Research System (NAARS), etc. The company's personnel records also may contain information that reveals the names of Bill's parents. If Eddie were a maternal uncle, Bill's parents' marriage license at the county clerk's office would reveal his mother's maiden name, which is probably also Eddie's last name. Finally, Bill claims that all of Eddie's nephews received a portion of the inheritance. You may find out if Bill's brothers' lifestyles have changed as dramatically as his.

Perpetrators usually save what they steal.

False Perpetrators rarely save what they steal; rather, they usually spend their ill-gotten gains.

"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.

False {All three elements of fraud—pressure, opportunity, and rationalization—are present. Joe had several financial pressures: He and his wife just had a fourth child; they had just purchased a new home; and his income decreased due to a severe drop in commissions earned. His opportunity arose from the fact that the company had poor internal controls over petty cash. Shortages were usually written off. Joe's rationalizations could have been that his thefts were only temporary; the company owed him more money; or he worked hard and deserved the money.}

You are having lunch with another student. During the course of your conversation, you tell your friend about your new fraud examination class. After you explain the devastating impact of fraud on businesses today, she questions how people can commit so much fraud given the advances in technology over the past several years. Advances in technology have resulted in a significant reduction in the size and frequency of frauds in recent years.

False {Although advances in technology have helped to prevent and detect some fraud, these advances also have opened up new ways for perpetrators to commit fraud that before were unthinkable. Computers, the Internet, and complex accounting systems have made it so easy that perpetrators need only make a telephone call, manipulate a computer program, or press a key on the keyboard to commit fraud. Because physical possession of stolen property is no longer required and because it is just as easy to program a computer to embezzle $1 million as it is $1,000, the size and number of frauds have increased tremendously.}

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.

False {Although fraud could be occurring, there is no conclusive proof. Several fraud symptoms do exist, but all of these symptoms could have other possible explanations. For example, the missing receiving documents may simply have been misfiled. It appears that the company did not have an accountant before Peter, and the person handling the books previously may have made errors causing the general ledger to be out of balance. The customer complaints could be unfounded or based on errors in billing. John's lifestyle may be funded by an inheritance, other business interests, or by investments.}

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.

False {Benford's Law accurately predicts for many kinds of financial data sets that the digits of each group of numbers in a set of naturally occurring numbers will conform to certain distribution patterns. Benford's Law works with numbers of similar items with no predetermined pattern, but it does not work with numbers such as personal ID numbers or lists where the numbers have a built-in minimum or predetermined pattern.}

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.

False {Descriptive fraud research has shown that legal action is taken in less than half of all cases involving frauds committed against organizations. Prior to the policy change regarding fraud committed within the Fortune 500 company, employee fraud was not seen as a serious issue, and prosecutions were unlikely. The general message was that nothing serious will happen to you if you commit fraud (fraud was acceptable), and so it proliferated. But by creating a policy that would essentially prosecute everyone involved in fraud (minimizing these bad-news reports to the CEO), it was clear that fraud would not be tolerated. As a result, fraud within the organization decreased.}

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.

False {If fraud is not present in the sample, you cannot know for sure whether fraud exists in the population. You would need to examine all checks to be 100 percent sure that fraud does not exist. Based on your sample size, you can state that, at a certain confidence level, the probability of fraud is not more than a certain percent. If you want to be more confident or reduce the probability of fraud, you must take a larger sample.}

You are a fraud examiner who has been hired by Bellevue Company to carry out an investigation. Bellevue is a beverage company that has experienced increased shipments of beverages but no increase in revenue. Management suspects that inventory is being shipped to unknown places or is being stolen. You have decided to use invigilation to help you determine if inventory is being stolen or shipped to unknown locations. After a period of keeping detailed shipping records, you would establish strict permanent controls at the beginning of the invigilation period to eliminate the possibility of fraud in the shipping process.

False {In this case, it may be appropriate to use some form of invigilation. You could begin by identifying possible suspects who have the opportunity to embezzle. Then, after a period of keeping detailed shipping records, you would establish temporary controls that eliminate the possibility of fraud for a period of two to four weeks, referred to as the invigilation period. As we have already indicated, opportunity is one of the three conditions that must exist before fraud can occur. When controls are made so strict that opportunities to commit fraud are eliminated, a fraud-free profile can be established. After the invigilation period, the controls would be lifted and detailed records would be maintained during the post-invigilation period. Then, you would compare shipping records before, during, and after the invigilation. If there are questionable differences, you should consider other investigative methods, such as using the net worth method.}

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.

False {Investigations should usually begin by using techniques that will not arouse suspicion and, most importantly, will not wrongly incriminate innocent people. Therefore, initially, as few people as possible should be involved, words such as "investigation" should be avoided ("audit" and "inquiry" are more appropriate), and the investigation should be started by using techniques that will not likely be recognized. As the inquiry proceeds, investigative methods will work inward toward the prime suspect(s), until finally he or she is interviewed. By waiting to interview the prime suspect(s), you can gather sufficient evidence to conduct a powerful, directed interview without giving your case away prematurely. [Figure 7.2 provides an illustration of this process.]}

Bob, who works as a credit manager for a large bank, has a reputation for being a very hard worker. His convenient downtown apartment is located near the bank, which allows him to work undisturbed late into the night. Everyone knows that Bob loves his job because he has been with the bank for many years and hardly ever takes a vacation. He is a very strict credit manager and has the reputation for asking very difficult questions to loan applicants before approving any credit. Nancy, Bob's director, noticed that Bob had not taken a mandatory week-long vacation for a number of years. Nancy does not need to be concerned about Bob's failure to take vacation time, given Bob's history of being tough on approving credit for the bank.

False {Nancy should be concerned. First, the bank has a mandatory one-week-long vacation policy. Bob should not be allowed to be an exception. Bob also fits many of the demographics for a fraud perpetrator: He has a lot of experience with the bank and is in a trusted position; he often works late into the night all by himself; everyone trusts him; and he likes to give the impression that he is tough on credit. Nancy should not assume that Bob has committed fraud; however, she should demand that Bob take a vacation, and she should be alert for additional signs of fraud.}

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.

False {Senior management should develop a code of ethics or conduct and communicate it throughout the company. Every employee should be required to read and sign the code each year.}

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.

False {The potential for fraud is high in this situation primarily due to a serious lack of segregation of duties. When one person is responsible for collecting and depositing cash and adjusting account balances, fraud can easily occur. One solution might be to segregate Joanne's duties by having a different employee open incoming cash receipts and prepare a listing of the receipts. Joanne would use the list to update customer account receivable balances. A third employee should make bank deposits. For small companies, achieving adequate segregation of duties is not always possible due to the expense of adding employees. In that case, the owner can assume some duties, such as opening cash receipts, making bank deposits, and/or opening and reconciling bank statements.}

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.

False {This is a real investment scam that was perpetrated on an American university campus a few years ago. Before it was stopped, hundreds of students had invested hundreds of thousands of dollars. Many warning signs would suggest this "investment opportunity" is a scam, including: The promised rate of 44 percent is too high and unreasonable. If it seems too good to be true, it probably is. This promised rate of return does not make business sense. The nature of the investment is complicated and can't be easily understood. Making the investment seem complicated is one way perpetrators try to conceal their frauds. You are excited about the investment because several of your friends have invested. Just because they didn't exercise due care doesn't mean you should also do something stupid.}

The z-score calculation is the best way to stratify data.

False {Z-scores are useful in identifying indicators. They are not normally associated with stratification.}

You're telling your boyfriend about your classes for the new semester. He is very interested and intrigued by the idea of becoming a fraud detective, but he wants to know whether fraud detectives will have job security and the type of work that is available. Career opportunities in fraud examination and forensic accounting are available primarily through employment with federal or state government agencies.

False {As the number of frauds and amounts of fraud losses increase, so do the opportunities for successful fraud-fighting careers. Many believe that fraud examination and forensic accounting will be among the fastest-growing and most rewarding careers in the future. Government fraud-fighters, consultant fraud-fighters, corporate employee fraud-fighters, and defense and plaintiff lawyers are just a few of the possible careers related to fraud prevention and detection.}

Fraud detection is an important element of minimizing losses from fraud, and it is important that frauds be detected as early as possible. Early detection is important because, in most cases, losses are greater at the beginning of a fraud and decrease significantly over time.

False {Because most frauds increase dramatically over time, it is extremely important that when frauds occur, they be detected early. In most cases, the fraud losses that an organization experiences in the final few months of a fraud are higher than the total losses in the first few years of the fraud.}

The following actual fraud occurred in a communications company. What Ruth Mishkin did in her spare time didn't concern the Boca Raton, Florida, public relations firm where she worked very much. "We thought she was just playing cards with the girls," says Ray Biagiotti, president of Communications Group, the firm that had employed her for nine years. She had become such a trusted employee that her bosses had put her in charge of paying bills, balancing bank accounts, and handling other cash management chores. They didn't realize their mistake until Ruth took a sick leave, and they discovered she had been pocketing company funds for years. The money had helped stoke a gambling habit that took the 60-year-old widow on junkets to casinos in the Bahamas, Monte Carlo, and Las Vegas. In all, the company claims she stole about $320,000. Ruth pleaded guilty to one count of grand theft and four counts of check forgery. She was placed on 10 years' probation and ordered to attend meetings of a chapter of Gamblers Anonymous, the national self-help group. Ruth's gambling addiction created a perceived opportunity for her to commit fraud.

False {Ruth's opportunity to commit fraud stemmed from the fact that she was a trusted employee who was in charge of paying bills, balancing bank accounts, and handling cash management. This lack of segregation of duties provided an easy opportunity to commit fraud. Ruth's gambling addiction created motivation to commit fraud so that she would have additional funds with which to gamble. When people are addicted to a vice such as gambling, they feel tremendous pressure. With so much pressure, it takes only a little rationalization and a small opportunity for someone to perpetrate a fraud.}

From a symptom perspective, which is true of fraud?

Fraud symptoms are often found in very few transactions. {Auditors have analyzed data to detect fraud for many decades. The personal computer—particularly with its spreadsheet programs and database management systems—provided auditors with tools to analyze both large and small data sets. However, it is important to realize that the methods auditors used (and still often use) were based on traditional audit procedures like statistical sampling, spot checking, and control totals. Even though the tools became electronic, many auditors still performed analysis techniques tailored to manual checking methods. Unfortunately, these traditional methods were more suited to finding errors than fraud.;; Fraud is different: It is the intentional circumvention of controls by intelligent human beings. Perpetrators cover their tracks by creating false documents or changing records in database systems. Evidence of fraud may be found in very few transactions— sometimes only one or two. Rather than being spread throughout the data set, fraudulent symptoms are found in single cases or limited areas of the data set. Detecting a fraud is like finding the proverbial "needle in the haystack."}

In October 2014, the following case was heard in New Jersey. A former optometrist was sentenced to seven years in state prison for conspiracy, theft by deception, falsifying records, and falsification of records relating to medical care, as part of a massive health insurance fraud. In addition to his prison sentence, the optometrist was ordered to pay a criminal insurance fraud fine of $100,000 and restitution of $97,975. The state is also in the process of seeking an additional $810,000 in civil insurance fraud penalties. The optometrist was found guilty of false insurance billing for providing eyeglasses and routine eye exams at no cost or at reduced cost and making up the difference by billing insurance carriers for services not rendered to patients. The optometrist also had his office staff create approximately 997 false patient records and charts and falsely bill insurance carriers for prescribed optometric services that were not rendered to his patients. He would also bill insurance companies for optometric treatments and tests for ocular conditions that patients did not actually suffer. The optometrist was also charged with falsifying patient records and charts. Which of the following factors provided the optometrist with an opportunity to commit fraud?

Inability to judge the quality of performance of the optometrist. {The major fraud opportunity in this case was the inability to judge the quality of performance of the optometrist. Although the insurance companies clearly could have said that the services rendered by the optometrist were not consistent with what they were paying for, they never had reason to believe they needed to assess the optometrist's services. Another factor was the lack of access to information. The insurance companies had no way of knowing that many of the services being billed for were not actually being performed or that many of the patients did not even exist.}

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?

Lack of clear organizational responsibilities. {A lack of clear organizational responsibilities is one factor that has been associated with high levels of fraud and that detracts from a positive work environment. Other factors include: a top management that does not care or pay attention to appropriate behavior; feedback or lack of recognition of job performance; perceived inequities in an organization; autocratic rather than participative management; low organizational loyalty; unreasonable budget expectations; unrealistically low pay; poor training and promotional opportunities; high turnover and/or absenteeism; lack of clear organizational responsibilities; and poor communication practices within the organization. In addition, a negative work environment may result from an organization's focusing on short-term results, particularly quarterly earnings per share, rather than emphasizing long-term market share.}

Helen Weeks has worked for Bonne Consulting Group (BCG) as the executive secretary in the administrative department for nearly 10 years. Her apparent integrity and dedication to her work has quickly earned her a reputation as an outstanding employee and has resulted in increased responsibilities. Her present responsibilities include making arrangements for outside feasibility studies, maintaining client files, working with outside marketing consultants, initiating the payment process, and notifying the accounting department of all openings or closings of vendor accounts. During Helen's first five years of employment, BCG subcontracted all of its feasibility and marketing studies through Jackson & Co. This relationship was subsequently terminated because Jackson & Co. merged with a larger, more expensive consulting group. At the time of termination, Helen and her supervisor were forced to select a new firm to conduct BCG's market research. However, Helen never informed the accounting department that the Jackson & Co. account had been closed. Since her supervisor allowed Helen to sign the payment voucher for services rendered, Helen was able to continue to process checks made payable to Jackson's account. Because her supervisor completely trusted her, he allowed her to sign for all voucher payments less than $10,000. The accounting department continued to process the payments, and Helen would take responsibility for distributing the payments. Helen opened a bank account in a nearby city under the name of Jackson & Co., where she would make the deposit. She paid all of her personal expenses out of this account. Assume that you have recently been hired by BCG to help detect and prevent fraud. You begin by assessing the effectiveness of the company's internal control framework. 1. Which of the following factors likely enabled Helen to perpetrate the fraud?

Lack of effective internal control activities or procedures. {The company lacks good control activities or procedures. Mainly, it lacks segregation of duties, a good system of authorizations, independent checks, physical safeguards, and documents or records. Helen, a trusted employee, was allowed to sign the payment vouchers for services rendered, and she was also allowed to sign for all voucher payments less than $10,000. To perpetrate the fraud, all she had to do was continue to process the checks to the terminated vendor and sign the vouchers.}

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?

Pressure, opportunity, and rationalization. {All three elements of fraud are present in this case—pressure, opportunity, and rationalization. The employee was motivated to commit fraud by financial pressures. Although the owner of the store maintains close relationships with employees, controls are minimal, and should an employee choose to be dishonest (as this example illustrates), he or she would have ample opportunity to steal. The third ingredient for fraud to occur is rationalization, which is indicated in this case by the employee's expressed intent to repay the stolen funds and by his contention that the money was for his family, not for himself.}

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?

Segregation of duties {Because there is no segregation of duties, Nancy has the opportunity to keep the cash she collects from the customers and write off the account when the books show that all funds have not been collected. The critical duties of writing checks, making bank deposits, and reconciling bank statements should be segregated, and dual custody control should be implemented. Nancy should not be collecting, recording, and depositing payments by herself. An additional employee may need to be hired. Commonly, an outsourced billing office is used as a check and balance. Each of these activities can be given dual custody by both Nancy and another person. Although this control can often be expensive, it may be worth it to the doctor. The doctor should analyze the risk/benefits of hiring another person.}

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?

Surveillance {Surveillance would be the proper method to use in this case. Because this case involves workers' compensation fraud, it must be shown that the man is not disabled. He was lying to the government about his physical condition and making money on the side. To obtain evidence of this type of fraud, surveillance or some other covert method must be used. In conducting surveillance, you must make sure that you do not invade a person's reasonable expectation of privacy under the Fourth Amendment to the Constitution.}

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?

The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud. {Fraud occurs when individuals intentionally cheat or deceive others to their advantage. In this case, Bob is committing a fraud. Regardless of the magnitude of the charges, he is intentionally charging nonbusiness lunches to his employer. This is also known as employee fraud or occupational fraud. Bob's actions fall into the category of misappropriation of assets, i.e., theft or misuse of the employer's resources. As an employee, you have an ethical responsibility to your employer to report Bob's fraudulent behavior. Fortunately, in this case nothing has been done that cannot be corrected easily. Because Bob is justifying his behavior by saying the recent memo pertaining to meal expenses does not apply to him because he is an intern, you should try to help Bob see the error of his logic and encourage him to correct the improper credit card charges. If Bob is unwilling to change his behavior, the appropriate superior probably should be notified.}

Bates numbers are identifying numbers used by attorneys involved in litigation to track all documents.

True Bates numbers are used by attorneys involved in litigation to track all documents.

Conversion is the third element of the fraud investigation triangle.

True Conversion is the third element of the fraud triangle plus inquiry approach to investigations.

Even if photocopies of original documents are allowed to be introduced as evidence in a court of law, they are still considered secondary evidence.

True Depending on the jurisdiction, only four situations usually permit the introduction of photocopies, which are considered secondary evidence, in a court of law.

A canceled check typically shows the account number of the person who presented the check, the teller who processed the check, and the sequence number of the transaction.

True If you were investigating a kickback or a forgery scheme, this check would direct you to the teller who processed the transaction and who may remember valuable information about the suspect. In addition, a check would allow you to complete a paper trail of the entire transaction. In e-commerce situations, XML documents and other files provide similar information.

Before financial institutions can sell or disclose confidential customer information, they must provide customers with the opportunity to "opt out" from information sharing.

True Using false pretenses is illegal under the new act, but it does allow banks and other financial institutions to share customer information if they disclose it to customers. They must provide customers the opportunity to "opt out" of information sharing.

When people convert stolen cash by entering into financial transactions, such as buying assets, they usually leave tracks that investigators can follow.

True When people enter into financial transactions, such as buying assets, they leave tracks or "financial footprints." Even in the so-called secrecy districts, like some island-based countries, financial footprints can be found because transactions involve many parties, countries, and financial institutions.

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.

True {A periodic letter to vendors that explains an organization's policy of not allowing employees to accept gifts or gratuities helps vendors understand whether buyers and sellers are acting in accordance with the organization's rules. Such letters clarify expectations, which is very important in preventing fraud. Many frauds have been uncovered when, after such a letter was sent, vendors expressed concern about their buying or selling relationships.}

A group of fraud examiners is coordinating an investigation at a local law firm. Several lawyers at the firm are suspected of overbilling clients, possibly creating fake client accounts, and then charging the firm for services "performed" for these fake clients. The fraud examiners begin preparing for the investigation by creating a vulnerability chart. The advantage of using a vulnerability chart is that it forces investigators to explicitly consider all aspects of a fraud and consider who was most likely to be the perpetrator, if there really was one.

True {A vulnerability chart is a chart that helps coordinate the various elements of the possible fraud. It lists missing assets, individuals with theft opportunities, theft investigative methods, concealment possibilities, conversion possibilities, symptoms observed, pressures of possible perpetrators, rationalization of perpetrators, and key internal controls that had to be compromised for the theft to occur. By listing every aspect relating to a specific fraud, examiners can have a clearer understanding of where to begin and how to conduct an investigation.}

Alexia Jones is a worker at a local 24-hour pharmacy. Alexia works the night shift and is the only worker. Because management is cost-conscious and business is slow at night, Alexia has been given the responsibility to do the accounting from the previous day. Alexia has two children, and her husband does not work. Alexia has strong pressure to provide well for her family. Assume that you were recently hired by the pharmacy as a business consultant to evaluate the internal controls and the risk of fraud. Reference to the fraud scale would indicate that Alexia poses a high risk of fraud pharmacy to the pharmacy.

True {Alexia has great pressure to provide well for her family. Alexia also has the opportunity to commit fraud, as she has the responsibility for accounting and is the only worker. She could easily steal cash and manipulate the accounting records. Although we don't know if Alexia's rationalization is high or low, we do know that the opportunity and pressure are high. By understanding the fraud scale, we can determine that if pressure and opportunity are high, it doesn't take too much rationalization for someone to commit fraud. Therefore, the risk for fraud is high in this case.}

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.

True {Detection and investigation are steps that are taken once fraud has occurred. At this point, much of the damage has already been sustained—victims' assets are stolen, victims must incur legal fees, lost time, negative public exposure, and other adverse consequences. Investigation of fraud is typically very expensive. Organizations and individuals who have proactive fraud prevention measures generally find that those measures pay big dividends.}

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.

True {Fraud investigation is a complex and sensitive matter. If investigations are improperly conducted, the reputations of innocent individuals can be irreparably damaged, guilty parties can go undetected and be free to repeat the act, and the offended entity may not have information to use in preventing and detecting similar incidents or in recovering damages. Therefore, it is important that fraud investigations not be conducted without predication.}

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.

True {Fraudulent (intentional) changes in data occur when the fraud occurs. With some frauds, this may be at regular intervals throughout the dataset, and discovery sampling tends to be effective in such situations. With other frauds, the fraudulent records may be in a limited number of transactions that are not representative of the population, or the fraud may occur at irregular intervals. Statistical sampling can be risky in these situations, but it can be the only method available in tests like sending confirmation letters to third parties. Because of sampling risks involved in discovery sampling, full population analysis should be used wherever possible. The use of computers to automate full population testing is a primary method of eliminating sampling risk. Discovery sampling is an important method in the investigator's toolkit but be sure to evaluate when and where it is most appropriate and useful.}

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.

True {Invigilation was an effective theft act investigation method in the oil theft case. When the employees knew they were being monitored, they shied away from their previous dishonest activity. But when the monitoring was over, these same employees resumed their fraud. By comparing the detailed records from the three time periods (before, during, and after the invigilation period), the investigators were able to see that fraud was occurring.}

ABC Company is a relatively small dry-cleaning operation that has a very steady level of business. Since the company hired a new employee, however, cash inflows have decreased and the amount of promotional coupon redemptions have increased dramatically. The owner of the company has been very impressed with this new employee, but has suspicions regarding her cashiering practices. When comparing cash sales to check and credit card sales, the owner noted that the coupon redemption rate was dramatically higher for cash sales. The owner does not want to wrongly accuse the employee if she is innocent, but does want to find out if fraud is occurring. The owner calls you as an expert on fraud and asks you to recommend a reliable way of gathering evidence that could determine if fraud is occurring. Surveillance and invigilation are two possible investigative methods that could be used to gather evidence in this case.

True {Surveillance and invigilation are both theft act investigation methods that could be applied in this case. Surveillance could be conducted by setting up a hidden camera above the cash register. The camera would enable the owner to monitor the actions of all employees at the register. The owner would want to take into consideration potential privacy issues, however. Invigilation could be accomplished by providing an excuse to monitor the employee's actions closely, thus taking away his or her opportunity to commit fraud. The owner would keep close track of the cash flows and coupon redemptions before, during, and after the invigilation period.}

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.

True {Tips and complaints are categorized as fraud symptoms rather than actual evidence of fraud because many tips and complaints turn out to be unjustified. It is often difficult to know what motivates a person to complain or provide a tip. Customers, for example, may complain because they feel they are being taken advantage of. Employee tips may be motivated by malice, personal problems, or jealousy. Tips from spouses and friends may be motivated by anger, divorce, or blackmail. Whenever tips or complaints are received, they must be treated with care and considered only as fraud symptoms. Individuals should always be considered innocent until proven guilty and should not be unjustly suspected or indicted.}

A bookkeeper in a $3 million retail company had earned the trust of her supervisor, so various functions normally reserved for management were assigned to her, including the authority to authorize and issue customer refunds. She proceeded to issue refunds to nonexistent customers and created documents with false names and addresses. She adjusted the accounting records and stole about $15,000 cash. She was caught when an auditor sent routine confirmations to customers on a mailing list and received an excessive number of "return-to-sender" replies. The investigation disclosed a telling pattern. The bookkeeper initially denied accusations but admitted the crime upon presentation of the evidence. You are a lawyer for this retail company, and your client has asked your advice about whether to prosecute the bookkeeper criminally, civilly, or both. When employee fraud is detected, the employer company should, if possible, pursue both criminal prosecution and a civil lawsuit.

True {When fraud is detected, companies should prosecute, if possible, in both criminal and civil courts. By proceeding in a civil suit, the company can try to recover some of the money lost from the fraud. By pursuing a criminal prosecution, the company can ensure that when other companies hire the perpetrator, those companies will know that the employee has committed fraud in the past and will be able to prevent the prospective employee from being in a position that provides the opportunity to commit fraud again. Firms do not often pursue both civil and criminal remedies, and sometimes do neither because of litigation costs, time involved, or the desire to avoid negative press.}

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?

Verify all information on each applicant's resume and/or application. {Before hiring an applicant for any position, the employer should verify all information on the applicant's résumé and/or application. The verification should be complete and conducted by an employee who is thorough and persistent in this important procedure. In addition, the employer should require all applicants to certify that the information on their application and/or résumé is accurate. Also, the employer should train those involved in the hiring process to conduct thorough and skillful interviews.}

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. {Symptoms of fraud can be separated into six groups: (1) accounting anomalies, (2) internal control weaknesses, (3) analytical anomalies, (4) extravagant lifestyle, (5) unusual behavior, and (6) tips and complaints. This case does not include any information related to the first three groups, but there are clear indications that James has an extravagant lifestyle as indicated by his cars, home, and furnishings. Further, his extravagant lifestyle has probably created the other financial problems, including overdue bills, pending lawsuits, and James's refusal to update equipment. James's anger, which led to firing an employee impulsively without adequate cause, is a behavioral symptom of possible fraud. Finally, while customer complaints are common, they can be possible fraud symptoms, especially if customers do not believe their accounts or charges appear appropriate.}

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. {Balance sheets and income statements are converted from position and period statements to change statements in four ways: (1) comparing account balances in the statements from one period to the next, (2) calculating key ratios and comparing them from period to period, (3) performing vertical analysis, and (4) performing horizontal analysis. The first approach compares numbers in the statement from one period to the next.}

Which of the following is usually the best way to obtain documentary evidence?

a. Computer-based queries of full-population accounting and other databases. {The best way to obtain documentary evidence is through computer-based queries of accounting and other databases. As discussed previously, these methods allow full-population analysis and are able to pinpoint evidential records within huge record populations.}

If fraud is not present in the sample, you cannot know for sure whether fraud exists in the population. You would need to examine all checks to be 100 percent sure that fraud does not exist. Based on your sample size, you can state that, at a certain confidence level, the probability of fraud is not more than a certain percent. If you want to be more confident or reduce the probability of fraud, you must take a larger sample.

a. Documentary evidence generally is not considered by fraud examiners to be as persuasive or reliable as eyewitness testimony. {When faced with a choice between an eyewitness and a good document as evidence, most fraud experts choose the document. Unlike witnesses, documents do not forget, they cannot be cross-examined or confused by attorneys, they cannot commit perjury, and they never tell inconsistent stories on two different occasions. In today's interconnected financial world, it is nearly impossible to transfer money without creating documents along the process. Documents are almost always available to the fraud investigator who knows where to find them because most fraud involves money at some point.}

Which of the following is NOT a question when identifying possible frauds that could exist?

a. How do competitors' processes compare? {Fraud examiners should ask questions such as the following: Who are the key players in the business? What types of employees, vendors, or contractors are involved in business transactions? How do insiders and outsiders interact? What types of fraud have occurred or been suspected in the past? What types of fraud could be committed against the company or on behalf of the company? How could employees or management acting alone commit fraud? How could vendors or customers acting alone commit fraud? How could vendors or customers working in collusion with employees commit fraud?}

Which of the following organizations maintain public information that can be accessed in record searches?

a. Local agencies. b. State agencies. c. Federal agencies. {Many federal, state, and local agencies maintain public records in accordance with various laws. Much of this information can be accessed by anyone who requests it, but some of it is protected under privacy laws that prevent disclosure to the public.}

An advantage of using ODBC to import data into a data warehouse is that:

a. ODBC automatically retrieves column names and types from the database. {Open Database Connectivity (ODBC) is a connector between the front-end analysis and the back-end corporate database. It is usually the best way to retrieve data for analysis because (1) it can retrieve data in real time, (2) it allows use of the powerful SQL language for searching and filtering, (3) it allows repeated pulls for iterative analysis, and (4) it retrieves metadata like column types and relationships directly.}

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. {Sampling risk is the risk that the sample was not representative of the population. To reduce sampling risk, the investigator can increase the sample size or use a random number generator to select the items to be examined. As stated previously, sampling risk can be significant when looking for fraud because fraud is often conducted in just a few transactions.}

Nonverbal cues of deception include all of the following except:

a. Repetition of the question. The most reliable cues in this area show that, relative to truth-tellers, liars' pupils tend to dilate more as they lie, they show increased overall nervousness, their vocal tension increases, and the pitch of their voice increases. One interesting nonverbal cue that is also associated with this area is that liars tend to raise their chin more than truth-tellers, perhaps in an effort to display confidence. Interestingly, people who are lying tend to be less engaging in their verbal and vocal emphasis as they relay their story. Similarly, their use of illustrators or hand movements decreases. Additionally, both their eye contact and foot and leg movements tend to decrease as well.

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. {Periodically, XYZ's management should have asked Peter Jones to take care of Miller's books while she was required to take vacation time. This would have helped detect the fraud at its early stages. Additionally, it might have prevented the fraud, because Mary would have known that someone else would be checking her work. The management of this company seems too relaxed. They did not provide for an independent check of the accounting records and cash. They created an easy opportunity for Mary to embezzle. There was an inadequate segregation of duties in the company. Peter Jones should have been assigned to do some of Mary's duties so that there was a reduced opportunity for embezzlement. The company should have paid more attention to internal controls, both preventive and detective. Mary had no accountability to anyone, and no one ever checked her work. Consistent communication could have been one of the effective ways of reducing the fraud. This would have helped identify and remind the employees of what is expected of them by the company. They could have also required a written and signed statement that stated the possible punishment for committing fraudulent acts.}

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. {You can detect fraud in the purchasing department by searching for employees with the same address or telephone numbers as vendors. You can also sort purchases by vendor and purchase volume and observe if the total purchases for any one vendor increases or decreases at an unexpected rate. Additionally, you could chart price increases of different products over time and the number of each unit that is purchased over time.}

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. Segregation of duties. {There was a serious lack of segregation of duties and independent checks as well as too much supervisory authority in one person in this bank. The bank placed far too much trust and supervisory authority in Robert. If the bank had designated separate supervisors to handle dormant accounts and customer complaints, or even if it had required Robert to take mandatory vacations or rotated him from time to time (so that other employees would periodically deal with customer complaints), the fraud could not have continued for so long or become so substantial.}

Documentary evidence such as private tax returns can usually be obtained only by:

a. Subpoena. b. Search warrant. c. Voluntary consent.

The most obvious disadvantage of the data-driven approach is:

b. High cost. {The primary advantage of the data-driven approach is the investigator takes charge of the fraud investigation process. Instead of waiting for tips or other indicators to become egregious enough to show on their own, the data-driven approach can highlight frauds while they are small. Instead of simply throwing a "fishing line" into the water and waiting for a bite, this approach allows the investigator to dive in and directly target potential frauds.}

Which of the following is a characteristic of a good interview?

b. Make the interview as concise as possible. Good interviews share common characteristics. Interviews should be of sufficient length and depth to uncover relevant facts. A good interview focuses on pertinent information and quickly steers the topic away from irrelevant information.

Each of the following is a clue that an interviewee is dishonest except:

b. Upon repeated accusations, a dishonest person's denials become more vehement. The theory that best explains the research on cues to deception suggests that liars' attempts to appear honest will lead them to exhibit behaviors in five areas: (1) increased tension, (2) less positive and pleasant interactions, (3) less forthcoming responses, (4) less compelling tales and, as already mentioned, (5) fewer ordinary imperfections. People who are concerned that someone may catch them lying have been shown to exhibit less ordinary imperfections. Dishonest people are more likely to be very specific in their denials. People who are lying tend to be less engaging in their verbal and vocal emphasis as they relay their story. Similarly, their use of illustrators or hand movements decreases. Additionally, both their eye contact and foot and leg movements tend to decrease as well.

People in the rationalization stage of reaction to a fraud:

b. Want to give the suspect one more chance. People in the rationalization stage attempt to justify the dishonest act and/or to minimize the crime. During this stage, managers believe they understand why the crime was committed and often feel that the perpetrator's motivation was almost justifiable.

Which of the following is the typical sequence of reactions to a crisis?

c. Denial, anger, rationalization, depression, acceptance.

Planning for interviews should not involve:

c. Judging the guilt of the suspect based on available documents. When you conduct interviews, follow a plan or outline to make sure that you meet your objectives. Proper planning allows you to get the most from the interview and to minimize the time spent.;; Effective planning involves gathering, in advance, as many facts as possible about the offense and the interviewee and establishing a location and time for the interview that will be conducive to success.

The net worth method of analyzing financial information can help to determine:

c. The amount of embezzled funds. {Once investigators compile information about spending and lifestyle from public records and other sources, they usually need to determine the extent of the stolen funds. The most common way to make such determinations is through net worth calculations. Essentially, the net worth method uses the following formula, which is based on a person's assets (things owned), liabilities (debts), living expenses, and income.; The net worth method for determining amounts embezzled has gained favor among fraud investigators in recent years. The FBI regularly uses this method, as does the DEA, which uses it to determine whether suspected narcotics traffickers have income from illegal drug sales. The IRS uses it to estimate unreported income in tax fraud cases. Because only assets and reductions in liabilities that can be discovered enter into the calculation, net worth calculations tend to give a conservative estimate of stolen funds.}

Although most perpetrators begin their thefts because of a perceived critical need, they usually continue to embezzle in order to:

d. Improve their lifestyle. {Although most perpetrators begin their thefts because of a perceived critical need, they almost always continue to embezzle after their immediate need is met.}

Which of the following is not a benefit of statistical sampling?

d. It allows auditors to be certain that fraud does not exist in a population. {Discovery sampling is the easiest of all statistical sampling methods to understand and implement, especially since most audit software applications like ACL and IDEA have functions that perform it. Investigators should never forget that even with discovery sampling, they can never be certain that fraud does not exist in a population of checks. Although discovery sampling does allow 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. Another risk can also lead to the wrong conclusion. In this instance, the auditor might examine a fraudulent check and not recognize it; this is known as non-sampling. Discovery sampling is widely used for both audit and fraud discovery purposes. It is very effective at finding errors and control weaknesses because these problems often occur throughout a dataset. Since they are unintentional, they usually occur at regular intervals over time—for example, whenever a control breaks down. Statistical samples are usually fairly representative of the population. Because of sampling risks involved in discovery sampling, full population analysis should be used wherever possible.}

Programs like CaseMap, CaseCentral, ZANTAZ, Ringtail, and DatiCon are examples of:

d. Software packages used to index and store evidence. {The FBI has one of the most sophisticated and advanced document examination laboratories in the world. The organization has been digitizing documents for many years, but it made a significant push in the early 2000s. That effort continues today. Like all information technology efforts, the underlying technology has changed and adapted as it has matured and as needs have changed. One of the most recent statements on the repository was in 2011, when the FBI stated that its Bureau Investigative Document Management and Analysis System (BIDMAS) used a commercial solution to scan and import documents into a central location.;; Some of the more popular programs used to index and store evidence are CaseMap and MasterFile, but many exist. Web searches for "case management software" and "litigation support software" will reveal current products with many different features.}

A database of criminal records maintained by the FBI is:

e. Both the III and the NCIC. {The major database maintained by the FBI is the National Crime Information Center (NCIC). The NCIC contains information on stolen vehicles, license plates, securities, boats, and planes; stolen and missing firearms; missing persons; and individuals who are wanted on outstanding warrants. The FBI also maintains the Interstate Identification Index (III), which is an outgrowth of the NCIC and benefits state and local law enforcement agencies. The III retains arrest and criminal records on a nationwide basis.}