Fraud 6-16 final

An altered or forged receipt can indicate what type of expense reimbursement scheme? a. Mischaracterized expense reimbursements -1- b. Fictitious expense reimbursements c. Overstated expense reimbursements d. All of the above

All of the above

During an interview, when an interviewee repeatedly fiddles with a pen or picks lint from her clothing, she is giving non-verbal clues called:

Manipulators

Permitting employees to book their own travel using their own credit card is an effective internal control over expense reimbursement schemes. a. True b. False

False

27. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. How was he caught? a. He purchased one too many high-ticket items for his son and this was brought to the attention of the CEO. b. A new president was hired and he found Chesterly out while reviewing the accounting records. c. Chesterly became ill and the receipts for personal items were found while he was out sick. d. The internal auditors found Chesterly out during an audit of his cost center's expenses.

A new president was hired and he found Chesterly out while reviewing the accounting records.

Which of the following procedures can be used to prevent mischaracterized expense reimbursement schemes? a. A policy should be established and communicated to employees regarding what types of expenses will and will not be reimbursed. b. Employees should be required to sign their expense reports before being reimbursed. c. The internal audit department should review all expense reports under a certain dollar amount. d. None of the above

A. A policy should be established and communicated to employees regarding what types of expenses will and will not be reimbursed.

3. ______________ questions are asked if you have a reasonable cause to believe that the respondent is responsible for the fraud under investigation. a. Admission-seeking b. Assessment c. Leading d. Closing

Admission-seeking

Daisy McMillan works as the office manager for Timball and Lewis, a medium-sized law firm. One afternoon, she went to the hardware store to purchase a few maintenance items for the office. While there, she also bought her husband a hammer as a birthday present. At the register, the items, including the hammer, totaled $63. She paid for all the items together and received both a carbon copy receipt and a separate credit card receipt. Back at the office, she carefully scratched additional numbers on to the carbon copy receipt to increase the total price to $168 and turned in the altered receipt for reimbursement. Several weeks later, she turned in the credit card receipt along with another reimbursement request for the $63. What type of expense reimbursement fraud did she commit? a. Overstated expense reimbursement b. Multiple reimbursements c. Mischaracterized expense reimbursement d. All of the above

All of the above

Expense reimbursement schemes include which of the following? a. Multiple reimbursements b. Mischaracterized expenses c. Overstated expenses d. All of the above

All of the above

Which of the following methods can be used to perpetrate a fictitious expense reimbursement scheme? a. Creating counterfeit receipts b. Stealing blank receipts c. Submitting expenses that were paid by a third party d. All of the above

All of the above

Which of the following procedures can be used to detect mischaracterized expense reimbursement schemes? a. Compare the dates of claimed reimbursable business expenses to the employees' work schedules. b. Compare current expense reimbursement levels to amounts for prior years. c. Compare current expense reimbursement levels to budgeted amounts. d. All of the above

All of the above

In an admission-seeking interview, once the accused has provided a verbal confession, the interviewer should focus on obtaining:

All of the above: An estimate of the total amount of money involved A motive for the offense The names of other people who are involved

At the conclusion of an interview, closing questions should be asked for which of the following purposes?

All of the above: Reviewing key facts to ensure that they have not been misunderstood Gathering previously unknown facts Asking the respondent if he or she has been treated fairly

Generally, there is nothing illegal about accusing an innocent person of misdeeds as long as:

All of the above: The accuser has predication to believe the accused has committed an offense. The accusation is made under reasonable conditions and in private. The accuser does not take any action that is likely to make an innocent person confess.

Which of the following is not considered a red flag of a fictitious expense reimbursement scheme? a. An employee repeatedly uses the company credit card for business travel expenses. b. An employee's reimbursement requests are always for round-dollar amounts. c. An employee submits reimbursement requests that consistently fall just below the reimbursement limit. d. An employee frequently requests reimbursement for high-dollar items that he claims were paid for in cash.

An employee repeatedly uses the company credit card for business travel expenses

During an admission-seeking interview, the accused individual will likely present reasons why he or she could not have committed the offense. When this occurs, the fraud examiner should step in and diffuse these alibis by:

Any of the above: Discussing the accused's deceptions Displaying the physical evidence Discussing the testimony of other witnesses

4. Which of the following is not one of the primary purposes of asking introductory questions during an interview? a. Establishing rapport between the interviewer and the subject b. Asking sensitive questions before the subject has the ability to go on the defensive c. Observing reactions to questions d. Establishing the theme of the interview

Asking sensitive questions before the subject has the ability to go on the defensive

2. While conducting an interview, you have reason to believe that the respondent is not being truthful. What type of questions will help you establish the respondent's credibility? a. Open b. Non-leading c. Admission-seeking d. Assessment

Assessment

The question "Do you think someone around here might be justified in making a secret arrangement with one of the company's vendors?" is an example of what type of interview question?

Assessment

Which of the following question types will generally not be asked during an information-gathering interview of a neutral witness? a. Introductory b. Informational c. Assessment d. Closing

Assessment

Private employers conducting an internal investigation are generally required to give Miranda warnings before commencing an admission-seeking interview with a non-union employee.

False

Which of the following is not a red flag in a fraudulent shipment scheme? A) An increase in bad debt expense B) An unexplained decrease in the scrap account C) Unusually high levels of reorders for D) inventory items Shipments with missing sales documents

B) An unexplained decrease in the scrap account

James Turner, CFE, was called in to investigate a sales skimming case at Durant Hardware. During an admission-seeking interview of Nadia Brown, the primary suspect, James asked, "Did you just want some extra money, or did you do this because you had financial problems?" Nadia began crying and nodded yes. This small admission as a response to James' question is called a:

Benchmark admission

Register disbursement schemes are difficult to conceal because they cause the cash drawer to be out of balance with the cash register tape. a. True b. False

False

28. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. What other frauds turned up in the investigation? a. Chesterly put his girlfriend on the payroll as a ghost employee. b. Chesterly skimmed some of the cash sales. c. Chesterly falsified sales figures to collect unearned bonuses. d. Chesterly cut special deals to his customers and received kickbacks in return.

Chesterly cut special deals to his customers and received kickbacks in return.

In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements. Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. What changes to internal controls were made as a result of Lane's fraud? a. Enforcement of a new policy that business expenditures other than travel be charged to personal credit cards only b. Clarification and better enforcement of the policy that all travel be booked through the company travel agent using a designated company credit card -5- c. Enforcement of a new policy that employees submit their travel expense reports for reimbursement within five days of returning from a trip d. All of the above

Clarification and better enforcement of the policy that all travel be booked through the company travel agent using a designated company credit card

. To safeguard against expense reimbursement schemes, organizations should require that employee expense reports be reviewed and approved by a supervisor outside the requestor's department. a. True b. False

False

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement schemes are the least common type of fraudulent disbursement schemes. a. True b. False -2-

False

Because they leave a solid audit trail, expense reimbursement schemes are generally easier to detect than other types of fraud schemes. a. True b. False

False

During a potentially volatile interview, there should be only one person in the room with the respondent in order to prevent intimidation.

False

During an admission-seeking interview, Andrew Douglas, the primary suspect, repeatedly began his responses with the phrase "to tell the truth." Additionally, he had trouble remembering several key facts regarding the events in question, even though his memory of the small details was excellent. Andrew's verbal clues likely indicate that he is being truthful.

False

During the introductory phase of an interview, the respondent states that he won't provide any information unless he is promised confidentiality. In this situation, you should give in to his request to ensure that you get the information you are seeking.

False

If a government employee agrees to award a contract to a vendor in exchange for a promise of future employment, this is considered to be an illegal gratuity True False

False

John Clark works as a land buyer for a city government. After negotiating the purchase of a parcel of land to be used for a new library, he asked the seller out for a coffee date, and she accepted. This situation is an example of illegal gratuity. True False

False

Linda Dudley, an employee of Bingham Company, was sent to an out-of-state conference to learn about the latest innovations in computer security. While she was at the seminar, her meals were picked up by a vendor hoping to get business from Bingham. Dudley also turned in receipts and requested reimbursement from her company for the same meals that the vendor paid for. What type of expense reimbursement fraud is this? a. Mischaracterized expense b. Overstated expense c. Fictitious expense d. None of the above

Fictitious expense

23. Remy Lewis has just started working as a marketing research analyst for Commercial Casting Company in New York City. He is relocating his family to New York from North Carolina, but they haven't moved yet. Twice a month, the company pays for Lewis to travel to North Carolina to visit his family and help with the move. During the month of September, Lewis only visited his family once; however, he submitted expense reports for mileage for two separate trips to North Carolina and back. What type of scheme is this? a. Mischaracterized expense reimbursement b. Billing c. Fictitious expense reimbursement d. None of the above

Fictitious expense reimbursement

Daniel Isley works as an internal auditor for Atlantic Insurance Co. While reviewing the company's travel and entertainment expenses, Isley noticed that one employee had submitted several receipts from Chase's Restaurant for round-dollar amounts just under the company's reimbursement limit. Further, the receipts were consecutively numbered, but were submitted over a six-month period. What type of scheme did Isley most likely uncover? a. Fictitious expense reimbursement b. Multiple reimbursement c. Mischaracterized reimbursement d. None of the above

Fictitious expense reimbursement

What type of expense reimbursement scheme occurs when an employee submits a receipt for an entertainment expense that a client paid for? a. b. c. d. Mischaracterizedexpensereimbursement Overstated expense reimbursement Fictitious expense reimbursement Duplicate reimbursement scheme

Fictitious expense reimbursement

In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements. Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. How was he punished? a. He was convicted of grand theft and received probation. b. He resigned from the company and a civil suit was filed against him. c. He was terminated and agreed to pay the money back. d. He was allowed to resign and the company agreed not to seek a refund if it was kept quiet.

He was terminated and agreed to pay the money back.

During an admission-seeking interview in which an accusation has been made, the respondent will normally object to the accusation and attempt to deny it. When you are convinced of the respondent's guilt, it is important to:

Interrupt the denial

During an interview, you ask the respondent a question that contains the answer as part of the question. This is called a(n):

Leading

18. Kevin Chitry, a sales executive for CIT Manufacturing, frequently took clients out for dinner and shows when they came to town to tour the plant. He usually paid for these expenses himself and submitted the receipts to his supervisor for approval and reimbursement. Occasionally, however, he also took his family out to restaurants and rock concerts and included these expenses in his reimbursement requests by indicating that he was entertaining a client. This type of fraud is known as a(n): a. Overstated expense reimbursement -3- b. Mischaracterized expense reimbursement c. Fictitious expense reimbursement d. Altered receipt reimbursement

Mischaracterized expense

Phil O'Hara is an internal auditor for the Shield Corporation. Recently he ran a report that listed payments to employees for business expenses that occurred while the employee was on vacation. What type of fraud scheme is Phil most likely to find? -4- a. Cash larceny b. Forged expenses c. Overstated expense reimbursement d. Mischaracterized expense reimbursement

Mischaracterized expense reimbursement

Claiming personal travel as a business expense is an example of what type of expense reimbursement scheme? a. Multiple reimbursements b. Overstated expense reimbursements c. Mischaracterized expense reimbursements d. Altered expense reimbursements

Mischaracterized expense reimbursements

Charlene DiAngelo is a sales manager for Northwest Paper & Plastics. On April 11, she took some clients out for a business lunch to discuss a potential contract. When she returned to the office, she made a photocopy of her restaurant receipt. Using correction fluid, she changed the date on the photocopy to read June 11. She submitted the original restaurant receipt with a reimbursement request on April 11 and held on to the photocopy for 2 months. On June 12, she submitted the altered photocopy along with a second reimbursement request. What type of fraud scheme did DiAngelo commit? a. Altered receipt b. Fictitious expense reimbursement c. Billing d. Multiple reimbursement

Multiple reimbursement

Donna Holbrook, an administrative assistant at Mason Enterprises, charged some office supplies to the company credit card. Several weeks later, she attached the store receipt from the purchase to an expense report and requested reimbursement from the company. This is an example of which type of expense reimbursement scheme? a. Overstated expense b. Multiple reimbursement c. Mischaracterized expense d. Over-purchased reimbursement

Multiple reimbursement

During an interview, the respondent frequently uses the phrases "honestly" and "I swear to God." The respondent is giving a type of verbal clue known as:

Oaths

As the manager of a local auto-parts store, Manny Ortega was responsible for reimbursing employees when they purchased supplies for the store with their own money. When employees brought Ortega their receipts for reimbursement, he would often alter the receipts to show a larger amount. Then he would ring a "no sale" on the cash register, remove the full amount per the altered receipt, and pocket the excess. Because the employee received the expected amount and the register totals remained in balance, Ortega was able to continue this scheme for nearly 2 years before being caught. What type of fraud did Ortega commit? a. Overstated expense reimbursement scheme b. Mischaracterized expense reimbursement scheme c. Register disbursement scheme d. None of the above

Overstated expense reimbursement

Respondents in an interview give both verbal and nonverbal clues that can be used to determine whether they are being deceptive. Which of the following is generally not considered a verbal clue to deception?

Overuse of emotive words

When obtaining a written confession during an admission-seeking interview, which of the following is not an item that should be included in the written statement?

Promise of leniency

5. During the introductory phase of an interview, the respondent states that he won't provide any information unless he is promised confidentiality. In this situation, you should give in to his request to ensure that you get the information you are seeking. a. True b. False

Question only one person at a time

6. Which of the following is a rule that the interviewer should follow when asking questions during the introductory phase of the interview? a. Promise confidentiality to the respondent. b. Give the interviewee the opportunity to respond to the source of the allegations. c. Question only one person at a time. d. All of the above

Question only one person at a time

The typical bid-rigging scheme committed during the need recognition phase of the contract negotiation process involves defining a "need" that can be met only by a certain supplier or contractor True False

True

29. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. He was caught, however, and his lifestyle came to a halt. What was the most likely reason that the company didn't have Chesterly prosecuted? a. Chesterly was well liked by everyone and, with new management coming in, the company thought that prosecuting him would have a negative impact on morale. b. Chesterly's wife became seriously ill and the company felt that it would have been too much of a blow to her recovery if he were in prison. c. Some of the company's customers were believed to have been involved in Chesterly's schemes. d. He agreed to mortgage his home to repay the money.

Some of the company's customers were believed to have been involved in Chesterly's schemes.

To safeguard against false voids schemes, companies should require a copy of the customer's receipt from the initial purchase as documentation for voided sales. TRUE FALSE

TRUE

When an employee perpetrates a credit card refund scheme, the perpetual inventory will show a greater amount than the physical inventory. FALSE TRUE

TRUE

When the subject of an investigation has been accused of misconduct, establishing a morally acceptable rationalization might allow the accused to reconcile his actions with his conscience. Which of the following is not an example of an acceptable rationalization?

The accused is a bad person by nature

When asking informational questions, you should start with general questions and then proceed to specific questions.

True

When obtaining a written statement during an admission-seeking interview, the investigator should prepare the statement for the confessor to sign.

True

24. In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements. Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. How was his scheme detected? a. The internal auditor discovered it during a routine audit of expense reimbursements. b. The department's administrative assistant took a message from the travel agency about a trip that she knew Lane didn't take. c. Lane's manager received an anonymous tip. d. The external auditors discovered it while sampling expenses during their annual audit.

The internal auditor discovered it during a routine audit of expense reimbursements

4. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement schemes have a lower median loss than check tampering schemes. a. True b. False

True

All notes taken by the interviewer should be preserved, as they may be needed if the case goes to trial.

True

An open question is a question that is worded in a way that makes it difficult to answer with a simple "yes" or a "no."

True

Assessment questions are worded so that dishonest people will likely agree with many of the statements, while honest people likely won't.

True

If an employee approves payment on an invoice that originates from a real company in which he or she has a hidden economic interest, this is considered to be conflict of interest schemes True False

True

If an employee submits a photocopy of a receipt as support for a business expense, the expense should be independently verified before it is reimbursed. a. True b. False

True

Melinda Speed, CFE, was conducting an interview of Charles Fuhrman, the shipping manager at B&D Supply Co. During the interview, Charles sat with his arms crossed over his chest and his legs aimed awkwardly at the door. Charles' nonverbal clues indicate that he is probably being deceptive.

True

Oral confessions are as legally binding as written confessions.

True

A(n) _____________ interview is one that has the potential to bring about strong emotional reactions in the respondent.

Volatile

For the perpetrator, the most dangerous part of a typical register disbursement scheme is often: a) Physically removing the cash from the register and carrying it out of the store b) Adjusting cash register tape to match the cash count c) Replacing the returned merchandise in the physical inventory d) Forging the customer receipt as documentation for the reversing transaction

a) Physically removing the cash from the register and carrying it out of the store

To facilitate a bribery scheme, a fraudster might divert company funds to a non-company account from which the illegal payments can be made. This accounts is called a a) Slush fund b) Petty cash fund c) Bid pool d) None of the above

a) Slush fund

37. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. Which of the following was a red flag that a fraud was being perpetrated? a. A single check was used to pay off several different customer accounts. b. The company experienced extremely rapid growth even while its competitors' growth was flat. c. The company kept changing auditors every other year. d. The bank account had been overdrawn on at least four occasions in one year.

a. A single check was used to pay off several different customer accounts.

26. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. How was his scheme detected? a. An exception report showed that Harkanell had claimed overtime hours for a period when there was no need to work overtime. b. The payroll department sent the timesheets for one pay period back to the supervisor for review when a suspicious number of hours had been indicated. c. An overtime audit was conducted revealing that Harkanell had worked an unusual number of hours compared to others in the department. d. The internal auditors received an anonymous tip.

a. An exception report showed that Harkanell had claimed overtime hours for a period when there was no need to work overtime.

27. The textbook lists several ways to reduce the pressures to commit financial statement fraud, including: a. Avoiding setting unachievable financial goals b. Maintaining accurate and complete internal accounting records c. Having confidential reporting mechanisms to communicate inappropriate behavior d. Maintaining accurate personnel records including background checks on new employees

a. Avoiding setting unachievable financial goals

In one of the cases in the textbook, Swainler's Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its theft insurance policy, the company had to show that the theft was an outside job. Before the insurance company paid Swainler's claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler's marketing manager, Frederic Boucher. Which of the following control weaknesses were present in the company? a. Because the company was run primarily on trust, many transactions were conducted without any documentation or controls. b. The surveillance cameras on the loading dock didn't work. c. Background checks were required only on senior executives and accounting personnel. d. All of the above

a. Because the company was run primarily on trust, many transactions were conducted without any documentation or controls.

7. Sharpe Medical Supply, Inc. has suffered a recent slow-down in sales and is in danger of showing a loss for the 20X1 fiscal year. To boost income, the sales manager encourages two of the company's largest customers to overbuy several slow-moving products at deep discounts. He also offers them extended payment terms, some of which delay payment until the end of 20X2. This is an example of what type of scheme? a. Channel stuffing b. Discount extension c. Sales re-routing d. Long-term contracts

a. Channel stuffing

2. Staff Accounting Bulletin Topic 13, "Revenue Recognition," indicates that revenue is considered realized or realizable and earned when four criteria are met. Which of the following is one of these criteria? a. Collectibility is reasonably assured. b. Goods have been scheduled to be delivered or services have been scheduled to be rendered within the current fiscal period. c. The seller has located alternate buyers. d. All of the above are criteria for revenue recognition.

a. Collectibility is reasonably assured.

8. The conceptual framework for financial reporting includes several assumptions that underlie generally accepted accounting principles. Which of the following is one of these assumptions? a. Economic entity b. Relevance c. Matching d. Comparability

a. Economic entity

Nicolette Garrison works part-time at an independent record store. Whenever her friend, Jacob Barker, comes into the store during one of her shifts, he picks up a CD and brings it to the register where Nicolette is stationed. After ringing a "no sale" transaction on the cash register, Nicolette pretends to swipe Jacob's credit card for payment. She puts the CD in a bag and gives it to Jacob, who walks out without actually paying for the merchandise. What kind of scheme is being committed? a. Fake sale b. False refund c. Sales skimming d. Cash larceny

a. Fake sale

Running a computer program that identifies shipping documents with no associated sales order can detect which of the following non-asset cash misappropriation schemes? a. False shipments b. Purchasing and receiving schemes c. Unconcealed inventory larceny d. Asset requisition schemes

a. False shipments

10. The most common method of misappropriating funds from the payroll is: a. Overpayment of wages b. Using a ghost employee c. Overstating commissions d. Theft of payroll deductions

a. Overpayment of wages

23. During a review of A+ Service's payroll records, Judy Penney, an internal auditor, noticed that Bradley Banks has no deductions taken from his paychecks for withholding taxes or insurance. She then searched for Banks in the personnel records, but could not locate him. Based on this information, what type of scheme did Penney most likely uncover? a. Ghost employee scheme b. Falsified salary scheme c. Fictitious vendor scheme d. None of the above

a. Ghost employee scheme

In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend's father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was Gunter punished? a. He was arrested, charged with grand theft and embezzlement, and sentenced to prison. b. He was indicted for receiving stolen property, placed on probation, and ordered to repay the company for the value of the stolen chips. c. The company fired him but agreed not to prosecute him if he repaid the money and did not go to the media. d. He wasn't, because he found out about the investigation and skipped town on the day he was to be arrested.

a. He was arrested, charged with grand theft and embezzlement, and sentenced to prison.

29. In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What was her motivation for stealing? a. Her boyfriend, a professional motocross racer, was injured in a race. b. She was getting married and needed money for the wedding. c. She blew the engine in her car and didn't have the money to replace it. d. She wanted to pay off her college loan early so she could save for a house.

a. Her boyfriend, a professional motocross racer, was injured in a race.

17. Recurring attempts by management to justify marginal or inappropriate accounting treatments on the basis of materiality is a red flag associated with which type of financial statement fraud? a. Improper disclosures b. Fictitious revenues c. Concealed liabilities d. None of the above

a. Improper disclosures

Sara Michaels works as a sales associate in the shoe department at a large chain department store. To supplement her income, Sara processed multiple fictitious refunds on sales made to customers. This is an example of what type of asset misappropriation? a. Register disbursement fraud b. Pay and return scheme c. Skimming scheme d. Cash larceny scheme

a. Register disbursement fraud

Which of the following procedures would be least helpful in preventing larceny of non-cash assets? a. Segregating the duties of sales and accounts payable b. Installing surveillance cameras in the warehouse and on sales floors c. Creating access logs to track employees that enter restricted areas d. Employing security guards at the entrance of the warehouse

a. Segregating the duties of sales and accounts payable

In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds. How was the fraud discovered? a. The bookkeeper noticed an unusually large number of policy overrides by Walker. b. The internal auditor developed a computer program that identified cashiers with an unusually high number of returns. c. The store manager caught Walker pocketing cash. d. An anonymous tip from the company's hotline came into the asset protection department.

a. The bookkeeper noticed an unusually large number of policy overrides by Walker.

13. Which of the following controls will help prevent and detect falsified hours and salary schemes? a. The duties of payroll preparation, authorization, and distribution are segregated. b. Sick leave and vacation time are monitored for excesses by the payroll department. c. Supervisors return authorized timecards to the employees for review before they are sent to the payroll department. d. All of the above

a. The duties of payroll preparation, authorization, and distribution are segregated.

20. Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to personally certify annual and quarterly SEC filings. Which of the following is an item that they must certify in their reports? a. They have disclosed to the audit committee any material control weakness. b. The financial statements were prepared in conformity with GAAP. c. The company's internal controls have prevented or detected all material instances of fraud during the last year. d. All of the above

a. They have disclosed to the audit committee any material control weakness.

3. Senior management is most likely to understate business performance in the financial statements for which of the following reasons? a. To reduce the value of an owner-managed business for purposes of a divorce settlement b. To comply with loan covenants c. To increase the value of a corporate unit whose management is planning a buyout d. To trigger performance-related compensation or earn-out payments

a. To reduce the value of an owner-managed business for purposes of a divorce settlement

13. The conservatism constraint for financial reporting states that, if there is any doubt, companies should aim to avoid overstating assets and income. a. True b. False

a. True

16. Comparing actual payroll expenses to budget projections can help identify falsified hours and salary schemes. a. True b. False

a. True

17. Comparing salaried employees' gross pay from one pay period to the next is one way of testing for payroll fraud. a. True b. False

a. True

24. Vertical analysis is also known as "common sizing" of financial statements. a. True b. False

a. True

25. Vanessa Armstrong was the chief financial officer for D&G Technologies, a publicly traded corporation. During the 20X1 fiscal year, she caused the company's financial statements to violate reporting requirements by including a significant overstatement of revenue so that she would receive a large performance bonus. When her transgression came to light, the company was required to issue restated financial statements for 20X1. Under the provisions of Sarbanes-Oxley, Vanessa must reimburse the company for any bonus she received during the 12 months after the 20X1 financials were initially filed. a. True b. False

a. True

27. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, losses due to financial statement frauds are higher than other occupational fraud schemes. a. True b. False

a. True

7. Salaried ghost employees are generally easier to create and more difficult to conceal than hourly ghost employees a. True b. False

a. True

8. The preferred and easiest method of concealing liabilities and expenses is to simply fail to record them. a. True b. False

a. True

9. Fraudulent manipulation of the going concern assumption usually results from an organization trying to conceal its terminal business situation. a. True b. False

a. True

Extracting round-dollar payments and summarizing them by vendor can help detect both corruption and billing schemes. a. True b. False

a. True

In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend's father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was the theft discovered? a. A security guard found the chips in a routine check of his work cart. b. An inventory manager filling an order noticed that many of the chips were missing. c. The auditors found the shortage when they conducted the annual inventory count. d. His co-worker notified the loss prevention department in exchange for a cash award.

b. An inventory manager filling an order noticed that many of the chips were missing.

In one of the case studies in the textbook, the General Service Administration (GSA), the federal government's bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. How did the investigation get started? a) A whistle blower called the GSA'a hotline to report that inspectors in New Jersey were receiving bribes for certifying the furniture b) A series of articles in a Washington, D.C. newspaper led to a congressional investigation c) An audit conducted by the GSA found a high rate of return of modular furniture during a sic month period d) a senator had his desk collapse when he threw his sub-committee's budget on this desk after a hearing

b) A series of articles in a Washington, D.C. newspaper led to a congressional investigation

Which of the following would likely not be a potential target for accepting bribes in a bid-rigging scheme? a) A product assurance representative b) An accounts payable clerk c) A contracting official d) The engineer in charge of the project's technical specification

b) An accounts payable clerk

the offering, giving, receiving, or soliciting of something of value for the purpose of influencing a business decision without the knowledge or consent of the principal is known as a) Official Bribery b) Commercial Bribery c) Conflict of interest d) Illegal gratitude

b) Commercial Bribery

In one of the case studies in the textbook, the General Service Administration (GSA), the federal government's bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. What happened to the furniture manufacturing company? a) It was charged with making false certifications and fined $2 million b) It lost its contract with the SA and went bankrupt c) It was bought by another company d) All of the above

b) It lost its contract with the SA and went bankrupt

Which of the following is a typical kickback scheme? a) Improper disclosure b) Overbilling c) Turnaround sales d) Extortion

b) Overbilling

An excessive number of reversing sales transactions all at the register is an indicator of which of the following schemes a) Skimming b) Register Disbursement c) Pass-through scheme d) Multiple Reimbursement

b) Register Disbursement

The primary approach for preventing conflicts of interest schemes is to develop and implement which of the following? a) a voucher system b) a company ethics policy c) a document retention program d) an anonymous reporting mechanism to receive tips and complaints

b) a company ethics policy

6. When a fraudster feeds fictitious information into the accounting system in order to manipulate reported results, this is called: a. Going outside the accounting system b. Beating the accounting system c. Going around the accounting system d. Playing the accounting system

b. Beating the accounting system

12. If an employee generates a much higher percentage of uncollected sales than his coworkers, what type of scheme might he be committing? a. Sales skimming b. Commission scheme c. Multiple reimbursement scheme d. Shell company scheme

b. Commission scheme

Identifying trends in over-purchased and/or obsolete inventory over several periods is a proactive computer audit test that can be used to detect which of the following schemes? a. False purchases b. Corruption c. Overstated expenses d. None of the above

b. Corruption

Fred Weaver is the contracts manager for a city government. In order for anyone to do business with the municipality, he or she must pay Fred 10 percent of the total amount of the contract. This type of corruption is known as: a. Bribery b. Economic extortion c. A conflict of interest d. Bid-rigging

b. Economic extortion

34. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. How was the fraud caught? a. His ex-wife contacted the SEC. b. Eddie lost a proxy battle for ownership, and the company's new owners quickly discovered the fraud as they reviewed the books. c. The audit committee received an anonymous tip which led them to the fraud. d. The auditors found that the inventory count had been changed.

b. Eddie lost a proxy battle for ownership, and the company's new owners quickly discovered the fraud as they reviewed the books.

10. It is more difficult to manipulate construction contracts that use the percentage of completion method than contracts that use the completed contract method. a. True b. False

b. False

14. GAAP strictly prohibits companies from engaging in all related-party transactions because, without an arm's-length business negotiation process, the company may suffer economic harm and ultimately injure unsuspecting shareholders. a. True b. False

b. False

15. Management has an obligation to disclose to the shareholders any fraud that is committed by the company's employees or vendors. a. True b. False

b. False

15. The term "financial statement" does not include a statement of cash receipts and disbursements, because this type of presentation violates the required use of accrual accounting under GAAP. a. True b. False

b. False

18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the most common type of fraudulent disbursement schemes. a. True b. False

b. False

19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the least costly type of fraudulent disbursement schemes. a. True b. False

b. False

21. The Sarbanes-Oxley Act provides that members of the audit committee may receive compensation for consulting or advisory work only if approved by a majority of the board members. a. True b. False

b. False

22. According to AU 240, fraud involving senior management should be reported directly to the shareholders as soon as the fraud is documented. a. True b. False

b. False

23. Under Sarbanes-Oxley, pubic accounting firms must rotate the lead partner or the partner reviewing the audit every year. a. True b. False

b. False

24. The civil and criminal protections for whistleblowers under Sarbanes-Oxley apply only to employees of publicly traded companies. a. True b. False

b. False

26. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the most common type of occupational fraud is financial statement fraud. a. True b. False

b. False

3. Marsha Wood added her one-year-old niece, Jackie, to the payroll at JNC Company and began issuing paychecks in Jackie's name, even though Jackie did not work for the organization. Marsha's niece is not considered a ghost employee because she is a real individual rather than a fictitious person. a. True b. False

b. False

5. To safeguard against ghost employee schemes, the person in charge of entering new employees in the payroll system should also distribute the paychecks so that he or she can look for payments to unauthorized employees. a. True b. False

b. False

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, median losses due to register disbursement schemes were the highest of all the fraudulent disbursement schemes. a. True b. False

b. False

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, register disbursement schemes were the most frequently reported type of fraudulent disbursement scheme. a. True b. False

b. False

An employee causes his organization to purchase merchandise that it does not need. This is an example of what type of scheme? a. Purchasing and receiving scheme b. False billing scheme c. Unconcealed larceny scheme d. Asset requisition scheme

b. False billing scheme

2. Which of the following is not a type of payroll scheme? a. Ghost employee scheme b. False deduction scheme c. Falsified hours and salary scheme d. Commission scheme

b. False deduction scheme

Nicolas Barrens conspired with his manager to steal nearly $6,000 over 2 months from the grocery store where they worked. Each time Nicolas rang up a customer at the register, he asked the customer if he'd like a receipt. When a customer said no, Nicolas pretended to discard the receipt in the trash, but actually slipped the receipt into his pocket. At the end of his shift, he filled out a void slip for each of these sales and submitted them to his supervisor for approval. With the original receipt and the approved void slip, Nicolas removed cash from the register in the amount of the voided sales and split the proceeds with his supervisor. Nicolas committed what type of fraud scheme? a. Fictitious expenses b. False voids c. Skimming d. None of the above

b. False voids

Which of the following is not a method used to conceal false shipments of inventory? a. Creating false sales orders b. Falsely increasing the perpetual inventory c. Writing off the inventory as scrap d. Physical padding

b. Falsely increasing the perpetual inventory

20. Jim Stevens is a payroll manager for a mid-sized insurance company in the southeast. Last year, his performance review was conducted late, so he received a retroactive pay increase. Because he was not authorized to access his own employee records, Stevens stole another employee's password and logged into the payroll system. He manipulated his records to keep the retroactive pay increase in effect in future periods, effectively doubling his intended pay raise. What type of fraud is this? a. Larceny of wages b. Falsified hours and salary scheme c. Commission scheme d. Ghost employee scheme

b. Falsified hours and salary scheme

36. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What type of financial statement fraud was committed? a. Fictitious assets b. Fictitious sales c. Improper disclosures d. Concealed expenses

b. Fictitious sales

Manually altering entries in an organization's books in order to conceal fraud is called: a. Padding the books b. Forced reconciliation c. Shrinkage d. Fictitious reconstruction

b. Forced reconciliation

12. Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of: a. Materiality b. Full disclosure c. Matching d. Cost-benefit

b. Full disclosure

21. Ellie Weaver works for the JAG Group as the customer service supervisor. When Joel Carter was hired into her department, she listed his start date as one month before he actually began work. Accordingly, the payroll department generated an extra paycheck for Carter, which Weaver intercepted and cashed at a liquor store. What type of fraud is this? a. Forged endorsement scheme b. Ghost employee scheme c. Altered payee scheme d. Falsified wages scheme

b. Ghost employee scheme

In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds. What was Walker's motive for committing the crime? a. His wife became ill and needed money to pay for prescription drugs. b. He had been demoted from a management position and wanted to get back at the store. c. He lost a lot of money gambling and was too embarrassed to tell his wife. d. He had accumulated nearly $60,000 in credit card debt and was about to lose his house.

b. He had been demoted from a management position and wanted to get back at the store.

27. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. What red flag was present that should have made someone suspicious? a. He used erasable ink to record the hours on the timesheets. b. He showed up for work on a day he had off so he could personally turn in the timesheets. c. No one else in the department had overtime hours but Harkanell. d. All of the above

b. He showed up for work on a day he had off so he could personally turn in the timesheets.

To prevent fraudulent shipments of merchandise, organizations should: a. Match every receiving slip to an approved purchase order. b. Match every outgoing shipment to a sales order. c. Make sure that all increases to perpetual inventory records are supported by proper source documents. d. All of the above

b. Match every outgoing shipment to a sales order.

38. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What happened to Weinstein? a. After the bankruptcy, he raised new capital and started another fabric coating company. b. He was convicted, sentenced to prison, and ordered to make restitution. c. He cooperated with the government and became an informant against his partners who had been siphoning cash off of government contracts. d. He was placed on probation after reimbursing the shareholders with the profits he had made on investments in the stock market.

b. He was convicted, sentenced to prison, and ordered to make restitution.

19. An unusual change in the relationship between fixed assets and depreciation is a red flag associated with which type of financial statement fraud scheme? a. Timing differences b. Improper asset valuation c. Improper disclosure d. All of the above

b. Improper asset valuation

According to the textbook, the best way for an organization to prevent fraudulent register disbursements is to: a. Have each employee compare the cash in his or her register drawer to the register tape at the end of each shift. b. Maintain appropriate separation of duties. c. Have a policy requiring photocopied receipts for sales refunds. d. All of the above

b. Maintain appropriate separation of duties.

Matching the vendor master file to the employee master file is a proactive computer audit test that can be used to detect which type of fraud scheme(s) a) Bribery b) Shell company c) Both a and b d) None of the above

c) Both a and b

25. In the vertical analysis of an income statement, _____________ is assigned 100 percent, with all other items expressed as a percentage thereof. a. Gross sales b. Net sales c. Net income d. Gross margin

b. Net sales

28. Establishing clear and uniform accounting procedures with no exception clauses can help reduce financial statement fraud by addressing which side of the fraud triangle? a. Pressures to commit fraud b. Opportunity to commit fraud c. Rationalizations of financial statement fraud d. Non-sharable problems

b. Opportunity to commit fraud

Ace Electronics is a company that sells computers, televisions, home entertainment centers, DVD players, and other electronic equipment. A downturn in the market has caused severe financial problems in the company. In order to fool the auditors as they begin their inventory count, several of Ace's managers have begun stacking empty boxes in the warehouse to create the illusion of extra inventory. This scheme is known as: a. Forced reconciliation b. Physical padding c. Inventory shuffling d. Misappropriation of intangible assets

b. Physical padding

19. Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and imposing sanctions where justified are duties of which of the following bodies? a. General Accounting Office's Oversight Board b. Public Company Accounting Oversight Board c. AICPA's Accounting Standards Board d. SEC's Subcommittee on Corporate Governance

b. Public Company Accounting Oversight Board

30. Bill Raymond is the CEO of the Drummond Group, a consulting group in the Carolinas. Sales have increased at least five percent every year for the past seven years. Unfortunately, the company has hit a slump this year, and revenue is far less than anticipated. However, in order to receive his performance bonus, Bill must show a sales increase of at least seven percent. When the financials are released, sales have increased by exactly seven percent. Which of the following ratio analyses would be most helpful in revealing that Bill included bogus sales in the company's financials? a. Inventory turnover b. Receivable turnover c. Debt-to-equity ratio d. Quick ratio

b. Receivable turnover

31. In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What happened to Jordon? a. The company terminated her employment but failed to press charges against her in order to keep things quiet. b. She was convicted but served no jail time. c. She skipped town and a warrant was issued for her arrest. d. She took out a loan for the amount stolen and paid the company back in lieu of the company pressing charges against her.

b. She was convicted but served no jail time.

In one of the cases in the textbook, Joe Anderson, a part-time shoe salesperson at a department store, perpetrated a fictitious returns scheme using third-party credit cards. Why was a fraud examination initiated? a. Another employee witnessed Anderson pocketing cash and reported the incident. b. The shoe department was losing money and had a high rate of returns on its shoes. c. The store's surveillance camera caught Anderson pocketing the money. d. Anderson credited the wrong account and the customer called up to inquire as to why her credit card had been credited.

b. The shoe department was losing money and had a high rate of returns on its shoes.

1. Which of the following is not an example of financial statement fraud? a. Falsification of material financial records, supporting documents, or business transactions b. Unintentional misapplication of accounting principles c. Deliberate omission of material disclosures d. All of the above are examples of financial statement fraud

b. Unintentional misapplication of accounting principles

30. In one of the case studies in the textbook, Katie Jordon was the "All-American Girl Next Door" working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. How was her scheme discovered? a. An employee tipped off the main office when she saw the timesheets listing an employee that she had never heard of. b. When Jordon's boss made a routine visit to the office, he noticed that there was no sign of an assistant in the office. c. She was splitting the proceeds with her boyfriend, and he contacted the home office when she broke up with him. d. The auditors found it when they conducted a routine audit of all new acquisitions after being in business for one year.

b. When Jordon's boss made a routine visit to the office, he noticed that there was no sign of an assistant in the office.

Johanna Pye is a hair stylist at Mamon Salon. The salon's policy states that stylists receive 40% of the revenue they generate as their compensation. Johanna grew tired of sharing her income with the salon and decided she wanted to make more money. She continued seeing her existing clients at the salon, but when new clients called for an appointment, Johanna lied and told them the salon was completely booked for the next few months. She then offered to come to their homes and cut their hair for 10% less than what the clients would be charged at the salon. She did not report the house call appointments to the salon, and was therefore able to keep all the income she generated from the side clients. This is an example of what type of scheme? a) Shell company b) Resource diversion c) Business diversion d) Double dealing

c) Business diversion

In one of the case studies in the textbook, the General Service Administration (GSA), the federal government's bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. The investigators eventually focused on one particular regional inspector because: a) He vacationed in Europe with the vendor and charged the rip back to the government as a business related trip b) He paid cash for a new home on the Jersey shore c) He purchased eleven race horses d) He had credit card charges of more than twice his annual salary during a six months period

c) He purchased eleven race horses

The key component to most kickback schemes is a) Forged endorsement b) Counterfeit invoices c) Price inflation d) stealing customer statements

c) Price inflation

To safeguard against kickback schemes, which of the following procedures should an organization implement? a) Have an employee in the purchasing department review the organization's payment patterns on a quarterly basis b) Establish a written policy specifying that employees cannot accept more than $500 annually in gifts from customers or suppliers c) Prohibit employees from engaging in any transactions on behalf of the organization when they have an undisclosed personal interest in the transaction d) All of the above

c) Prohibit employees from engaging in any transactions on behalf of the organization when they have an undisclosed personal interest in the transaction

Which of the following is a red flag that might indicate that a bid-rigging scheme is occurring? a) The contract price is usually low b) A high bid is followed by amendments that reduce the payments to the contractor c) The losing bidders become sub-contractors on the project d) Many more bidders responded to the request for proposal than expected

c) The losing bidders become sub-contractors on the project

_____________ is the offering, giving, receiving, or soliciting of something of value as a reward for a favorable decision a) Business diversion b) economic extortion c) illegal gratitude d) Commercial bribery

c) illegal gratitude

Register and disbursement schemes are different from skimming and larceny at the register in that they a) are on-book schemes, where as skimming and larceny are off-book schemes b) require the use of an accomplice c) leave a record of the removal of money on the register tape d) all the above

c) leave a record of the removal of money on the register tape

Abe Wilson works as a city councilman in large city on the east coast. As part of his duties, he negotiated the purchase of some land in order to build a new water treatment plant for the city. The land was sold to the city by Jake Bryan for terms that were favorable to the city. After the sale was finalized, Bryan treated Abe and his wife to an all-expenses-paid Alaskan cruise. This type of fraud is known as: a. A conflict of interest b. Bribery c. An illegal gratuity d. Economic extortion

c. An illegal gratuity

Andy Kaplan is a foreman for JCP Enterprises, a regional construction company. He recently ordered some plumbing supplies from the company warehouse for an office building project he is overseeing. When the supplies arrived at the job site, however, he loaded them in his truck and took them home to use in remodeling his master bathroom. What kind of inventory theft scheme did Andy commit? a. False shipments b. Unconcealed larceny c. Asset requisition d. Misappropriation of intangible assets

c. Asset requisition

22. The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting firms are allowed to perform for audit clients. Which of the following services are public audit firms now expressly prohibited from performing for their audit clients? a. Quarterly review services b. Tax services c. Bookkeeping services d. All of the above

c. Bookkeeping services

22. Jed Butler is an internal auditor for Billings Industries. Recently he ran a program that identified customer accounts which had previously been dormant for six months or more but had sales in the last two months of the year. What type of fraud would this test most likely reveal? a. Shell company scheme b. Pay-and-return scheme c. Commission scheme d. Personal purchases scheme

c. Commission scheme

9. An organization that seeks to fraudulently minimize its net income due to tax considerations may do so by: a. Recording fictitious revenues b. Omitting existing liabilities c. Expensing capitalized expenditures d. Underestimating warranty repairs expense

c. Expensing capitalized expenditures

15. Which of the following can be used to test for commission schemes? a. Extract manual checks and summarize by salesperson and amount. b. Compare hours reported per timecard system to payroll system. c. Extract customer sale balances that exceed the customer credit limit. d. None of the above

c. Extract customer sale balances that exceed the customer credit limit.

Which of the following computer audit tests can be used to detect purchasing and receiving schemes? a. Identifying dormant customer accounts for the past six months that show a sale in the last two months of the year b. Calculating the ratio of the largest sale to the next largest sale by customer c. Extracting all inventory coded as obsolete and possessing reorder points within the inventory system d. All of the above

c. Extracting all inventory coded as obsolete and possessing reorder points within the inventory system

24. Orange Publishing hired Moe McDonnell, CFE, to investigate some large variances in the company's labor costs. While looking through the payroll records for the shipping department, McDonnell noticed several employees who claimed extensive overtime during pay periods in which the company's incoming and outgoing shipments were minimal. McDonnell pulled the timesheets for these pay periods and noticed that those belonging to the suspect employees had signatures that didn't match the signatures on the other timesheets. What type of fraud might these findings indicate? a. Ghost employee scheme b. Commission scheme c. Falsified hours and salary scheme d. Overstated expenses scheme

c. Falsified hours and salary scheme

31. Sally Lauren is the external auditor for Modus Industries, a public company that manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What type of financial statement fraud scheme could be occurring? a. Inflated inventory b. Omitted expenses c. Fictitious accounts receivable d. None of the above

c. Fictitious accounts receivable

Billy Mitchell is the head cashier for a clothing store that specializes in men's silk suits. After losing big at the local dog track, Billy was in the hole financially. To cover his gambling debts, he started issuing numerous refund credits to his own credit card for amounts just below the store's review limit. This is an example of a __________________ scheme. a. Cash larceny b. Credit card skimming c. Fictitious refunds d. Understated reimbursement

c. Fictitious refunds

5. While conducting the annual audit of Bluebird Company's financial statements, Elsie Finnegan, CFE, CPA, came across some fishy findings. The company recorded several large and unusual sales at the end of the fiscal year to customers Elsie had never heard of. Further, all of these sales occurred within the company's specialty division, which had previously been in danger of closing due to recurring losses. Based on these findings, what type of financial statement fraud is likely occurring? a. Expense omission b. Unrecorded warranties c. Fictitious revenues d. All of the above

c. Fictitious revenues

1. A _______________ is an individual on the payroll who does not actually work for the organization. a. Falsified employee b. Phantom employee c. Ghost employee d. Shell employee

c. Ghost employee

7. If a fraudster uses his computer to produce fictitious financial statements while completely ignoring the data in the accounting system, this is an example of what general financial statement fraud method? a. Beating the accounting system b. Playing the accounting system c. Going outside the accounting system d. None of the above

c. Going outside the accounting system

Of the following, which is the best method for detecting the theft of inventory? a. Have the warehouse manager personally oversee bi-monthly inventory counts. b. Have someone from purchasing conduct inventory counts every quarter. c. Have a designated person in customer service follow-up with customers who have complained about short shipments. d. Match vendor addresses against employee addresses.

c. Have a designated person in customer service follow-up with customers who have complained about short shipments.

28. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. How was the case resolved? a. He confessed to falsifying the overtime and was terminated. b. A civil suit was filed to recover the loss. c. He was convicted and sentenced to prison. d. None of the above

c. He was convicted and sentenced to prison.

35. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What happened to Eddie Antar? a. He fled the country and is still at large. b. He repaid the money and was placed on probation. c. He was convicted of racketeering and sentenced to prison. d. He became a witness for the SEC against his cousin, the CFO, in exchange for a reduced sentence.

c. He was convicted of racketeering and sentenced to prison.

26. The technique for analyzing the percentage change in individual financial statement items from one accounting period to the next is known as: a. Ratio analysis b. Vertical analysis c. Horizontal analysis d. Correlation analysis

c. Horizontal analysis

Which of the following tests can be used to detect register disbursement schemes? a. Extract the top 10 employees with the lowest sales activity. b. Identify and examine unique journal entries in the cash accounts. c. Identify customer sales posted to one credit card and refunds posted to another credit card. d. None of the above

c. Identify customer sales posted to one credit card and refunds posted to another credit card.

16. At the suggestion of the external auditors, the audit committee of Alpha Technologies called in Bryce Miller, CFE, to investigate some suspected improprieties. During his investigation, Bryce learns that the company has been involved in several highly-complex transactions with related parties that do not appear to have any logical business purpose. Further, Alpha's organizational structure is overly complex and involves some unusual legal entities with overlapping lines of authority. Bryce also discovers four large bank accounts in the Cayman Islands that have no clear business justification. When questioned about these situations, the company's CEO treats them as unimportant and refuses to provide any further explanation. What type of financial statement fraud scheme do Bryce's findings most likely indicate? a. Fictitious revenues b. Improper asset valuation c. Improper disclosures d. Concealed expenses

c. Improper disclosures

32. Scott Ruskin is the CEO of Decatur Materials. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants. Scott is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Scott undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light? a. Quick ratio b. Collection ratio c. Inventory turnover d. Profit margin

c. Inventory turnover

In one of the cases in the textbook, Joe Anderson, a part-time shoe salesperson at a department store, perpetrated a fictitious returns scheme using third-party credit cards. What happened as the result of the investigation? a. Anderson was terminated and promised to pay back all the fraudulent proceeds. b. The department store recovered most of its losses through its bonding company. c. Local and federal charges for embezzlement and financial transaction card fraud were brought against Anderson and 27 co-conspirators. d. All of the above

c. Local and federal charges for embezzlement and financial transaction card fraud were brought against Anderson and 27 co-conspirators.

11. The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation? a. Full disclosure b. Revenue recognition c. Materiality d. Cost-benefit

c. Materiality

Meredith Chapman works as a retail clerk at a children's clothing store. When a customer returns an item for a cash refund, Meredith enters an amount greater than the actual refund into the register, pays the customer the amount owed for the returned merchandise, and keeps the excess cash for herself. What type of scheme is Meredith committing? a. Overstated expenses b. Cash larceny c. Overstated refunds d. Skimming

c. Overstated refunds

11. Capitalizing revenue-based expenses as depreciable assets will cause income to be ____________ in the current period and _______________ in future periods. a. Understated; overstated b. Understated; understated c. Overstated; understated d. Overstated; overstated

c. Overstated; understated

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the theft of which type of non-cash asset was the least common but caused the highest median loss? a. Equipment b. Proprietary information c. Securities d. Inventory

c. Securities

4. Which of the following is a red flag associated with fictitious revenues? a. An unusual decrease in gross margin b. An unusual decline in the number of days' purchases in accounts payable c. Several unusual and highly complex sales transactions recorded close to the period end d. Recurring losses while reporting increasing cash flows from operations

c. Several unusual and highly complex sales transactions recorded close to the period end

The unaccounted-for reduction in the company's inventory that results from theft is called: a. Physical defalcation b. Spoilage c. Shrinkage d. Misappropriation of intangible assets

c. Shrinkage

1. According to COSO's study, Fraudulent Financial Reporting: 1998-2007, which of the following is the most likely to commit financial statement fraud? a. Organized criminals b. Mid-level employees c. The chief exective officer and/or chief financial officer d. Lower-level employees

c. The chief exective officer and/or chief financial officer

16. Which of the following is not one of the provisions established under the Sarbanes-Oxley Act? a. Code of ethics for senior financial officers b. Management assessments of internal controls c. The creation of the Public Accounting Standards Board d. Criminal penalties for altering documents

c. The creation of the Public Accounting Standards Board

In one of the cases in the textbook, Swainler's Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its theft insurance policy, the company had to show that the theft was an outside job. Before the insurance company paid Swainler's claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler's marketing manager, Frederic Boucher. How did the investigator identify Boucher's involvement? a. Boucher's ex-wife found out and contacted Swainler's board of directors. b. A former employee of Swainler's went to work for a competitor and told his manager about Boucher's involvement. c. The investigator found telephone calls made by Boucher to a warehouse where some of the stolen drives had been traced. d. Investigators found a large cash deposit in Boucher's bank account around the time that the drives went missing.

c. The investigator found telephone calls made by Boucher to a warehouse where some of the stolen drives had been traced.

4. Which of the following is not necessary for a ghost employee scheme to succeed? a. Timekeeping and wage rate information must be collected. b. The ghost must be added to the payroll. c. The perpetrator must have access to a bank account in the ghost employee's name. d. A paycheck must be issued to the ghost.

c. The perpetrator must have access to a bank account in the ghost employee's name.

9. Which of the following procedures will not help prevent ghost employee schemes? a. The personnel records are maintained separately from the payroll and timekeeping functions. b. The personnel department conducts background and reference checks on all prospective employees before hiring them. c. The person responsible for hiring new employees also supervises the payroll function. d. The personnel department verifies all changes to the payroll.

c. The person responsible for hiring new employees also supervises the payroll function.

4. Which of the following is not a reason that senior management would overstate business performance to meet certain objectives? a. To meet a lender's criteria for granting/extending loan facilities b. To meet or exceed the earnings or revenue growth expectations of stock market analysts c. To reduce current expectations so that future growth will be better perceived and rewarded d. To increase the amount of financing available from asset-based loans

c. To reduce current expectations so that future growth will be better perceived and rewarded

21. According to SAS 99 (AU 240), "Consideration of Fraud in a Financial Statement Audit," the auditor should ask management about the risks of fraud and how they are addressed. Which of the following is not described as an issue that the auditor should ask management about? a. Whether management has knowledge of fraud or suspected fraud b. Management's understanding of the risk of fraud c. Whether and how management communicates the company's financial results to its employees d. Programs that the entity has established to prevent, deter, or detect fraud

c. Whether and how management communicates the company's financial results to its employees

In an interview situation, the process of observing behavior before critical questions are asked is called:

calibrating

To deter kickback schemes, an organization should implement which of the following procedures? a) Separate the purchasing, authorizing, and cash disbursement functions b) Track purchase levels by vendor c) Compare the prices paid for goods and services to market rates d) All of the above

d) All of the above

Which of the following can be used to conceal a false refund scheme? a) Destroying register tapes b) Issuing refunds below the review limit c) Forcing inventory totals d) All of the above

d) All of the above

Which of the following is a red flag indicating that an employee may be receiving kickbacks? a) The purchase of inferior-quality inventory or merchandise b) An unusual high volume of purchases from a particular vendor c) The payment of purchase amounts that are frequently above market rates d) All of the above

d) All of the above

Donna Boyd is an internal auditor for GDP, INC., an electronics manufacturer. While conducting a routine review of the company's inventory costing, she discovers that the cost of one of the parts they use in manufacturing DVD players has been steadily increasing over the last six months and is now much higher than the general market price. Additionally, se noticed that the company has been heavily favoring one specific supplier for that part. Based on these circumstances, what type of fraud scheme may be occurring at GDP? a) Kickbacks b) Conflict of interest c) Shell company d) Any of the above

d) Any of the above

Stanley Block works in the IT department at Towery INC. After finding out that the company is planning to purchase four more computers for the accounting department, Stanley bough four computers from a friend for $1200. Then, using his brother's name and address as vendor information, he resold the computers to Towery for $2300. This type of scheme is known as a (n) a) Over-purchase sale b) Resource diversion sale c) Double-sided sale d) Turnaround sale

d) Turnaround sale

Which of the following schemes can be detected by identifying vendor address that are not designated as a business address? a) shell company schemes b) kickback schemes c) conflicts of interest d) all of the above

d) all of the above

Which of the following is a type of register disbursement scheme? a) fictitious refunds b) overstated refunds c) false voids d) all the above

d) all the above

13. An inability to generate cash flows from operations while reporting earnings and earnings growth is a red flag for which of the following financial statement fraud schemes? a. Improper asset valuation b. Fictitious revenues c. Concealed liabilities and expenses d. All of the above

d. All of the above

14. Which of the following computer audit tests can be used to detect ghost employee schemes? a. Extract users who can write checks and also add new employees in the payroll and timecard system. b. Extract all employees without a social security number. c. Compare employees reported per timecard system to the payroll system. d. All of the above

d. All of the above

17. As the result of the Sarbanes-Oxley Act, the Securities Exchange Commission has implemented which of the following rules? a. New standards of professional conduct for attorneys b. Insider trades during pension fund blackout periods c. Conditions for use of non-GAAP financial measures d. All of the above

d. All of the above

18. Which of the following is a common target for improper asset valuation schemes? a. Accounts receivable b. Business combinations c. Inventory valuation d. All of the above

d. All of the above

18. Which of the following is a duty of the Public Company Accounting Oversight Board? a. Registering accounting firms that audit publicly traded companies b. Establishing or adopting standards relating to audits of publicly traded companies c. Enforcing compliance with professional standards and securities laws relating to public company audits d. All of the above

d. All of the above

2. Which of the following is a reason that a chief executive officer might commit financial statement fraud? a. To receive or increase a performance bonus b. To avoid termination due to poor performance c. To conceal the company's true performance d. All of the above

d. All of the above

20. Which of the following is an example of improper asset valuation? a. Fictitious accounts receivable b. Understating assets c. Misclassifying assets d. All of the above

d. All of the above

23. AU 240 requires auditors to document: a. Any specific risks of material misstatement due to fraud that were identified b. The discussion among engagement personnel regarding the susceptibility of the entity's financial statements to material misstatement due to fraud c. The reasons supporting the auditor's conclusion if the auditor has not identified improper revenue recognition as a risk d. All of the above

d. All of the above

29. Promoting strong values, based on integrity, throughout the organization can help reduce financial statement fraud by addressing which side of the fraud triangle? a. Non-sharable financial needs b. Opportunity to commit fraud c. Pressure to commit fraud d. Rationalization of fraud

d. Rationalization of fraud

33. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What financial statement fraud scheme did Eddie commit? a. Overstatement of inventory b. Improper disclosures c. Fictitious revenues d. All of the above

d. All of the above

6. An unusual growth in the number of days' sales in receivables can be a red flag for which of the following financial statement fraud schemes? a. Timing differences b. Fictitious revenues c. Improper asset valuation d. All of the above

d. All of the above

8. Which of the following analyses can be used to identify ghost employee schemes? a. Identifying employees who have no withholding taxes taken out b. Comparing actual payroll expenses to budgeted expenses c. Comparing employees who have the same Social Security number, bank account, or physical address d. All of the above

d. All of the above

Greg Manor is the sales manager at County Arts & Crafts Supply. Recently he has received several complaints from customers who claim they were not given a receipt for their purchases. What type of scheme might this situation indicate? a. Skimming b. False refunds c. False voids d. All of the above

d. All of the above

Running a computer program that compares adjustments to inventory to the void/refund transactions summarized by employee can detect which of the following schemes? a. Register disbursement schemes b. Cash larceny schemes c. Skimming schemes d. All of the above

d. All of the above

Unexplained increases in inventory shrinkage can be a red flag that signals which type of fraud scheme? a. Fictitious refunds b. Inventory larceny c. Sales skimming d. All of the above

d. All of the above

Which of the following computer audit tests can be used to detect an inventory misappropriation scheme? a. Identifying inventory receipts in the receiving system that do not agree to the receipts per the accounts payable system b. Identifying inventory shipments delivered to an address that is not designated as a business address c. Identifying inventory with a negative quantity balance d. All of the above

d. All of the above

Which of the following methods can be used to conceal inventory shrinkage on a company's books? a. Creating fictitious sales and receivables b. Writing off inventory as obsolete c. Physical padding d. All of the above

d. All of the above

Which of the following procedures can be used to prevent and detect a register disbursement scheme? a. Randomly call customers who have returned merchandise or voided sales. b. Restrict access to the control key or management code that authorizes reversing transactions. c. Place signs around the store encouraging customers to ask for and examine their receipts. d. All of the above

d. All of the above

Which of the following is not a type of corruption scheme? a. Bribery b. Conflict of interest c. Illegal gratuities d. Concealed payments

d. Concealed payments

25. Allison Duval, CFE, has been retained by National Mortgage Company to investigate some suspicious activity. As part of her examination, Duval compares the company's payroll expenses to budgeted projections and to prior years' totals. She also runs an exception report looking for any employees whose compensation has increased disproportionately over the prior year. She then compares the payroll files to the human resource files to test for differing salary rates. What type of scheme is Duval most likely looking for? a. Ghost employee scheme b. Payroll tampering scheme c. Commission scheme d. Falsified hours and salary scheme

d. Falsified hours and salary scheme

Leslie White, CFE, was called in to investigate suspicious activity at Anderson's Department Store. During her investigation, she ran a test to search for customer sales and refunds that occurred on the same day. She also summarized refunds by employee and extracted the names of all employees who can post both refunds and inventory adjustments. What type of scheme is Leslie most likely looking for? a. Skimming b. Unconcealed larceny c. Fraudulent reimbursements d. Fictitious refunds

d. Fictitious refunds

6. If a fraudster fails to remove a terminated employee from the payroll and collects the former employee's fraudulent paychecks, he or she is committing a: a. Payroll larceny scheme b. Falsified hours and salary scheme c. Forged endorsement scheme d. Ghost employee scheme

d. Ghost employee scheme

In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds. What happened to Walker? a. He was placed on probation and ordered to make full restitution. b. The store terminated his employment and accepted a promissory note for the amount stolen in return for not turning him over to the police. c. His parole for a previous conviction was revoked and he was returned to prison. d. He was arrested, but disappeared after making bail.

d. He was arrested, but disappeared after making bail.

Ben Rogers works as a cashier for Tillis Sporting Goods. One afternoon, he asked his sister Dawn to come into the store. When she arrived, Ben put three watches, two fishing reels, and four pairs of sunglasses in a sack and gave it to her. Dawn walked out of the store, sold two of the watches, and returned to the store later to return the other items for a refund. What type of asset misappropriation has been committed? a. Sales skimming b. Pay-and-return scheme c. False refund scheme d. Inventory larceny scheme

d. Inventory larceny scheme

14. A company's financial statements are the responsibility of: a. The independent auditors b. The shareholders c. The accounting department d. Management

d. Management

11. Which of the following is not a method typically used by an employee to fraudulently inflate his or her hours in a manual timekeeping system? a. Collusion b. "Lazy manager" method c. Forging the supervisor's signature d. Manipulating the pay grade

d. Manipulating the pay grade

5. If a fraudster manipulates the assumptions used to calculate depreciation charges in order to increase earnings to a desired figure, which general method of financial statement fraud is the fraudster using? a. Going outside the accounting system b. Beating the accounting system c. Going around the accounting system d. Playing the accounting system

d. Playing the accounting system

10. Intentionally reporting product sales in the financial statements for the period prior to when they actually occurred is a violation of which generally accepted accounting principle? a. Periodicity b. Matching c. Historical cost d. Revenue recognition

d. Revenue recognition

3. Recording revenue from a sale even though the rights and risks of ownership have not yet passed to the purchaser is an example of what type of fictitious revenue scheme? a. Partial sale b. Circumstantial sale c. Tentative sale d. Sale with conditions

d. Sale with conditions

12. Which of the following is a red flag associated with concealed liabilities and expenses? a. Gross margin significantly lower than industry average b. An unusual increase in the number of days' purchases in accounts payable c. An unusual change in the relationship between fixed assets and depreciation d. Significant reductions in accounts payable while competitors are stretching out payments to vendors

d. Significant reductions in accounts payable while competitors are stretching out payments to vendors

According to the 2010 report to the nations on occupational fraud and abuse, schemes involving corruption were the least common of the three types of occupational fraud schemes True False

false

According to the 2010 report to the nations on occupational fraud and abuse, the median loss due to corruption schemes was the highest of the three types of occupational fraud schemes True False

false

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, non-cash schemes occur more frequently than cash schemes. True False

false

To deter inventory theft schemes, organizations should install security cameras in the warehouses without the employees' knowledge. True False

false

According to the 2010 report to the nations on occupational fraud and abuse, bribery schemes occurred more often than other types of corruption schemes True False

true

According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash schemes have a higher median loss than non-cash schemes. True False

true

An unexplained increase in uncollectible accounts receivable may be a warning sign of a non-cash asset misappropriation scheme involving false shipments of inventory. True False

true

Borrowing a company asset for personal use without permission, even if it is returned unharmed, is a form of non-cash asset misappropriation. True False

true

To supplement her income, Jeanne Lester decided to start her own bookkeeping business while still working as an office assistant at Howe & Lyon, a small CPA firm. Not having much start-up capital for her new business, she used her phone at work to contact clients and her work computer to print invoices and client letters. However, she ordered and paid for her own office supplies and used her own postage stamps to mail the invoices and letters. From the information given, has Jeanne misappropriated any of the firm's assets? Yes No

yes