AIS Chapter 5 - Exam 4
Auditor's Responsibility
SAS No. 99 (AU-C Section 240) requires auditor's to: Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests Document and Communicate findings Incorporate a technology focus
8) Explain the impact of SAS No. 99 on auditors' responsibilities.
SAS No. 99, effective December 2002, requires that auditors explicitly consider fraud risks when planning and performing an audit. - Auditors must understand types and characteristics of fraud. Audit teams must review clients' financial statements for areas susceptible to fraud and communicate with each other during planning of the audit. Auditors must ask management and audit committee members about any past or current instances of fraud. Since many frauds involve revenue recognition, auditors must exercise special care and testing in examining revenue accounts. Audit procedures and testing must be tailored in response to fraud risk assessment. Auditors must evaluate the risk of management override of controls and any other indications of fraud occurrences. All audit procedures, testing and findings must be documented and communicated to management and the audit committee. Auditors must evaluate and recognize the impact of technology on fraud risks, as well as opportunities technology may provide to design fraud-auditing procedures.
1) Most frauds are detected by A) external auditors. B) hotline tip. C) internal auditors. D) the police.
b
13) Which characteristic of the fraud triangle often stems from a lack of internal controls within an organization? A) pressure B) opportunity C) rationalization D) concealment
b
15) What is the most prevalent opportunity within most companies to commit fraud? A) lack of any internal controls B) failure to enforce the internal controls C) loopholes in the design of internal controls D) management's failure to believe employees would commit fraud
b
16) This component of the fraud triangle explains how perpetrators justify their (illegal) behavior. A) pressure B) rationalization C) concealment D) opportunity
b
Once fraud has occurred, which of the following will reduce fraud losses? (Select all correct answers) a.) Insurance b.) Regular backup of data and programs c.) Contingency plans d.) Segregation of duties e.) a,b,c
e
Which of the following conditions is/are usually necessary for a fraud to occur? (Select all correct answers) a.) Pressure b.) Opportunity c.) Explanation d.) Rationalization e.) a,b,d
e
Which type of fraud did the Treadway Commission define
fraudulent financial reporting is "cooking the books" (e.g., booking fictitious revenue, overstating assets, etc.)
What are the components of the fraud triangle
pressure, opportunity rationalization
the computer fraud classifications
- If a computer is used to commit fraud it is called computer fraud. - Computer fraud is classified as: Input Processor Computer instruction Data Output
Two Categories of Fraud
1. Misappropriation of assets Theft of company assets which can include physical assets (e.g., cash, inventory) and digital assets (e.g., intellectual property such as protected trade secrets, customer data) 2. Fraudulent financial reporting "cooking the books" (e.g., booking fictitious revenue, overstating assets, etc.)
Describe at least four ways a company can make fraud less likely to occur.
A company can decrease fraud by: good hiring and firing practices; good management of unhappy employees; training in fraud awareness; manage and track computer licenses; implement signed confidentiality agreements; maintain visible security; educate the workforce in ethics and the penalties for illegal acts.
What are the actions recommended by the Treadway Commission to reduce the possibility of fraudulent financial reporting?
Answer: organizational environment that contributes to the integrity of the financial reporting process. Identify and understand the factors that lead to fraudulent financial reporting. Assess the risk of fraudulent financial reporting within the company. Design and implement internal controls to provide reasonable assurance that the fraudulent financial reporting is prevented.
Definition of Fraud
Any means a person uses to gain an unfair advantage over another person; includes: - A false statement, representation, or disclosure - A material fact, which induces a victim to act - An intent to deceive - Victim relied on the misrepresentation - Injury or loss was suffered by the victim - Fraud is white-collar crime
What is lapping
Concealing the theft of cash by means of a series of delays in posting collections to accounts receivable.
the four categories of threats to AIS
Natural and Political disasters Software errors and equipment malfunctions Unintentional acts Intentional acts
9) Why is computer fraud on the rise?
Not everyone agrees on what constitutes computer fraud and some people may commit computer fraud unwittingly and not be aware of it. Many computer frauds go undetected. The belief that "it just can't happen to us." - Most networks have a low level of security. - Many Internet sites provide guidance on how to commit computer crimes. - Law enforcement is unable to keep up with the number of computer frauds. -Most frauds are not reported. The total dollar value of losses is difficult to calculate.
8) A teller at a savings and loan drive-through accepted a cash payment from customer #1 for an auto loan. The teller appeared to process the payment, but told the customer the printer was jammed and she can't print a receipt. The customer accepted the excuse and drove away. The teller pocketed the cash and wrote down customer #1's loan number and payment amount for future reconciling. A couple of days before customer #1's monthly statement was printed, the teller recorded a cash payment from customer #2 as if it were made by customer #1. The teller pocketed the difference between the two payments. The teller continued to steal and misapply customer payments for the next two years without detection. Identify the type of fraud scheme described. Describe five controls you would implement to address the fraud risk, and label each control as preventive or detective.
The fraud appears to be misappropriation of assets that is being concealed with a lapping scheme. Controls would include: 1. rotation of duties (primarily detective) 2. mandatory vacations (primarily detective) 3. surveillance with cameras (primarily detective) 4. staggered statement printing schedules, unknown to tellers (detective) 5. sequentially prenumbered, duplicate receipts (detective) 6. segregation of duties between cash handling and recording (preventive) 7. encourage customers to utilize on-line banking for loan payments and to frequently check balances (detective)
1) Lapping is best described as the process of A) applying cash receipts to a different customer's account in an attempt to conceal previous thefts of cash receipts. B) inflating bank balances by transferring money among different bank accounts. C) stealing small amounts of cash, many times over a period of time. D) increasing expenses to conceal that an asset was stolen.
a
1) Perhaps the most striking fact about natural disasters in relation to AIS controls is that A) many companies in one location can be seriously affected at one time by a disaster. B) losses are absolutely unpreventable. C) there are a large number of major disasters every year. D) disaster planning has largely been ignored in the literature.
a
10) Which of the following is not a way to reduce fraud losses? A) Conduct periodic external and internal audits. B) Maintain adequate insurance. C) Use software to monitor system activity. D) Store backup copies of program and data files.
a
17) The most efficient way to conceal asset misappropriation is to A) write-off a customer receivable as bad debt. B) alter monthly bank statements before reconciliation. C) alter monthly physical inventory counts to reconcile to perpetual inventory records. D) record phony payments to vendors.
a
2) Perpetrators do not typically A) attempt to return or pay back stolen amounts soon after the initial theft, but find they are unable to make full restitution. B) use trickery or lies to gain the confidence and trust of others at the organization they defraud. C) become bolder and more greedy the longer the theft remains undetected. D) begin to rely on stolen amounts as part of their income.
a
2) Which of the following is not an example of the fraud triangle characteristic concerned with rationalization? A) revenge against the company B) intent to repay "borrowed" funds in the future C) sense of entitlement as compensation for receiving a lower than average raise D) belief that the company won't suffer because an insurance company will reimburse losses
a
2) Which of the following is the greatest risk to information systems and causes the greatest dollar losses? A) human errors and omissions B) physical threats such as natural disasters C) dishonest employees D) fraud and embezzlement
a
3) Why is computer fraud often much more difficult to detect than other types of fraud? A) because massive fraud can be committed in only seconds, leaving little-to-no evidence B) because most perpetrators invest their illegal income rather than spend it, concealing key evidence C) because most computer criminals are older and more cunning than perpetrators of other types of fraud D) because perpetrators usually only steal very small amounts of money at a time, requiring a long period of time to pass before discovery
a
4) SAS No. 99 requires that auditors A) plan audits based on an analysis of fraud risk. B) detect all material fraud. C) alert the Securities and Exchange Commission of any fraud detected. D) take all of the above actions.
a
4) Which of the following is not a management characteristic that increases pressure to commit fraudulent financial reporting? A) close relationship with the current audit engagement partner and manager B) pay for performance incentives based on short-term performance measures C) high management and employee turnover D) highly optimistic earnings projections
a
4) ________ is a simple, yet effective, method for catching or preventing many types of employee fraud. A) Requiring all employees to take annual vacations B) Monitoring employee bank accounts and net worth C) Monitoring employee behavior using video cameras D) Explaining that fraud is illegal and will be severely punished to employees
a
5) Excessive heat is an example of a(n) ________ threat. A) natural and political disasters B) software errors and equipment malfunctions C) unintentional acts D) system inefficiency
a
5) Researchers have compared the psychological and demographic characteristics of white-collar criminals, violent criminals, and the general public. They found that A) few differences exist between white-collar criminals and the general public. B) white-collar criminals eventually become violent criminals. C) most white-collar criminals invest their illegal income rather than spend it. D) most white-collar criminals are older and not technologically proficient.
a
6) The fraud that requires the least computer knowledge or skill involves A) altering or falsifying source data. B) unauthorized use of computers. C) tampering with or copying software. D) forging documents like paychecks.
a
6) Which of the following is not an example of one of the basic types of fraud? A) While straightening the store at the end of the day, a shoe store employee finds and keeps an expensive pair of sunglasses left by a customer. B) An executive devised and implemented a plan to accelerate revenue recognition on a long-term contract, which will allow the company to forestall filing for bankruptcy. The executive does not own any stock, stock options or grants, and will not receive a bonus or perk because of the overstated revenue. C) A purchasing agent places a large order at higher-than-normal unit prices with a vendor that gave the agent tickets to several football games. D) A salesperson approves a large sales discount on an order from a company owned partially by the salesperson's sister.
a
7) The simplest and most common way to commit a computer fraud is to A) alter computer input. B) alter computer output. C) modify the processing. D) corrupt the database.
a
7) What agency did the United States create to use cyber weapons and to defend against cyber attacks? A) U.S. Cyber Command B) Department of Network Security C) Department of Cyber Defense D) Department of Technology Strategy
a
8) Downloading a master list of customers and selling it to a competitor is an example of A) data fraud. B) output theft. C) download fraud. D) fraudulent financial reporting.
a
8) Which of the following fraudulent acts generally takes most time and effort? A) lapping accounts receivable B) selling stolen inventory to get cash C) stealing inventory from the warehouse D) creating false journal entries to overstate revenue
a
8) Which type of threat causes the greatest dollar losses? A) software errors and equipment malfunctions B) unintentional acts C) intentional acts D) system inefficiency
a
9) In many cases of fraud, the ________ takes more time and effort than the ________. A) concealment; theft B) theft; concealment C) conversion; theft D) conversion; concealment
a
Which of the following causes the majority of computer security problems? a.) Human errors b.) Software errors c.) Natural disasters d.) Power outages
a
Which of the following is a fraud in which later payments on account are used to pay of earlier payments that were stolen? a. lapping b. kiting c. Ponzi scheme d. salami technique
a
Who perpetrates fraud
anyone Some distinguishing characteristics of fraud perpetrators are: -they tend to spend their illegal income to support their lifestyle; - once they begin it becomes harder to stop and they become bolder as each incident happens; ---once they start to rely on the ill-gotten gains, they become more greedy and sometimes careless and overconfident. In the case of computer criminals, they are often young and have substantial computer knowledge. About two-thirds are men and likely to be an employee of the firm from which they steal. Many are unhappy or disgruntled with their employer because they feel unappreciated and underpaid. Most have no previous criminal record.
3) On Tuesday morning, Chen Lee, Chief Information Officer at American Trading Corporation (ATC), got some bad news. The hard drive use to store system data backups was lost while it was being transported to an offsite storage location. Chen called a meeting of her technical staff to discuss the implications of the loss. Which of the following is most likely to relieve her concerns over the potential cost of the loss? A) ATC has a comprehensive disaster recovery plan. B) The hard drive was encrypted and password protected. C) The shipper has insurance that will reimburse ATC for the cost of the hard drive. D) ATC has a copy of the hard drive onsite, so a new copy for storage offsite can easily be prepared.
b
4) A power outage is an example of a(n) ________ threat. A) natural and political disasters B) software errors and equipment malfunctions C) unintentional acts D) system inefficiency
b
4) Why is computer fraud often more difficult to detect than other types of fraud? A) Rarely is cash stolen in computer fraud. B) The fraud may leave little or no evidence it ever happened. C) Computers provide more opportunities for fraud. D) Computer fraud perpetrators are just more clever than other types of criminals.
b
6) Identify the opportunity below that could enable an employee to commit fraud. A) An employee's spouse loses her job. B) An employee has a close association with suppliers or customers. C) An employee suddenly acquires lots of credit cards. D) An employee is upset that he was passed over for a promotion.
b
6) What was the first known cyber-attack intended to harm a real-world physical target? A) Sasser B) Stuxnet C) Michelangelo D) Doomsday
b
Which of the following statements is false? a.) The psychological profiles of white-collar criminals differ from those of violent criminals b.) The psychological profiles of white-collar criminals are significantly different from those of the general public c.) there is little to no difference between computer fraud perpetrators and other types of white-collar criminals d.) Computer fraud perpetrators often do not view themselves as criminals
b
Which type of fraud is associated with 50% of all auditor lawsuits? a.) Kiting b.) Fraudulent financial reporting c.) Ponzi scheme d.) Lapping
b
1) Seble wants to open a floral shop in a downtown business district. She doesn't have funds enough to purchase inventory and pay six months'' rent up front. Seble approaches a good friend, Zhou, to discuss the possibility of Zhou investing funds and becoming a 25% partner in the business. After a lengthy discussion Zhou agrees to invest. Eight months later, Zhou and Seble have a major argument. In order for Zhou to sue Seble for fraud, all the following must be true except A) Zhou's decision to invest was primarily based on Seble's assertion that she had prior floral retail experience. B) Seble told Zhou she had worked at a floral shop for several years, when in fact she did not have any prior experience in floral retail. C) before Zhou invested, Seble prepared a detailed business plan and sales forecasts, and provided Zhou with copies. D) Zhou's 25% share of the business is worth substantially less than her initial investment.
c
1) Which of the following is least likely to result in computer fraud? A) releasing data to unauthorized users B) allowing computer users to test software upgrades C) allowing computer operators full access to the computer room D) storing backup tapes in a location where they can be quickly accessed
c
11) Logic errors are an example of which type of threat? A) natural and political disasters B) software errors and equipment malfunctions C) unintentional acts D) system inefficiency
c
11) Which fraud scheme involves stealing customer receipts and applying subsequent customer cash payments to cover the theft? A) kiting B) laundering C) lapping D) bogus expense
c
12) One fraudulent scheme covers up a theft by creating cash through the transfer of money between banks. This is known as A) lapping. B) misappropriation of assets. C) kiting. D) concealment.
c
2) Which of the following will not reduce the likelihood of an occurrence of fraud? A) encryption of data and programs B) use of forensic accountants C) adequate insurance coverage D) required vacations and rotation of duties
c
3) "Cooking the books" is typically accomplished by all the following except A) overstating inventory. B) accelerating recognition of revenue. C) inflating accounts payable. D) delaying recording of expenses.
c
5) Intentional or reckless conduct that results in materially misleading financial statements is called A) financial fraud. B) misstatement fraud. C) fraudulent financial reporting. D) audit failure fraud.
c
9) All of the following are required for an act to be legally classified as fraudulent except A) a falsehood is made. B) about a material fact. C) to inflict pain. D) resulting in a financial loss.
c
9) Which of the following is not a way to make fraud less likely to occur? A) Adopt an organizational structure that minimizes the likelihood of fraud. B) Create an organizational culture that stresses integrity and commitment to ethical values. C) Create an audit trail so individual transactions can be traced. D) Effectively supervise employees.
c
Which of the following is not an example of computer fraud? a.) Theft of money by altering computer records b.) Obtaining information illegally using a computer c.) Failure to perform preventive maintenance on a computer. d.) Unauthorized modification of a software program
c
Which of the following is the most important, basic, and effective control to deter fraud? a.) Enforced vacation b.) Logical access control c.) Segregation of duties d.) Virus protection control
c
10) Misappropriation of assets is a fraudulent act that involves A) dishonest conduct by those in power. B) misrepresenting facts to promote an investment. C) using computer technology to perpetrate. D) theft of company property.
d
10) Which of the following is the best way to hide theft of assets? A) creating "cash" through the transfer of money between banks B) conversion of stolen assets into cash C) stealing cash from customer A and then using customer B's balance to pay customer A's accounts receivable D) charging the stolen asset to an expense account
d
11) Which of the following is not a way to improve fraud detection? A) Install fraud detection software. B) Implement a fraud hotline. C) Employ a computer security officer. D) Implement computer-based controls over input, processing, storage, and output activities.
d
14) Which situation below makes it easy for someone to commit a fraud? A) placing excessive trust in key employees B) inadequate staffing within the organization C) unclear company policies D) All of the above situations make it easy for someone to commit a fraud.
d
2) How does the U.S. Justice Department define computer fraud? A) as any crime in which a computer is used B) as any act in which cash is stolen using a computer C) as an illegal act in which a computer is an integral part of the crime D) as an illegal act in which knowledge of computer technology is essential
d
3) Identify the threat below that is not one of the four types of threats faced by accounting information systems. A) natural and political disasters B) software errors and equipment malfunctions C) unintentional acts D) system inefficiency
d
3) Insiders are frequently the ones who commit fraud because A) they are more dishonest than outsiders. B) they need money more than outsiders. C) they are less likely to get caught than outsiders. D) they know more about the system and its weaknesses than outsiders.
d
5) Why do many fraud cases go unreported and unprosecuted? A) Major fraud is a public relations nightmare. B) Fraud is difficult, costly, and time-consuming to investigate and prosecute. C) Law enforcement and the courts are often so busy with violent crimes that little time is left for fraud cases. D) all of the above
d
7) Which of the following is a financial pressure that could cause an employee to commit fraud? A) a feeling of not being appreciated B) failing to receive a deserved promotion C) believing that their pay is too low relative to others around them D) having a spouse injured in a car accident and in the hospital for several weeks
d
Which of the following control procedures is most likely to deter lapping? a.) Encryption b.) Continual update of the access control matrix c.) Background check on employees d.) Periodic rotation of duties
d
Which of the following is NOT one of the responsibilities of the auditors in detecting fraud according to SAS No. 99? a.) Evaluate the results of their audit tests b.) Incorporate a technology focus c.) Discuss the risks of material fraudulent misstatements d.) Catch the perpetrators in the act of committing the fraud
d
