Financial Questions (updated through page 70)

In a directory advertising scheme, the con man sells advertising space in a non-existent magazine or directory. A. True B. False

A. True The essence of directory advertising schemes is the sale of advertising in a non-existent magazine or directory. A fake (or in some cases a real) directory is shown to the potential victim. The victim contracts and pays for display or classified advertising that is to appear some months in the future. By that time, the fraudster has disappeared.

The insurance business is highly susceptible to fraud. A. True B. False

A. True The insurance business, by its very nature, is susceptible to fraud. Insurance is a risk distribution system that requires the accumulation of liquid assets in the form of reserve funds which are in turn available to pay loss claims. Insurance companies generate a large steady flow of cash through insurance premiums.

Because phony death certificates usually are not difficult to obtain, false death claims on life insurance policies are often paid relatively easily. A. True B. False

A. True To obtain reimbursement for life insurance, a death certificate is required. However, phony death certificates are not that difficult to obtain. The person might be very much alive and missing or the person might be dead, and the death is past posted. With small settlements, death claims are not closely scrutinized and are paid relatively easily.

A counterfeit traveler's check can often be detected by feeling the check surface. The surface of a phony check will feel slick and flat. A. True B. False

A. True Travelers' checks have several distinguishing features. Watermarks and holograms are common, as well as micro-printing and ultraviolet ink. There are basically two methods of counterfeiting travelers' checks: color copying and offset lithography/printing. Color copied checks lack the raised ink texture which the intaglio printing press gives most travelers' checks. Instead of a textured feel, a phony check will appear slick and flat. Offset lithographic reproductions of actual checks are of higher quality than color-copied checks. However, neither will have the texture, watermarks, micro-printing, or holograms which the genuine articles have.

A health care provider can often bill a patient's insurance for a service not covered by using false diagnoses or procedure codes. A. True B. False

A. True When a provider knows that a service is not covered, using false diagnoses and covered procedure codes manipulation will generally get the claim paid. In addition, before ordering expensive laboratory x-rays or other similar services, physicians justify the ordering of such procedures by documenting that a need exists to make such diagnostic inquiries. The services are rendered, but because false information on a claim is used to deceive the insurance company, the claim is considered a false claim.

Which of the following circumstances may appear to be a strong indication of negligence? A. When the taxpayer has deductions that are "too good to be true" B. When the taxpayer fails to file on time C. When the taxpayer fails to sign the return D. When the taxpayer transposes two numbers

A. When the taxpayer has deductions that are "too good to be true" Negligence is strongly indicated where information is omitted on tax returns or deductions are "too good to be true." A penalty based on a percentage of the underpayment will be imposed on any of the following: (1) negligence or disregard of rules and regulations, (2) any substantial underpayment of income tax, (3) any substantial valuation, (4) any substantial overstatement of pension liabilities, and (5) any substantial understatement of estate or gift tax valuations.

Which of the following is a type of computer virus? A. Worms B. Freeware C. Executable files D. Crasher

A. Worms A worm is a self-replicating program which resides as a file on a system, executes an autonomous process, and deliberately moves from system to system. It looks for other nodes on the networks, copies itself to them and causes the self-copy to execute on other nodes. These programs find network utilities showing node names, monitor network traffic, randomly select network identification codes as well as other mischief.

Blue, a cash register teller, signed onto her register, rang a "no sale" to open the drawer, and then removed several hundred dollars. According to Corporate Fraud Handbook, what kind of scheme is this? A. A register disbursement scheme B. A cash larceny scheme C. A skimming scheme D. None of the above

B. A cash larceny scheme The most straightforward cash larceny scheme is one in which the perpetrator just opens the register and removes currency. This might be done as a sale is being conducted to make the theft appear to be part of the transaction, or perhaps when no one is around to notice the perpetrator digging into the cash drawer. For instance, a teller could simply sign onto a register, ring a "no sale" and take currency from the drawer. A "register disbursement scheme" cannot be correct because register disbursement schemes involve a fraudulent transaction that justifies the removal of cash from the register such as a false return or a voided sale. Blue did not make any entry that would account for the missing money. "A skimming scheme" cannot be correct because the money in the register was already a part of the company's accounting system. There was no indication that the cash was part of an unrecorded or understated sale.

ABC, Inc. and XYZ, Inc. are the only two companies in Lincoln County that lay asphalt. An audit reveals that the state is paying more for asphalt work in Lincoln County than in other counties in the state. A review of the records reveals that of the last ten asphalt contracts awarded, five have gone to ABC and five have gone to XYZ. What scheme might ABC and XYZ be involved in? A. Bid suppression B. Bid rotation C. Phantom bidding D. Altering bids

B. Bid rotation Bid rotation is a form of collusive bidding whereby a group of prospective vendors exchanges information on contract solicitations, taking turns at submitting the "low bid."

A "protected computer" as defined under the federal Computer Fraud and Abuse Act includes all but which of the following: A. Computer used by a financial institution B. Computer used only in intrastate commerce C. Computer used by the U.S. Government D. Computer used in foreign commerce

B. Computer used only in intrastate commerce A "protected computer" as defined under the federal Computer Fraud and Abuse Act includes: * A computer which is used exclusively by a financial institution or the United States Government * Any computer the use of which affects a computer used by a financial institution or the federal government * A computer that is used in interstate or foreign commerce or communication

Which of the following is the best preventative measure against computer hacking? A. Welcome screens should not say "welcome to the _________company" B. Elimination of as many dial-in ports as possible C. Call-back modems D. Security software packages

B. Elimination of as many dial-in ports as possible Because hackers require dial-in capability to gain access, the best prevention strategy is to eliminate as many dial-in ports as possible. Unfortunately, the trend today is to install more, not fewer, dial-in capabilities because telecommuting and customer connectivity are driving the demand for more dial-in capability.

Practice Advisory 1210.A2-2 - Responsibility for Fraud Detection - states that the internal auditor has the responsibility to establish and maintain internal control at a reasonable cost. A. True B. False

B. False According to Practice Advisory 1210.A2-2 - Responsibility for Fraud Detection: Management has a responsibility to establish and maintain an effective control system at a reasonable cost. To the degree that fraud may be present in activities covered in the normal course of work as defined above, internal auditors have a responsibility to exercise "due professional care" as specifically defined in Standard 1220 with respect to fraud detection. Internal auditors should have sufficient knowledge of fraud to identify the indicators that fraud may have been committed, be alert to opportunities that could allow fraud, evaluate the need for additional investigation, and notify the appropriate authorities.

Failure to record corresponding revenues and expenses in the same accounting period will result in income and profit understatement in the period when the revenue is recorded and income and profit overstatement in the period in which the corresponding expenses are recorded. A. True B. False

B. False According to generally accepted accounting principles, revenue and corresponding expenses should be recorded or matched in the same accounting period. The timely recording of expenses is often compromised due to pressures to meet budget projections and goals, or due to lack of proper accounting controls. As the expensing of certain costs is pushed into periods other than the ones in which they actually occur, they are not properly matched against the income that they help produce. For example, revenue may be recognized on the sale of certain items, but the cost of goods and services that went into the items sold might intentionally not be recorded in the accounting system until the subsequent period. This might make the sales revenue from the transaction almost pure profit, inflating earnings. In the next period, earnings would be depressed by a similar amount.

The Bank Secrecy Act's main purpose is to prevent financial institutions from releasing information about their customers without the customers' approval. A. True B. False

B. False Although money laundering has been around for a long time, the Bank Secrecy Act (BSA), which went into effect in 1970, was the first major piece of legislation aimed at detecting and preventing money laundering. The purpose of the law as stated in section 5311 is "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings." The BSA sets forth a system of reporting and recordkeeping requirements designed to help track large or unusual financial transactions.

If a securities offense is egregious, the SEC will usually prosecute offenders criminally. A. True B. False

B. False Although there are criminal penalties attached to violations of the federal securities laws, the Securities and Exchange Commission does not have the power to take criminal action. SEC investigations that disclose potentially criminal violations are usually referred to the Federal Bureau of Investigation.

An illegal gratuity requires proof of an intent to influence. A. True B. False

B. False Illegal gratuities are similar to bribery schemes except there is not necessarily an intent to influence a particular business decision before the fact. In the typical illegal gratuities scenario, a decision is made which happens to benefit a certain person or company. The party who benefited from the decision then gives a gift to the person who made the decision. The gift could be anything of value. An illegal gratuity does not require proof of an intent to influence.

Electronic Data Interchange (EDI) has the potential to save the health care industry billions per year in paper costs, and many fraud examiners believe the incidence of health care fraud will decrease as well. A. True B. False

B. False In the current health care system, there are over 1,500 third-party payers that process over four billion medical claims every year. Because the health care system uses over 450 different types of forms, it is estimated that in the past, the health care industry spent as much as $100 billion per year to process its paperwork. Thus, EDI has the potential to save the health care industry from $8 billion to $20 billion every year because claims are now sent electronically to the third-party payer, thus eliminating the paper. It is very simply a more efficient way for the health care industry to do business. However, fraud examiners fear that a more efficient system also paves the way for more efficient ways to defraud the health care industry.

Unfortunately for fraud examiners, non-cash larceny schemes are often very complicated. A. True B. False

B. False Most non-cash larceny schemes are not very complicated. They are typically committed by employees (warehouse personnel, inventory clerks, shipping clerks, etc.) with access to inventory or supplies. Many employees simply carry company assets away in open view of other employees. People tend to assume that their friends and acquaintances are acting honestly. When they see a trusted co-worker taking something out of the workplace, most people assume that the culprit has a legitimate reason for doing so.

Hospitals never receive kickbacks from revenue recovery firms. A. True B. False

B. False Often hospitals are unaware (sometimes intentionally) of the extent of the fraud committed by revenue recovery firms. However, in other cases, revenue firms report that they will contact a hospital or nursing home directly and tell them that if the institution will give them their bills, they will split the additional payment received from the provider by the added charges.

Most telemarketing and other consumer frauds are committed against young people. A. True B. False

B. False Older people are the favorite prey of telescammers. They make up 11 percent of the population but constitute 30 percent of the victims of consumer fraud and 50 percent of all phone scam victims. Forty-five percent of senior citizens have been offered investments by a person unknown to them. Seniors own more than half of all financial assets in the U.S.

People in the research and development department are typically very secretive about new products, and it is difficult to find out information from them. A. True B. False

B. False One would think that R&D would be the most heavily guarded department in a company, but access to R&D information is surprisingly easy. R&D personnel are almost always in the flow of information. The open exchange of information is part of the nature of their job. They participate in conferences, attend trade shows, and work with academic institutions; however, at each of these functions, they leave themselves open for intelligence spies to listen, mingle, and ask questions.

So-called "smart cards" differ from ordinary credit cards in that they do not contain a microprocessor memory chip like credit cards do. A. True B. False

B. False Smart Cards contain a microprocessor memory chip instead of holograms. This allows cardholders more purchasing options as well as increased security.

The debt to equity ratio is computed by dividing current liabilities by total equity. A. True B. False

B. False The debt to equity ratio is computed by dividing total liabilities by total equity. This ratio is one that is heavily considered by lending institutions. It provides a clear picture of the comparison between the long-term and short-term debt of the company and the owner's financial injection plus earnings to date. Debt to equity requirements are often included as borrowing covenants in corporate lending agreements.

Although credit scams promise to secure a loan for the applicant regardless of credit history, they often do supply information which will be helpful for the applicant to secure a loan. A. True B. False

B. False The simplest credit scam promises that the company will secure a loan for the applicant, regardless of credit history and references, if the person pays an upfront fee, usually between $35 and $75. Checking account debits are a favorite payment method, as are 900 numbers, which charge by the minute (up to $40 or $50 per call) to hear information widely available which provides no help in swaying a loan for the listener. Usually there are few or no loans made. Occasionally, loan information and applications may be mailed out to the victim, but usually, after the fee has been paid, the operators are not heard from again.

Which of the following is NOT a type of check tampering scheme? A. Forged maker B. False voids C. Authorized maker D. Forged endorsement

B. False voids Five methods are used to commit check tampering frauds: *Forged maker schemes *Forged endorsements *Altered payees *Concealed check schemes *Authorized maker schemes False voids are a type of register disbursement scheme.

Which of the following is not a skimming scheme according to Corporate Fraud Handbook? A. Unrecorded sales B. Forged checks C. Understated sales D. Short term skimming

B. Forged checks According to Corporate Fraud Handbook, skimming schemes generally fall into one of the following categories: * Unrecorded sales * Understated sales and receivables * Theft of checks from the mail * Short term skimming

The cash schemes discussed in Corporate Fraud Handbook fall into two broad categories: __________________ and __________________. A. Cash thefts; skimming B. Fraudulent disbursements; cash thefts C. False billings; payroll schemes D. Fraudulent disbursements; false billings

B. Fraudulent disbursements; cash thefts It is helpful to break down the cash schemes into two broad groups, the first being the fraudulent disbursement schemes and the second being what we will loosely term the theft schemes. Fraudulent disbursement schemes are those in which a distribution of funds is made from some company account in what appears to be a normal manner. The method for obtaining the funds may be the forging of a check, the submission of a false invoice, the doctoring of a timecard and so forth. The key is that the money is removed from the company in what appears to be a legitimate disbursement of funds. Theft schemes, on the other hand, are what we typically think of as the outright stealing of cash. The perpetrator does not rely on the submission of phony documents or the forging of signatures; he simply grabs the cash and takes it. The theft schemes fall into two categories: skimming and larceny schemes. Skimming is defined as the theft of off-book funds. Cash larceny schemes, on the other hand, involve the theft of money that has already appeared on a victim company's books.

The Private Securities Litigation Reform Act requires that each audit of a public company must include procedures designed to provide reasonable assurance of detecting "__________" that would have a direct and material effect on the financial statements. A. Fraud B. Illegal acts C. Corruption D. None of the above

B. Illegal acts The Private Securities Litigation Reform Act (PSLRA), passed in 1995, sets forth several responsibilities for independent auditors of public companies. One of the requirements is that each audit of the financial statements of a public company must include procedures designed to provide reasonable assurance of detecting "illegal acts" that would have a direct and material effect on the determination of financial statement amounts.

One recent innovation has significantly reduced the incidence of check fraud among banks. This technique is which of the following? A. Video spectral comparator B. Inkless fingerprints C. Electrostatic detection apparatus D. Signature analysis

B. Inkless fingerprints A biometric fingerprint identifier requires the check writer to match fingerprints with the account holder's, which are on file. Banks reported reductions in check fraud of 40% after the machine was introduced in the mid-1990s. Non-account holders who want checks cashed at banks which have implemented this system are required to put an inkless fingerprint on their check. If the check does prove false, law enforcement will already have evidence regarding the fraudster's identity. The cost to a bank of implementing the inkless fingerprint system could be redeemed by preventing a single instance of check fraud. Banks throughout the nation now use this technique to cut fraud losses.

All of the following are basic methods of proving illegal payments EXCEPT: A. Secretly infiltrating ongoing transactions B. Inquiries of the Internal Revenue Service C. Identifying and tracing through audit steps D. Turning an inside witness

B. Inquiries of the Internal Revenue Service There are three basic ways to prove illegal payments: identify and trace them by audit steps, turn an inside witness, or secretly infiltrate or record ongoing transactions. An audit may focus on the point of suspected payment or receipt, or both. As a very general proposition, on-book schemes are best approached from the point of payment, and off-book schemes are most easily identified at the suspected point of receipt, or through the use of an inside witness, or surveillance.

Which GAAP principle requires corresponding expenses and revenue to be recorded in the same accounting period? A. Consistency B. Matching principle C. Conservatism D. Full disclosure

B. Matching principle The matching concept requires the books and records and the resultant financial statements to match revenue and expense in the proper accounting period. Fraud can occur when purposeful attempts are made to manipulate the matching concept. For example, through controlling the year-end cut-off in financial figures, many companies boost their current net income by counting revenue from the following year early, and by delaying the posting of this year's expenses until next year.

The distinguishing feature of a Ponzi scheme is: A. The schemes last a long time B. Old investors are paid with new investors' money C. They all involve either cash or check D. None of the above

B. Old investors are paid with new investors' money Even though the terms Ponzi scheme and pyramid are used interchangeably, there is a distinction between the two. Simply put, all Ponzi schemes are pyramids, but not all pyramids are Ponzi schemes. The key element in a Ponzi scheme is that initial investors are paid with subsequent investors' money. There is little or no legitimate commerce.

Which of the following is NOT a common type of credit card fraud? A. De-emboss/re-emboss B. Profiling C. Advance payments D. Shaving and pasting

B. Profiling Advance payments, shaving and pasting, and de-emboss/re-emboss are all forms of credit card fraud. Profiling is not.

Which of the following should NOT be included as part of the "fraud team" assembled to investigate a possible fraud? A. Legal counsel B. Suspect's supervisor C. Management representative D. Auditors

B. Suspect's supervisor Fraud examinations usually require a cooperative effort among different disciplines. A typical investigation team might include the following: Certified Fraud Examiners, auditors, security, human resources, management representative, outside consultant, and legal counsel. At least in the initial stages of the investigation, there would be no need to include the employee's direct supervisor, especially when you do not know if the supervisor may be involved.

Examples of fraud schemes perpetrated by health care institutions and their employees include all of the following EXCEPT: A. Billing for experimental procedures B. Unintentional misrepresentation of the diagnosis C. Improper contractual relationships D. DRG creep

B. Unintentional misrepresentation of the diagnosis Fraud schemes perpetrated by institutions and their employees include those commonly used by doctors and other providers. However, the more common schemes in which institutions are primarily involved include: filing of false cost reports, DRG creep, billing for experimental procedures, improper contractual and other improper relationships with physicians, and revenue recovery firms billing for extra charges.

The most common denomination of forged traveler's checks is: A. $10 B. $20 C. $100 D. $50

C. $100 Anyone familiar with travelers' checks knows that $100 checks are quite common. Some check rings specialize in the production and distribution of this type of check. Commonly, check passers of this type make small purchases using a fake $100 travelers' check, and receive the bulk of the amount back in cash. Naturally, this scheme works well in areas which have a lot of tourist business. Rings often pull this scam several times in one area in rapid succession.

Which of the following is NOT one of the major standards of generally accepted accounting principles? A. Full disclosure B. Matching C. Accuracy D. Going concern

C. Accuracy Generally accepted accounting principles include these eight major standards: 1) Materiality 2) Matching 3) Conservatism 4) Going concern 5) Cost 6) Objective evidence 7) Consistency 8) Full disclosure

Acceptance of a late bid, falsification of documents or receipts to get a late bid accepted, changes in the bid after other bidders' prices are known, and awarding the contract to the last bidder are typical red flags of which type of contract and procurement fraud? A. Presolicitation schemes B. Bid-rigging schemes C. Bid submission schemes D. Performance schemes

C. Bid submission schemes To detect bid submission schemes the fraud examiner should be aware of the following red flags: * Acceptance of late bid * Falsification of documents or receipts to get a late bid accepted * Change in bid after other bidders' prices are known * Change in bid dates * Receipt of late bids * Last bid usually receives the bid

Which of the following is NOT a red flag of check tampering? A. Questionable payee addresses B. Missing checks C. Cancelled checks D. Voided checks

C. Cancelled checks Check-Tampering Red Flags The following irregularities may indicate fraud: * Voided checks may indicate employees have embezzled cash and charged the embezzlement to expense accounts. When the expense is paid (from accounts payable), fraudulent checks are marked and entered as void and removed from distribution points. An account-balancing journal entry is then made. The list of voided checks should be verified against physical copies of the checks. Bank statements should be reviewed to ensure that voided checks have not been processed. * Missing checks may indicate lax control over the physical safekeeping of checks. Stop payments should be issued for all missing checks. * Checks payable to employees, with the exception of regular payroll checks, should be closely scrutinized. Such an examination may indicate other schemes such as conflicts of interest, fictitious vendors, or duplicate expense reimbursements. * Altered endorsements or dual endorsements of returned checks may indicate possible tampering. * Returned checks with obviously forged or questionable signature endorsements should be verified with original payee. * Altered payees on returned checks should be verified with intended payee. * Duplicate or counterfeit checks indicate fraud. These checks may be traceable to depositor through bank check coding. * Questionable deposit dates should be matched to the corresponding customer accounts. * An examination of all cash advances may reveal that not all advances are properly documented and, therefore, inappropriate payments have been made to employees. * Customer complaints regarding payments not being applied to their accounts should be investigated. * A questionable payee or payee address on a check should trigger review of the corresponding check and support documentation.

An employee who is responsible for entering personnel information into the company's computer system deliberately deletes payroll information in the system for several co-workers. This type of action is most properly referred to as which of the following? A. Computer fraud B. Unauthorized access C. Computer crime D. None of the above

C. Computer crime Computer fraud is generally defined as a defalcation or embezzlement accomplished by tampering with the computer or data files. Since the employee did not stand to benefit from the action, it is not properly classified as a defalcation or embezzlement. Since the employee was given access to the system by his employer to do his job, it cannot be classified as unauthorized access. However, since the employee deliberately destroyed computer data, it can be classified as a computer crime. Manipulation or destruction of data is most often classified as a computer crime and not computer fraud.

The most common bankruptcy-related crime is: A. Multiple filing B. Petition mills C. Concealment of assets D. A planned bustout

C. Concealment of assets The most common bankruptcy-related crime is the concealment of assets rightfully belonging to the debtor estate. Concealments vary from little or no monetary value to tens of millions of dollars.

The purpose of draw requests in construction lending is to provide: A. Additional architectural designs B. Documentation that all architectural and engineering designs and quotes have been completed C. Documentation that costs have been incurred and reimbursement is sought D. Additional engineering quotes

C. Documentation that costs have been incurred and reimbursement is sought Construction loan advances are generally supported by draw requests. A draw request is the documentation substantiating that a developer/borrower has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. A typical fraud scheme involves requesting advances on the loan for inappropriate costs, such as personal expenses and/or construction costs for an unrelated project. Draw requests may provide the greatest opportunity for a developer to commit fraud because the lender relies upon the developer's documentation.

Delta, a Certified Fraud Examiner and expert accounting witness, was explaining to the jury that a company's financial statements must include information on changes in accounting methods, contingent liabilities, significant subsequent events, and all other information necessary for users to make valid, informed decisions. Delta was explaining the concept of: A. Application of judgment B. Matching C. Full disclosure D. None of the above

C. Full disclosure The accounting principle of full disclosure requires the financial statements of an entity to include all information necessary for the formation of valid decisions by the users. The statements should not include too much information, but are required to include enough information so that the user is not mislead. Supplemental notes to the financial statements are often required to meet these criteria.

Proof in a fraud case usually proceeds through three basic stages. These stages are listed below. In what order does the examiner proceed through these stages? I. Sealing the case through examination of the subject II. Obtaining direct evidence III. Building circumstantial evidence A. II., III., I. B. I., II., III. C. III., II., I. D. I., III., II.

C. III., II., I. Proof in most complex white-collar cases usually proceeds through three basic stages. First, the fraud examiner builds the circumstantial case through interviews of cooperative witnesses and review of available documentation. Then the examiner uses the circumstantial evidence to identify and persuade an inside witness who can provide direct evidence against the defendant. Then the case is sealed, defenses are identified and rebutted, and intent is proved through examination of the subject.

The practice of recording the deposits of transfers between multiple bank accounts before recording the disbursements is called which of the following? A. Timing differences B. Lapping C. Kiting D. An error

C. Kiting Kiting is the practice of recording the deposit of an interbank transfer before recording the disbursement, thus briefly double-counting the amount of cash. In a kiting scheme, multiple bank accounts are opened and money is "deposited" from account to account, although the money never exists. Check kiting is one of the original white-collar crimes.

A tax preparer can be liable for an understatement penalty if he or she acts in bad faith and knew or reasonably should have known that a position taken on the return was which of the following? A. Had been affirmed by previous tax courts. B. Would result in greater tax liability for the client. C. Not realistically possible of being sustained on its merits D. Would result in less tax liability for the client.

C. Not realistically possible of being sustained on its merits Unless there is a reasonable cause for an understatement and the preparer acted in good faith, a penalty of $250 will be assessed against any person who is a preparer, who knew or reasonably should have known that a position taken on a return was: * Not realistically possible of being sustained on its merits * Not disclosed under U.S.C. 6662(d)(2)(B)(ii) * A frivolous position.

Baker, an employee of ABC Corporation, had complete control of the purchasing function for his department. Baker authorized the purchase of several thousand dollars worth of supplies which were unnecessary to ABC. Baker used these supplies to make improvements to his home. This is an example of what kind of fraud? A. Check tampering B. Theft of inventory C. Personal purchases with company funds D. None of the above

C. Personal purchases with company funds Personal Purchases with Company Funds: Instead of undertaking billing schemes to generate cash, many fraudsters simply purchase personal items with their company's money. Company accounts are used to buy items for fraudsters, their businesses, their families, and so on. The fraudster in this type of scheme buys an item and submits the bill to his employer as if it represented a purchase on behalf of the company. The goal is to have the company pay the invoice. This kind of scheme is classified as a fraudulent billing scheme rather than a theft of inventory. The heart of the scheme is not the taking of the inventory but the purchasing of the inventory. In other words, when an employee steals merchandise from a warehouse, he is stealing an asset that the company needs, an asset that it has on hand for a particular reason. The harm to the victim company is not only the cost of the asset, but the loss of the asset itself. In a purchasing scheme, on the other hand, the asset which is taken is superfluous. The perpetrator causes the victim company to order and pay for an asset which it does not really need, so the only damage to the victim company is the money lost in purchasing the particular item.

ABC, Inc. submits a bid on a contract. At the same time, it submits bids from several nonexistent companies. It appears to the contractor that there has been a vigorous bidding competition when in fact, ABC has been merely bidding against itself. This type of scheme is known as which of the following: A. Bid rotation B. Complementary bids C. Phantom bids D. Bid suppression

C. Phantom bids Several companies have been caught creating dummy companies to submit a variety of bids on a single contract. That way, they give the appearance of vigorous competition while actually bidding against themselves. The bids from fictitious companies are referred to as phantom bids.

An insurance agent collects payment from a person for insurance, but doesn't remit the check to the insurance company, keeping the payment. This is known as: A. Churning B. Equity fraud C. Premium fraud D. None of the above

C. Premium fraud In the instance of premium fraud, an agent collects the premium, but doesn't remit the check to the insurance carrier.

Under the bankruptcy laws, an examiner is an expert appointed by the court. All of the following powers are afforded the examiner EXCEPT the power to: A. Investigate and report the results of the investigation B. Depose witnesses C. Run the business D. Subpoena records

C. Run the business An examiner is normally appointed in a Chapter 11 bankruptcy proceeding to investigate certain allegations of fraud and misconduct on the part of the debtor (or principals of the debtor). If the examiner is appointed, his sole responsibility is to "investigate and report" the results of his investigation to the court and the interested parties as quickly as possible. Examiners have the power to subpoena records and depose witnesses. They do not have the power to run businesses, make business decisions, or propose reorganization plans, though the courts may expand the powers of the examiner to include duties done by trustees.

An SPI program is a good way for corporations to protect sensitive information. SPI stands for which of the following: A. Secretive proprietary investments B. Securing privileged information C. Safeguarding proprietary information D. None of the above

C. Safeguarding proprietary information Companies should develop a program for safeguarding proprietary information (SPI). Businesses should seek out a corporate information officer (CIO) to develop and manage an SPI program. An alternative is to hire a security management consultant to develop a program and then maintain it on a yearly basis. In either case, the CIO should have information management skills and be knowledgeable about trade secret protection.

Cash theft schemes fall into which of the following two categories? A. Unrecorded sales and false discounts B. Skimming and unrecorded sales C. Skimming and larceny D. Register manipulation and understated sales

C. Skimming and larceny Cash theft schemes fall into two categories, skimming and larceny. The difference in the two types of schemes depends completely on when the cash is stolen. Cash larceny is the theft of money that has already appeared on a victim organization's books, while skimming is the theft of cash that has not yet been recorded in the accounting system. The way in which an employee extracts the cash may be exactly the same for a cash larceny or skimming scheme.

All BUT which of the following red flags are indicators of bid-rigging schemes? A. Wide disparity in bid prices B. Other qualified vendors fail to submit proposals C. Successful bidder consulting with buyer in need recognition stage D. Joint ventures by firms who could have proposed individually

C. Successful bidder consulting with buyer in need recognition stage To detect bid-rigging schemes, the examiner must be alert for the following red flags: (1) wide disparity in bid prices; (2) other qualified vendors who fail to submit bids; and (3) joint venture bids by firms which could have bid individually.

In very basic terms, the Securities Act of 1933 can be thought of as regulating the issuance of the securities themselves, while the Securities Exchange Act of 1934 regulates mainly _______. A. Exempting securities from registration B. Earnings disclosures C. Trading of securities D. None of the above

C. Trading of securities Unlike the Securities Act of 1933, the Securities Exchange Act of 1934 mainly deals with post-issuance trading. This act, which gave birth to the Securities and Exchange Commission (SEC), requires the registration of securities brokers and dealers. Simply put the 1933 Act can be thought of as regulating the issuance of the securities themselves, while the 1934 Act covers subsequent trading.

Negligence penalties may be assessed against the tax preparer if the preparer does any of the following EXCEPT: A. Knows the information, if used, would result in an understatement of tax liability B. Aids in preparation of a false return C. Verifies suspect information D. Knows or has reason to know that the false information will be used in connection with any material matter arising under IRS rules

C. Verifies suspect information Any person who does the following shall, in addition to other penalties, pay a penalty of $1,000 ($10,000 in the case of a corporation) for each period during which he: * Aids or assists in, procures, or advises with respect to the preparation of any portion of a false return, affidavit, claim, or other document * Knows, or has reason to believe, that the information will be used in connection with any material matter arising under internal revenue laws * Knows the portion (if so used) would result in an understatement of tax liability for another person.

In a computerized system, maintenance controls perform all but which of the following functions? A. Ensure that stored data has not been changed except through normal processing channels B. Provide that data is kept up-to-date C. Verify password compliance D. Identify unusual data requiring further action

C. Verify password compliance Maintenance controls provide that data is kept up to date or identify unusual data requiring further action. They also ensure that data stored on file is not changed except through the normal processing cycle. Maintenance control techniques are used for one-for-one checking, batch control totals, and programmed checks.

Which of the following is/are type(s) of fraudulent disbursement schemes? A. Register disbursement scheme B. Check tampering scheme C. Authorized maker scheme D. All of the above

D. All of the above All of the following are types of fraudulent disbursement schemes: *Register disbursement schemes *Check tampering schemes *Altered payee schemes *Authorized maker schemes

A common type of fraud encountered in oil/gas and other mineral securities investments is: A. Inflated drilling and completion costs B. An invalid mineral rights lease C. Exaggeration of discovery and production potential D. All of the above

D. All of the above As in all cases of securities fraud one should look for discrepancies in promoters' credentials, business history, and commission. The following misrepresentations and omissions are often encountered: * Drilling and Completion Costs: Costs are often hugely inflated to bilk the investor. * Lease: Promoters frequently do not have a valid mineral rights lease. * Discovery and Production Potential: The investor may be misled regarding the likelihood of striking oil and the amount produced. This information is usually contained in the geologist's report. * Wells: The promoter may exaggerate the number and depth of wells, thus inflating the operating costs paid by investors. * Self-dealing: The promoter may declare a good well dry in order to reap the benefits of a productive well later when the investors have given up. * Dry Holes: Often these are completed by the promoter solely to improve his completion record and collect completion funds from investors. * Royalties: Insiders may be assigned the majority of royalties while investors receive only a small portion. * Number of Partners: Promoters are likely to oversell the well, i.e., 99/64ths.

Which of the following is a general method of making illegal payments? A. Checks and other financial interests B. Payment of credit card bills C. Gifts, travel, and entertainment D. All of the above

D. All of the above Certain traditional methods of making illegal payments fall into the hierarchical pattern as follows: * Gifts, travel and entertainment * Checks and other financial interests * Hidden interests * Loans * Payment of credit card bills * Transfers at other than fair market value * Promises of favorable treatment or subsequent employment

The predominant form of authenticating valid users on a computer system is to employ passwords. Which of the following are essential in maintaining effective password security? A. Passwords revoked if the employee is terminated B. Passwords of sufficient length (e.g., six characters) C. Prohibition of shared passwords D. All of the above

D. All of the above Passwords are the predominant form of authenticating valid users. Effective password administration is essential for maintaining security. Passwords should be of sufficient length (usually a minimum of eight characters) to avoid guessing. Group passwords and sharing of passwords should be prohibited so as to maintain individual accountability. Passwords of all terminated employees should be revoked immediately. Security administration often coordinates the notification of terminated employees with the personnel function. Employees who have changed job functions or transferred should have their old password canceled and a new one issued, if appropriate.

Corporate Fraud Handbook discussed several methods that fraudsters use to conceal check tampering. These include: A. Forced reconciliations B. Miscoding fraudulent checks C. Preparing bogus support documentation D. All of the above

D. All of the above Since most check tampering schemes do not consist of a single occurrence but instead continue over a period of time, concealing the fraud is arguably the most important aspect of the scheme. Concealment of the fraud means not only hiding the identity of the criminal, but in most cases hiding the fact of the fraud. The most successful frauds are those in which the victim company is unaware that it is being robbed. Obviously, once a business learns that it is being victimized it will take steps to staunch its bleeding and the end of the fraudster's scheme will be at hand. The methods of concealment specifically identified by Occupational Fraud and Abuse were: * Forced reconciliations * Re-altering cancelled checks * Coding fraudulent checks to existing accounts * Re-issuing intercepted checks * Producing bogus support

Which of the following are common real estate loan fraud schemes? A. Equity skimming B. Appraisal fraud C. Mortgage-backed security fraud D. All of the above

D. All of the above There are several types of external real estate fraud schemes. Some of these schemes include: * Appraisal fraud * Mortgage-backed security fraud * Equity skimming * Land flips.

Which of the following is a way for employees on commission to fraudulently increase their pay? A. Altered sales B. Converting sales of others C. Fictitious sales D. All of the above

D. All of the above There are three ways employees on commission can fraudulently increase their pay: 1) falsify the amount of sales made, 2) increase the rate of commission, or 3) claim the sales of another employee. Employees can falsify the amount of sales they have made in three ways, the first being the creation of fictitious sales. The second way for fraudsters to falsify the value of sales they have made is to alter the prices listed on sales documents. The third way employees can overstate sales is by claiming the sales of another employee as their own.

Common services that are not generally covered by insurance or health care providers, and therefore are often fraudulently manipulated, include: A. Weight loss programs B. "Stop smoking" programs C. School physicals D. All of the above

D. All of the above When a provider knows that a service is not covered, by using false diagnoses and covered procedure codes manipulation he will generally get the claim paid. In addition, before ordering expensive laboratory x-rays or other similar services, physicians justify the ordering of such procedures by documenting that a need exists to make such diagnostic inquiries. The services are rendered, but because false information on a claim is used to deceive the insurance company, the claim could be considered fraudulent. Examples of common services not covered are: * Annual physical examination * School physicals * Weight loss programs * Stop smoking programs * Investigational or experimental procedures * Cosmetic surgery

Which of the following are examples of a conflict of interest? A. An employee who has an undisclosed economic or personal interest in a transaction that adversely affects the person's employer B. The employee's interest in the transaction is undisclosed and the employer does not know of the employee's interest in the business deal C. An employee who has an undisclosed interest in a transaction, however, the employee acts in a manner detrimental to his company in order to provide benefit to a relative, not himself D. All of the above are examples

D. All of the above are examples The vast majority of conflict cases occur because the fraudster has an undisclosed economic interest in a transaction. However, the fraudster's hidden interest does not necessarily have to be economic. In some scenarios, an employee acts in a manner detrimental to his company in order to provide a benefit to a friend or relative, even though the fraudster receives no financial benefit from the transaction himself. In order to be classified as a conflict of interest scheme, the employee's interest in the transaction must be undisclosed. The crux of a conflict case is that the fraudster takes advantage of his employer; the victim organization is unaware that its employee has divided loyalties. If an employer knows of the employee's interest in a business deal or negotiation, there can be no conflict of interest.

Which of the following is an example of an intangible asset? A. Goodwill B. Patents C. Leaseholds D. All of the above are intangible assets

D. All of the above are intangible assets According to Marshall and McManus, "intangible assets" are "long-lived assets that differ from property, plant, and equipment that has been purchased outright or acquired under a capital lease -- either because the asset is represented by a contractual right, or because the asset results from a purchase transaction but is not physically identifiable. Examples of the first type of intangible assets are leaseholds, patents, and trademarks; the second type of asset is known as goodwill."

Insurance Agent/Broker fraud includes which of the following? A. Premium fraud B. Fictitious payees C. Fictitious death claims D. All of the above are types of Agent/Broker fraud schemes

D. All of the above are types of Agent/Broker fraud schemes Types of Insurance Agent/Broker Fraud include: * Premium Fraud--Agent collects the premium, but doesn't remit the check to the insurance company. This results in the insured having no coverage. * Fictitious Payees--An agent or a clerk can change the beneficiary of record to a fictitious person and subsequently submit the necessary papers to authorize the issuance of a check. * Fictitious Death Claims--An agent or employee obtains a fictitious death certificate and requests that a death claim check be issued. The agent receives the check and cashes it.

In order to conceal the misappropriation of an asset, the accounting equation can be balanced by all of the following EXCEPT: A. Reducing owners' equity B. Creating an expense C. Reducing a liability D. Decreasing another asset

D. Decreasing another asset The accounting equation, Assets=Liabilities+Owners' Equity, is the basis for all double-entry accounting. If an asset is stolen, the equation can be balanced by increasing another asset, reducing a liability, reducing an owners' equity account, reducing revenues (and thus retained earnings), or creating an expense (and thus reducing retained earnings). Of these, creating a fraudulent expense is most common.

All of the following are examples of bid submission schemes EXCEPT: A. Altering bids B. Premature opening of bids C. Controlled bid opening D. Material mischarges

D. Material mischarges Schemes involving bid submissions can take many forms. It can involve anyone in the contracting cycle such as a buyer or contracting official, engineer, technical representative, quality or product assurance representative, subcontractor, or liaison employee - anyone who can influence the awarding of a contract. Examples of bid submission schemes are: * Premature opening of bids * Altering bids * Unjustifiable extension of bid opening dates * Controlled bid opening * Falsifying bid logs and document

In order to prevent inventory theft, who should conduct physical observations of a company's inventory? A. Purchasing agents B. Warehouse personnel C. Purchasing supervisor D. None of the above

D. None of the above Someone independent of the purchasing or warehousing functions should conduct physical observation of inventory. The personnel conducting the physical observations also should be knowledgeable about the inventory.

White booked a flight for a business trip with his company's travel agent. He filled out two expense reports for this trip, and on each report he requested reimbursement for the cost of the ticket. On one report, he attached his airline stub as support for the expense. On the other report he attached the travel agency's invoice as support. According to Corporate Fraud Handbook, what kind of scheme was White attempting? A. A false billing scheme B. An overstated expense scheme C. A mischaracterized expense scheme D. None of the above

D. None of the above White was attempting a multiple reimbursement scheme. This type of fraud involves the submission of a single expense several times to receive multiple reimbursements. The most frequent example of a duplicate reimbursement scheme is the submission of several types of support for the same expense.

Which of the following is the primary focus of the Bank Secrecy Act? A. Interstate transfer of funds B. Preventing the disclosure of confidential financial information C. Tax evasion reporting D. Reporting and recordkeeping requirements

D. Reporting and recordkeeping requirements The Bank Secrecy Act (BSA) consists of two titles. Title I contains provisions requiring that financial institutions and securities brokers and dealers keep extensive records of the transactions and accounts of their customers. Title II of the BSA (originally entitled "Currency and Foreign Transactions Reporting Act") requires banks, "financial institutions" (which includes casinos, securities brokers and dealers, and currency exchanges), and, in some cases, individuals to report to the government certain transactions.

Which of the following is NOT a type of a corrupt recipient? A. The "rule breaker" B. The "complainer" C. The "big spender" D. The "gift giver"

D. The "gift giver" A person taking payoffs or embezzling funds often fits into one of these categories: the "big spender" (one of the most common detection methods for this type of scheme); the "gift taker" (one who regularly accepts inappropriate gifts); the "odd couple" (payers and recipients who have an apparent, friendly social relationship and these people do not appear to have much in common); the "rule breaker" (one who either independently or through influencing another, breaks, bends, or ignores standard operating procedures to benefit the payer); the "complainer" (one who makes excuses for deficiencies in the payer's services). Genuine need (legitimate pressures which induce an individual to participate in an illegal scheme) may be involved.

Which of the following is the most common type of occupational fraud? A. Asset misappropriation B. Bribery C. Extortion D. Fraudulent Financial Statements

A. Asset misappropriation Asset misappropriations are by far the most common of all occupational frauds. There are three major categories of asset misappropriation schemes: cash receipt schemes, fraudulent disbursements, and theft of inventory and other assets.

A scheme whereby a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process, is called what? A. Daisy chain B. Linked financing C. Nonexistent borrower scheme D. None of the above

A. Daisy chain In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process. Its purpose is to mask or hide bad loans by making them look like they are recent and good.

All of the following are possible defenses to tax fraud EXCEPT: A. Death of the taxpayer B. The taxpayer establishes that an objectively reasonable position was taken C. The taxpayer establishes that there is no deficiency D. The taxpayer establishes that he did not have an unrestricted right to the income

A. Death of the taxpayer Fraud penalties survive the death of the taxpayer.

Dick is a graphic designer. He is hired to do a layout of a brochure for XYZ Company. When the work is completed, XYZ Company pays him $12,000 in cash. Which of the following best describes what Dick is or is not required to do? A. Dick is required to file IRS Form 8300 because he received a cash payment of more than $10,000 B. Dick is not required to report the transaction because he is not a "financial institution" C. Dick is required to file a Currency Transaction Report because he received more than $10,000 D. Dick is required to report the transaction only if he has reason to believe it is "suspicious"

A. Dick is required to file IRS Form 8300 because he received a cash payment of more than $10,000 Title 31, Section 5331 of the U.S. Code (instituted as part of the USA PATRIOT Act) requires that any person engaged in a trade or business and who in the course of such trade or business receives more than $10,000 in cash in one or more related transactions shall file IRS Form 8300. Reported transactions include any sale made in a trade or business that is retail in nature, a sale for goods and services, a sale of real property, an exchange of cash for cash, a collectible, a consumer durable, repayment of a loan, and conversion of cash to negotiate instruments.

Which of the following is NOT a favorite business for laundering money? A. Electronics stores B. Vending machines C. Restaurants D. Wholesale distribution

A. Electronics stores Businesses that are commonly used to front money laundering operations include bars, restaurants, and nightclubs. These businesses charge relatively high prices, and customers vary widely in their purchases. Vending machine operations also possess many characteristics favorable to a money laundering operation. Wholesale distribution businesses have historically been a prominent part of money laundering. The revenues in a wholesaling business are not typically as flexible as in food service and vending machine operations, but with a diverse product line and falsified invoices, it is still possible to inject a good deal of illegal cash into the business.

Which of the following is NOT a type of skimming scheme? A. False refunds B. Understated sales and receivables C. Unrecorded sales D. Theft of checks through the mail

A. False refunds Skimming is the removal of cash from a victim entity prior to its entry in the accounting system. Employees who skim from their companies steal sales or receivables before they are recorded in the company books. Skimming schemes generally fall into one of four categories: *Unrecorded sales *Understated sales and receivables *Theft of checks through the mail *Short-term skimming False refunds are a type of register disbursement scheme.

In a telemarketing scam, the person who calls the potential victim and makes the initial pitch is known as the: A. Fronter B. Verifier C. Closer D. None of the above

A. Fronter The fronter calls victims and makes the initial pitch. This low-level worker is usually breaking into the business and reads from a script to the prospective customer. Fronters seldom see the merchandise or know the full extent of the operation. Keeping fronters in the dark, at least in theory, limits what they can tell investigators and protects them in the event of prosecution.

According to the IIA Practice Advisory 1210.A2-1 Identification of Fraud, the internal auditor's responsibilities for detecting fraud are: I. Have sufficient knowledge of fraud to be able to identify indicators II. Be alert to opportunities, such as control weaknesses, that would allow fraud III. Evaluate the indicators that fraud may have been committed IV. Notify the appropriate authorities outside the organization if there are sufficient indicators that fraud is being committed A. I., II., and III. Only B. II., III., and IV. Only C. I., II., III. and IV D. I., II., and IV. Only

A. I., II., and III. Only In conducting engagements, the internal auditor's responsibilities for detecting fraud are to: I. Have sufficient knowledge of fraud to be able to identify indicators that fraud may have been committed. This knowledge includes the need to know the characteristics of fraud, the techniques used to commit fraud, and the types of frauds associated with the activities reviewed. II. Be alert to opportunities, such as control weaknesses, that could allow fraud. If significant control weaknesses are detected, additional tests conducted by internal auditors should include tests directed toward identification of other indicators of fraud. Some examples of indicators are unauthorized transactions, override of controls, unexplained pricing exceptions, and unusually large product losses. Internal auditors should recognize that the presence of more than one indicator at any one time increases the probability that fraud may have occurred. III. Evaluate the indicators that fraud may have been committed and decide whether any further action is necessary or whether an investigation should be recommended. IV. Notify the appropriate authorities within the organization if a determination is made that there is sufficient indicators of the commission of a fraud to recommend an investigation.

The three common methods for concealing liabilities and expenses are: I. Liability/Expense Omissions II. Capitalized Expenses III. Early Revenue Recognition IV. Failure to Disclose Warranty Costs and Liabilities. A. I., II., and IV. B. III. and IV. C. II., III., and IV. D. I., II., and III.

A. I., II., and IV. Concealed liabilities and expenses can be difficult to detect because there frequently is no audit trail. There are three common methods for concealing liabilities and expenses: Liability/Expense Omissions, Capitalized Expenses, and Failure to Disclose Warranty Costs and Liabilities.

Under Section 302 of the Sarbanes-Oxley Act, the CEO and CFO are required to personally certify that they have evaluated the company's _________ within the past ninety days. A. Internal controls B. Personal loans C. Material misstatements D. Audit committee

A. Internal controls Under Sarbanes-Oxley, the CEO and CFO not only have to certify that they are responsible for their companies' internal controls, but also that they have evaluated the controls within 90 days prior to their quarterly or annual report. Essentially, this new certification requirement mandates that companies actively and continually re-evaluate their control structures to prevent fraud.

A money laundering scheme cannot be successful until the _________ is eliminated or made so complex that individual steps cannot be easily traced. A. Paper trail B. Integration C. Reporting D. Placement

A. Paper trail A money laundering scheme cannot be successful until the paper trail is eliminated or made so complex that individual steps cannot be easily traced. The number of steps used depends on how much distance the money launderer wishes to put between the illegally earned cash and the laundered asset into which it is converted. A greater number of steps increases the complexity of tracing the funds, but it also increases the length of the paper trail and the chance that the transaction will be reported.

One illegal type of investment scam is called a: A. Ponzi B. Patsy C. Percy D. None of the above

A. Ponzi A Ponzi scheme is generally defined as an illegal business practice in which new investors' money is used to make payments to earlier investors.

Which of the following is the definition of the computer manipulation technique known as a "salami" technique? A. Stealing a small amount of assets from a large number of sources without noticeably reducing the whole B. Searching for valid access codes or trap doors C. Using several networks in a series in order to avoid detection D. Toggling back and forth between benign activity and hacking

A. Stealing a small amount of assets from a large number of sources without noticeably reducing the whole Salami techniques involve the theft of small amounts of assets from a large number of sources without noticeably reducing the whole. For example, in a banking system, the amount of interest to be credited to an account is rounded off. Instead of rounding off the number, that fraction of it is credited to a special account owned by the perpetrator.

All of the following terms describe characteristics of a corrupt payer EXCEPT: A. The "Big Spender" B. The "One-Person Operation" C. The "Too Successful Bidder" D. The "Gift Bearer"

A. The "Big Spender" Typical signs of a corrupt payer include: (1) the "Gift Bearer," (2) the "Sleaze Factor," (3) the "Too Successful Bidder," (4) poor quality, higher prices, or (5) the "One- Person Operation." The "Big Spender" is a typical sign of a corrupt recipient.

Claim fraud may well represent an insurance company's largest fraud risk. Most claims are legitimate; however, some are not. All of the following are red flags for claims fraud EXCEPT: A. The insured is calm about delays in settling the claim B. In a burglary loss, the claim includes large, bulky property C. In a fire loss, the claim includes a lot of recently purchased expensive property D. A claim is made shortly after the policy's inception

A. The insured is calm about delays in settling the claim Red flags of insurance claim fraud include the following: * The claim is made a short time after the policy's inception or after a coverage increase or change * The insured has a history of many insurance claims * The insured previously asked the insurance agent hypothetical questions about coverage in the event of a loss similar to the actual claim * The insured is very pushy and insistent about a fast settlement, and exhibits more than the usual amount of knowledge about insurance coverage and claims procedure * In a burglary loss, the claim includes large, bulky property * In a theft or fire loss claim, the claim includes a lot of recently purchased, expensive property, or the insured insists that everything was the best or the most expensive model, especially if the insured cannot provide receipts, owner's manuals, or other proof-of-purchase documentation.

According to the 2004 Report to the Nation, what was the most common outcome in occupational fraud cases that were reported to law enforcement authorities? A. The perpetrator pled guilty or no contest B. The perpetrator was acquitted C. The state declined to prosecute the offense D. The perpetrator was convicted at trial

A. The perpetrator pled guilty or no contest There were 319 cases referred to law enforcement in our 2004 study in which the respondents were able to provide information about the outcome of the cases. Over half of these cases were still pending at the time of our study. Among cases that had reached their conclusion, the most common outcome was for the perpetrator to plead guilty or no contest. This occurred in nearly 37 percent of the referred cases. Another 5 percent of perpetrators were convicted at trial, as opposed to less than 1 percent (3 perpetrators) who were acquitted. In 8 percent of the cases, the state declined to prosecute the offense.

In a home-based business scheme, the swindlers marketing home-based businesses require a person to buy materials for assembly-at-home products, but the materials are essentially worthless or cheap. A. True B. False

A. True A popular fad today, many companies marketing home-based businesses require one to buy materials for assembly-at-home products. The consumer is promised that the company will purchase the completed products, and when it does not, is left with a bad investment and a stock of cheap, worthless goods.

According to the U.S. General Accounting Office, health insurance fraud accounts for between 3 and 10% of total health care spending. A. True B. False

A. True According to the U.S. General Accounting Office, the most common estimate of health insurance fraud is 10% of our total health care spending. However, because no one knows exactly what the figure is, the figure has also been estimated to be from 3 to 10% per year. This translates to a minimum loss of $60 billion and perhaps as much as $200 billion by 2006. Health care providers perpetrate the majority of this fraud.

Merchants should be advised not to accept a VISA credit card that begins with a 5 and has less than 13 digits. A. True B. False

A. True All VISA accounts begin with a 4 and contain either 13 or 16 digits. MasterCard account numbers begin with a 5 and contain 16 digits. If a customer presents a VISA card with a number that begins with a 5, then the card is probably counterfeit.

Pyramid schemes, Ponzi schemes, and even ostrich farms can (under certain conditions) be considered "securities." A. True B. False

A. True An investment contract is considered a "security" under the Howey test if certain conditions are met. There are numerous examples of such investment contracts, including Ponzi schemes, pyramid schemes, and even ostrich farms. In order to come within the Howey test, the investment must be a common enterprise, with an expectation of profit, and the profit must be generated solely from the efforts of others.

Consumer fraud has been found in history since at least the first century. A. True B. False

A. True Complaints of consumer fraud can be found as far back as the first century when Pliny the Elder told of the adulterated honey being sold in Rome and the mixing of wine with gypsum, lime, pitch, rosin, wood ashes, salt, sulphur, and other artificial additives.

Expense reports should require all of the following: * Receipts or other support documentation * Explanation of the expense including specific business purpose * Time period expense occurred * Place of expenditure * Amount A. True B. False

A. True Detailed expense reports should require the following information: * Receipts or other support documentation * Explanation of the expense including specific business purpose * Time period expense occurred * Place of expenditure * Amount It is not enough to have the detailed reports submitted if they are not reviewed. A policy requiring the periodic review of expense reports, coupled with examining the appropriate detail, will help deter employees from submitting personal expenses for reimbursement.

Green, a Certified Fraud Examiner and expert accounting witness, told the jury that the concept of consistency does not preclude a change in an accounting principle previously employed. Green's statement is: A. True B. False

A. True Entities should employ consistent accounting procedures from period to period. However, the concept of consistency does not completely prohibit changes in the accounting principles used. Changes are permissible when it is believed that the use of a different principle will more fairly state net income and financial position. Examples of changes in accounting principles include a change in the method of inventory pricing, a change in the depreciation method for previously recorded assets, and a change in the method of accounting for long-term construction contracts. The disclosure for a change in accounting principles should include the justification for the change, and the justification should explain why the newly adopted principle is preferable.

Generally, expense account review uses one of two methods: historical comparisons or comparisons with budgeted amounts. A. True B. False

A. True Generally, expense account review uses one of two methods: historical comparisons or comparisons with budgeted amounts. A historical comparison compares the balance expended this period in relation to the balance spent in prior, similar periods. When performing this review, consider changes to the marketing, servicing, or other company operations. Budgets are estimates of the money and/or time necessary to complete the task. They are based on past experience with consideration for current and future business conditions. Therefore, when comparing actual and budgeted expenses, determining inordinate expenses or inaccurate budget estimates is important.

Revenue should not be recognized for work that is to be performed in subsequent accounting periods, even though the work may currently be under contract. A. True B. False

A. True In general, revenue is recognized or recorded when it becomes realized or realizable, and earned. These criteria are considered to be met when: *Persuasive evidence of an arrangement exists; *Delivery has occurred or services have been rendered; *The seller's price to the buyer is fixed or determinable; and *Collectibility is reasonably assured. Therefore, Revenue should not be recognized for work that is to be performed in subsequent accounting periods, even though the work may currently be under contract. The revenue should be recognized in the period in which the work is performed.

When tracing illegal payments, if the suspected payer is unknown, then the examiner should focus on the suspected recipient. A. True B. False

A. True Often, the only practical approach to identifying and tracing illegal payments is to focus on the suspected recipient, particularly if the person making the payments is unknown, suspected of taking from many, or if payments are in cash or from off-book funds.

The Sarbanes-Oxley Act imposes two types of certifications on CEOs and CFOs -- criminal certifications and civil certifications. A. True B. False

A. True One of the most significant changes effected by the Sarbanes-Oxley Act is the requirement that the Chief Executive Officer and the Chief Financial Officer of public companies personally certify annual and quarterly SEC filings. There are two types of officer certifications mandated by Sarbanes-Oxley: criminal certifications, which are set forth in Section 906 of the Act and codified at 18 USC )1350, and civil certifications, which are set forth in Section 302 of the Act.