Fraud Examination Midterm
True or False: Marsha Wood added her one-year-old niece, Jackie, to the payroll at JNC Company and began issuing paychecks in Jackie's name, even though Jackie did not work for the organization. Marsha's niece is not considered a ghost employee because she is a real individual rather than a fictitious person.
False
True or False: According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the most common type of occupational fraud is financial statement fraud.
False
True or False: Assessing an area as having a high fraud risk means that fraud is occurring there.
False
True or False: Effective internal controls can eliminate the need for a fraud risk assessment.
False
True or False: In assessing the significance to the organization of identified fraud risks, the fraud risk assessment team should first consider them on an inherent basis.
False
True or False: In general, management should avoid sharing the fraud risk assessment process and results with employees.
False
True or False: Internal control is a process aimed at proactively identifying and addressing an organization's vulnerabilities to internal and external fraud.
False
True or False: It is not important to consider reputation risk in performing a fraud risk assessment since this risk cannot easily be mitigated
False
True or False: Management is not likely to have sufficient knowledge of controls to override them.
False
True or False: The Sarbanes-Oxley Act provides that members of the audit committee may receive compensation for consulting or advisory work only if approved by a majority of the board members.
False
True or False: The civil and criminal protections for whistleblowers under Sarbanes-Oxley apply only to employees of publicly traded companies.
False
True or False: The implementation of hidden controls is a crucial component of an effective proactive fraud deterrence plan.
False
True or False: The term "financial statement" does not include a statement of cash receipts and disbursements, because this type of presentation violates the required use of accrual accounting under GAAP.
False
True or False: The terms deterrence and prevention mean the same thing and cab be used interchangeably.
False
True or False: To maximize the effectiveness of the fraud risk assessment process, the fraud risk assessment team should include both facts and opinions in its report.
False
True or False: To safeguard against ghost employee schemes, the person in charge of entering new employees in the payroll system should also distribute the paychecks so that he or she can look for payments to unauthorized employees.
False
True or False: Under Sarbanes-Oxley, pubic accounting firms must rotate the lead partner or the partner reviewing the audit every year.
False
True or False: Vigorously prosecuting fraud perpetrators is considered to be the best proactive way to deter fraud.
False
Jim Stevens is a payroll manager for a mid-sized insurance company in the southeast. Last year, his performance review was conducted late, so he received a retroactive pay increase. Because he was not authorized to access his own employee records, Stevens stole another employee's password and logged into the payroll system. He manipulated his records to keep the retroactive pay increase in effect in future periods, effectively doubling his intended pay raise. What type of fraud is this?
Falsified hours and salary scheme
True or False: According to the 2012 Report to the Nations on Occupational Fraud and Abuse, losses due to financial statement frauds are higher than other occupational fraud schemes.
True
True or False: All organizations, regardless of size, should institute a formal ethics policy.
True
True or False: Although hotlines are an essential part of an effective fraud reporting system, only about 5 percent of hotline calls are actually developed into solid cases.
True
True or False: Both management and auditors have a responsibility for fraud risk management.
True
True or False: Comparing actual payroll expenses to budget projections can help identify falsified hours and salary schemes.
True
True or False: Comparing salaried employees' gross pay from one pay period to the next is one way of testing for payroll fraud.
True
True or False: According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the least costly type of fraudulent disbursement schemes
False
Risks resulting from ineffective or nonexistent controls are known as which of the following?
Residual risks
True or False: According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the most common type of fraudulent disbursement schemes
False
When a fraudster feeds fictitious information into the accounting system in order to manipulate reported results, this is called:
Beating the accounting system
If an employee generates a much higher percentage of uncollected sales than his coworkers, what type of scheme might he be committing?
Commission scheme
Jed Butler is an internal auditor for Billings Industries. Recently he ran a program that identified customer accounts which had previously been dormant for six months or more but had sales in the last two months of the year. What type of fraud would this test most likely reveal?
Commission scheme
An action that will not increase the perception of detection within an organization?
Conducting clandestine audits
Modification of behavior through the perception of negative sanctions is called:
Deterrence
Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of:
Full disclosure
A _______________ is an individual on the payroll who does not actually work for the organization
Ghost employee
During a review of A+ Service's payroll records, Judy Penney, an internal auditor, noticed that Bradley Banks has no deductions taken from his paychecks for withholding taxes or insurance. She then searched for Banks in the personnel records, but could not locate him. Based on this information, what type of scheme did Penney most likely uncover?
Ghost employee scheme
Ellie Weaver works for the JAG Group as the customer service supervisor. When Joel Carter was hired into her department, she listed his start date as one month before he actually began work. Accordingly, the payroll department generated an extra paycheck for Carter, which Weaver intercepted and cashed at a liquor store. What type of fraud is this?
Ghost employee scheme
If a fraudster fails to remove a terminated employee from the payroll and collects the former employee's fraudulent paychecks, he or she is committing a:
Ghost employee scheme
If a fraudster uses his computer to produce fictitious financial statements while completely ignoring the data in the accounting system, this is an example of what general financial statement fraud method?
Going outside the accounting system
The school of ethical thought that advocates concrete ethical principles that cannot be violated is the:
Imperative ethical principle
The concept of ______________ provides that corporations can legally be held criminally responsible for the acts of their employees if those acts were done in the course and scope of their employment and for the apparent benefit of the corporation.
Imputed liability
A company's financial statements are the responsibility of:
Management
The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation?
Materiality
For the past several months the Adams Shop, a mom and pop retail store, has suffered costly losses due to the theft of merchandise. Putting in a comprehensive surveillance system that covers all of the entrances and exits at all four of their locations is not feasible at this time. Nevertheless, they have decided to install several surveillance cameras in their flagship store. They notified their employees that the cameras were being installed and placed posters at the store entrances notifying their customers of the new security. Not surprisingly, thefts decreased dramatically within a month and continued to decline over the next six months. Without the cash to install cameras in all the stores, Adams installed fake cameras at the other three stores and let employees and customers at those locations know about the cameras. Thefts dropped at the other stores as well. The concept that most likely explains why the thefts decreased is known as:
Perception of detection
The axiom that states "employees who believe that they will be caught engaging in occupational fraud and abuse are less likely to commit it" is called:
Perception of detection
The most common method of misappropriating funds from the payroll is:
Overpayment of wages
_________ controls are designed to stop an undesirable event from occurring, whereas _________ controls are designed to identify an undesirable event that has already occurred.
Preventive; detective
Intentionally reporting product sales in the financial statements for the period prior to when they actually occurred is a violation of which generally accepted accounting principle?
Revenue Recognition
True or False: Dean Crawley is a foreman for the Albuquerque Construction Co. As part of his duties, Dean often must run to the hardware store to purchase supplies when they are needed immediately for a building project. One afternoon, Dean's building crew ran out of a particular sized nail and needed 35 more right away to meet their tight project deadline. Dean went to the nearest hardware store to restock, but quickly realized he had forgotten his wallet. Rather than waste precious time retrieving his wallet, he slipped 40 nails into his pockets and walked out without paying for them. Even though Dean's actions specifically violated company policies, the company may still be held criminally responsible for his theft.
True
True or False: Fraud prevention involves removing the root cause of fraudulent behavior, such as economic deprivation or social injustice
True
True or False: Fraudulent manipulation of the going concern assumption usually results from an organization trying to conceal its terminal business situation.
True
True or False: One of the first steps in a fraud risk assessment involves identifying potential fraud risks inherent to the organization.
True
True or False: Salaried ghost employees are generally easier to create and more difficult to conceal than hourly ghost employees
True
True or False: The "tone at the top" that is set by management is more important in providing a strong ethical message to employees than having a formal organizational ethics policy in place.
True
True or False: The Corporate Sentencing Guidelines allow organizations that have an effective fraud prevention and detection program in place to receive more lenient criminal sentences than those without such a program.
True
True or False: The objective of a fraud risk assessment is to help management recognize factors that make an organization most vulnerable to fraud so that management can address those factors to reduce the exposure.
True
True or False: The results of a fraud risk assessment can help auditors design programs and procedures in a way that enables the auditors to look for fraud in known areas of high risk.
True
True or False: Vanessa Armstrong was the chief financial officer for D&G Technologies, a publicly traded corporation. During the 20X1 fiscal year, she caused the company's financial statements to violate reporting requirements by including a significant overstatement of revenue so that she would receive a large performance bonus. When her transgression came to light, the company was required to issue restated financial statements for 20X1. Under the provisions of Sarbanes-Oxley, Vanessa must reimburse the company for any bonus she received during the 12 months after the 20X1 financials were initially filed.
True
True or false: The conservatism constraint for financial reporting states that, if there is any doubt, companies should aim to avoid overstating assets and income.
True
The school of ethical thought that advocates situational ethics, i.e., each behavior should be evaluated on its own merits, is the
Utilitarian ethical principle
Brian Ferguson is a cashier at a 24-hour convenience store. He has worked the night shift for the last year and a half, and often fills in for other employees at the last minute, but has never received a raise. Furthermore, Brian just got passed over for a promotion to store manager, which would have nearly doubled his pay. Understandably, he is outraged. Because his employer is so "cheap" and "unfair," Brian begins taking cases of beer and snacks home to supplement his income. The term that best describes Brian's theft as retribution for his inadequate pay is:
Wages in kind
The conceptual framework for financial reporting includes several assumptions that underlie generally accepted accounting principles. Which of the following is one of these assumptions? a. Economic entity b. Relevance c. Matching d. Comparability
a. Economic entity
Which of the following is not a true statement regarding the fraud risk assessment process? a. It is more of a science than an art b. To be most effective, it should be an ongoing, continuous process c. It should be influenced by the culture of an organization d. It is aimed at proactively identifying an organization's vulnerabilities to fraud
a. It is more of a science than an art
Which of the following controls will help prevent and detect falsified hours and salary schemes? a. The duties of payroll preparation, authorization, and distribution are segregated. b. Sick leave and vacation time are monitored for excesses by the payroll department. c. Supervisors return authorized timecards to the employees for review before they are sent to the payroll department. d. All of the above
a. The duties of payroll preparation, authorization, and distribution are segregated
Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to personally certify annual and quarterly SEC filings. Which of the following is an item that they must certify in their reports? a. They have disclosed to the audit committee any material control weakness. b. The financial statements were prepared in conformity with GAAP. c. The company's internal controls have prevented or detected all material instances of fraud during the last year. d. All of the above
a. They have disclosed to the audit committee any material control weakness.
Senior management is most likely to understate business performance in the financial statements for which of the following reasons? a. To reduce the value of an owner-managed business for purposes of a divorce settlement b. To comply with loan covenants c. To increase the value of a corporate unit whose management is planning a buyout d. To trigger performance-related compensation or earn-out payments
a. To reduce the value of an owner-managed business for purposes of a divorce settlement
Which of the following is not a type of payroll scheme? a. Ghost employee scheme b. False deduction scheme c. Falsified hours and salary scheme d. Commission scheme
b. False deduction scheme
Which of the following is not a potential corruption risk? a. Payment of bribes to public officials, companies, or private individuals b. Inadequate disclosures pertaining to related-party transactions c. Receipt of kickbacks, bribes, or gratuities d. Aiding and abetting of fraud by customers or vendors
b. Inadequate disclosures pertaining to related-party transactions
Which of the following factors should be considered in assessing the likelihood of occurrence of each fraud risk? a. Financial statement and monetary significance b. Internal control environment of the organization c. Criminal, civil, and regulatory liabilities d. Financial condition of the organization
b. Internal control environment of the organization
Which of the following is not true regarding fraud risk? a. It can be analyzed quantitatively b. It results exclusively from sources internal to the organization c. It can be analyzed qualitatively d. It encompasses reputation risk
b. It results exclusively from sources internal to the organization
Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and imposing sanctions where justified are duties of which of the following bodies? a. General Accounting Office's Oversight Board b. Public Company Accounting Oversight Board c. AICPA's Accounting Standards Board d. SEC's Subcommittee on Corporate Governance
b. Public Company Accounting Oversight Board
Having an adequate program to report fraud is vital to the success of an organization's efforts to detect and deter fraud. Which of the following is a key point that should be emphasized in such a program? a. If everyone works together, fraud, waste, and abuse can be completely eliminated within the organization. b. There is an exact method for reporting suspected wrongdoing. c. Penalties may be assessed on employees who report inaccurate information, regardless of intent. d. All of the above
b. There is an exact method for reporting suspected wrongdoing.
As it relates to Corporate Sentencing Guidelines, corporations are required to perform certain minimum steps for due diligence. Which of the following is not one of the required steps? a. Consistently enforce standards through appropriate discipline. b. Have policies defining standards and procedures to be followed by the organization's agents and employees. c. Assign internal audit personnel to ensure compliance. d. Use due care not to delegate significant authority to people who are known to have a propensity to engage in illegal activities.
c. Assign internal audit personnel to ensure compliance.
The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting firms are allowed to perform for audit clients. Which of the following services are public audit firms now expressly prohibited from performing for their audit clients? a. Quarterly review services b. Tax services c. Bookkeeping services d. All of the above
c. Bookkeeping services
Management should consider which of the following in establishing an acceptable level of fraud risk for the organization? a. The organization's business objectives b. The organization's risk tolerance level c. Both A and B d. Neither A nor B
c. Both A and B
Which of the following can be used to test for commission schemes? a. Extract manual checks and summarize by salesperson and amount. b. Compare hours reported per timecard system to payroll system. c. Extract customer sale balances that exceed the customer credit limit. d. None of the above
c. Extract customer sale balances that exceed the customer credit limit.
18. Which of the following information-gathering techniques enables the fraud risk assessor to observe the interactions of employees as they discuss a question or issue? a. Interviews b. Surveys c. Focus groups d. Anonymous feedback mechanisms
c. Focus groups
The vulnerability of an organization to those capable of overcoming the three elements of the fraud triangle is known as which of the following? a. Inherent risk b. Fraud risk assessment c. Fraud risk d. Control risk
c. Fraud risk
Fraudulent financial reporting risks include which of the following? a. Payment of bribes or gratuities b. Aiding and abetting of fraud by outside parties c. Inappropriately reflected balance sheet amounts d. Misappropriation of intangible assets
c. Inappropriately reflected balance sheet amounts
16. Which of the following is a type of detective control? a. Segregating duties b. Performing background checks c. Performing surprise audits d. Ensuring proper alignment between an individual's authority and level of responsibility
c. Performing surprise audits
Which of the following actions might management take in order to transfer a residual fraud risk? a. Eliminate the related asset b. Exit the related activity c. Purchase fidelity insurance d. Implement countermeasures
c. Purchase fidelity insurance
According to COSO's study, Fraudulent Financial Reporting: 1998-2007, which of the following is the most likely to commit financial statement fraud? a. Organized criminals b. Mid-level employees c. The chief executive officer and/or chief financial officer d. Lower-level employees
c. The chief executive officer and/or chief financial officer
Which of the following is not one of the provisions established under the Sarbanes- Oxley Act? a. Code of ethics for senior financial officers b. Management assessments of internal controls c. The creation of the Public Accounting Standards Board d. Criminal penalties for altering documents
c. The creation of the Public Accounting Standards Board
Which of the following is not necessary for a ghost employee scheme to succeed? a. Timekeeping and wage rate information must be collected. b. The ghost must be added to the payroll. c. The perpetrator must have access to a bank account in the ghost employee's name. d. A paycheck must be issued to the ghost.
c. The perpetrator must have access to a bank account in the ghost employee's name.
Which of the following procedures will not help prevent ghost employee schemes? a. The personnel records are maintained separately from the payroll and timekeeping functions. b. The personnel department conducts background and reference checks on all prospective employees before hiring them. c. The person responsible for hiring new employees also supervises the payroll function. d. The personnel department verifies all changes to the payroll.
c. The person responsible for hiring new employees also supervises the payroll function.
Which of the following is not a reason that senior management would overstate business performance to meet certain objectives? a. To meet a lender's criteria for granting/extending loan facilities b. To meet or exceed the earnings or revenue growth expectations of stock market analysts c. To reduce current expectations so that future growth will be better perceived and rewarded d. To increase the amount of financing available from asset-based loans
c. To reduce current expectations so that future growth will be better perceived and rewarded
Which of the following factors enhances a fraud risk assessment? a. Collaboration between management and auditors b. Independence and objectivity of those leading and conducting the work c. Inclusion of people's perceptions at all levels of the organization d. All of the above
d. All of the above
Which of the following factors should be considered when selecting a sponsor for the fraud risk assessment? a. Seniority b. Independence c. Ability to elicit cooperation d. All of the above
d. All of the above
As the result of the Sarbanes-Oxley Act, the Securities Exchange Commission has implemented which of the following rules? a. New standards of professional conduct for attorneys b. Insider trades during pension fund blackout periods c. Conditions for use of non-GAAP financial measures d. All of the above
d. All of the above
Factors that influence the level of fraud risk faced by an organization include which of the following? a. The nature of the business b. The effectiveness of the organization's internal control c. The ethics and values of the organization and the people in it d. All of the above
d. All of the above
When assessing the potential incentives, pressures, and opportunities to commit fraud, the fraud risk assessment team should evaluate which of the following? a. Incentive programs and how they may affect employees' behavior when conducting business or applying professional judgment b. Highly complex business transactions and how they might be used to conceal fraudulent acts c. Opportunities for collusion d. All of the above
d. All of the above
Which of the following analyses can be used to identify ghost employee schemes? a. Identifying employees who have no withholding taxes taken out b. Comparing actual payroll expenses to budgeted expenses c. Comparing employees who have the same Social Security number, bank account, or physical address d. All of the above
d. All of the above
Which of the following computer audit tests can be used to detect ghost employee schemes? a. Extract users who can write checks and also add new employees in the payroll and timecard system. b. Extract all employees without a social security number. c. Compare employees reported per timecard system to the payroll system. d. All of the above
d. All of the above
Which of the following is a duty of the Public Company Accounting Oversight Board? a. Registering accounting firms that audit publicly traded companies b. Establishing or adopting standards relating to audits of publicly traded companies c. Enforcing compliance with professional standards and securities laws relating to public company audits d. All of the above
d. All of the above
Which of the following is a reason that a chief executive officer might commit financial statement fraud? a. To receive or increase a performance bonus b. To avoid termination due to poor performance c. To conceal the company's true performance d. All of the above
d. All of the above
Which of the following should be included in an organization's formal ethics policy? a. Specific conduct that violates the policy b. A statement that dishonest acts will be punished c. Information on how unethical conduct can be reported d. All of the above
d. All of the above
Which of the following techniques can be used to evaluate the effectiveness and efficiency of internal controls? a. Review of the accounting policies and procedures in place b. Interviews with management and employees c. Consideration of the risk of management's override of controls d. All of the above
d. All of the above
Which of the following is not one of the three interrelated elements that enable someone to commit fraud? a. Opportunity b. Non-sharable financial need c. Ability to rationalize d. Fraud risk
d. Fraud risk
Which of the following is not a method typically used by an employee to fraudulently inflate his or her hours in a manual timekeeping system? a. Collusion b. "Lazy manager" method c. Forging the supervisor's signature d. Manipulating the pay grade
d. Manipulating the pay grade
If a fraudster manipulates the assumptions used to calculate depreciation charges in order to increase earnings to a desired figure, which general method of financial statement fraud is the fraudster using? a. Going outside the accounting system b. Beating the accounting system c. Going around the accounting system d. Playing the accounting system
d. Playing the accounting system