Midterm

Fraud is considered to be:

A serious problem that continues to grow.

Because ABC Company suffered large losses from fraud last year, senior management has decided to be more proactive in implementing a fraud prevention environment. In interviewing employees, they found that many employees were unclear about which behaviors were ethical and which were not. Management is considering ways to better educate employees about ethical behavior. Which of the following actions should ABC take in response to this issue?

ABC Company's human resources staff should develop a code of ethics to be read and signed by each employee having supervisory responsibilities.

A company's control environment includes:

All of them: Corporate hiring practices. The tone that management establishes toward what is honest and acceptable behavior. Having an internal audit department.

Effective fraud-fighters usually put most of their time and effort into trying to minimize or eliminate , so as to reduce the occurrence of fraud.

All three parts of the fraud triangle (Especially Reducing opportunities)

Power is used to influence another person to participate in an already existing fraud scheme.

Almost always

John Adams is the manager at a local store. The store opened four years ago and has been doing very well. With current business growing, John decided to hire Peter O'Riley to work as an accountant. When Peter started working at the store, he found several things that appeared unusual. For example, six receiving documents have been lost, the general ledger is out of balance, one customer has complained that he is continually being overcharged, and another customer complained that he does not receive timely service. John lives in an expensive house and has several beautiful sports cars. Discuss whether fraud could be occurring. Does evidence of fraud exist, or are only fraud symptoms present? In response to this question, select which of the following statements is true.

Although fraud could be occurring, there is no conclusive proof. Several fraud symptoms do exist, but all of these symptoms could have other possible explanations.

James Davis owns a small Internet service provider business. Recently, customers have been complaining that they are overcharged and are not receiving timely customer service. Billing rates seem to increase without notice. Five years ago, James used funding from several different investors in order to start his Internet service. Currently, he has 17 outstanding bills to be paid, all with late charges. Five of the bills include notices stating that lawsuits are pending. Also, he has not paid dividends to investors in two years. Every day, James drives either his Mercedes-Benz or his new Lexus to work. Before starting the business, James drove only one car, a Suzuki Samurai. James now lives in a palatial home and owns very expensive furniture. Employees constantly ask James for new equipment, but the "boss" refuses to update the old equipment. Two weeks ago, James was irate and fired one of his accounting clerks for not depositing some checks on time. James is known for losing his temper. Which of the following is a symptom of fraud that is not evident in this case based on the information provided?

Analytical anomalies.

Peter Jones, a senior accountant, and Mary Miller, a junior accountant, were the only accountants for XYZ Company, a medium-sized business. Peter had been with the company for over four years and was responsible for the Purchasing Department. Mary had been working at the company for a little over five years, and she had neither applied for a vacation nor taken any days off in the last three years. She was responsible for cash receipts and disbursements. She also collected the cash from the cash register, counted it and matched it with cash register receipts, made a record of daily receipts, and then put the money in the safe. Once a week, she would take the paperwork to her supervisor, Susan Lowe, one of the managers, who would check it. Mary later resigned from the company. At the time of her resignation, Peter was asked to handle Mary's responsibilities while the company looked for a person to replace her. Peter soon realized that there had been some manipulation of accounting records and embezzlement of funds. Investigations revealed that approximately $30,000 had been stolen. What could the management of XYZ Company have done to prevent Mary's embezzlement or to detect the fraud earlier? Select all of the correct answers.

Communicate to employees what behavior is expected of them and the consequence of committing fraud. Require Mary to take vacation time each year. Implement appropriate preventive and detective controls.

evidence includes evidence gathered from paper, computers, and other written documents.

Documentary

A method of classifying investigative approaches into testimonial evidence, documentary evidence, physical evidence, and personal observations is referred to as the:

Evidence square.

Which of the following is not one of the categories of employee fraud symptoms?

Firm structure.

Because of the ability to override internal controls, it is usually most difficult to prevent which type of fraud?

Fraud committed by a company president.

The single most effective tool in preventing and detecting fraud is usually:

Having a good system of internal controls.

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

Inability to judge the quality of performance of the optometrist.

Which of the following is true regarding fraud?

It is seldom observed.

Which of the following is not true of civil litigation?

It must be heard by 12 jurors.

You have recently graduated from college with an MBA. Upon graduation, you start working for Roosevelt Power Plant. The boss, Mr. Jones, invites you into his office. Mr. Jones describes to you a large fraud that has recently taken place in the company. He asks you what actions should be taken to ensure that fraud does not occur again. After analyzing the company, you compile a list of actions that will be needed to prevent fraud from occurring again. Upon presenting the necessary steps and controls to be taken, Mr. Jones notices your suggestion: "Create a culture of honesty and create a positive work environment for employees." Mr. Jones is enraged and wants to know what a positive work environment has to do with the prevention and detection of fraud. Which of the following factors detracts from a positive work environment?

Lack of clear organizational responsibilities.

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

Lack of effective internal control activities or procedures.

Which of the following is not a common vice that motivates people to commit fraud?

Living above ones means

People will often be dishonest if they are placed in an environment of:

Loose accountability. High pressure. Low integrity. Also poor controls

Which of the following is not a form of vendor fraud?

Not paying for goods purchased.

"Predication of fraud" is defined as:

Reasonable belief that fraud has occurred or is occurring.

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

Ruth's gambling addiction created motivation to commit fraud so that she would have additional funds with which to gamble.

Robert was the chief teller in a large New York bank. Over a period of three years, he embezzled $1.5 million. He took the money by manipulating dormant accounts. Robert was responsible both for handling dormant accounts and for dealing with complaints from customers. When a customer would complain about his account, Robert was always the one to explain the discrepancy. He usually used the excuse that "it's a computer error." Which of the following control activities would most likely have prevented this fraud?

Segregation of duties.

You are a new summer intern working for a major professional services firm. During your lunch break each day, you and a fellow intern Bob eat at a local sandwich shop. One day, Bob's girlfriend joins you for lunch. When the bill arrives, Bob pays with a company credit card and writes the meal off as a business expense. Bob and his girlfriend continue to be "treated" to lunch for a number of days. You know Bob is well aware of a recent memo that came down from management stating casual lunches are not valid business expenses. When you ask Bob about the charges, he replies, "Hey, we're interns. Those memos don't apply to us. We can expense anything we want. " Which of the following statements regarding Bob's use of the company credit card is not true?

The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud.

Most people who commit fraud:

Use the embezzled funds to improve their lifestyle.

Karen, a friend of yours, recently started her own business, The Bike and Boulder Company (B&B). B&B specializes in the sales of mountain bikes and rock-climbing equipment. Karen is putting the finishing touches on her company policies and procedures. She knows you are taking a fraud class and asks you to review what she has completed thus far. You quickly notice that Karen has neglected to address fraud and fraud prevention in her policies and procedures. What policies and procedures would you suggest Karen implement to prevent and detect fraud at B&B? Which of the following fraud prevention policies or procedures would you recommend to Karen with respect to hiring employees?

Verify all information on each applicant's resume and/or application.

The single most critical element for a fraud to be successful is

confidence

Good internal controls will often opportunities for individuals to commit fraud within an organization.

decrease

Good documents and records are some of the best controls.

detective

An important factor in creating a culture of honesty, openness, and assistance in the workplace is maintaining an program.

employee assistance

An individual who owns his or her own business and is the sole employee needs internal control activities.

few

Advances in technology had an effect either on the size or frequency of fraud or on the detection or investigation of fraud.

have

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

high

Nellie works for a large manufacturing company. She heads the information systems department and works closely with the accounting department. Nellie knows a lot about the company's database systems and accounting practices. Her responsibilities include working with the company's vendors to create data communication lines. The company works with many vendors, including a large number of new vendors that have been added due to the company's rapid growth. Recently, Nellie has become concerned about the effectiveness of the internal controls in ensuring the integrity of the purchasing function. She expressed her concerns to senior management and has been asked to recommend proactive steps the company can take to prevent fraud from collusion between employees and vendors. Select the correct response to complete this sentence: A periodic letter to vendors explaining an organization's policy of not allowing employees to accept gifts or gratuities an effective tool for both preventing and uncovering collusive frauds.

is

Frauds typically start and get as the perpetrator tries to conceal their dishonest acts.

large larger

As fraud perpetrators become more confident in their fraud schemes, they usually steal and spend increasingly amounts.

larger

A fraud be perpetrated through an unintentional mistake.

may not

Fraud prevention is cost-effective than fraud detection or investigation.

more

Tips and complaints are the common way fraud is detected.

most

When perpetrators are criminally convicted of fraud, they serve jail sentences and/or pay fines.

often

The two elements in creating a positive work environment are (1) having an - policy and (2) having personnel and operating procedures.

open door positive

Internal control weaknesses give employees to commit fraud.

opportunities

The three elements of the fraud triangle are a perceived pressure, a perceived , and .

opportunity, rationalization

You have been hired by a small firm to analyze its accounts receivable department and assess how susceptible it is to fraud. The company operates a table manufacturing facility. The only employee in accounts receivable is Joanne, an employee of 10 years. Joanne opens all cash receipts, credits the clients' accounts, and deposits the money at the bank. Select the correct response to complete this sentence: The lack of is a control weakness that poses the greatest fraud-related risk for this company.

proper authorization

Fraud is a crime that is observed.

seldom

The text states that many frauds are detected when an employee, a friend, a manager, a customer, or another person provides a tip or complaint that something is wrong. One large company, for example, which uncovered more than 500 individual frauds, discovered 43 percent of the frauds based on customer complaints or employee tips. Fill in the blank with the correct answer. Tips and complaints are not evidence of actual fraud but instead should only be considered fraud

symptoms

Fraud perpetrators who are prosecuted, incarcerated, or severely punished commit fraud again.

usually do not

Most experts agree that fraud-related careers be in demand in the future.

will

With the right opportunity or significant pressure, most people steal or embezzle.

would probably