ACNT 1305
0. A company has a 22% profit margin and has employee fraud of $220,000. Calculate the additional revenue needed to offset this lost income. $540,000. $720,000. $820,000. $1,000,000. Some other amount.
1,000,000
Which of the following acts is generally prohibited, according to the AICPA Code of Professional conduct? a. Accepting a commission for recommending a product to an audit client b. Accepting a contingent fee for executive officer placement from a tax client. c. Writing a financial management newsletter promoted and sold by a publishing company d. Purchasing a product from a third party and reselling it to a tax client.
A
79. Which would not be a procurement fraud scheme? a. Split purchases. b. Duplicate invoices. c. Product substitution. d. Washing checks. e. Unnecessary purchases.
Answer: d. Washing checks.
3. A detection risk is a risk that an account or transactions contain materials misstatements before the effects of the controls. a. True b. False
B - I believe the answer is False. Detection risk is the risk that procedures performed by the auditor will not detect a misstatement that exists that could be material. Detection risk is more so a function of the effectiveness of the auditor's procedures when conducting the audit and is dependent on the auditor's judgement. The above questions is more so defining inherent risk.
Building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks is best called: a. Skimming. b. Kiting. c. Money laundering. d. Lapping. e. None of the above.
B - kiting
What is an investigative technique used by the SEC to investigate specific companies for cooking the books? a. Lapping. b. Kiting. c. Wildcatting. d. Ghosting. e. Channeling.
C. - "Wildcatting," was a term coined in the oil industry. It refers to drilling in unexplored ground. Under this strategy, the SEC will review an entire industry when it finds trouble at one or two major companies.
Explain why forensic accounting is like a three-layered wedding cake.
Cakes are compromised by different layers that together create a product that is greater than the sum of its parts. Similarly, forensic accounting requires professionals to have a set of skills that together help create the competency needed for the job. The book mentions that the "layers" to forensic accounting are knowledge in accounting principles, risk management and audits, and the legal/court systems. The icing would be made of communication skills. A cake with no icing is worth less than the completed product and in a similar fashion, an individual that is great in accounting but lacks communication skills and understanding of the court system will be an ineffective forensic accountant.
103. The typical audit trail connects what to what?
Check this one out - A. Source documents to cross-referenced documents. AU 339: Audit Documentation discusses the importances of properly documenting correct-references.
IRS agents often use the expenditure approach when a taxpayer is purchasing assets or investments, rather than spending lavishly. a. True b. False
Correct answer is B. False Through the expenditures method, the IRS will look for spending that exceeds an individual's reported taxable income in a specific tax year. If the expenditures exceed reported taxable income in a tax year, the excess is suspected to be unreported income. The expenditures method is utilized in cases where an individual spends money on consumables (items that do not increase net worth), such as travel, entertainment, food, drink, hobbies, etc, but not on assets (items that increase net worth), such as stocks and real estate.
Which is not one of the factors in SAS No. 99's pyramid of fraud? A. Incentives. B. Pressures. C. Opportunities. D. Attitudes/rationalization. E. All of the above are SAS No. 99 factors.
E
68. In the process of using the net worth method, you find that income of a person is $92,000 and overall expenses are $61,000. Calculated net worth is $611,000 and computed net worth is $430,000. Any unexplained net worth income or (decrease) would be: a. $31,000. b. $150,000. c. $181,000. d. $212,000. e. Another answer is correct.
FIGURE OUT
16. Effective internal controls will always stop fraud. a. True b. False
False
8. Generally accepted audit standards are designed to catch most material fraud. A. True B. False
False
A forensic accountant does not search public records. a. True b. False
False
Data‐driven forensic techniques will always detect fraud schemes, including bribery and kickbacks. a. True b. False
False
Fraud is much like an iceberg: many of the behavioral factors lurk on top of the water ready to sink a corporation. a. True b. False
False
Counting the inventory by an auditor would be a corrective control. True False
False Counting inventory is a detective controls. Training, process redesign, additional technology, quality circle teams and budget variance reports are corrective controls. Counting inventory is an additional control on top of the preventive controls. Controls that find errors that preventive controls missed are detective control. Corrective controls are actions taken after the detection, to avoid future errors.
6. A pressing financial obligation is an example of an opportunity for an employee to embezzle funds. a. True b. False
False - A pressing financial obligation sounds more like it gives the individual the rationalization to commit the fraud. This event does not give the individual an opportunity to commit the fraud as it does not provide them a way to perform the fraud scheme.
36. One need not be a CPA to obtain the Certified in Financial Forensics (CFF). a. True b. False
False - The CFF is a certification that is issued by the American Institute of Certified Public Accountants (AICPA). In order to be a member of the AICPA, one must be an accountant; therefore, to obtain the CFF from the AICPA, one must be an accountant
8. Theft is similar to embezzlement. True False
False - Theft involves taking personal property of another without their consent or permission. Embezzlement in the fraudulent appropriation of money or property that is lawfully in one's possession. For example, a treasurer for a charitable organization who is entrusted with depositing cash from a fundraiser, who then uses the cash to make personal purchases would be guilty of embezzlement.
Kiting involves recording of payment on a customer's account sometime after the receipt of the payment. A. True B. False
False - check this
The most common method of detecting occupational fraud is by internal auditors. True False
False -Tips from disgruntled employees, customers, vendors, etc are the most common way that occupational fraud is detected.
5. Substantive auditing tests do not include analytical procedures.
False. The text states that analytical procedures are included in substantive auditing tests. Auditing tests are time-consuming and expensive tests of details of account balances. Auditors gather evidence provided by the underlying accounting data and all other available information.
IRS Agents may not use indirect methods to determine unreported income. a. True b. False
False: While direct methods are preferred, indirect method are allowed during an IRS investigation. The IRS has changed their policies on indirect investigations many times in the past years, but they have never banned the use of indirect methods during an investigation despite many arguments that these methods encroach on an individual's right to privacy. The main reason/argument for maintaining the use of indirect methods is that the IRS has prosecuted many high profile cases of tax fraud, proving their effectiveness. Many famous cases have been prosecuted under fraud accusations that originating from investigations into a defendant's excessive life style, such as in the case of infamous gangster Al Capone. However, congress has acknowledged that unrestricted use of indirect method could entitle some investigators to push the boundaries of legality while overstepping bounds of privacy. Due to this indirect methods of and IRS investigation have been limited.
70. Which of the following is an example of a proactive approach to fraud detection? a. Logging of exceptions. b. Intelligence gathering. c. Reviewing variances. d. Effective internal controls. e. All of the above.
I agree with answer choice E. Being proactive means testing the effectiveness of the protocols or methods being in please. It is more beneficial for the company to catch any errors before an intruder does. It saves the company from any extra expenses on damage caused. Being proactive should help detect and assess the any risk factors within the company's infrastructure. Answer choices A-E, are methods discussed in our book given to be proactive.
In the 1920s, what senior partner began giving speeches encouraging financial and industrial investigations?
Ironically, the senior partner that gave speeches encouraging financial and industrial investigations was no other than Arthur Andersen. It is easy to see how a man with such high expectations for his profession was able to establish what was to become a highly respected CPA firm. However, as the book suggests, the name and original vision of the firm became diluted over the years to the point were the all-mighty dollar became the most important objective of the firm.
2. Under what circumstances may an IRS agent use indirect methods?
The IRS agent may use the indirect method when direct methods do not provide meaningful results and the circumstantial evidence suggesting concealment of income. The direct method is preferred as it relies on hard evidence such as copies of invoices, bank statements, canceled checks and so on. However, there are instances where such a trail is nonexistent but there is other observable evidence that suggests hidden income. Such evidence could be a person driving a car that is worth more than their annual income. Even though indirect methods are useful in identifying fraud, congress has imposed limits on the use of these methods over concerns of privacy as the IRS has been known to use these methods rather aggressively.
15. What are the three factors of the fraud pyramid?
The fraud pyramid is made up of perceived pressure, perceived opportunity, and rationalization.
What is a red flag with respect to earnings?
There are many options in inflating earnings and the auditor must be aware of this. As such, a major red flag exists in identifying that cashflows do not change at the same rate as net income. Companies have been known to improperly categorize expenses or improperly recognizing revenue when not earned to improve the appearance of earnings. A company that is growing in earning but has decreasing cash flows represents a major concern. This could signal fraud in "cooking" the books or an inability to properly collect from A/R.
1. Misappropriation of assets means obtaining something of value or avoiding an obligation by deception. a. True b. False
True
15. An IRS revenue agent may drive by a taxpayer's home without violating the statutory prohibition against financial status audits. a. True b. False
True
18. A cut-off bank statement is a normal bank statement except that it covers a shorter time period. a. True b. False
True
2. One of the two fieldwork stages of gathering audit evidence is the account balance‐testing phase. a. True b. False
True
24. Where the application of funds is greater than the sources, a person is deemed to have an understatement of income. a. True b. False
True
27. The smoking gun to convict Al Capone was a cash receipts journal with Capone's name on it. a. True b. False
True
28. Tests of controls may not be effective in detecting fraud, because management can override controls. a. True b. False
True
29. Plagiarism is considered to be fraud. a. True b. False
True
3. The audit committee is one leg of the six‐legged stool of the financial reporting process. a. True b. False
True
30. A forensic accountant uses interviews and leveraging techniques designed to elicit sufficient information to prove or disprove a hypothesis. a. True b. False
True
4. A control risk is a risk that a material error in the balance or transaction class will not be prevented or detected. a. True b. False
True
4. Discovering fraud is like using a metal detector at a city dump to find some rare coins. a. True b. False
True
52. Reconciliation of bank statements would be considered a detective control. a. True b. False
True
8. The lifestyle of a person may give clues to the possibility of unreported income or fraud. a. True b. False
True
A bribery scheme can best be caught by behavioral factors. True False
True
A business in a declining industry would be an example of a motivation risk factor. True False
True
A forensic accountant must have interviewing skills. a. True b. False
True
Arthur Andersen created a CPA firm that eventually disappeared. True False
True
Consulting standards may apply to a forensic accountant. a. True b. False
True
Criminology is one area of the forensic accountant's knowledge base. a. True b. False
True
Financial fraud is more likely to occur if a company has a poor management control philosophy. a. True b. False
True
Forensic-type fieldwork refers to an attitudinal shift in an auditor's degree of skepticism. a. True. b. False
True
Fraudsters and embezzlers may be the nicest people in the world. True False
True
Ineffective internal controls are a tempting open door or opportunity for fraud. a. True b. False
True
Just like termites, fraud can destroy an organization. a. True b. False
True
Poor controls or missing controls cause loss of assets and poor business decisions. True False
True
Recessions often increase fraud and abuse. A. True B. False
True
Rotation of duties can help prevent skimming schemes. a. true b. false
True
The COSO report said that the Chief Executive Officer was involved in approximately 72% of fraudulent financial reporting cases. True False
True
The Sarbanes‐Oxley Act mandates that CEOs and CFOs must certify the appropriateness of financial statements and disclosures. a. True b. False
True
The scribes of ancient Egypt were the forerunners of today's accountants. a.True b.False
True
With a single clue, a forensic accountant can solve a fraudulent mystery.
True
Reversing reserves is sometimes called "cookie jar" accounting. True False
True - As explained in the book, "cookie jar" accounting is the reversal of bad debt, taxes, and litigation. To appeal to stakeholders, companies misrepresent their financial statements by using "cookie jar" accounting. Allowing for companies to false inflate income, and decrease expenses.
The audit committee is one leg of the six-legged stool of the financial reporting process. True False
True - Financial reporting process, to be reliable to produce financial information that can be useful for investors, creditors, analysis and others, can only be achieved with an integrated system of corporate governance comprising six groups: the board of directors, the audit committee, the top management team, internal auditors, external auditors, and governing bodies such as the SEC, AICPA - the six-legged stool of the financial reporting process.
Like on television shows, a forensic accountant may have to keep a chain of custody. a. True b. False
True - Many times forensic accounting is used as evidence and forensic accounts can be called upon as expert witnesses in the course of a fraud investigation or other relating court case. Due to this it is essential to remember the legal proponent of forensic accounting, and to ensure that the rules of evidence are followed. A key item in these cases is to ensure the forensic accountants are following the rules for chain of custody during their review to ensure all evidence collected is admissible in a court of law.
12. The KGB used financial lifestyle probes and audits to capture a number of spies and moles. A. True B. False
True - One of the greatest discoveries of the KGB was finding out how Alrich Hazen Ames got away with his lifestyle from the CIA. When the KGB used financial lifestyle techniques on Ames, they discovered his constant abuse with unidentified assets.
10. Skimming is an "off-book" technique to remove cash before a company records the receipts. a. True b. False
True - Skimming involves taking cash from a cash transaction and then either reporting a lower total for the transaction or not reporting the transaction at all. Skimming can be a technique used to avoid paying taxes, by reducing the amount of cash receipts recorded, the company has less income that it has to pay tax on.
Peremptory refers to the fact that a forensic accountant can be proactive. a. True b. False
True - The book discusses peremptory as a factor of in the definition of forensic accounting. In this context, peremptory refers to the preemptive role a forensic accountant can take in preventing fraud from occurring. There doesn't need to be a reason to suspect fraud to be proactive in stopping it.
23. An internal auditor director should report directly to the audit committee of the Board of Directors. a) True b) False
True - The book states that CEOs and CFOs are involved in 72% and 43% respectively of fraudulent financial reporting cases. The ability of management to override controls make direct reporting of suspicions or concerns to the audit committee more desirable than reporting to management.
The bill-and hold practice involves selling inventory to customers and holding the merchandise, with an agreement to deliver the goods later.
True - This is a type of overstated-income scheme and the transactions do not always involve fraud however, this type of transaction should be examined closely because it can be abused.
An IRS Agent normally has to start with minimum income probes if no Schedule C or F is attached to the tax return. True False
True: If no schedule C or F is attached and, ei if they are probing nonbusiness return, IRS agents quizzes taxpayer about possible income sources other than what is reported on the return. According to IRS minimum income probes are analytical tests which helps IRS determine taxpayer's accuracy in reporting income. IRS agent may interview the taxpayer to gain an insight into taxpayer's financial history, identify any barter type exchanges and likes to determine underreporting.
5.Knowledge of both statute law and case law may be relevant to the goals or objectives of a forensic accountant. a. True b. False
a
51. What was the smoking gun to convict Al Capone? a. An accountant's cash receipts ledger. b. Lavish lifestyle. c. Murdering a competitor. d. Wholesaling alcoholic beverages. e. None of the above.
a
59. Which is not one of the three M's of financial statement fraud? a. Missing general ledger. b. Manipulation. c. Misrepresentation. d. Intentional misapplication. e. None of the above.
a
8. A psychology course would not be helpful for a forensic accountant. a. True b. False
a
92. Which of the following is a type of brainstorming? a. Open brainstorming. b. Closed brainstorming. c. Lightning brainstorming. d. All of the above.
a
Why was the AICPA Code of Professional Conduct created? a. To maintain quality of practice and provide guidance to AICPA members. b. Writing a financial management newsletter promoted and sold by a publishing co c. Purchasing a product from a third party and reselling it to a tax client.
a
4. Misrepresentation is one of the three M's of financial reporting fraud. a. True b. False
a - The three M's of financial reporting fraud are manipulation, misrepresentation, misapplication. Misrepresentation is the intentional omission from the financial statements of events, transactions, or other significant information.
50. Peremptory refers to: a. Be there first. b. Not requiring any cause to be shown. c. One who strives to be the best. d. Take the place of. e. None of the above
a. Be there first.
According to the FBI's definition of fraud, there should be an application or threat of physical force or violence. a.True b.False
b
A forensic audit is generally a sampling activity. a. True b. False
b - A financial audit in other words a "regular" audit is generally a sampling activity. Which means they don't look at each and every transaction. But a forensic audit is actually the opposite. They're supposed to look in things much more detailed, and to get insight on why things do or do not add up to what they should be.
4. Lapping is building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks. a) True b) False
b - false. The technique described is kiting. Lapping often occurs when one person handles cash and record keeping duties. The fraudster steals some cash, and covers it with the receipt from another customer. To catch the fraud, an investigator compares checks on a sample of deposit slips to the detail of customer credits that are listed on the day's posting to the customers' account receivables. Also, lapping schemes can be revealed by forcing the suspected fraudster to use vacation days. When they cannot perpetuate their scheme, the employee who fills their role may discover the fraud.
A forensic accountant can normally assume that the books and records are true and correct. a. True b. False
b.
Forensic Accounting is defined as: a. The practice of applying defined financial ratios to investigate a company's financial health. b. The use of law enforcement to subpoena financial records to determine unlawful actions. c. The application of investigative and analytical skills for resolving financial issues in a manner that meets standards required by courts of law. d. The investigatory arm of the Securities and Exchange Commission.
c
Horizontal analysis typically involves what? a. Comparison of companies by market share in the industry b. Comparison of cash value at a predictable moment in liquidity c. Comparison of year-to-year changes in financial statements. d. Comparison of organizational structure best suited for a planned business venture. e. Both a and b.
c
David Smithers, CPA, has extensive advisory services and consulting for his client, owned by his father, but David only does compilations with appropriate compilation reports for this client. His wife owns 4% of the stock of this client. Is David considered in violation of the AICPA CODE OF CONDUCT? a. Yes. The independence rule regarding non-covered members is violated. b. Yes. The independence rule covering covered members is violated c. No. The independence rule is not violated. d. Yes, but none of these answers, a-c apply
c - AICPA members are bound by the AICPA Code of Professional Conduct. Rule 201 requires that members provide professional services with competency. In the delivery of personal financial planning services, a member shall adhere to the following Principles of Professional Conduct
An example of "channel stuffing" would be: a. Keeping books open beyond the appropriate time b. Combining restricted fund account with the general fund account. c. Booking income before receiving payments. d. Inflating revenues with phony software sales. e. None of the above.
c - According to the text, channel stuffing is recording revenue before it has been earned. A company cannot book income before you receive the payment, the entry does not work. If anything, the company should be booking a receivable. This type of fraud allows a company to overstate their revenues.
Accountants appointed by a court as a special master are protected from disclosure under the attorney work product doctrine. True False
check this - False - An accountant may be appointed by an attorney to gather and interpret facts, prepare analyses, help the attorney interpret evidence, advise about issues and strategies involved in a legal matter, locate other accountants to act as consultants or expert witnesses, and help expert witnesses form their opinions. Accountants acting as consultants will not be asked to testify in a judicial or regulatory proceeding, and their work usually will be protected from disclosure by the attorney work product privilege. An accountant may be retained by an attorney or court as an expert witness to testify in a judicial or administrative proceeding. Accountants often are asked to lend their expertise to shareholder disputes, valuation controversies, and commercial damage claims
An example of rationalization, an essential element of fraudulent activity (e.g., the fraud triangle), would be: a. Report better than actual performance in order to help your stock options. b. Needing to pay a large gambling debt. c. A week internal control. d. "Borrowing" the petty cash fund on a temporary basis. e. None of the above.
d
92. Forensic accountants should compare travel and expense vouchers to employment records and tax records in order to find: a. Kiting schemes. b. Lapping. c. Layering schemes. d. Ghost employees. e. All of the above.
d - Ghost employees are on payroll, but are not currently employed. They can be former employees or fictional employees. It is important to keep record of employees that quit, are fired or retire. Separation of payroll duties may prevent creation of ghost employees. Layering transactions is used to launder money. It is transferring money to cover up the original source of the transaction. Kiting is taking advantage of the float to deposit bad checks. Lapping is diverting payments from one account to another.
64. Which white‐collar crimes does the FBI investigate? a. Money laundering. b. Bank fraud. c. Health care fraud. d. Environmental crimes. e. All of the above.
d. Environmental crimes. While the FBI does investigate environmental crimes, they are not considered to be white-collar crimes. Aside from the ones listed above, other white collar crimes investigated by the FBI include antitrust, bankruptcy fraud, corporate/securities fraud, insurance fraud, mass marketing fraud, and mortgage fraud.
37. Forensic accountants need an understanding of: a. Accounting. b. Law. c. Criminology. d. Investigative auditing. e. All of the above.
e
45. Which task probably would not be required of a Certified Fraud Examiner? a. Gather evidence. b. Write reports. c. Assist in investigating fraud. d. Testify in the courtroom. e. All of the above may be required.
e
82) Which probably would not help prevent procurement fraud through phantom vendors? a. Doing a parking-lot test. b. Reviewing cliques within the sales department. c. Having an anonymous hot-line. d. Having an approved vendors list. e. All of the above would help prevent procurement fraud.
e
Which would not be a behavioral red flag? a. Close association with a vendor. b. Executive has a wheeler‐dealer attitude. c. Material weakness not corrected. d. Employee does not take vacations. e. None of the above.
e
Which is not an entity‐level control? a. Controls related to the control environment. b. Controls over management override. c. Controls to monitor results of operations. d. Controls over the period‐end financial reporting process. e. None of the above.
e - All of the controls mentioned above are entity-level controls. The entity-level controls consist of controls related to the control environment, controls over management override; the company's risk assessment process, centralized processing and controls, including shared service environments, control to monitor results of operations, controls to monitor other controls, including activities of the audit committee and self-assessment programs, controls over the period-end financial reporting process, and policies that address significant business control and risk management practices. Entity level controls are part of the COSO Cube. SOX controls require companies to have an COSO Cube internal control framework.
Which group probably is not an important element of a fraud risk program? a. Board of Directors. b. Audit Committee. c. Internal Audit Department. d. Management. e. None of the above.
e - BOD, audit committees, internal auditors, management, and staff are all including in the important elements of fraud risk program under roles and responsibilities. It's essential for all groups listed to be given clearly defined roles and responsibilities under a company's fraud detection program. This helps each group identify with their potential personal liability of fraud, and take ownership of their responsibilities in relation to controls and financial statements. This also outlines specifically what is expected from each group, and prevents any "I didn't know" or other excuses in relation to fraud prevention.
Which is not one of the Daubert factors? a. Whether the theory existed before litigation began. b. Whether the theory or technique in question can be and has been tested. c. The theory's known or potential error rate. d. The theory has attracted widespread acceptance. e. All are Daubert factors.
e - Originally aimed at scientific methodologies and the expert witnesses who employed them, Daubert and its five-factor evaluation have since been expanded to experts in non-scientific domains as well. The five Daubert factors are applied in federal courts and in several state courts. Today, nearly every litigation who relies on an expert witness is familiar with the Daubert factors. Many witnesses, however, are unfamiliar with them. Keeping the Daubert factors in mind during witness depositions and trial preparation can do much to ensure that the witness's testimony is admissible and admitted at trial.
Which is not one of the six areas of litigation services that the AICPA committee suggested in 1986? a. Damages. b. Valuation. c. Accounting. d. Analyses. e. All the above were suggested
e - here are two areas of forensic accounting: investigative accounting and litigation support. The six areas of litigation services are damages, antitrust analyses, accounting, valuation, general consulting and analyses.
Which would be a red flag of phantom vendors? a. Unfamiliar vendor. b. Vendor's name consists of initials. c. Vendor has post office box address. d. Rapidly increasing purchases from one vendor. e. All of the above.
e -The red flags of phantom vendors are as follow: invoices for unspecified consulting or other poorly defined services, unfamiliar vendors, vendors that have only a post-office-box address, vendors with company names consisting only of initials, rapidly increasing purchases from one vendor, vendor billings more than once a month, vendor addresses that match employee addresses, and large billings broken into multiple smaller invoices.
61. Which would probably not be an added procedure in a forensic audit? a. Extensive use of interviews. b. Not accepting sampling as evidence. c. Mending evidential matter standards with the rules of evidence. d. Searching for legal evidence. e. All would be used.
e. A forensic audit as discussed in the book is a compilation of many skills and methods not only pertaining to accounting, but also consulting and legal skills. Interviews are commonly used in audit, because the subject of time is crucial.
