Exam 2 (6 - 10)
d
Select the statement that is most accurate with regard to materiality. A. Materiality does not create discretionary choices for managers, executives, and auditors. B. Earnings management is not sufficiently material to constitute fraud. C. Materiality is based on a percentage of net sales. D. Materiality includes both quantitative and qualitative factors
d
Which is the following is a purpose of admission-seeking questions? A. To develop the proper theme that will achieve the desired confession. B. Determine if a Miranda warning is required. C. To interrupt denials and repeat the accusation until the culpable person confesses. D. To clear innocent persons and encourage culpable persons to confess.
d
Which of the following attributes of a fraud examination often provides the most compelling evidence of intent on the part of a fraudster? A. Perceived pressure B. The fraud act C. Conversion D. Concealment
c
Which of the following is not true with regard to evidence? A. Evidence is anything legally admitted at trial. B. Evidence is anything perceivable by the five senses: sight, hearing, touch, smell, and taste. C. Evidence is coincidental with proof. D. Evidence is anything relevant to the issue under consideration.
b
Which of the following is not true with regard to predication? A. Predication is generally the starting point for a fraud examination. B. Predication would suggest that the suspected perpetrator should be interrogated. C. Once the predication threshold has been reached, the need to consider issues such as the rights of individuals and probable cause is enhanced. D. Predication is defined as the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred.
d
Which of the following is true? A. The following is an open question: "Did you approve this fictitious company as a vendor?" B. The following is a closed question: "You weren't really in Vegas when the fraud was perpetrated, were you?" C. The following is a leading question: "What events led up to the alleged missing money?" D. The following is an admission-seeking question: "You are really a good, kind person; when you stole the money, you didn't really mean to harm anyone did you?"
b
According to the ACFE 2016 Report to the Nations, which of the following is the most frequent source of initial fraud detection? A. A call to the police B. Tips C. Accidental discovery D. The combined discovery of fraud by internal and external auditors
b
Given the four criteria necessary for a sale to be complete, which of the following is not one of those conditions? a. Delivery has occurred or services rendered. b. Cash has been collected. c. The sales price is fixed or determinable. d. Documentation exists that can serve as evidence of a sale.
predication
The totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, and/or will occur.
a
When is it least appropriate to use an indirect method for income reconstruction? A. The person or entity of interest has adequate books and records. B. Gross profit percentages appear to change significantly from period to period. C. There are few or no original invoices or other supporting documentation. D. There are missing check numbers and checks for supporting documentation.
c
When judging deception, which of the following is most accurate? A. Stressful reactions are indicative of lying. B. A single stress reaction is enough to heighten suspicions of culpability. C. Clues to deception can be non-verbal as well as verbal. D. When judging deception, interviewers need to be well trained and practiced in their craft in order to avoid mistaken accusations.
c
Of the following, choose the one that depicts a situation where liabilities and expenses are manipulated to make a company appear more profitable? a. Liabilities are capitalized to increase revenues b. Adelphia Communications fraud c. Failure to record employee payroll earned but not paid as of period end d. Failure to record warranty costs when the facts suggest that disclosure is more appropriate accounting treatment
b
Related to financial reporting disclosures, even when reported, which of the following still requires careful examination by the antifraud professional? a. Omitted liability disclosures b. Related party transactions c. Accounting changes d. Management fraud
financial statement fraud
the use of deliberate misstatement of omissions of amounts or disclosures of financial statements to deceive financial statement users
interviewing
to gain information
analytical anomalies
transactions or financial statement relationships that do not make sense
testimony real demonstrative
types of evidence that may be offered at trail:
concealed liabilities and expenses fictitious revenues improper asset valuation improper disclosures timing difference
types of fraudulent financial statement schemes:
accounting anomalies
unusual activities that seem to violate normal expectations for the accoutning system
CAATTs
used for data extraction and analysis
financial profiling
using indirect methods to estimate assets controlled, or income to an entity
introductory informational closing assessment admission-seeking
what are the five types of interview and interrogation questions?
creating and altering physical documents
what is the most common concealment method?
financial statement fraud
what is the most common form of occupational fraud?
timing differences
what method of financial statement fraud do public companies tend to use?
patterns
what suggest that an act was deliberate?
larger
public companies have _____ fraud team
a
From the conceptual framework for financial reporting, which concept permits management to account for transactions in any manner they please? a. Materiality b. Consistency c. Historical cost d. None of the above
validity
refers to the underlying accuracy and integrity of the information
targeted fraud assessment
requires top-down approach
introduction
sets the tone for the interview
introduction admission-seeking
stages of interrogation
introduction body close
stages of interviewing
predication
starting point for a formal fraud examination
targeted fraud assessment
starts with a foundation of solid knowledge, skills, and abilities in the areas of fraud detection and investigation
understand the business understand the control environment
steps to detecting fraud
to know where to look and how to proceed
the key to detecting fraud is ....
a
Which of the following is not one of the three types of evidence that may be offered at trial? A. Fingerprints B. Demonstrative C. Testimony D. Real
a
During an admission-seeking interview in which an accusation has been made, the respondent will normally object to the accusation and attempt to deny it. When you are convinced of the respondent's guilt, it is important to: a. Interrupt the denial. b. Ask the respondent to put the denial in writing. c. Repeat the denial for confirmation of understanding. d. None of the above
relevance and reliability comparability and consistency
qualitative characteristics
b
Which of the following best explains what is meant by invigilation? A. Invigilation becomes the key piece of evidence that is presented as compelling with regard to the perpetrator's guilt. B. Invigilation is an investigative method centered on changes in patterns of performance around the time that suspicious activity occurred. C. Invigilation provides evidence of the concealment of a fraud act. D. Invigilation is usually considered a relatively weak form of evidence, except in circumstances where no other evidence is available.
b
Which of the following is a suggested approach for properly conducting interviews? A. To ensure accuracy, the interviewer should keep the discussion specific, even if it means using technical terms. B. The distance between the interviewer and interviewee should be about 6 feet apart. C. Handcuffs are often used to protect the interviewer. D. The interview room should be set up like a conference room with the interviewee sitting across the table from the interviewer.
b
Which of the following is most accurate with regard to interviewing and interrogation? A. Interviewing and interrogation are synonymous and are used interchangeably by investigators. B. Interviewing is centered on information collection while interrogation is used to solicit a confession. C. Interrogation has negative connotations associated with it and is a term no longer used by investigators. D. Interviewing and interrogation are often over-relied upon by investigators.
c
Which of the following is not a common reason why senior management might overstate or understate business performance? a. Pressures to boost revenues or expenses b. Improperly designed incentive (e.g., bonus) packages c. High levels of personal debt leading to a need for the executive to generate cash d. Desire to manage earnings until conditions improve
a
Which of the following is not a fictitious revenue scheme? a. Matching expenses to revenues b. Premature revenue recognition c. Conditional sales d. Channel stuffing
c
Which of the following is not a goal of introductory questions? A. Establish a theme for the interview. B. Establish a baseline for interviewee reactions. C. Solicit the confession before the interviewee is expecting it. D. Obtain a commitment for assistance.
b
Which of the following is not a method by which documents may be altered? A. Erasure B. Shredding C. Chemical washing D. Eradication
d
Which of the following is not a methodology by which financial statement fraud is committed? a. Manipulation of revenue b. Manipulation of asset valuations c. Manipulation of disclosures d. Manipulation of accounting regulations
a
Which of the following is not a reason for obtaining a written confession from the subject of an investigation? A. A written confession will hold up better than a videotaped confession because the video tape is cumbersome in court. B. The written confession helps establish the intent of the perpetrator. C. A written confession is likely to have greater credibility with the jury. D. The written confession makes it less likely that the perpetrator will alter his or her confession as the trial date approaches.
b
Which of the following is not a reason that the prevention and detection of fraud resulting from management override and collusion presents a significant challenge for the antifraud community? A. Internal controls are generally designed to prevent a single fraudster acting alone. B. Internal controls are best at assisting in the detection of fraud acts arising from collusion and management override. C. The Board of Directors maintains little direct supervisory oversight of executive operational actions and decisions. D. Collusive and executive perpetrators tend to be better prepared to deal with oversight mechanisms such as internal and external auditors.
b
Which of the following is not a step in the targeted fraud risk assessment process? A. Identify the parties who have the ability to commit the potential fraud. B. Place the parties who most likely committed the potential fraud under arrest to illicit a confession. C. Identify, understand, and evaluate the company's operating environment and the pressures that exist. D. Review past fraud experience within the company for the process being evaluated.
a
Which of the following is not an inherent part of Statement on Auditing Standards, No. 99/113? A. Greater scrutiny of the chief executive and chief financial officers personal financial condition B. Enhanced professional skepticism C. Emphasis on pre-audit discussions such as brainstorming D. Emphasis on interviews with key personnel throughout the organization, including supervisors, managers, and executives
b
Which of the following is not considered a benefit of strong interviewing and interrogation skills? A. Reduced investigation time. B. Indirect evidence of the culpability of the guilty party. C. The elimination of innocent subjects or targets. D. Increased probability of investigative success.
a
Which of the following is not considered a reason for the incorporation of nonfinancial numbers in fraud detection efforts? A. Nonfinancial numbers have little use in fraud detection because it is financial numbers that have been manipulated. B. Management wants operations to run smoothly and many operational decisions are dependent on the accuracy and integrity of nonfinancial information. C. Nonfinancial numbers are often generated outside the accounting and reporting system and thus may not be subject to the same types of manipulations found with fraudulent accounting numbers. D. Nonfinancial data should be correlated with or reconciled to, financial data.
c
Which of the following is not considered a red flag (indicator) of fraud? A. Accounting anomalies B. Analytical inconsistencies C. Nonfinancial numbers D. Behavioral anomalies
d
Which of the following is not considered an item that may be utilized for concealment and thus a resource for investigators? A. Authentic documents B. Reconciliations and reconciling items C. Journal entries D. E-mail communications
a
Which of the following is not correct with regard to the physiology of deception? A. Arrogance is a poor character quality and a reaction to stress. B. People lie for one of two reasons: to receive a reward or to avoid punishment. C. Everyone lies but only poor liars show signs of stress. D. Argumentative behavior may be a sign of stress.
d
Which of the following is not one of the five major classifications of financial statement fraud? a. Fictitious revenues b. Improper disclosures c. Concealed liabilities d. Channel stuffing
d
Which of the following statements best describes corporate governance with respect to fraud? A. Auditors are primarily responsible for the detection of fraud, the Board of Directors for the deterrence of fraud and management for the prevention of fraud. B. An auditor is primarily responsible for the detection, prevention, and deterrence of fraud acts at the organization under audit. C. The corporate governance fabric includes management, internal and external auditors but excludes the Board of Directors because executive management reports to the Board. D. Management is primarily responsible for adopting sound accounting policies and ensuring the fair presentation of financial performance, results of operations and the financial condition of the company.
d
Which of the following statements is most accurate with regard to red flags for fraud? A. Red flags are compelling indicators that fraud has occurred. B. The investigation and resolution of red flags is the final step in the audit process. C. Financial performance deviations from budgeted numbers should always be a cause for alarm and suggest the need for a fraud investigation. D. Most red flags are explainable anomalies and are not, after subsequent investigation, indicators of fraud.
concealment
_________ is the activity that is most closely associated with intent
documentary
___________ evidence is the backbone to most financial forensic examinations
invigilation
an examination technique that considers periods before, during, and after a suspected fraud has occurred
identification of red flags or anomalies targeted risk assessmetn
approached to fraud detections
targeted fraud assessment
assumes a direct relationship between the level of risk associated with material weakness in a company's controls and the amount of attention devoted to that area in an audit
economic entity going concern monetary unit periodicity
assumptions:
external auditors' role
attest to the fairness of management's presentation of the financial information and assertions
detection
concealment suggests ________
cost-benefit materiality industry practice conservatism
constraints:
insider acting alone more than one individual acting collusively an outside third party
categories of fraud schemes:
relevant material competent
characteristics of evidence
assumptions principles constraints
recognition and measurement concepts:
reduce pressures reduce the opportunity reduce grounds for rationalization
deterrence of financial statement fraud
no
do red flags typically meet predication thresholds?
recognition that fraud may be present questioning mind and a critical assessment of evidence commitment to persuasive evidence to determine whether or not fraud is present
enhanced professional skepticism
intent
examiner must provide _______
body
facts and evidence of the case are reviewed with the interviewee
vertical analysis horizontal analysis ratio analysis analysis of cash flows analysis of nonfinancial numbers
financial statement analysis includes:
implementation of internal controls that act as independent checks
fraud examiners need to pay as much attention to the ________________________________ as they do to the design of those controls to prevent fraud
introduction
greets the interviewee and states the reason for the interview
playing the accounting system beating the accounting system going outside the accounting system
how do people commit financial statement fraud?
inventory valuation accounts receivable business combinations long-term assets
improper asset valuation categories:
liability omissions subsequent events management fraud related-party transactions accounting changes
improper disclosures usually include:
relevant
information will make a difference to a decision maker
fraud prevention fraud deterrence fruad detection
internal control objectives:
close
interviewer will review and summarize important aspects of the interview
earnings management
involves deliberate actions by management to meet specific earnings objectives, generally for private gain
booking fictitious assets misrepresenting asset valuation improperly capitalizing inventory and start up costs
long-term asset schemes:
admission-seeking
looking for rationalization
liability/expense omission capitalized expenses failure to disclose warranty costs and liabilities
methods to conceal liabilities and expenses:
top
most common detection method
elements of fraud
need to develop evidence around the _______
interrogation
obtain an admission of guilt or obtain evidence
historical costs revenue recognition matching full disclosure
principles
journal entries recorded in the books and records should be examined for proper backup documentation significant accounting estimates need to be reviewed unusual "one-time" transactions should be scrutinized to ensure that they have an appropriate underlying business rationale
procedures that are effective in identifying breakdowns in internal controls due to override and collusion
a
which of the following is most accurate with regard to data that becomes integral evidence in an examination? A. The best evidence is reliable and valid. B. Internet searching always provides quality data. C. Discarded trash seldom contains evidence of investigative value because of its condition. D. Evidence obtained from extra-organizational sources (e.g., bank) will always be reliable and valid.
d
which of the following is not one of the five types of interview and interrogation questions? a. informational questions b. closing questions c. introductory questions d. rapport-seeking questions
senior management mid- and lower-level employees organized criminals
who commits financial statement fraud?
because it's unique for each individual
why can indirect evidence only be gathered to prove pressure?
to conceal true business performance to preserve personal status/control to maintain personal income/wealth
why do people commit financial statement fraud?
