Fraud Examination Ch.1-3
Which of the following people is most likely to have opportunities to commit fraud?
62 year old Dave has loyally worked up his company's corporate ladder for the past 24 years
An effective accounting system is designed to provide which of the following to help discover fraud?
An audit trail
Wilma participates in a fraud scheme by executing some derivative trades because she believed that a senior analyst knew more about complex derivative transactions than she did. These transactions were fraudulent in nature. Which type of power was employed to deceive Wilma?
Expert power
Poor credit could become a ____ that could lead to fraud.
Financial pressure
Which of the following frauds is usually the most expensive?
Financial statement fraud
Evidence Square
First approach to fraud investigation 1. Testimonial evidence 2. Documentary Evidence 3. Physical evidence 4. Personal evidence
According to the Sarbanes-Oxley legislation, current changes to, or waivers of codes of ethics should be disclosed in:
Form 8-K.
Pressure
Four groups: Financial pressures Vices Work related pressures Other Pressures Financial pressure is the most common type to commit fraud
The GDP in the economy of Ponziland was $5 billion in the year prior to the frauds (year 1). The economy were growing at 4 percent. Frauds during the year reduce aggregate income by $200 million. During the year, the economy has:
remained flat.
Follow-Up Legal Action
Civil Action: Purpose is to recover money or other assets from the fraud perpetrators and others associated with the fraud Criminal Action: Can only be brought by law enforcement or statutory agencies It's much more difficult to get a criminal conviction than a judgement in a civil case.
Individuals often participate in fraud because they believe that by not participating in the fraud scheme, they may lose their job. Which type of power is at play here?
Coercive power
Which of the following is NOT an element of a Ponzi scheme?
Collected money is invested.
Modeling and labeling are sub-components of which fraud-related element of an organization?
Control environment
Which area of investigative method involves searching for ways in which perpetrators have spent or used their stolen assets?
Conversion
Which among the following frauds is most likely to be a civil charge?
Defamation
Classifications of Fraud
Employee Fraud Occupational Fraud A third classification divides frauds according to victims
Research has shown that ______ detect most frauds.
Employees
Which level in the ethical maturity model can be summarized as "willingness to pay the price for ethics?"
Ethical courage
Fraud statistics come from all of the following sources EXCEPT:
Fraud perpetrator
According to the study mentioned in the text, which of the following is true about fraud perpetrators compared to property offenders?
Fraud perpetrators are more educated than property offenders
Organizations Fight Fraud by Implementing:
Fraud prevention early fraud detection fraud investigation follow-up legal action and/or resolution Preventing fraud is generally the most cost effective way to reduce losses from fraud
Which of the following is an example of a whistle-blowing system?
Fraud reporting hotline
Common Vice Pressures
Gambling Drugs Alcohol Expensive extramarital relationships
Common Financial Pressures
Greed Living beyond one's means High bills or personal debt Poor credit Personal financial losses Unexpected financial needs
Which of the following approaches is most useful in creating a culture of honesty and integrity in the workplace?
Hiring right kind of employees
Fraud Element Triangle
Part of the second approach to fraud investigation Theft Act Conversion Concealment
Fraud Motivation Triangle
Part of the second approach to fraud investigation Perceived pressure Rationalization Perceived opportunity
Which of the following is an example of an authorization control procedure?
Password protection
Fraud Triangle
Perceived Pressure Rationalization Perceived Opportunity
Customer Fraud
Perpetrator: Customers Victim: organization that sells to customer Explanation: Customers don't pay, pay too little, or get too much from the organization through deception.
Employee Fraud
Perpetrator: Employee Victim: the employer Explanation: Employees use their positions to take or divert assets belonging to their employer. This is the most common type of fraud.
Investment scams and other consumer frauds
Perpetrator: Fraud perpetrators- all kinds Victim: unwary investors Explanation: These types of frauds are committed on the Internet and in person and obtain the confidence of individuals to get them to invest money in worthless schemes.
Management Fraud (Financial Statement Fraud)
Perpetrator: Management Victim: Shareholders Explanation: Management manipulates the financial statements to make the company look better than it is. This is the most expensive type of fraud.
Vendor Fraud
Perpetrator: Vendors Victim: the organization the vendors sell to Explanation: Vendors either overbill or provide lower quality or fewer goods than agreed.
Recent research has shown that there is an ethical maturity model (EMM) that explains why people make unethical decisions. Which of the following represents the foundation of ethics according to this model?
Personal ethical understanding
Investigative techniques under which approach include invigilation, surveillance, and covert operations?
Personal observation
Which of the following is a component of the evidence square?
Personal observation
Which of the following is a prerequisite for a fraud investigation?
Predication
_______ refers to the circumstances, taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will incur.
Predication
What is the most cost-effective way to minimize the cost of fraud?
Prevention
Investigative methods utilized to catch a fraud perpetrator while he/she is actually receiving a kickback fall under which of the following categories?
Theft act investigative methods
Government agencies such as the FBI, FDIC, IRS, or various health agencies publish fraud statistics from time to time. Which of the following observations concerning such statistics is true?
They provide only those statistics related to their jurisdiction.
Which of the following is NOT a common rationalization of fraud perpetrators?
No one will care
Six Major Factors That Increase Opportunity
1. Lack of controls 2. Inability to judge performance quality 3. Failure to discipline fraudsters 4. Lack of access to information 5. Ignorance, apathy, and incapacity 6. Lack of audit trail
Common Work Related Pressures
"Get even with employer" Motivated by these factors: getting little recognition feeling job dissatisfaction Fear of losing one's job being overlooked for a promotion feeling underpaid
A company is a victim of a $414 million fraud. At that time its profit margin is 10%. How much additional revenue should the company generate in order to recover the effect on net income?
$4.14 billion
In the past, most frauds were detected:
by accident.
Three Primary Ways to Detect Fraud
1. By chance 2. By providing "whistle-blowing" systems 3. By data mining
Five Critical Elements in Creating a Culture of Honesty and High Ethics
1. Have top management model appropriate behavior 2. Hire the right kind of employees 3. Communication expectations and require periodic written acceptance to the expectations 4. Create a positive work environment 5. Enforce policies for handling fraud
To Eliminate Fraud, Organizations should:
1. Identify sources and measure fraud risks. 2. Implement preventative and detective measures 3. Create widespread monitoring by employees 4. Have internal and external auditors
How is the confidence element established in a Ponzi scheme?
By paying returns to investors initially.
A smart fraudster usually manipulates which financial record in order to better avoid an audit trail?
Income statement.
Which of the following is NOT a primary reason for increased size and number of frauds?
Increased centralization of businesses
Which of the following is true of the "swing group" of employees in organizations?
Individuals in this group have situational ethics.
Fraud is...
Intentional to trick or deceive someone out of their assets theft crime
Which of the following is NOT a primary control procedure to minimize the occurrence of fraud?
Internal audit department
Telemarketing fraud usually falls into this category.
Investment scams
Which of the following is NOT a characteristic of management fraud?
Kickbacks or bribes.
A fraud perpetrator uses the float time between banks to give the impression that he had money in his accounts. Which crime is he committing?
Kiting
What is the strongest factor in deterring future fraud activity?
Legal prosecution.
Which of the following is NOT an example of a fraud-fighting career?
Maintaining the security of public records.
Which of the following is NOT a part of the evidence square?
Management evidence
Fraud in companies such as WorldCom, Enron, Waste Management, Sunbeam, Rite-Aid, Phar-Mor, Parmalat, and ZZZZBest are examples of:
Management fraud.
What is the most important element in a control environment?
Management's role and example
Which is following observations is TRUE?
Most fraud perpetrators have profiles that are similar to those of other people.
All of the following are part of the fraud element triangle EXCEPT:
Rationalization
Which of the following is usually the most expensive of all control procedures?
Segregation of duties
Definition of Fraud
Seven Parts: 1. a representation 2. about a material point 3. which is false 4. and intentionally or recklessly so 5. which is believed 6. and acted upon by the victim 7. to the victim's damage
Who are the primary victims of financial statement fraud?
Stockholders
Which type of evidence is gathered from individuals using investigative techniques such as interviewing, interrogation, and honesty tests?
Testimonial evidence
Documents and records are an important control activity. Which of the following statements concerning this activity is true?
The entire accounting system serves as a documentary control.
Most fraud perpetrators have profiles that look like:
Those of other honest people
Which legal code makes the bribing of public officials illegal?
Title 18, U.S. Code Section 201
Employee embezzlement can be direct or indirect. Indirect fraud occurs when:
an employee receives a kickback from a vendor.
Civil claims begin when one party files a complaint against another, usually for the purpose of:
being awarded financial restitution.
Criminal Law
branch of law that deals with offenses of a public nature
The following are all elements of Title 26, U.S. Code Section 7201 EXCEPT:
bribes paid may be deducted as business expenses.
When management fraud occurs, companies usually:
overstate assets and net income.
Organizations and individuals that have proactive fraud prevention measures usually find that their prevention efforts:
pay big dividends.
Civil Law
deals with the rights of individuals
In fraud prosecution cases, ______ matter consists of the underlying data and all corroborating information available.
evidential
In an organization, individuals who suspect fraud usually don't come forward because they:
fear being branded as a whistle-blower.
Management fraud is often referred to as:
financial statement fraud.
The burden of proof in a criminal case:
level is beyond a reasonable doubt.
All of the following factors can be associated with high levels of fraud and detract from a positive work environment EXCEPT:
low turnover.
One way that criminal law differs from civil law is that it:
must yield a unanimous verdict.
Fraud is not...
taken by physical force a mistake or error Victimless insignificant because no one is hurt acceptable or justifiable
Segregation of duties, as a control procedure, is most often used
when cash is involved.
Which of the following is a possible indication that fraud may be present?
An employee's lifestyle changes suddenly.
Which of the following is a result of the presence of fraud prevention controls within an organization?
Employees are less likely to commit fraud.
Which of the following is FALSE concerning legal actions by organizations regarding fraud?
Legal action stops future frauds.
Studies reveal that honesty levels in advaned countries are decreasing. What do these findings indicate for the future regarding fraud?
Less perceived opportunity will have to be present.
Which of the following about rationalization is NOT true?
Rationalizing is unnecessary when there are multiple opportunities present to commit fraud.
Which of the following statements regarding fraud on behalf of an organization is true?
This type of fraud benefits top executives as it generally increases stock price.
Which of the following is NOT a perceived pressure that can lead to employee fraud?
anticipated actual financial reports that are below published expectations
Which of the following skills would be least beneficial in a career as a fraud-fighting professional?
auto mechanic
Which of the following is an example of a vice pressure?
expensive extramarital relationship(s).
Which of the following is NOT a proactive hiring procedure?
instilling in employees a desire to develop ethical awareness and courage to do the right thing
Which of the following is NOT a primary way fraud can be detected early?
watching those employees whose honesty test results were suspicious
Which of the following questions should be answered when considering fraud risk and fraud prevention?
which employees are in the best position to commit fraud
