Fraud Final (updated) ch 1-6 & 10-13

Quick Ratio

(Current Assets - Inventory - Prepaids) / Current Liabilities

Identify the formula used to calculate z-score. a. (Mean − Value)/Standard Deviation b. (Mean − Value)/(Mean + Value) c. (Value − Mean)/Standard Deviation d. (Value − Mean)/Median

(Value − Mean)/Standard Deviation

The single most critical element for a fraud to be successful is opportunity. a. True b. False

False

Greed, living beyond one's means, and high bills all describe what type of fraud-related pressure? a. Financial b. Peer c. Environmental d. Work-related

Financial

According to the study mentioned in the text, which of the following is true about fraud perpetrators compared to property offenders? a. Fraud perpetrators are more likely to be caught than property offenders. b. Fraud perpetrators are more educated than property offenders. c. Fraud perpetrators are more likely to be men than property offenders. d. Fraud perpetrators are much younger than property offenders.

Fraud perpetrators are more educated than property offenders.

Which of the following key activities related to fraud is the most important and cost-effective way to reduce losses from fraud? a. Follow-up legal action b. Early fraud detection c. Fraud investigation d. Fraud prevention

Fraud prevention

Which method will result in the biggest savings? a. Fraud prevention—including EAP plans b. Fraud detection—including audit proactively, monitoring c. Investigation—including criminal prosecution d. Promotion—including raising rank or position

Fraud prevention—including EAP plans

Which of the following is an example of a whistle-blowing system? a. Bulletin board service b. Supervisor intervention c. Removing middle management layer d. Fraud reporting hotline

Fraud reporting hotline

Which of the following is the most important step in data analysis? a. Gathering the right data in the right format in the right time period b. Understanding the available data c. Learning the basics of table structure and field types d. Learning the basics of key relationships and query syntax

Gathering the right data in the right format in the right time period

GP Ratio=

Gross profit/net sales where GP is gross sales-sales returns-cogs and net sales is gross sales-sales returns

Which of the following is NOT a primary way fraud can be detected early? a. By accident b. Finding anomalies in the financial records c. Someone reports suspicious activity d. Watching those employees whose honesty test results were suspicious

Watching those employees whose honesty test results were suspicious

Which of the following is a component of the evidence square? a. Rationalization b. Perceived pressure c. Personal observation d. Perceived opportunity

personal observation

According to Benford's Law, the first digit of random data sets will most often begin with which number? a.7 b.1 c.3 d.4

1

From the select balance sheet items below, calculate the quick ratio. Item Amount Item Amount Cash. $20,000 Accounts payable $11,000 Notes receivable 15,000 Wages payable 5,000 Stock. 5,000 Retained earnings 20,000 Inventory 6,000. Notes payable. 8,000 a. 0.83 b. 1.25 c. 1.63 d. 1.08

1.25

While using n-grams, a match percentage of ________ or ________ generally indicates very similar values. a. 10 percent, smaller b. 20 percent, greater c. 5 percent, smaller d. 40 percent, greater

20 percent, greater

Approximately ____ of all frauds are committed by an individual acting alone. The remaining ____ involve collusion and often involve the ____ thefts. a. 63%, 37%, smallest b. 71%, 29%, largest c. 47%, 53%, smallest d. 18%, 82%, largest

71%, 29%, largest

Fraud is considered to be: a. A problem under control. b. A mild problem that most businesses need not worry about. c. A problem that affects very few individuals. d. A serious problem that continues to grow.

A serious problem that continues to grow.

_____ has been adopted by most major accounting firms and is a powerful platform for data analysis. a. ACL Audit Analytics b. CaseWare's IDEA c. Microsoft Office + Active Data d. SAS

ACL Audit Analytics

Which of the following statements is NOT true? a. Accounting errors are usually spread evenly throughout a data set. b. Traditional auditing methods are more suited to finding errors than fraud. c. Accounting anomalies indicate fraud has occurred or is occurring. d. Fraud investigation involves determining who committed the fraud, the schemes used, and how much money or assets were taken.

Accounting anomalies indicate fraud has occurred or is occurring.

Recording an expense to conceal fraud involves making a fictitious journal entry. A faulty journal entry is an example of which fraud symptom? a. Accounting anomaly b. Internal control weakness c. Unusual behavior d. Analytical anomaly

Accounting anomaly

For enhanced data analysis, which of the following is a good option for users who want a familiar interface and a less expensive alternative to ACL and IDEA? a. ActiveData b. Pearl c. DataSource d. Excel

ActiveData

_____ are a two-dimensional view with cases in one dimension and the calculations in the other. a. N-grams b. Z-scores c. Pivot tables d. Soundex algorithms

Pivot tables

There are three simple procedures that small business owners should do on a timely basis to prevent fraud when they can't afford sufficient employees to guarantee effective segregation of duties. Which of the following is NOT one among them? a. Pay everything by check so that there is a record. b. Always open the bank statement and reconcile it themselves. c. Allow one key employee to operate the bank account personally. d. Sign every check themselves and not delegate the signing to anyone else.

Allow one key employee to operate the bank account personally.

What does the following journal entry indicate? Legal Expense..................2,900 Cash...............................2,900 a. $2,900 cash is due to an attorney. b. A sum of $2,900 was received from an attorney in advance. c. $2,900 cash is due from an attorney. d. An attorney was paid $2,900 in cash.

An attorney was paid $2,900 in cash.

_____ fraud symptoms are procedures or relationships that are unusual or that do not make sense. a. Analytical b. Accounting c. Internal control d. Environmental

Analytical

An auditor noticed that Company B had an exorbitant increase in sales and drastic decreases in its inventory and accounts receivables. This statement symbolizes which fraud symptom? a. Accounting anomaly b. Internal control weakness c. Analytical anomaly d. Unusual behavior

Analytical anomaly

A mathematical algorithm that predicts the percentage of the time each digit will appear in a sequence of numbers is: a. inductive fraud detection. b. deductive fraud detection. c. Benford's Law. d. horizontal analysis.

Benford's Law

A company used computer auditing techniques to compare employees' telephone numbers with vendors' telephone numbers. This is an example of which step in a proactive fraud auditing? a. Identifying fraud risk exposures b. Identifying the fraud symptoms of each exposure c. Building audit programs to proactively look for symptoms and exposures d. Investigate fraud symptoms identified

Building audit programs to proactively look for symptoms and exposures

Kickbacks from vendors to buyers might generate which one of the following symptoms? a. Buyer not relating well to other buyers and vendors b. Decreasing purchases from favored vendor c. Increasing purchases from other vendors d. Decreasing prices and increasing quality

Buyer not relating well to other buyers and vendors

How does a smart embezzler manipulate accounting records to conceal fraud? a. By increasing assets b. By manipulating stock accounts c. By manipulating dividends d. By increasing expenses

By increasing expenses

Some researchers have added a fourth element to the fraud triangle making it a fraud diamond. What is that element? a. Propensity toward illegal acts b. Lack of self-respect c. Greed d. Capability

Capability

__________ is the ability of the fraud perpetrator to make an individual perceive punishment if he or she does not participate in the fraud. a. Expert power b. Coercive power c. Legitimate power d. Reward power

Coercive power

According to the study mentioned in the text, people who commit fraud are most similar to which of the following groups? a. Property offenders b. College students c. Convicted felons d. Animal lovers

College students

Which of the following is least effective while searching for anomalies? a. Comparing account balances in the statements from one period to the next. b. Calculating key ratios and comparing them from one period to the next. c. Performing horizontal analysis. d. Performing vertical analysis.

Comparing account balances in the statements from one period to the next.

Modeling and labeling are subcomponents of which fraud-related element of an organization? a. Control environment b. Accounting system c. Audit procedures d. Review procedures

Control environment

Which of the following describes the overall tone of the organization that management establishes through its modeling and labeling, organization, communication, and other activities? a. Detection framework b. Risk mitigation channel c. Support network d. Control environment

Control environment

____ focuses more on creating a culture of openness than eliminating opportunities. a. Proactive auditing b. Installing good internal controls c. Monitoring employees d. Creating a positive work environment

Creating a positive work environment

Which of the following is an analytical symptom of kickbacks? a. Decreasing purchases from other vendors b. Charging normal price for goods supplied c. Providing better-quality goods d. Smaller purchase quantities and more frequent orders

Decreasing purchases from other vendors

Document symptoms to some extent can signal that embezzlement is taking place. Which among the following usually does NOT point to some problem with the source documents? a. Photocopied documents b. Different names or addresses of payees or customers c. Excessive voids or credits d. Increased past-due accounts

Different names or addresses of payees or customers

Which of the following proactive fraud detection methods use Benford's Law to detect fraud? a. Vertical analysis b. Digital analysis c. Real-time analysis d. Time trend analysis

Digital analysis

Audits, public record searches, and net worth calculations are used to gather what type of evidence in fraud investigation? a. Testimonial b. Forensic c. Documentary d. Observational

Documentary

Stuart, a CFE, is investigating a possible management fraud. He found an email on an employee's computer to use as evidence in the case. Under which category of evidence would an email message fall? a. Testimonial evidence b. Documentary evidence c. Physical evidence d. Personal observation

Documentary evidence

What is the overall term for the investigative technique that includes gathering evidence through data mining, audits, computer searches, net worth calculations, and financial statement analysis? a. Documentary evidence b. Testimonial evidence c. Physical evidence d. Personal observation

Documentary evidence

Which of the following statements is true about the characteristics of real-time analysis? a. With real-time analysis in place, there is no need for continual improvement and updating of indicators. b. It is a distinct technique because it specifically analyzes each transaction for correctness rather than for fraud. c. Effective real-time analysis allows real-time modification and deletion of less-effective indicators. d. The most effective real-time analysis uses indicators that are hard-coded into the system.

Effective real-time analysis allows real-time modification and deletion of less-effective indicators.

Which level in the ethical maturity model can be summarized as a "willingness to pay the price for ethics"? a. Ethical positioning b. Ethical courage c. Personal ethical understanding d. Application of ethics to business situations

Ethical courage

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? a. Expert power b. Referent power c. Coercive power d. Reward power

Expert power

A fraud may be perpetrated through an unintentional mistake. a. True b. False

False

Advances in technology have had no effect either on the size or frequency of fraud or on the detection or investigation of fraud. a. True b. False

False

All frauds that are detected by organizations are made public. a. True b. False

False

One of the most important responsibilities of an employer is the hiring and retention of employees. Which of the following situations reflects the current market scenario? a. High turnover, high loyalty b. High turnover, low loyalty c. Low turnover, high loyalty d. Low turnover, low loyalty

High turnover, low loyalty

Which of the following should be emphasized in an employee reporting program? I. Fraud, waste, and abuse occur in few companies. II. The company actively encourages employees with information to come forward. III. The name of the employee reporting the fraud must be known. IV. The report need not be made to one's immediate supervisor. a. II and III. b. I, II, III, and IV c. I, II, and IV d. II and IV

II and IV

A good fraud auditing involves four steps. Which of the following is the correct sequence? a. Identifying fraud risk exposures; building audit programs to proactively look for symptoms and exposures; investigating fraud symptoms identified; and identifying the fraud symptoms of each exposure. b. Identifying fraud risk exposures; identifying the fraud symptoms of each exposure; building audit programs to proactively look for symptoms and exposures; and investigating fraud symptoms identified. c. Building audit programs that proactively check for symptoms and exposures; identifying fraud risk exposures; identifying the fraud symptoms of each exposure; and investigating fraud symptoms identified. d. Identifying the fraud symptoms of each exposure; identifying fraud risk exposures; investigating fraud symptoms identified; and building audit programs to proactively look for symptoms and exposures.

Identifying fraud risk exposures; identifying the fraud symptoms of each exposure; building audit programs to proactively look for symptoms and exposures; and investigating fraud symptoms identified.

Which of the following is a highly suspicious financial statement relationship? a. Increased revenues with increased cash flows b. Increased volume with decreased cost per unit c. Increased inventory with decreased payables d. Increased inventory with increased warehousing costs

Increased inventory with decreased payables

Which of the following is a highly suspicious financial statement relationship? a. Increased revenues with decreased receivables b. Decreased production with decreased scrap c. Increased volume with increased scrap d. Decreased cost per unit with increased level of output

Increased revenues with decreased receivables

While using financial statement analysis, which ratio will be most useful in assessing the company's operational efficiency? a. Current ratio b. Quick ratio c. Cost of goods sold percentage d. Inventory turnover

Inventory Turnover

Which of the following is not true of civil litigation? a. The purpose is to compensate for harm done to another. b. It usually begins when one party files a complaint. c. It must be heard by 12 jurors. d. Only "the preponderance of the evidence" is needed for the plaintiff to be successful.

It must be heard by 12 jurors.

Fraud examiners must be able to recognize signals that a journal entry may have been manufactured to conceal a fraud. Which of the following is a common journal entry fraud symptom? a. Journal entries with documentary support b. Journal entries that balance c. Adjustments to receivables or payables that are made monthly d. Journal entries made near the end of an accounting period

Journal entries made near the end of an accounting period

Allowing the clerk who checked out customer A to handle a return by that same individual without presenting the receipt would NOT be an example of which of the following weaknesses in internal controls? a. Lack of segregation of duties b. Lack of requiring proper documents and records c. Lack of independent checks d. Lack of an adequate accounting system

Lack of an adequate accounting system

Which of the following factors creates an opportunity for fraud? a. Greed b. Living beyond one's means c. Lack of an audit trail d. The organization owes it to me

Lack of an audit trail

Which of the following best describes an action that can cause a whistle-blowing system in place in the organization to fail? a. The organization requires employees to report all suspicious activity. b. The employee suspecting fraud reports directly to his/her supervisor's manager. c. Management is slow to act on reports of suspected fraud. d. An extensive code of ethics is in place and on file in order to answer employee inquiries.

Management is slow to act on reports of suspected fraud.

What is the most important element in a control environment? a. Management's communication b. Management's role and example c. The hiring process d. The internal audit department

Management's role and example

Which of the following scenarios is least conducive to fraud? a. Outstanding bills at home b. Mandatory vacation time c. Economic downturns d. Moral decay in upper management

Mandatory vacation time

Which of the following is NOT a common rationalization of fraud perpetrators? a. The organization owes me. b. I'm only borrowing the money. c. No one will get hurt. d. No one will care.

No one will care.

Which of the following is not a form of vendor fraud? a. Non-shipment of goods even though payment has been made. b. Overcharging for purchased goods. c. Not paying for goods purchased. d. Shipment of inferior goods.

Not paying for goods purchased.

Which of the following statements regarding ODBC is NOT accurate? a. ODBC stands for Open Database Communications. b. ODBC is a standard method of querying data from corporate relational databases. c. ODBC is a connector between the front-end analysis and the back-end corporate database. d. ODBC is already included with most operating systems.

ODBC stands for Open Database Communications.

Generally, internal controls are implemented in a corporation to help prevent which element of the fraud triangle? a. Perceived opportunity b. Perceived pressure c. Rationalization d. Authorization

Perceived opportunity

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? a. Personal ethical understanding b. Ethical courage c. Ethical leadership d. Application of ethics to business situations

Personal ethical understanding

_____ 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. a. Audit process b. Surveillance c. Predication d. Investigation

Predication

Which of the following acts by management could discourage someone from reporting an observed act of fraud? a. Providing clear instructions of who to contact b. Providing assurance of anonymity c. Providing clear instructions on how to convey the information d. Providing a clear list of possible consequences

Providing a clear list of possible consequences

Which of the following usually motivates embezzlers to indulge in a fraudulent activity? a. Pursuit of immediate gratification b. Safeguard their future c. Cover expenses required to live d. Protection against uncertainties

Pursuit of immediate gratification

Which of the following would usually be an environment conducive to fraud? a. Low turnover b. Reactive rather than proactive management c. Supportive rather than rivalrous relationships d. Long-term business focus

Reactive rather than proactive management

Which of the following ratios can be used to assess a company's solvency? a. Current ratio b. Return on assets c. Times-interest-earned ratio d. Inventory turnover

Times-interest earned ratio

An employee decides to steal cash from his/her employer. What would be the best way to conceal such a fraud? a. Recording the stolen cash as an expense. b. Writing down accounts payable for a supplier. c. Increasing accounts receivable from a customer. d. Writing down as dividend paid to shareholders.

Recording the stolen cash as an expense.

___ is the ability of the perpetrator to relate to the potential co-conspirator. a. Expert power b. Legitimate power c. Referent power d. Reward power

Referent power

Which of the following is a step that organizations should undertake while recruiting employees? a. Conduct a covert investigation on the background of each candidate. b. Consider the candidate's word as truth to ensure a culture of trust and honesty. c. Require candidates to certify that all information on their résumé is accurate. d. Verify the candidate's race, age, and religion during the interview.

Require candidates to certify that all information on their résumé is accurate.

Which of the following actions would most likely create an opportunity for fraud? a. Requiring all documents over seven years old be shredded b. Requiring that the department manager authorize purchase orders only for purchase amounts for more than $100 c. Requiring one password code for each entire department to enter the storeroom d. Using a manual accounting system

Requiring one password code for each entire department to enter the storeroom

Identify the true statement about detecting fraud using financial statement reports. a. Performing horizontal analysis requires converting the income statement balances into percentages of gross sales. b. Vertical analysis is the most direct method of focusing on changes from period to period. c. Before performing any data-driven analysis that targets fraud and corruption in financial statements, the numbers in all three types of financial statements need to be converted to percentages. d. Small frauds may not affect the summarized financial statements significantly enough to be detected.

Small frauds may not affect the summarized financial statements significantly enough to be detected.

Which of the following appears to be common to most embezzlers who are caught? a. Long-term focus b. Investments made in low-risk instruments c. Saving what they steal d. Spending on lifestyle improvements

Spending on lifestyle improvements

Which of the following financial statements can be used to answer the question, "Where did the cash come from to pay dividends?" a. Income statement b. Balance sheet c. Statement of cash flows d. Trial balance

Statement of cash flows

Which of the following is a control problem related to segregation of duties? a. Julie writes expense checks and Mark collects cash from customers. b. Bob order office supplies and deposits the company's checks. c. Steve records receivables and writes off bad debts. d. Rebecca records journal entries and orders lunch.

Steve records receivables and writes off bad debts.

___ is the splitting of complex data sets into case-specific tables. a. Deviation b. Stratification c. Data mining d. Soundex

Stratification

Which of the following is true? a. Stratification is the splitting of data into case-specific tables. b. Stratification is an extension of summarization. c. Summarization provides detail for each grouping into tables. d. Stratification is utilized to create a z-score across data sets.

Stratification is the splitting of data into case-specific tables.

Which of the following is NOT a possible control activity? a. Having separate authorization, bookkeeping, and custody functions. b. Protecting access to important information with a password. c. Requiring two individuals to work on the same task. d. Supervisory review of each task completed by employees.

Supervisory review of each task completed by employees.

Which of the following is the largest employee group in most organizations? a. Employees who display ethical leadership b. Group of employees who will always be honest c. Group of employees who will be dishonest anytime it benefits them d. Swing group of employees who could be honest or dishonest

Swing group of employees who could be honest or dishonest

Which of the following is a true statement regarding the United States Social Security Administration (SSA)? a. The SSA publishes a monthly list of newly issued Social Security numbers. b. The SSA publishes a monthly list of Social Security numbers that are no longer in use. c. The SSA database of valid numbers can be accessed by interested parties. d. The SSA database can be used to create mailing lists.

The SSA publishes a monthly list of Social Security numbers that are no longer in use.

_______ require(s) every public company to have a code of ethics to help deter wrongdoing. a. The Glass Steagall legislation b. The Sarbanes-Oxley legislation c. The Securities Act d. Generally Accepted Auditing Standards

The Sarbanes-Oxley legislation

Which of the following is a true statement regarding the fraud scale depicted in the text? a. The greater the perceived opportunity to commit fraud, the less rationalization it takes to commit fraud. b. The more dishonest a person is, the higher the need to rationalize the fraud act. c. When the financial pressure increases, even low perceived opportunity is sufficient to commit fraud. d. As the "need" to gamble increases, rationalization to commit fraud becomes easier.

The greater the perceived opportunity to commit fraud, the less rationalization it takes to commit fraud.

What is the most likely outcome when a company demotes the perpetrator but allows him or her to go unprosecuted? a. The company will avoid bad publicity. b. The perpetrator may commit another fraud in the future. c. The perpetrator will be saved from pain and embarrassment. d. Management will send a signal that fraud will not be tolerated.

The perpetrator may commit another fraud in the future.

______ involves the actual taking of cash, inventory, information, or other assets, whereas _______ involves selling stolen assets or transferring them into cash and then spending the cash. a. Conversion, coercion b. Theft, conversion c. Coercion, theft d. Theft, coercion

Theft, conversion

Which of the following is true of most accounting errors? a. They are primarily caused by lack of training. b. They represent intentional sabotage of controls. c. They are problems caused by failures in systems, procedures, and policies. d. They represent fraud.

They are problems caused by failures in systems, procedures, and policies.

Manufacturing companies with a profit margin of 10 percent must usually generate about 10 times as much revenue as the dollar amount of the fraud in order to restore net income to its pre-fraud level. a. True b. False

True

Most experts agree that fraud-related careers will be in demand in the future. a. True b. False

True

When perpetrators are criminally convicted of fraud, they often serve jail sentences and/or pay fines. a. True b. False

True

The proactive method of fraud detection is a six-step process. Which of the following is the correct process sequence? a. Identify possible frauds that could exist; catalog possible fraud symptoms; understand the business; use technology to gather data about symptoms; automotive detection procedures; analyze results; and investigate symptoms b. Catalog possible fraud symptoms; understand the business; identify possible frauds that could exist; analyze results; use technology to gather data about symptoms; and investigate symptoms c. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; investigate symptoms; use technology to gather data about symptoms; and analyze results d. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; use technology to gather data about symptoms; analyze results; and investigate symptoms

Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; use technology to gather data about symptoms; analyze results; and investigate symptoms

Which approach converts financial statement numbers to percentages of total assets or total sales? a. Horizontal analysis b. Vertical analysis c. Ratio analysis d. Variance analysis

Vertical analysis

Which of the following questions should be answered when considering fraud risk and fraud prevention? a. Which types of fraud are the easiest and least costly to prevent? b. Which employees are in the best position to commit fraud? c. Which symptoms of a fraud act are most likely to be spotted? d. What are all of the types of possible fraud that can be committed?

Which employees are in the best position to commit fraud?

Which statistical approach is one of the most powerful and yet simple methods for identifying outliers? a. N-grams b. Z-score c. Time-trend analysis d. Soundex algorithm

Z-score

An employee who has the responsibilities of both writing checks and making bank deposits would have ____ to commit fraud. a. financial pressure b. a perceived opportunity c. the rationalization d. validation

a perceived opportunity

Research in moral development strongly suggests that honesty can be BEST reinforced when: a. expectations of honesty are implied. b. fraud perpetrators are given a second chance. c. appreciation is exhibited for honesty. d. a proper example is set by management.

a proper example is set by management.

Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500. Calculate the inventory turnover ratio. a. 2 b. 0.5 c. 3.3 d. 1.3

a. 2

Which of the following is NOT one of the components of the fraud exposure rectangle? a. Accounting system controls b. Management and directors c. Financial results and operating characteristics d. Organization and its industry

a. Accounting system controls

How is the sales return percentage ratio calculated? a. By dividing sales returns by total sales b. By dividing total sales by sales returns c. By dividing sales returns by net sales d. By dividing net sales by sales returns

a. By dividing sales returns by total sales

According to study of financial statement frauds by the Committee of Sponsoring Organizations (COSO), who is the most common perpetrator of financial statement fraud? a. Chief Executive Officer b. Chief Financial Officer c. Chief Operating Officer d. Finance Controller

a. Chief Executive Officer

In addition to changes in financial statements, which of the following can indicate financial statement fraud has occurred? a. Information in the footnotes to the financial statements b. Stable dividend payout ratio c. Increased hiring of qualified employees by the company d. Addition of an independent member on the board

a. Information in the footnotes to the financial statements

Which of the following is a valid reason behind the prevalence of revenue-related financial statement fraud? a. It is easy to manipulate net income using revenues and receivables accounts. b. Revenue-related frauds are difficult to hide from detection. c. A reversing effect of the fraud automatically occurs in the subsequent period. d. Auditors generally focus more on balance sheet items than on revenue accounts.

a. It is easy to manipulate net income using revenues and receivables accounts.

Corporate financial statement fraud discovered in 2001 resulted in how many of the ten largest corporate bankruptcies in United States history? a. Seven b. Six c. Nine d. Eight

a. Seven

According to the text, why is the accounts receivable turnover ratio widely used in analyzing revenue-related fraud? a. Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare cases. b. Adding fictitious receivables will generally decrease the number of days it takes to collect receivables. c. If the ratio generally exceeds 1, recording fictitious sales will significantly increase the ratio, making it easy to spot fraud. d. Since the ratio should ideally equal 1, any deviation from this number is easy to detect.

a. Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare cases.

Which of the following is a typical symptom of a revenue-related fraud? a. Significant new, unknown customers b. Fall in gross profit percentage compared to the previous year c. Purchases from suppliers not approved on vendor lists d. The company having a huge customer base

a. Significant new, unknown customers

10-K forms refer to which of the following? a. The corporate reports filed with the SEC b. The tax returns filed with the IRS c. The press releases to the newswires d. The bankruptcy filing document

a. The corporate reports filed with the SEC

When a company records fictitious revenues, what is the effect on asset turnover ratio? a. The ratio increases b. The ratio decreases c. No effect d. The ratio might increase or decrease depending upon the transaction

a. The ratio increases

When do frauds occur in related-party transactions? a. When the transactions are not properly disclosed b. When assets are transferred between related parties at fair value c. When arrangements are made between two parties that create a conflict of interest in a business setting d. When the arrangement creates operating revenues

a. When the transactions are not properly disclosed

Which of the following occurs when an auditor and auditee only consider conditions that directly affect themselves but not the other party? a. Zero-order reasoning b. Deductive reasoning c. First-order reasoning d. Higher-order reasoning

a. Zero-order reasoning

Understanding a company's relationships with financial institutions and bondholders is important because: a. it can indicate the extent to which the company is leveraged. b. it can reveal whether significant short selling of the company's stock has occurred. c. it can uncover the fraudulent transactions from special purpose entities. d. it may help in raising additional funds from the financial institutions.

a. it can indicate the extent to which the company is leveraged.

Many financial statement frauds have been perpetrated because management: a. needed to report high income to support stock prices. b. wanted to decrease the total tax payable by the company. c. wanted to show artificial losses to employees. d. wanted to pay lower dividends to the shareholders.

a. needed to report high income to support stock prices.

Asset frauds are often easier to detect than other types of financial statement fraud because: a. overstated assets are always included on the balance sheet. b. of the off-book nature of asset frauds. c. asset overstatements are almost always quite significant.

a. overstated assets are always included on the balance sheet.

No mention of the contingent liability needs to be made in the financial statements, if the probability of payment is: a. remote. b. probable. c. reasonably possible. d. not plausible.

a. remote.

In liability fraud, liabilities are most often: a. understated. b. overstated. c. recorded as assets. d. recorded as expenses.

a. understated.

A "right-to-audit" clause: a. provides rights to the vendor to audit the company's books at any time. b. gives an external auditor the right to audit the company's books. c. is considered in civil court as an invasion of privacy. d. alerts vendors that the company reserves the right to audit the vendor's books at any time.

alerts vendors that the company reserves the right to audit the vendor's books at any time.

Benford's Law: a. applies to numbers that have built-in limits. b. is most effectively used with assigned numbers. c. applies best to numbers that occur naturally. d. uses ratios to detect fraud.

applies best to numbers that occur naturally.

Every fraud is comprised of all the following elements EXCEPT: a. the theft act. b. concealment. c. conversion. d. assault.

assault

Which of the following is a symptom of potential inventory fraud? a. An auditor observing a weakness in the inventory-receiving procedures b. An auditor observing an override of an internal control c. An auditor observing inadequate physical controls in the warehouse d. An auditor observing the lack of authorization required for purchases of inventory under $1,000

b. An auditor observing an override of an internal control

There has been an auditor change at Company X. Which of the following situations may NOT signal a potential fraud problem? a. Failure to pay an audit fee b. Auditee believing that the auditor's fees are too high c. Suspected fraud or other problems by the auditor d. Auditor-auditee disagreement

b. Auditee believing that the auditor's fees are too high

What are special purpose entities (SPEs)? a. Fictitious organizations formed to perpetrate a financial statement fraud b. Business interests formed solely to accomplish some specific task or tasks c. Bodies formed to establish audit reporting standards and rules d. Independent audit boards set up to ensure that financial statements are verified

b. Business interests formed solely to accomplish some specific task or tasks

Overstating ending inventory has the following effect on cost of goods sold and net income respectively. a. COGS - overstated and NI - overstated b. COGS - understated and NI - overstated c. COGS - overstated and NI - understated d. COGS - no effect and NI - understated

b. COGS - understated and NI - overstated

Which of the following is an example of examining nonfinancial data to detect fraud? a. Noting an increase in billing charges per customer b. Comparing the dates of sales to shipment dates c. Comparing line item current expenses to prior years d. Calculating the percent increase in inventory amounts

b. Comparing the dates of sales to shipment dates

Which of the following is a common inventory-related fraud scheme? a. Channel stuffing b. Cutoff problems c. Related-party transactions d. Side agreements

b. Cutoff problems

Which of the following are accounting symptoms that may indicate cash or marketable security misstatements? a. Obtaining statements directly from financial institutions as of the date you are concerned about. b. Differences between recorded amounts and amounts confirmed with banks, brokers, and other independent parties. c. Having physical possession of marketable security certificates. d. Comparing cash and marketable security balances with those of similar companies.

b. Differences between recorded amounts and amounts confirmed with banks, brokers, and other independent parties.

Which of the following is NOT true regarding "topside" journal entries used to commit financial statement fraud? a. Upper management usually records the journal entry b. Entries are recorded to subsidiary ledgers c. The journal entry may be recorded after normal business hours d. Entries often bypass the normal process for posting journal entries

b. Entries are recorded to subsidiary ledgers

Examining a company's relationships with other individuals and entities can reveal important information about financial statement fraud. Identify the piece of information that is correctly linked to its source. a. Examining relationships with financial institutions will show whether there has been significant "short selling" of the company's stock. b. Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance. c. Examining a company's relationships with its lawyers will show whether management is able to unduly influence the selection of accounting principles and the determination of significant estimates. d. Examining relationships with regulatory bodies will show whether the company has recently changed legal counsel.

b. Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance.

Identify an example of a perceived pressure that can motivate financial statement fraud. a. The ability to obfuscate the fraud behind complex transactions b. Failure to meet Wall Street's earnings expectations c. Rationalizing that all companies use aggressive accounting practices d. A weak board of directors

b. Failure to meet Wall Street's earnings expectations

Which of the following are considered the backbone of capitalism and allow investors, lenders, and regulators to measure the performance of a business? a. Government policies b. Financial statements c. Stock prices d. Credit reports

b. Financial statements

Which ratio will increase in a liability fraud? a. Accounts payable/Purchases b. Interest expense/Notes payable c. Total liabilities/Total assets d. Lease expense/Total fixed assets

b. Interest expense/Notes payable

The study done by the Committee of Sponsoring Organizations (COSO) on financial statement frauds that occurred during the period from 1987-1997 had many key findings. Which of the following is NOT among them? a. Frauds were most commonly perpetrated by improper revenue recognition, overstatement of assets, and understatement of expenses. b. Most of these firms had audit committees that met at least four times a year. c. Severe consequences were associated with companies who committed financial statement fraud. d. Most companies were experiencing net losses or were just holding break-even positions in periods prior to the fraud.

b. Most of these firms had audit committees that met at least four times a year.

Which of the following actions by the company auditor increases the potential to detect fraud? a. Comparing current procedure test results to a prior year b. Performing new procedures not conducted in prior years c. Assigning the same audit staff to the audit from year to year d. Carefully checking the audit test results

b. Performing new procedures not conducted in prior years

Which ratio will increase when accounts payable is not recorded? a. Accounts payable/Inventory b. Quick assets/Current liabilities c. Accounts payable/COGS d. Accounts payable/Total liabilities

b. Quick assets/Current liabilities

Which legislation led to the establishment of the Public Company Accounting Oversight Board? a. Private Securities Litigation Reform Act b. Sarbanes-Oxley Act c. Gramm-Leach-Bliley Act d. Glass-Steagall Act

b. Sarbanes-Oxley Act

How is a contingent liability reported if it is considered "reasonably possible?" a. The liability may or may not be recorded in the footnotes to financial statements. b. The contingent liability should be disclosed in the footnotes to the financial statements. c. The liability should be disclosed in the footnotes as well as on the face of the financial statements. d. No mention of the liability needs to be made in the financial statements.

b. The contingent liability should be disclosed in the footnotes to the financial statements.

What is meant by the term "topside" journal entries? a. The entries appearing in the beginning of a general ledger b. The entries that involve the overriding of internal controls c. The entries made toward the end of the accounting period d. The entries posted to subsidiary ledgers where supporting information is maintained

b. The entries that involve the overriding of internal controls

Which of the following observations concerning backdating of options is true? a. It will not result in restatement of financial statements. b. The extraordinary timing and frequency of occurrences defied statistical probability. c. There is no concrete evidence that managers gained because of this practice. d. It is an accepted means of compensating managers who perform exceedingly well.

b. The extraordinary timing and frequency of occurrences defied statistical probability.

When a company understates the cost of goods sold, what is the effect on the inventory turnover ratio? a. The ratio might increase or decrease depending upon the amount by which it is understated b. The ratio will decrease c. No effect d. The ratio will increase

b. The ratio will decrease

Analytical symptoms for unrecorded notes and mortgages payable include which of the following? a. Significant increases in recorded debt b. Unreasonable relationships between interest expense and recorded liabilities c. Recorded amounts of notes payable, mortgages payable, and other debts that appear to be too high d. Significant sales of assets with not much cash flow

b. Unreasonable relationships between interest expense and recorded liabilities

Which of the following can be used to simultaneously view the relationships between all numbers on the balance sheet or income statement? a. Horizontal analysis b. Vertical analysis c. Ratio analysis d. Trend analysis

b. Vertical analysis

Should nonfinancial indicators be used for assessing fraud risk? Why or why not? a. No. A company's financial statement data need not always be consistent with its nonfinancial measures. b. Yes. Management can more easily manipulate financial numbers but finds it harder to keep all the nonfinancial information consistent with the financial information. c. No. Nonfinancial measures are indicative of physical assets alone. d. Yes. Management attempts to commit fraud first show up in these indicators. Financial statement fraud is an attempt to cover up those attempts.

b. Yes. Management can more easily manipulate financial numbers but finds it harder to keep all the nonfinancial information consistent with the financial information.

Inventory fraud often involves overstating inventory and/or understating cost of goods sold. The result is a decrease in the: a. gross profit ratio. b. inventory turnover ratio. c. number of days sales in inventory. d. accounts receivable turnover ratio.

b. inventory turnover ratio.

While generally accepted accounting principles do allow flexibility, standards of _________, ________, and ________ must always prevail in the financial statements. a. subjectivity; integrity; validation b. objectivity; integrity; judgment c. recording; reporting; accounting d. quality; excellence; judgment

b. objectivity; integrity; judgment

In asset fraud, assets are most often: a. understated. b. overstated. c. recorded as liabilities. d. recorded as revenues.

b. overstated.

According to a study sponsored by the Committee of Sponsoring Organizations (COSO), the most common way to manipulate revenue accounts is by: a. reclassifying expenses as revenues. b. recording fictitious revenues. c. inappropriately reducing sales returns and allowances. d. prematurely recording revenue.

b. recording fictitious revenues.

If an auditor notices fraud symptoms related to inventory, one of the best ways to confirm if a fraud is occurring is to: a. ask senior management. b. search out tips and complaints from employees who may be aware that something isn't right. c. report suspicions to regulatory agencies for further investigation. d. continue searching for additional symptoms of the potential fraud.

b. search out tips and complaints from employees who may be aware that something isn't right.

Once a fraud has occurred and a preventive solution developed, the solution should: a. not be implemented because of the reactive circumstance in which it was created. b. be implemented only after testing by external auditors. c. always be implemented by default. d. be implemented only if it meets the cost-effectiveness test.

be implemented only if it meets the cost-effectiveness test.

In the past, most frauds were detected: a. by surveillance and undercover operations. b. by accident. c. by providing ways for people to report suspicions of fraud. d. by examining transaction records and documents to determine if there were anomalies that could represent fraud.

by accident

According to a study of financial statement frauds by the Committee of Sponsoring Organizations (COSO), the average fraud lasts for how many months? a. 12 months b. 18 months c. 24 months d. 30 months

c. 24 months

Company XYZ had a long-standing relationship with a leading law firm. In fact, the law firm's business with this company was one of its most profitable relationships. If the law firm decides that it no longer wants to conduct business with the company, this is: a. Indicative that the company might have a lot of customer lawsuits against it b. Not any sort of meaningful indicator of fraud activity c. A large cause for concern that financial statement fraud may be occurring d. An indication that the client has likely outgrown the law firm

c. A large cause for concern that financial statement fraud may be occurring

Which of the following is most likely an indicator of potential revenue fraud? a. A sudden increase in the sales discount percentage b. A high sales return percentage c. A rapidly increasing asset turnover ratio d. A rapidly decreasing working capital turnover ratio

c. A rapidly increasing asset turnover ratio

Which of the following is a performance evaluation method that focuses on both financial and nonfinancial indicators of performance such as customer satisfaction? a. 360-degree survey b. Critical incidents method c. Balanced scorecard d. Pareto chart

c. Balanced scorecard

Which asset is probably the most difficult to overstate under normal audit procedures? a. Fixed assets b. Marketable securities c. Cash d. Accounts receivable

c. Cash

Which of the following is a fraud scheme affecting the inventory? a. Refreshing transactions b. Side agreements c. Double counting d. Lapping

c. Double counting

Which of the following is a commonly used ratio to discover inventory-related fraud? a. Number of days' in receivable ratio b. Sales return percentage ratio c. Gross profit ratio d. Earnings per share

c. Gross profit ratio

An auditor adjusts the audit plan by introducing unexpected audit procedures in response to what the auditor believes management may be doing to conceal a fraud based on management's strategic reasoning. Which order of reasoning is occurring here? a. Low-order reasoning b. Zero-order reasoning c. Higher-order reasoning d. First-order reasoning

c. Higher-order reasoning

Which of the following is NOT an activity specifically listed in the text as prohibited by the Sarbanes-Oxley Act for an auditor of a company to perform contemporaneously? a. Appraisal or valuations services b. Actuarial services c. Income tax preparation services d. Bookkeeping services

c. Income tax preparation services

Which of the following may indicate management fraud? a. The name of a relative of a member of upper management is suggested to fill a board of directors' vacancy. b. Increases and decreases in inventory fluctuate from period to period. c. Inconsistencies exist between what management is telling the auditor and what the auditor observes. d. Several mistakes are discovered in the inventory records.

c. Inconsistencies exist between what management is telling the auditor and what the auditor observes.

What is the difficulty in using horizontal, vertical, or ratio analysis? a. The complicated calculations required to arrive at change statements b. Identifying the changes and speed of changes in the ratios, when the change is unexpected or unexplained c. Knowing when a change in account balance or relationship is significant enough to signal possible fraud d. Assessing the magnitude or significance of changes in account balances looking only at raw financial statement numbers

c. Knowing when a change in account balance or relationship is significant enough to signal possible fraud

Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these facts, which one of the following should be most carefully examined? a. Transactions that result in healthy revenues b. Large market capitalization c. Loans and other financing transactions between related entities d. Dividend paid out in the previous year

c. Loans and other financing transactions between related entities

Which of the following applies to a "cookie jar?" a. Understated accounts payable b. Overstated current assets c. Overstated reserves d. Recording fictitious revenues

c. Overstated reserves

Which of the following tends to be the most common method for understating cost of goods sold? a. Understating purchases b. Overstating purchase returns c. Overstating inventory

c. Overstating inventory

A CEO believes that the company should try to keep the stock price high by manipulating the financial statements to protect its shareholders. Which element of the fraud triangle is discussed here? a. Perceived opportunity b. Trauma c. Rationalization d. Perceived pressure

c. Rationalization

Which of the terms refers to the ability to anticipate a fraud perpetrator's likely method of concealing a fraud? a. Zero-order reasoning b. Deductive reasoning c. Strategic reasoning d. Low-order reasoning

c. Strategic reasoning

Your audit team, working with a newly acquired client, discovers that there has been fraudulent financial reporting for the past five years. Who is most likely to have been involved in the fraud? a. Middle management in positions of trust b. Disgruntled employees c. Top management d. The accountants in charge of preparing the financial statements

c. Top management

Which of the following is a rare situation that may arise in a privately owned company that wants to decrease the amount of income taxes paid to the government? a. Understating purchases b. Overstating net income c. Understating inventory d. Understating cost of goods sold

c. Understating inventory

Which of the following is a documentary symptom associated with revenue-related fraud? a. Unusual delays by the entity in providing revenue-related, requested information b. Weaknesses in the cutoff processes or other key accounting processes c. Unsupported or unauthorized revenue-related balances or transactions d. Unusual relationships between two revenue-related accounts

c. Unsupported or unauthorized revenue-related balances or transactions

Which of the following is an analytical symptom associated with revenue-related financial statement frauds? a. Untrue responses by management to queries about revenue-related accounts b. Missing documents in the revenue cycle c. Unusual entries made at the end of the accounting period that increase revenues d. Significant bonuses tied to meeting earnings forecasts

c. Unusual entries made at the end of the accounting period that increase revenues

In case of deferred revenue liabilities, when should revenues almost always be recorded as earned? a. When the company receives an order for delivery of the product or the performance of a service b. When the company is reasonably sure that the product can be developed and delivered c. When the service is performed or the product is shipped d. When the company receives cash for the service to be performed or the product to be delivered

c. When the service is performed or the product is shipped

Which of the following is a finding of the Treadway Commission? a. Financial statement frauds occur very often, the average fraud lasts about two years. b. The CEO perpetrates the fraud in 72% of the cases. c. While financial statement frauds occur infrequently, they are extremely costly. d. Financial statement fraud occurs mostly in companies that are listed.

c. While financial statement frauds occur infrequently, they are extremely costly.

The first step to uncovering revenue fraud is to: a. determine how each transaction could be misstated. b. evaluate the efficiency of the management. c. analyze and diagram the various transactions between an organization and its customers. d. identify scheme-specific symptoms and proactively search for more fraud.

c. analyze and diagram the various transactions between an organization and its customers.

Capitalizing costs that should be expensed: a. is a practice mostly found in large, well-established companies. b. usually has no effect on net income. c. has the effect of increasing net income by the same amount of the capitalized costs. d. is a healthy practice if they are written off shortly after the transaction takes place.

c. has the effect of increasing net income by the same amount of the capitalized costs.

Overstating of sales in the income statement leads to a: a. decrease in inventory turnover ratio. b. decrease in EPS. c. increase in gross profit ratio. d. decrease in accounts receivable ratio.

c. increase in gross profit ratio.

It is usually easier to detect inadequate disclosure fraud that involves______ disclosures than it is to detect disclosure fraud that involves _______ disclosures. a. fraudulent, irrelevant b. unintentional; intentional c. misleading; missing d. missing; fraudulent

c. misleading; missing

Frauds are more likely to occur in: a. large, historically profitable companies. b. companies with an active board of directors. c. smaller companies where one or two individuals have almost all control in decision making. d. any company, as the probability of a fraud does not change with the size of a company.

c. smaller companies where one or two individuals have almost all control in decision making.

All of the following adjustments can be used to understate accounts payable EXCEPT: a. recording purchases after year end. b. overstating purchase discounts. c. understating purchase returns. d. omitting purchases.

c. understating purchase returns.

Which area of investigative method involves searching for ways in which perpetrators have spent or used their stolen assets? a. Theft act b. Concealment c. Conversion d. Collusion

conversion

Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500. Calculate the number of days' sales in inventory. a. 145 b. 274 c. 110 d. 183

d. 183

Which of the following is most likely an indicator of fraud involving inventory overstatement? a. A sudden increase in the inventory turnover ratio b. A sharp decrease in gross profit margin c. A sudden decrease in sales d. A sudden increase in number of days' sales in inventory

d. A sudden increase in number of days' sales in inventory

Which of the following ratios is relatively more helpful in highlighting revenue-related frauds? a. Working capital turnover ratio b. Earnings per share c. Asset turnover ratio d. Accounts receivable turnover

d. Accounts receivable turnover

Which of the following is the term for a practice where the effective dates on stock options are deliberately changed for the purpose of securing extra pay for management? a. Backtracking b. LEAP c. Arbitrage d. Backdating

d. Backdating

Which of the following terms depicts processing orders for goods that are stored by the seller, often, because the buyer is not ready or able to receive the goods at the time of the order? a. Sham sales b. Side agreements c. Consignment sales d. Bill-and-hold sales

d. Bill-and-hold sales

In this phase of the economy, most businesses appear to be highly profitable. a. Trough b. Recession c. Recovery d. Boom

d. Boom

What is the meaning of "short sell?" a. Buy shares from a brokerage firm and enter into a forward transaction to sell the shares at today's price on a future date. b. Sell the shares at today's price to an investor and enter into an option agreement to buy the shares back in the near future. c. Buy shares from one brokerage firm and sell the shares to another brokerage firm with a view to make quick money. d. Borrow shares from a brokerage and sell the shares at today's price with the intention to repay the borrowed stock they sold at some future time when the stock is trading for a lower price.

d. Borrow shares from a brokerage and sell the shares at today's price with the intention to repay the borrowed stock they sold at some future time when the stock is trading for a lower price.

Which type of fraud will not have any analytical symptoms? a. Inventory fraud b. Revenue fraud c. Liability fraud d. Disclosure fraud

d. Disclosure fraud

What is the least effective method for comparing financial statement information between companies? a. Performing ratio analysis b. Performing horizontal analysis c. Studying the statement of cash flows d. Focusing on changes in financial statement numbers

d. Focusing on changes in financial statement numbers

Which of the following is NOT a kind of question that should be asked in order to understand the exposure to management fraud? a. Is a legitimate business purpose apparent for each separate entity of the business? b. Have significant recent changes occurred in the nature of the organization? c. Are the accounting and information technology staff and organization effective? d. How many employees are there in the organization who have many years with the organization?

d. How many employees are there in the organization who have many years with the organization?

According to the study done by the Securities and Exchange Commission, in what area were the greatest number of enforcement actions taken? a. Improper use of off-balance-sheet arrangements b. Improper expense recognition c. Improper accounting for business combinations d. Improper revenue recognition

d. Improper revenue recognition

Which of the following is an example of a perceived opportunity that can lead to financial statement fraud? a. Inability to compete with other companies b. Independent audit and a strong board of directors c. Thinking that fraud is good for the company d. Inadequate internal controls

d. Inadequate internal controls

Which of the following would be least likely to indicate potential fraud activity? a. Increased borrowing at one specific bank b. Increased numbers of short sales by investors c. Increased business with related parties d. Increased customer appreciation activities

d. Increased customer appreciation activities

What is often referred to as "abusing the cutoff?" a. Inflating revenues by using implied side agreements b. Inflating revenues by selling unused assets for a promise to buy them or similar assets back at roughly the same price c. Inflating current revenues by allowing customers to return products and cancel sales in future periods d. Inflating revenues by including revenues in the current period that should be recognized in the next period

d. Inflating revenues by including revenues in the current period that should be recognized in the next period

When management fraud occurs, companies usually: a. overstate assets and net income. b. understate assets and net income. c. overstate assets and understate net income. d. understate assets and overstate net income.

overstate assets and net income.

Which types of questions should be asked about a company's relationship with financial institutions? a. Is a significant part of the company's income or revenues derived from one or two large transactions? b. Has management placed unreasonable demands on the auditor, including unreasonable time constraints? c. Has significant "short selling" of the company's stock occurred? If so, for what reasons? d. Is the organization highly leveraged through bank or other loans?

d. Is the organization highly leveraged through bank or other loans?

What is the practice in which cash receipts are misapplied to hide fictitious receivables called? a. Bill-and-hold b. Channel stuffing c. Partial shipment d. Kiting

d. Kiting

The presence of fraud symptoms should cause a fraud examiner to do which of the following? a. Refuse to complete the audit b. Report the fraud to the SEC c. Call a press conference to detail the findings d. Launch an investigation

d. Launch an investigation

Why are overstated reserves sometimes referred to as "cookie jar" reserves? a. Companies involved in mergers or acquisitions overstate their liabilities by creating "cookie jar" reserves. b. The reserve is commonly created during bad times or when routine senior management changes occur. c. Some companies may require customers to make deposits for future goods or services that can be intentionally recorded as revenue, which is like money stored in a cookie jar. d. Like money stored in a cookie jar, overstated revenues represent a stash of accounting earnings that can be used to bolster the perceived performance of the company in the future.

d. Like money stored in a cookie jar, overstated revenues represent a stash of accounting earnings that can be used to bolster the perceived performance of the company in the future.

Which of the following is a potential revenue-related fraud scheme? a. Cutoff problems b. Double counting c. Holding items on consignment d. Partial shipment

d. Partial shipment

Which of the following is defined as selling unused assets for a promise to buy them or similar assets back at roughly the same price? a. Bill-and-hold sales b. Kiting c. Channel stuffing d. Round-tripping

d. Round-tripping

Which of the following expenditures would be most suspicious if it were capitalized? a. Equipment purchases b. Computer purchases c. Prepaid expenses d. Salaries to the top management

d. Salaries to the top management

Which is a common method of providing executive compensation by allowing top management to purchase stock at a fixed share price? a. Stock splits b. Arbitrage c. Dividends d. Stock options

d. Stock options

Which of the following is a true statement regarding searching for inventory analytical symptoms? a. Examining the changes in recorded amounts from period to period provides useful information regarding potential fraud. b. Studying the statement of cash flows is not a useful means of looking for potential fraud. c. Utilizing vertical analysis for the current year is a useful means of identifying potential fraud. d. The pace of the change in the numbers can often be indicative of potential fraud.

d. The pace of the change in the numbers can often be indicative of potential fraud.

When examining whether a company has underrecorded accounts payable, all of the following ratios are helpful EXCEPT: a. Quick assets/Current liabilities b. Accounts payable/Purchases c. Accounts payable/Cost of goods sold d. Unearned revenue/Accounts payable

d. Unearned revenue/Accounts payable

All of the following observations concerning off-balance-sheet arrangements are true, EXCEPT: a. a common use is to allocate risks among third parties. b. they might include structured finance or special purpose entities. c. they are often used to engage in leasing, hedging, or research and development services. d. they are considered illegal under SEC guidelines.

d. they are considered illegal under SEC guidelines.

Most software packages have functions for generating _____ about columns of data, which include statistical summaries like control totals, mean, maximum, minimum, standard deviation, number of zero values, number of empty records, and so on. a. captions b. histograms c. headings d. descriptives

descriptives

Benford's Law can help detect fraud by: a. establishing weaknesses in the accounting control system. b. identifying accounting anomalies. c. focusing on unexplained changes. d. identifying possible attempts by fraudsters to make stolen amounts look random.

identifying possible attempts by fraudsters to make stolen amounts look random.

The red flag that is generally identified when employee and vendor telephone numbers are the same is: a. dummy vendors. b. employees purchasing goods for personal use. c. billing more than once for the same purchase. d. providing poor-quality goods.

dummy vendors

Research has shown that ______ detect most frauds. a. auditors b. customers c. vendors d. employees

employees

Horizontal analysis is performed when: a. total assets are set at 100% and all other balances are shown as a percentage of total assets. b. financial statement data are shown for two periods with the amount and percentage of change for each line item. c. there is a need to calculate and compare key ratios from period to period. d. income statement amounts are shown as a percentage of total sales.

financial statement data are shown for two periods with the amount and percentage of change for each line item.

One way to create and communicate clear expectations about what is and is not acceptable in an organization is: a. having separate, nonintegrated personnel and operating policies. b. creating an expectation of punishment. c. following a reactive management style. d. having a clearly defined code of conduct in place

having a clearly defined code of conduct in place

The theory behind _____ is that if people know their work or activities will be monitored by others, the opportunity to commit and conceal a fraud will be reduced. a. documentation b. segregation of duties c. system of authorizations d. independent checks

independent checks

Communicating expectations about honesty and integrity throughout a company includes all of the following elements EXCEPT: a. identifying appropriate values and ethics. b. fraud awareness training. c. consistent punishment for violators. d. insisting that top management model appropriate behavior.

insisting that top management model appropriate behavior.

One of the disadvantages of Benford's Law in detecting fraud is: a. potential suspects are more likely to know you are trying to detect fraud than if you didn't use such detection techniques. b. users must be thoroughly trained in its complexities to implement and use. c. that those cases with the lowest probabilities do not match Benford's Law and may need further investigation. d. it only broadly identifies the possible existence of fraud; it fails to narrow possibilities to a manageable field of promising leads.

it only broadly identifies the possible existence of fraud; it fails to narrow possibilities to a manageable field of promising leads.

All transactions related to specific accounts, such as cash or inventory, are summarized in the: a. journal. b. ledger. c. trial balance. d. balance sheet.

ledger

According to Benford's Law, 5 will be the first digit of a random number set: a. more often than 1. b. less often than 4. c. about the same as 6. d. more often than 3.

less often than 4.

Studies show that legal action against fraudsters is typically taken: a. less than 25 percent of the time. b. less than 50 percent of the time. c. more than 75 percent of the time. d. at least 50 percent of the time.

less than 50 percent of the time.

All of the following factors can be associated with high levels of fraud and detract from a positive work environment EXCEPT: a. top management that does not pay attention to behavior of employees. b. lack of recognition of job performance. c. unrealistically low pay. d. low turnover.

low turnover

An operating condition that can contribute to a higher risk of fraud is: a. management by crisis. b. high company loyalty. c. flexible rules. d. proper authorization.

management by crisis

One of the most common errors investigators make when analyzing time trends is: a. incorrect data preparation. b. focusing only on one variable, time (the x-axis if graphed). c. not monitoring the time taken. d. not standardizing for time.

not standardizing for time.

A red flag search to detect kickbacks would include: a. invoices without valid purchase order. b. employee and vendor telephone numbers are the same. c. purchase orders with zero dollar amounts by buyer. d. price increases greater than 20% for several consecutive years.

price increases greater than 20% for several consecutive years.

All of the following are part of the fraud element triangle EXCEPT: a. the theft act. b. concealment. c. conversion. d. rationalization.

rationalization

A good internal control system includes: a. open work environments. b. rigid rules. c. segregation of duties. d. following strict hiring procedures.

segregation of duties

Preventive controls include: a. independent checks. b. segregation of duties. c. documents and records. d. financial statement reviews.

segregation of duties

While methods like high-low slope, average slope, handshaking, and Box-Jenkins exist, one of the most popular techniques for summarizing the slope of a graph is: a. summarization. b. stratification. c. statistical regression. d. arithmetic progression.

statistical regression.

Specific implementations of delimited text are called TSV. What does TSV stand for? a. toxicity screening value b. time segmented volume c. tab separated values d. tactical secure voice

tab separated values

Digital analysis is: a. the art of analyzing the digits that make up number sets like invoice amounts, reported hours, and costs. b. a technique which calculates the average probability for each grouping of data. c. the searching for expected relationships between numbers. d. the use of numeric values for decision making.

the art of analyzing the digits that make up number sets like invoice amounts, reported hours, and costs.

Which of the following records data for each case in a graph and analyzes the slope? a. summarization analysis b. time trend analysis c. fuzzy matching method d. cross tables method

time trend analysis

Fraud is most commonly detected by: a. monitoring employees. b. auditors. c. discouraging collusion. d. tips and complaints.

tips and complaints

Segregation of duties, as a control procedure, is most often used: a. when the task involved is complex. b. when it is impossible for one person to complete a task. c. when appraisals are conducted. d. when cash is involved.

when cash is involved