ACCT 4120: Chapter 1-4 Practice Test

Question 1

True/False
Once predication is present, an investigation is usually undertaken to determine whether or not fraud is actually occurring.

Answer 1

True

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 occur. Fraud investigations should not be conducted without predication.

Question 2

True/False
In vendor fraud, customers don’t pay for goods purchased.

Answer 2

False

Customer fraud involves a customer who does not pay for goods or services. Vendor fraud involves a vendor who provides inferior goods, overcharges, or pays bribes to get favored treatment.

Question 3

Research shows that fraud occurs less frequently when employees feel:
a. Ownership in the organization.
b. Challenged with unreasonable performance goals.
c. Threatened.
d. Abused by management.

Answer 3

a. Ownership in the organization.

The fourth element in creating a culture of honesty and high ethics involves developing a positive work environment.

Research results indicate that fraud occurs less frequently when employees have positive feelings about an organization and have a feeling of ownership in that organization than when they feel abused, threatened, or ignored.

Question 4

Which of the following is not a recognized method of eliminating fraud opportunities?
a. Having good internal controls.
b. Creating an expectation of punishment.
c. Monitoring employees.
d. Engendering employee goodwill by having lax rules.

Answer 4

d. Engendering employee goodwill by having lax rules.

When pressure, opportunity, and rationalization combine, the likelihood of a fraud being perpetrated increases dramatically. If one of the three elements is missing, fraud is less likely.

Five methods of eliminating fraud opportunities: (1) having good internal controls, (2) discouraging collusion between employees and customers or vendors and clearly informing vendors and other outside contacts of the company’ s policies against fraud, (3) monitoring employees and providing a hotline (whistle-blowing system) for anonymous tips, (4) creating an expectation of punishment, and (5) conducting proactive auditing.

Question 5

True/False
Even a good system of internal controls will often not be completely effective because of fallibilities of the people applying and enforcing the controls.

Answer 5

True

Because of the inherent limitations of controls, a control system by itself can never provide absolute assurance that all fraud will be prevented. Trying to prevent fraud by having only a good control system is like fighting a skyscraper fire with a garden hose. In combination with the other methods described in the following, however, having a good control framework is an extremely important part of any fraud prevention program.

Question 6

True/False
Developing a positive work environment is of little importance when creating a culture of honesty.

Answer 6

False

An important step in creating a culture of honesty involves developing a positive work environment.

Question 7

Investment scams most often include:
a. Worthless investments or assets sold to unsuspecting investors.
b. An action by top management against employees.
c. An overcharge for purchased goods.
d. Nonpayment of invoices for goods purchased by customers.

Answer 7

a. Worthless investments or assets sold to unsuspecting investors.

Employee embezzlement is the most common type of occupational fraud.

Vendor fraud has been in the news time and again over the years because of significant overcharges by major vendors on defense and other government contracts. Vendor fraud, which is extremely common in the United States, comes in two common forms: (1) fraud perpetrated by vendors acting alone and (2) fraud perpetrated through collusion between buyers and vendors. Vendor fraud usually results in either an overcharge for purchased goods, the shipment of inferior goods, or the non-shipment of goods even though payment is made.

Question 8

To prevent fraud from recurring, most organizations and other fraud victims should:
a. Take no legal action.
b. Pursue only civil remedies.
c. Pursue only criminal remedies.
d. Pursue either civil or criminal action, depending on the circumstances, or both.

Answer 8

d. Pursue either civil or criminal action, depending on the circumstances, or both.

When organizations do not pursue legal action, the word usually spreads quickly throughout the organization that “Nothing serious will happen if you steal from the company.” Employees who understand this message are more likely to commit future frauds than are employees of organizations who understand that there is an expectation of strict and universal punishment for dishonest acts.

Once a fraud has been investigated, victim organizations must decide what legal and other actions to pursue. At a minimum, they should make sure that controls are implemented and training takes place to prevent similar occurrences in the future. In addition, the company must decide whether to sue civilly (to try to recover stolen funds) or to pursue criminal prosecution or both.

Question 9

True/False
Effective hiring policies that discriminate between marginal and highly ethical individuals contribute to an organization’s success in preventing fraud.

Answer 9

True

If an organization is to be successful in preventing fraud, it must have effective hiring policies that discriminate between marginal and highly ethical individuals, especially when recruiting for high-risk positions.

Question 10

True/False
Fraud can be perpetrated to benefit oneself or to benefit one’s organization.

Answer 10

True

Fraud can be perpetrated to directly benefit oneself or indirectly benefit oneself by benefiting the organization. Employee fraud, in which an individual embezzles from his or her employer, usually benefits the perpetrator directly. Management fraud, in which an organization’s officers deceive investors and creditors by manipulating financial statements, is most often perpetrated to benefit an organization and its officers.

Question 11

The most effective way to reduce losses from fraud is:
a. Implementing proactive fraud detection programs.
b. Detecting fraud early.
c. Severely punishing fraud perpetrators.
d. Preventing fraud from occurring.

Answer 11

d. Preventing fraud from occurring.

The second-most cost-effective fraud-fighting activities involve implementing proactive approaches to detect fraud early, before it has chance to grow.

The most cost-effective fraud-fighting activities are those that involve preventing fraud from occurring.

Question 12

Most frauds start small and:
a. If not detected, continue to get larger.
b. Usually decrease in amount.
c. Remain steady and consistent.
d. None of these.

Answer 12

a. If not detected, continue to get larger.

Events that scare or threaten the perpetrator result in discontinuance of the fraud, only to be resumed when threats pass.

Most frauds start small and, if not detected, continue to get larger and larger.

Question 13

True/False
A proper system of authorization will help ensure good internal controls.

Answer 13

True

Authorization control procedures take many forms. Passwords authorize individuals to use computers and to access certain databases. Signature cards authorize individuals to enter safe deposit boxes, to cash checks, and to perform other functions at financial institutions. Spending limits authorize individuals to spend only what is in their budget or approved level. When people are not authorized to perform an activity, the opportunity to commit fraud is reduced.

Question 14

Which of the following is the least reliable resource for fraud statistics?
a. Insurance organizations.
b. FBI agencies.
c. Health agencies.
d. Fraud perpetrators.

Answer 14

d. Fraud perpetrators.

Statistics on how much fraud is occurring, whether it is increasing or decreasing, and how much the average fraud costs come from four basic sources.

Although most people and even most researchers believe that fraud is increasing both in size and frequency, it is difficult to know for sure. First, it is impossible to know what percentage of fraud perpetrators are caught. Are there perfect frauds that are never detected, or are all frauds eventually discovered? In addition, many frauds that are detected are quietly handled by the victims and never made public.

Question 15

True/False
Effective fraud-fighters usually put most of their time and effort into minimizing the pressures for fraud perpetrators to commit fraud.

Answer 15

False

Effective fraud-fighters put their efforts into trying to eliminate all three parts of the fraud triangle, especially reducing opportunities.

Question 16

Which of the following personnel and operating policies contribute to high-fraud environments?
a. Management by crisis.
b. Rigid rules.
c. High employee lifestyle expectations.
d. Poor promotion opportunities.
e. All of these.

Answer 16

e. All of these.

Research has shown that positive personnel and operating policies are important factors in contributing to high- or low-fraud environments. Uncertainty about job security, for example, has been associated with high-fraud environments.

Personnel and operating conditions and procedures that appear to contribute to high-fraud environments include the following:

-Managers who don’t care about or pay attention to honesty (who model apathetic or inappropriate behavior)
I-nadequate pay
-Lack of recognition for job performance
-Imposition of unreasonable budget expectations
-Expectations that employees live a certain lifestyle (e.g., belong to a country club)
-Perceived inequalities in the organization
-Inadequate expense accounts
-Autocratic or dictatorial management
-Low company loyalty
-Short-term business focus
-Management by crisis
-Rigid rules
-Negative feedback and reinforcement
-Repression of differences
-Poor promotion opportunities
-Hostile work environments
-High turnover and absenteeism
-Cash flow or other financial problems
-Reactive rather than proactive management
-Managers who model wheeler-dealer, impulsive, insensitive, emotional, or dominant personalities
-Rivalrous rather than supportive relationships
-Poor training
-Lack of clear organizational responsibilities
-Poor communication practices

Question 17

True/False
Criminal conviction is much more difficult to achieve than a civil judgment because there must be proof “beyond a reasonable doubt” that the perpetrator intentionally stole assets.

Answer 17

True

It is much more difficult to get a criminal conviction than it is to get a judgment in a civil case. Whereas only a preponderance of the evidence (more than 50 percent) is necessary to win a civil case, convictions are only successful if there is proof “beyond a reasonable doubt” that the perpetrator “intentionally” stole money or other assets.

Question 18

Which of the following is not a reason identified by Deloitte why whistle-blowing systems fail?
a. Pressure to comply.
b. Lack of awareness.
c. Lack of anonymity.
d. Culture.

Answer 18

a. Pressure to comply.

Close monitoring facilitates early detection. It also deters frauds because potential perpetrators realize that “others are watching.” It is because monitoring by colleagues is such an effective way to catch dishonest acts that Section 806 of the Sarbanes-Oxley Act of 2002 requires all public companies to have a whistle-blower system that makes it easy for employees and others to report suspicious activities.

A good whistle-blowing program is one of the most effective fraud prevention tools. When employees know that colleagues have an easy, nonobligatory way to monitor each other and report suspected fraud, they are more reluctant to become involved in dishonest acts. Research has shown that for a whistle-blowing system to work effectively, it must have the following elements:

-Anonymity
-Independence
-Accessibility
-Follow-up

Question 19

Which of the following is not one of the three elements of the fraud triangle?
a. Intelligence.
b. Perceived opportunity.
c. Perceived pressure.
d. Rationalization.

Answer 19

a. Intelligence.

People who try to prevent fraud usually work on only one of the three elements of the fraud triangle: opportunity.

Although there are thousands of ways to perpetrate fraud, Dennis Greer’s example (in the opening case of the chapter) illustrates the three key elements common to all of them. His fraud included (1) a perceived pressure, (2) a perceived opportunity, and (3) some way to rationalize the fraud as acceptable. These three elements make up what we call the fraud triangle.

Question 20

True/False

Fraud is difficult to detect because some fraud symptoms often cannot be differentiated from non-fraud factors that appear to be symptoms.

Answer 20

True

Detection of fraud usually begins by identifying symptoms, indicators, or red flags that tend to be associated with fraud. Unfortunately, these red flags can often be associated with non-fraud factors as well.