Chapter 15

Question 1

Explain fraud

Answer 1

is know as misrepresentation of the truth

Question 2

The definition of frauds has four element. Identify them and explain them

Answer 2

False statement : The perpetrator either lies directly or hides it
Knowledge : the perpetrator knows the statement is false
Reliance : the victim relies on info when deciding or acting
Damages: victim suffer the damages as result of relying on false statement

Question 3

During fraud risk assessment what are they usually categorized

Answer 3

financial
Operational
compliance

Question 4

External fraud si

Answer 4

perpetrated by customer, vendor or other outside parties against the company

Question 5

Occupation fraud ( called internal fraud) is

Answer 5

committed by owners, management, executive and employees who use their position to enrich themselves

Question 6

What are the three categories of occupational fraud

Answer 6

Corruption
Asset misappropriation
Financial statement fraud

Question 7

Explain corruption

Answer 7

the inappropriate use if influence to obtain a benefits contrary to the perpetrator responsibility or therights of people

Question 8

Whats are the 4 types of corruption and explain them

Answer 8

Conflict of interest : employees prioritize their personal interest overs those of the company
Illegal gratuities :Manager or executives receive something of value as a rewards for favorable business decision
Commercial bribery : Employees accept payment or something of value for favorably influencing business decision
Economic extortion: Employees threaten someone to pay up or else bear the consequences

Question 9

What are behavioural red flags

Answer 9

Clues that indicate the possibility a person may be invled into fraud

Question 10

What are the six common behavioural red flags

Answer 10

Financial difficulties
Living beyonds ones means
Close associations with vendor or customer
Recent divorce or family problem
Control issue or unwillingness to share duties
Big shot attitude

Question 11

What is the fraud triangle

Answer 11

a framework that is used to identifies the three motivational element associated with fraud

Question 12

What are the three element on the fraud triangle

Answer 12

Perceived pressure
Opportunity
rationalization

Question 13

Explain perceived pressure

Answer 13

motive or an incentive that pushes a person toward the decision to commit fraud

Question 14

Whats are example of perceived pressure

Answer 14

drug or gambling
inability to pay debts
maintaining a certain lifestyle

Question 15

What are the opportunity for fraud

Answer 15

poor internal controls
Collusion
management override

Question 16

Explain tone at the top

Answer 16

the culture of an organization that flows downstream from executive leaderships and it impact in all ares

Question 17

Whats are the ways companies detect fraud

Answer 17

identifying non behavioural red flags at a process or entity level
Setting a whistleblower hotlines
Using data analytic to continuously monitor process and systems for fraud trends
Conducting independent checks of peoples work
Reviewing adequate documentation that leaves an audit trail

Question 18

What are the 2 type of financial statement analysis

Answer 18

Horizontal analysis
Vertical analysis

Question 19

Explain vertical analysis

Answer 19

Involved calculating each line item in the same financial statement as a percentage of another line item in the same financial statement

Question 20

Explain horizontal analysis

Answer 20

involved investigating the changes in financial statement item by comparing the 2 or more financial statements from different periods

Question 21

Whats asset misappropriation

Answer 21

theft of corporate assets , cash, inventory, fixed asset and more

Question 22

What is skimming

Answer 22

employees steals cash before is records in the accounting records

Question 23

Whats is Larcency

Answer 23

theft of the company assets after the company has recorded the assets in its books

Question 24

explain unconcealed larcency

Answer 24

employee does not make an effort to concel the theft

Question 25

Explain fictitious sales larcency

Answer 25

employee creates a fake sales receipt for the stolen phone

Question 26

Explain fraudulent disbursements

Answer 26

employees cause the business to make a payment for an inappropriate purpose ( most common type of asset misappropriation )

Question 27

Expense reimbursement scheme is

Answer 27

reimburse the perpetrator for expenses the never incurred

Question 28

Double dipping is

Answer 28

submitting a valid credit card expense twice: once as credit car the other as a cash transaction

Question 29

What is a payroll scheme

Answer 29

business pays the perpetrator for time not worked

Question 30

Billing schemes is

Answer 30

result in fraudulent payments to vendors

Question 31

Whats financial statement fraud

Answer 31

materially misrepresenting the financial results of a company by manipulating the amounts or inappropriately disclosing information in the financial statement to deceive investor and other users of the financial statements

Question 32

Two kinds of financial statements that are commonly used are

Answer 32

Overstating, asset, revenues and profits
Understating liabilities, expenses and losses

Question 33

What are the ways to overstate revenue, assets and profits

Answer 33

Sham sales : fictitious revenue with false documentation
Unauthorized shipments: creating goods that never orders
Channel stuffing : Encourage the sales of extra inventory to increase the current year sales, implied that customer can return it but not providing a reserve against theses expected return in the current year
Sales cutoff: Involved recording the sales that occur after the balance sheet date in the current year of financial statement to inflate the sales

Question 34

What are ways to understate liabilities, expense and loses

Answer 34

Capitalization of expense : recognizing cost that should be expensed as capitalized cost
Expense cutoff: expense are not recorded until the next accounting period

Question 35

What are the three fraud scheme related to understating revenue and explain them

Answer 35

Misclassification of revenue: inappropriately recognize revenue as a different type of income
Sales cutoff: rather than recognizing the sales , company defer revenue until the next accounting period
Unrecorded revenue: involves not documenting sales or destroying sales documentation and diverting funds and more

Question 36

How will a company overstated expense

Answer 36

Expensing capitalized cost: company recognizes capital cost that should be recorded to an asset account as expense, thus reducing net income

Expense cutoff: prematurely recording them in the current accounting period rather the next one