Chapter 3: Ethics, Fraud, And Internal Control

Question 1

Ethics

Answer 1

Pertains to the principles of conduct that individuals use in making choices and guiding their behavior in situations that involve the concept of right and wrong

Question 2

Business Ethics

Answer 2

Involves finding the answers to 2 questions. How do managers decide what is right in conducting business? And how do they achieve what is right?

Question 3

Computer Ethics

Answer 3

Is the analysis of the nature and social impact of computer technology and the corresponding formulation and justification of policies for the ethical use of such technology

Question 4

Privacy

Answer 4

People desire to be in full control of what and how much information about themselves is available to others

Question 5

Security

Answer 5

Is an attempt to avoid such undesirable events as a loss of confidentiality or data integrity

Question 6

Fraud

Answer 6

Denotes a false representation of a material fact made by one party to another party with the intent to deceive the other party to justifiably rely on the fact

Question 7

False Representation

Answer 7

There must be a false statement or a non disclosure

Question 8

Material Fact

Answer 8

A fact must be a substantial factor in inducing someone to act

Question 9

Intent

Answer 9

There must be the intent to deceive or the knowledge that one’s statement is false

Question 10

Justifiable Reliance

Answer 10

The misrepresentation must have been a substantial fact on which the injured party relied

Question 11

Injury or Loss

Answer 11

The deception must have caused injury or loss to the victim of the fraud

Question 12

Employee Fraud

Answer 12

Is generally designed to directly convert cash or other assets to the employee’s personal benefit

Question 13

Management Fraud

Answer 13

Usually does not involve the direct theft of assets. Is usually done by top management where internal controls can’t detect

Question 14

Fraud Triangle

Answer 14

Consists of situational pressure, opportunity, and ethics

Question 15

Fraudulent Statements

Answer 15

Are associated with management fraud. The financial statement misrepresentation must bring direct or indirect financial benefit to the perpetrator

Question 16

Corruption

Answer 16

Involves an executive, manager or employee of the organization in collusion with an outsider. 10% of occupational fraud cases

Question 17

Bribery

Answer 17

Involves giving, offering, or soliciting things of value to influence an official in the performance of their lawful duties

Question 18

Illegal Gratuity

Answer 18

Involves giving or receiving something of value because of an official act that has been taken

Question 19

Conflict of Interest

Answer 19

Occurs when an employee acts on behalf of a third party during the discharge of their duties or has self interest in the activity

Question 20

Economic Extortion

Answer 20

Is the use of force by an individual or organization to obtain something of value

Question 21

Skimming

Answer 21

Involves stealing cash from an organization before it is recorded on the organization’s books and records

Question 22

Cash Larceny

Answer 22

Involves schemes in which cash receipts are stolen from an organization after they have been recorded in the organization’s books and records

Question 23

Lapping

Answer 23

In which the cash receipts clerk first steals and cashes a check from customer A and makes up the difference from customer B

Question 24

Vendor Fraud

Answer 24

Are perpetrated by employees who cause their employer to issue a payment to a false supplier by submitting invoices for goods and services

Question 25

Shell Company

Answer 25

First requires that the perpetrator establish a false supplier in the books of the victim company. Them by issuing false invoices creates payments to this false supplier

Question 26

Pass Through Fraud

Answer 26

Is similar to a shell company fraud with the exception that a transaction has taken place. Inventory is purchased from a legitimate supplier then the place is inflated by a fake supplier before being sold to the victim company

Question 27

Pay and Return

Answer 27

Involves a clerk with check writing authority who intentionally pays a vendor twice for the same invoice. The supplier reimburses one of the checks and the employee takes the cash

Question 28

Check Tampering

Answer 28

Involves forging or changing in some material way a check that the organization has written to a legitimate payee.

Question 29

Payroll Fraud

Answer 29

Is the distribution of fraudulent paychecks

Question 30

Expense Reimbursement Fraud

Answer 30

Involves false or inflated expense reimbursements

Question 31

Non Cash Misappropriations

Answer 31

Involve the theft of non cash assets like inventory or information

Question 32

Internal Control System

Answer 32

Consists of policies, practices, and procedures to achieve objectives

Question 33

Management Responsibility

Answer 33

The establishment and maintenance of a system of internal control is the responsibility of management

Question 34

Reasonable Assurance

Answer 34

Cost of achieving objectives should not outweigh the benefits

Question 35

Methods of Processing

Answer 35

Control techniques vary with different types of technology

Question 36

Limitations of Internal Control

Answer 36

Possibility of error, circumvention, management override, and changing conditions

Question 37

Exposure

Answer 37

The absence or weakness of a control

Question 38

Preventive Controls

Answer 38

Are passive techniques designed to reduce undesirable events by forcing compliance with prescribed or desired actions

Question 39

Detective Controls

Answer 39

Are designed to identify undesirable events that elude preventive controls

Question 40

Corrective Controls

Answer 40

Are actions taken to reserve the effects of errors detected

Question 41

Sox Section 302

Answer 41

Requires management to certify organization's internal on a quarterly and annual basis

Question 42

Sox Section 404

Answer 42

Requires management to assess internal control effectiveness

Question 43

Control Environment

Answer 43

Set the tone for the organization and influences control awareness

Question 44

Risk Assessment

Answer 44

To identify, analyze, and manage financial reporting risks

Question 45

Monitoring

Answer 45

Is the process by which the quality of internal control design and operations can be assessed

Question 46

Control Activities

Answer 46

Are policies and procedures to ensure appropriate actions are taken to deal with identified risks

Question 47

Transaction Authorization

Answer 47

Is to ensure all material transactions processes are valid

Question 48

Segregation of Duties

Answer 48

Designed to minimize incompatible functions including separating transaction authorization and asset custody and record keeping

Question 49

Supervision

Answer 49

Is a compensating control in organizations too small for sufficient segregation of duties

Question 50

Accounting Records

Answer 50

Consist of source documents, journals, and ledgers which provide an audit trial

Question 51

Access Controls

Answer 51

Ensure that only authorized personnel have access to firm assets

Question 52

Independent Verification Procedures

Answer 52

Are checks to identify errors and misrepresentations

Question 53

Check Digit

Answer 53

Is a control digit that is added to the data code when originally assigned

Question 54

Missing Data Check

Answer 54

Identifies blank or incomplete input fields

Question 55

Numeric Alphabetic Check

Answer 55

Indemnified data in the wrong form

Question 56

Limit checks

Answer 56

Identify fields that exceed authorized limits

Question 57

Range Checks

Answer 57

Verify that all amours fall within an acceptable range

Question 58

Reasonableness Checks

Answer 58

Verify that amounts that have based limit and range checks are reasonable

Question 59

Validity Checks

Answer 59

Compares actual fields against acceptable values

Question 60

Processing Controls

Answer 60

Are programmed procedures to ensure an applications logic is functioning properly

Question 61

Batch Controls

Answer 61

Manage the flow of high volume transactions and reconcile system output with original input

Question 62

Audit Trail Controls

Answer 62

Ensure every transaction can be traced through each stage to processing from source to financial statements

Question 63

Grandfather Father Son Backup

Answer 63

Used with systems that use sequential master files

Question 64

Destructive Update

Answer 64

Approach leaves no backup copy and requires a special recovery program if data is destroyed or corrupted

Question 65

Output Controls

Answer 65

Are procedures to ensure output is not lost, misdirected or corrupted and that privacy is not violated