Chapter 3: Fighting Fraud: An Overview

Question 1

Once fraud has been committed, there are no winners.

Answer 1

True

Question 2

Fraud prevention involves two fundamental activities: (1) a hotline for tips and (2) assessing the risk of fraud and developing concrete responses to mitigate the risks and eliminate opportunities for fraud.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

No matter how well an organization has developed a culture of honesty and high ethics, most organizations will still have some fraud.

Answer 4

True

Question 5

Research has shown that it is employees and managers, not auditors, who detect most frauds.

Answer 5

True

Question 6

If a perpetrator is not caught, his confidence in the scheme will decrease, and he will become less and less greedy.

Answer 6

False

Question 7

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

Answer 7

True

Question 8

Most investigators rely heavily on interviews to obtain the truth.

Answer 8

True

Question 9

Physical evidence includes evidence gathered from paper, computers, and other written documents.

Answer 9

False

Question 10

Legal action taken by an organization can affect the probability of whether fraud will reoccur.

Answer 10

True

Question 11

Investigating fraud is the most cost-effective way to reduce losses from fraud.

Answer 11

False

Question 12

Fraud prevention includes taking steps to create and maintain a culture of honesty and high ethics.

Answer 12

True

Question 13

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

Answer 13

True

Question 14

Expectations about punishment must be communicated randomly among work groups if fraud is to be prevented.

Answer 14

False

Question 15

Frauds typically start large and get smaller as the perpetrator tries to conceal his dishonest acts.

Answer 15

False

Question 16

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

Answer 16

True

Question 17

The three elements of the fraud triangle by which the investigative techniques are often classified are (1) the theft act, (2) concealment efforts, and (3) conversion methods.

Answer 17

True

Question 18

Organizations often want to avoid embarrassment and expense, so they terminate fraudulent employees without having the prosecuted further.

Answer 18

True

Question 19

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

Answer 19

True

Question 20

In order to create a culture of honesty and confidentiality, persons aware of fraudulent activity should be encouraged to tell only the CEO.

Answer 20

False

Question 21

Since complete fraud prevention is impossible because it requires changing actual human behavior, successful companies should forgo fraud prevention and instead focus on strong fraud detection programs.

Answer 21

False

Question 22

Since fraud prevention programs are so costly, despite being ethically superior, they almost always rest in higher costs and thus lower net income than using only a strong system of fraud detection.

Answer 22

False

Question 23

Most fraud perpetrators have a long history of dishonesty and deceit.

Answer 23

False

Question 24

The most effective way to reduce losses from fraud is:

a. Detecting fraud early.
b. Implementing proactive fraud detection programs.
c. Preventing fraud from occurring.
d. Severely punishing fraud perpetrators.

Answer 24

c. Preventing fraud from occurring.

Question 25

To successfully prevent fraud, and organization must:

a. Identify and remedy internal control weaknesses.
b. Explicitly consider fraud risks.
c. Take proactive steps to create the right kind of environment.
d. All of the above

Answer 25

d. All of the above

Question 26

The best way for management to model appropriate behavior is to:

a. Enforce a strict code of ethics.
b. Set an example of appropriate behavior.
c. Train employees about appropriate behavior.
d. Make employees read and sign a code of conduct.

Answer 26

b. Set an example of appropriate behavior.

Question 27

Which of the following is NOT a proactive way for a company to eliminate fraud opportunities?

a. Severely punishing fraud perpetrators.
b. Assessing risks.
c. Implementing appropriate preventive and detective controls.
d. Creating widespread monitoring of employees.

Answer 27

a. Severely punishing fraud perpetrators.

Question 28

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 the above

Answer 28

a. If not detected, continue to get larger.

Question 29

Because of the ability to override internal controls, it is usually most difficult to prevent which type of fraud?

a. Investment scams
b. Fraud committed by a company president.
c. Employee fraud.
d. Customer fraud.

Answer 29

b. Fraud committed by a company president.

Question 30

Which of the following refers to the circumstances, taken as a whole, that would lead to a reasonable prudent professional to believe fraud has occurred, is occurring, or will occur?

a. Evidential circumstance.
b. Investigation
c. Invigilation.
d. Predication

Answer 30

d. Predication

Question 31

A method of classifying investigative approaches into testimonial evidence, documentary evidence, physical evidence, and personal observations is refereed to as the:

a. investigative square of evidence
b. Investigation square
c. Evidence square
d. Fraud triangle plus

Answer 31

c. Evidence square

Question 32

Usually, for everyone involved (especially victims) the investigation of fraud is very:

a. Pleasant and relaxing
b. Educational
c. Exciting
d. Traumatic and difficult

Answer 32

d. Traumatic and difficult

Question 33

To prevent fraud from reoccurring, 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 33

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

Question 34

All of the following are ways to create a culture of honesty and high ethics except:

a. Creating a positive work environment
b. Hiring the right kind of employees
c. Having top management model appropriate behavior
d. Eliminating opportunities for fraud

Answer 34

d. Eliminating opportunities for fraud

Question 35

The tone at the top when related to fraud usually refers to management’s attitude about:

a. How management labels appropriate behavior
b. Management’s attitude about fraud prosecution
c. Management’s attitude about employee absenteeism
d. How management models appropriate behavior

Answer 35

d. How management models appropriate behavior

Question 36

Research shows that fraud occurs less frequently when employees feel:

a. Abused by management
b. Threatened
c. Challenged with unreasonable performance goals
d. Ownership in the organization

Answer 36

d. Ownership in the organization

Question 37

Opportunities to commit fraud can be eliminated by identifying sources of fraud, by implementing controls, and through independent checks. One other effective way of eliminating opportunities is:

a. Teaching employees to monitor and report fraud
b. Terminating and punishing employees who commit fraud
c. Failing to terminate or punish employees who commit fraud
d. Identifying indicators of fraud or red flags

Answer 37

a. Teaching employees to monitor and report fraud

Question 38

Drawbacks to establishing a hotline for employees to report fraud include all of the following except:

a. The expense of having a hotline
b. Many incidents reported are hoaxes motivated by grudges and other non-fraud reasons
c. Some symptoms reported are caused by non-fraud factors
d. This method for finding fraud is outdated

Answer 38

d. This method for finding fraud is outdated

Question 39

“Predication of fraud” is defined as:

a. Reasonable belief that fraud has occurred or is occurring
b. Irrefutable evidence that fraud has been committed
c. Motivation for committing fraud
d. Punishment of fraud perpetrators

Answer 39

a. Reasonable belief that fraud has occurred or is occurring

Question 40

Which of the four types of evidence includes interrogation and honesty testing?

a. Testimonial
b. Documentary
c. Physical
d. Personal observation

Answer 40

a. Testimonial

Question 41

The three elements present in most cases of fraud are:

a. Theft act, rationalization, and opportunity
b. Pressure, opportunity, and conversion
c. Theft act, concealment, and conversion
d. Theft act, pressure, and opportunity

Answer 41

c. Theft act, concealment, and conversion

Question 42

Most often, victims of fraud do not take legal action against perpetrators. This is because legal action can be:

a. Unproductive
b. Embarrassing
c. Expensive
d. All of the above

Answer 42

d. All of the above

Question 43

The best argument for taking legal action against fraud perpetrators is;

a. Huge cash settlements from prosecuting fraud are an excellent source of revenue
b. Legal action usually results in positive publicity for the company
c. Prosecution of perpetrators is a way to keep lawyers busy
d. Prosecution of perpetrators discourages future occurrences of fraud.

Answer 43

d. Prosecution of perpetrators discourages future occurrences of fraud.

Question 44

Factors that are usually associated with high levels of employee fraud include all of the following except:

a. Negative feedback and lack of recognition of job performance
b. Perceived inequalities in an organization
c. Long and difficult hours shared equally by everyone in the organization
d. High turnover and absenteeism

Answer 44

c. Long and difficult hours shared equally by everyone in the organization

Question 45

Which of the following is true regarding the Sarbanes-Oxley Act of 2002?

a. Companies with revenues exceeding $10 million must have a whistle-blower system in place
b. Public companies must have a whistle-blower system in place
c. Public companies with revenues exceeding $10 million must have a whistle-blower system in place
d. All companies must have a whistle-blower system in place

Answer 45

b. Public companies must have a whistle-blower system in place