EXAM 2

Question 1

Ch 6 - Corruption and the Human Factor

Question 2

Module 1: Corruption Schemes

Question 3

In the ACFE Fraud Tree, corruption schemes are broken down into four classifications:

1. B___y
2. I___l gr___ies
3. E____ic ex___n
4. C____ts of i___st

Answer 3

1. Bribery
2. Illegal gratuities
3. Economic extortion
4. Conflicts of interest

Question 4

Define Bribery

Bribery may be defined as the 1) of___, g__g, re___ng, or so___ng anything of 2) v___e to 3) in___ce an 4) of__l a_t.

The term 4.5) o__al a_t means that traditional bribery statutes proscribe only 5) pa__s made to 6) in__e the de___ns of 7) go___t ag___s or em__es.

Answer 4

1) offering, giving, receiving, or soliciting
2) value
3) influence
4) official act
4.5) official act
5) payments
6) influence the decisions
7) government agents or employees.

Question 5

Define Commercial Bribery

Many occupational fraud schemes, however, involve commercial bribery, which is similar to the traditional definition of bribery except that something of 2) v___e is 3) of__d to influence a 4) b___ss decision rather than an 5) o__al act of go___nt

Answer 5

2) value
3) offered to influence
4) business decision
5) official act of government

Question 6

Define Illegal Gratuities

are similar to 1) b___ schemes, except that something of 2) v___e is given to an employee to r___d a d___ rather than in__ce it

Answer 6

1) bribery
2) value is given to an employee to reward a decision rather than influence it

In an illegal gratuity scheme, a decision is made that happens to benefit a certain person or company.

Question 7

Define Economic Extortion

cases are the 1) “p__ up or e__” cor___on schemes

Answer 7

1) “pay up or else” corruption

Question 8

Define Conflict of Interest

occurs when an 1) e___e, m___er, or e___e has an 2) u___d ec__c or p___al i__st in a transaction that 3) ad___y af__ts the
organization

the keyword is ____

Answer 8

1) employee, manager, or executive
2) undisclosed economic or personal interest
3) adversely affects

the keyword is undisclosed

Question 9

Module 2: Bribery

Question 10

Define Bribery

Something of 1) v__e of___d to 2) inf___e b___s 3) d___on or of___l a__

Answer 10

1) value offered
2) influence business
3) decision or official act

Question 11

1) U___r-the-t___e p____nts for the exercise of influence over a business decision

Just 2) of___g a payment can constitute as a 3) b___e

Answer 11

1) Under-the-table payments
2) offering a payment
3) bribe

Question 12

Bribery schemes generally fall into two broad categories:

1. ki___s
2. b__-ri___ng sc__es

Answer 12

1. kickbacks
2. bid-rigging schemes

Question 13

Define Kickback Schemes

Submission of 1) in___es for g__ds and se___es that are either 2) o__ed or fic___s

-Involve 3) co____n between 4) e___s and v___rs

Answer 13

1) invoices for goods and services
2) overpriced or fictitious
3) collusion
4) employers (organization insiders) and vendors (organization outsiders)

Question 14

Kickback schemes almost 1) al___s at___k the 2) pu___g function of the victim company, so it stands to reason that these frauds are often undertaken by 3) em__es with purchasing re___ies.

Answer 14

1) always attack
2) purchasing function
3) employees with purchasing responsibilities.

Question 15

Kickbacks Schemes

Moreover, these schemes are 1) na___ly m__e c___n when the 2) p___ng decision is ultimately made by 3) o___ p__n.

That is why the usual kickback suspect is the 4) h__ of the 5) pu___g d___t or a k__ d___n-ma___ in the 6) pu___g process

Answer 15

1) naturally more common
2) purchasing decision
3) one person
4) head
5) purchasing department or a key decision-maker
6) purchasing

Question 16

Kickback Schemes (Diverting Business to Vendors)

In some instances, an employee/fraudster receives a kickback simply for 1) di___g e___s b___ess to a v__.

There might be 2) n__ o___g involved in these cases;

Answer 16

1) directing excess business to a vendor
2) no overbillling

Question 17

Diverting Business to Vendors

the 1) vendor simply 2) p___s the ki____ks to 3) e___e a s___y st__m of b___s from the pu___g company.

Answer 17

1) vendor
2) pays the kickbacks
3) ensure a steady stream of business from the purchasing

Question 18

Diverting Business to Vendors

Because these transactions 1) d__ n___ require the d___t pa___nt of c___, they
can be particularly 2) d___lt to detect

Answer 18

1) do not require the direct payment of cash
2) difficult

Question 19

Diverting Business to Vendors

Assuming the vendor simply wants to get the buyer’s business and does not increase his prices or bill for undelivered goods and services, how is the buyer harmed?

The problem is that, having 1) bought off an employee of the purchasing company, a vendor is 2) n__ lo___r subject to the n___l e___ic pr___es of the m___ce.

This vendor 3) d___ n__t have to co___e with other suppliers for the 4) p___ng company’s business and consequently has 5) n__ inc___e to provide a l__ p__e or q__y mer___e.

Answer 19

1) bought off
2) no longer subject to the normal economic pressures of the marketplace
3) does not have to compete
4) purchasing
5) no incentive to provide a low price or quality merchandise.

Question 20

Overbilling Schemes:
Employees with Approval Authority

In most instances, kickback schemes 1) b__n as o___ng schemes in which a 2) v__or submits in___d in___s to the v___ company.

Answer 20

1) begin as overbilling schemes
2) vendor submits inflated invoices to the victim

Question 21

Overbilling Schemes:
Employees with Approval Authority

The 1) f___e in___s either 2) o___e the 3) c__t of a__al go__s and se___s or reflect 4) fi___us s___

Answer 21

1) false invoices
2) overstate
3) cost of actual goods and services
4) fictitious sales

Question 22

Overbilling Schemes:
Employees with Approval Authority

the ability to 1) a___ize pu___s (and thus to authorize 2) fr___t pu___es) is usually a 3) k___ to kickback schemes.

Answer 22

1) authorize purchases
2) fraudulent purchases
3) key

Question 23

Overbilling Schemes: Fraudsters Lacking Approval Authority

Although the majority of kickback schemes involve people with authority to approve purchases, this authority is not an absolute necessity;

in some cases, the 1) la__ of a___ty simply makes the 2) il___l ac___ty m___e ch___ng for the fra___

Answer 23

1) lack of authority
2) illegal activity more challenging for the fraudster

Question 24

Overbilling Schemes: Fraudsters Lacking Approval Authority

When an employee 1) ca___t ap___e 2) f___nt purchases himself, he can still orchestrate a 3) k___ck sc___e if he can 4) ci___nt pu___ng c___ls

Answer 24

1) cannot approve
2) fraudulent purchases himself
3) kickback scheme
4) circumvent purchasing controls

Question 25

Overbilling Schemes: Fraudsters Lacking Approval Authority

In 1) l___ so___ed schemes, a 2) co__t e___ee might simply take a 3) f___nt in___e from a ve___r and s___ it into a stack of 4) pr___d inv___s b___e they are in___t into the accounts payable system.

Answer 25

1) less sophisticated
2) corrupt employee
3) fraudulent invoice from a vendor and slip
4) prepared invoices before they are input into the accounts payable system.

Question 26

Overbilling Schemes: Fraudsters Lacking Approval Authority

Kickback schemes can be very 1) d___t to detect

Answer 26

1) difficult

Question 27

Other Kickback Schemes

In some circumstances, 1) ou___s seek other fraudulent 2) as___ce from em__es of the 3) vi__m company

In other cases, bribes come from 4) p___l p____ers who seek a 5) lo___ p__e from the victim company

Answer 27

1) outsiders
2) assistance from employees 3) victim
4) potential purchasers
5) lower price

Question 28

What’s another kickback schemes?

-s___ f__s

Answer 28

slush funds

Question 29

Slush Funds

Every bribe is a 1) t__-s___d transaction. In each case where a vendor bribes a purchaser, there is someone on the vendor’s side of the transaction who is making an illicit payment. It is, therefore, just as likely that your employees are paying bribes as accepting them.

To obtain the 2) f___s to make these payments, employees usually 3) di___rt c___ny money into a 4) s___h f___d

Answer 29

1) two-sided
2) funds
3) divert
4) slush fund

Question 30

Define Slush Funds

a 1) n___ny ac___nt from which b__ can be made

Answer 30

1) noncompany account from which bribes

Question 31

Slush Funds

Assuming that the briber’s company 1) d__ n___ au___e bribes, he must find a way to generate the funds necessary to 2) il___y in___ce so__e in a__er organization.

Therefore, the key to the crime from the briber’s perspective is the 3) di___n of m___y into a sl__h f__d

Answer 31

1) does not authorize bribe
2) illegally influence someone in another
3) diversion of money into a slush fund

Question 32

Preventing and Detecting Kickback Scheme

• Se____e p____ing, au___on, re___g and storing g___s, and ca___ d____nts duties
• Ma____e of up___ed v__or l__t
• R___w and m___ch all su___t in di__nt v___rs
• Ro___y m___or pr__s p__d for g___s and s___s
• Monitor tr___s in the c__s of go__s and se__ed p___d
• Establish pr___e thresholds for material p___s

Answer 32

• Separate purchasing, authorization, receiving and storing goods, and cash disbursements duties
• Maintenance of updated vendor list
• Review and match all support in disbursement vouchers
• Routinely monitor prices paid for goods and services
• Monitor trends in the costs of goods and serviced purchased
• Establish price thresholds for material purchases

Question 33

Preventing and Detecting Kickback Scheme (cont.)

• T___k p___se le__s by v__or
• Check q___y of g___ds delivered
• Compare a__l ex___es to bu___d a___ts
• Review or___on b___g pat__s
• “Ri___t-to-a__it” clause
• Establish wr__n p___s pr___g acceptance of gi___s or fa___s

Answer 33

• Track purchase levels by vendor
• Check quality of goods delivered
• Compare actual expenditures to budgeted amounts
• Review organization buying patterns
• “Right-to-audit” clause
• Establish written policies prohibiting acceptance of gifts or favors

Question 34

Bid-Rigging Schemes

Any advantage, one vendor can 1) g__ over his competition, may be extremely 2) v___le.

The benefit of 3) “i___e in___e” can 4) en__e that a vendor will 5) w__ a s___ht-a__r c__ct. Many vendors are willing to 6) p__ s___ly for this influence

Answer 34

1) gain
2) valuable
3) “inside influence”
4) ensure
5) win a sought-after contract
6) pay significantly

Question 35

Bid-Rigging Schemes

In the 1) co___ve bidding process, all bidders are 2) le__y supposed to be placed on a 3) “l___l p___g f__d,” bidding under the 4) s__e terms and conditions

Answer 35

1) competitive
2) legally
3) “level playing field”
4) same

Question 36

Bid-Rigging Schemes

Categorized based on the stage in which fraudster exerts his influence:

o P__-so____on phase
o S____on phase
o Su___on phase

Answer 36

o Pre-solicitation phase
o Solicitation phase
o Submission phase

Question 37

Pre-solicitation phase

In the pre-solicitation phase of the competitive bidding process—before bids are officially sought for a project—bribery schemes can be broken down into two distinct types.

1) N___ re___n scheme
2) Sp___n Schemes

Answer 37

1) Need recognition scheme
2) Specification Schemes

Question 38

Pre-solicitation phase

Define Need Recognition Schemes

which an employee of a 1) pur___g company is p__d to co___e his company that a 2) par___r p___ct is ne___ry.

Answer 38

1) purchasing company is paid to convince
2) particular project is necessary.

Question 39

Need Recognition Schemes

The typical fraud in the need recognition phase of the contract negotiation is a conspiracy between the 1) b__r and 2) co___or in which an employee of the buyer 3) re___s something of va__e and in r___n recognizes a “n__” for a particular p__t or s___ce.

The result of such a scheme is that the victim company 4) pu___s un___y g___s or s__es from a supplier at the direction of the corrupt employee.

Answer 39

1) buyer
2) contractor
3) receives something of value and in return recognizes a “need” for a particular product or service
4) purchases unnecessary goods or services

Question 40

Pre-solicitation phase

Define Specifications Schemes

to have the 1) sp___ns of the 2) co__t tailored to the 3) st___s of a p___ar s__er.

Answer 40

1) specifications
2) contract tailored
3) strengths of a particular supplier.

Question 41

Specifications Schemes

One corruption scheme that occurs in this process is the 1) fr____nt t___g of sp___ons to a pa__ar v__or aka “b__ t__ng”

In these cases, the vendor 2) p__s o__ an e___ee of the 3) b__r who is involved in the 4) pr___n of sp___ns for the co___t.

In return, the 5) e___e sets the specifications of the contract to acc____e that ve___r’s c___s.

Answer 41

1) fraudulent tailoring of specifications to a particular vendor aka “bid tailoring”
2) pays off an employee
3) buyer who is involved
4) preparation of specifications for the contract
5) employee sets the specifications of the contract to accommodate that vendor’s capabilities.

Question 42

Specifications Schemes

The methods used to 1) re___t co____on in the bidding process may include the use of 2) “pr____on” procedures that are known to 3) el___e ce__n c___rs

Answer 42

1) restrict competition
2) “prequalification” procedures
3) eliminate certain competitors

Question 43

Specifications Schemes

1) S__e-s__ce or no___e procurement justifications may also be used to 2) e____e co___on and steer 3) co___ to a pa___ar v___or.

Answer 43

1) Sole-source or noncompetitive procurement
2) eliminate competition
3) contracts to a particular vendor

Question 44

Specifications Schemes

1) D___te w___ng of v___ue sp___ns.

In this type of scheme, a 2) su___r p___s an employee of the p___ng company to w__e sp___ns that will require a____nts at a l__r d__e.

This will allow the supplier to 3) r__e the p___e of the co___t when the a____ts are made.

Answer 44

1) Deliberate writing of vague specifications

2) supplier pays an employee of the purchasing company to write specifications that will require amendments at a later date

3) raise the price of the contract when the amendments

Question 45

Specifications Schemes

Another form of specification fraud is 1) b__ sp___g

2) F___l l___ required co___ve bi___g on projects over a ce___n d__ar va___e

Answer 45

1) bid splitting
2) Federal law required competitive bidding on projects over a certain dollar value

Question 46

Specifications Schemes

View specifications earlier than competitors

An 1) e___us and u___ir form of bid-rigging occurs when a vendor 2) p___s an employee of the 3) b___r for the 4) r__t to see the sp____ns e____r than other c___rs.

The employee 5) d___s n__ a__r the 6) s___ns to s_t the v__or, but instead simply gives him a 7) h__ s__t on pl__g his b__.

The 8) e___a p__g t__e gives the vendor an 9) ad___e over his competitors in preparing a bid for the job

Answer 46

1) egregious and unfair
2) pays
3) buyer
4) right to see the specifications earlier than other competitors
5) does not alter
6) specifications to suit the vendor
7) head start on planning his bid
8) extra planning time
9) advantage

Question 47

The Solicitation Phase

In the solicitation phase of the competitive bidding process, fraudsters attempt to 1) in____e the s___on of a co___r by re____ng the p___l of co___rs from whom bids are sought

Answer 47

1) influence the selection of a contractor by restricting the pool of competitors from whom bids are sought

Question 48

The Solicitation Phase

In other words, a 1) c___pt ve___r p___s an employee of the purchasing company to assure that o__e or m__ of the vendor’s competitors d__ n__ get to b__ on the c___ct.

In this manner, the corrupt vendor is able to 2) i__ve his cha___s of w___ng the job.

Answer 48

1) corrupt vendor pays an employee of the purchasing company to assure that one or more of the vendor’s competitors do not get to bid on the contract
2) improve his chances of winning the job.

Question 49

What are the 3 types of solicitation phases

1) B__ P___g
2) Fi___s S__rs
3) Ot__r M___s

Answer 49

1) Bid Pooling
2) Fictitious Suppliers
3) Other Methods

Question 50

Define Pooling

process by which 1) s__l bid___ conspire to 2) s__t up co__ts and en__e that each gets a 3) c__in a___nt of w___

Answer 50

1) several bidders
2) split up contracts and ensure
3) certain amount of work

Question 51

Fictitious Suppliers

Another way to 1) e___te com___n in the solicitation phase of the selection process is to 2) so___t b__s from fic___s su___rs

Answer 51

1) eliminate competition
2) solicit bids from fictitious suppliers

Question 52

Other Methods

Competition for a contract can be 1) li___d by s___ly 2) res___g the t__e for s___ting bi__

Bribed purchasing officials can also 3) re___ct c__on for their c__-co___ors by s___ng b___s in obscure publications where other vendors are unlikely to see them.

Answer 52

1) limited by severely
2) restricting the time for submitting bids
3) restrict competition for their co-conspirators by soliciting bids

Question 53

The Submission Phase

In the actual submission phase of the process, where bids are 1) pr__d to the buyer, several schemes may be used to 2) w__ a c___ct for a pa___r su___er.

The 3) pri__al o__e tends to be 4) ab___ of the s___d-b__ process

Answer 53

1) proffered
2) win a contract for a particular supplier
3) principal offense
4) abuse of the sealed-bid

Question 54

The Submission Phase

Vendors also 1) b__e em___es of the 2) pu___r for information on how to 3) pr__e their b__s.

Answer 54

1) bribe employees
2) purchaser for information 3) prepare their bids.

Question 55

The Submission Phase

Other reasons to bribe employees of the purchaser include the following:

-to ensure acc__e of a la__ b__
-to f__y the b__ l__
-to ex___d the bi__ op__g da__
-to co__l bid o___ngs

Answer 55

-to ensure acceptance of a late bid
-to falsify the bid log
-to extend the bid opening date
-to control bid openings

Question 56

Preventing and Detecting Bid-Rigging Schemes

• Mo__r pr__ tr__s
• Change o___rs or am___ts
• Very la__, u___d pr___e differences among bidders
• Qua___d bidders f__l to submit c___ct proposals
• Split l___e p___s into several sm__r jobs

Answer 56

• Monitor price trends
• Change orders or amendments
• Very large, unexplained price differences among bidders
• Qualified bidders fail to submit contract proposals
• Split large projects into several smaller jobs

Question 57

Preventing and Detecting Bid-Rigging Schemes

• Pa__ns within bidding process
  -L__ bidder a___s w__s
  -Re___y wi__g by n___w mar___
  -Predictable rotation of bid winners
• Losing bidders appear as su___rs
• Bids from fic___us su__rs

Answer 57

• Patterns within bidding process
  o Last bidder always wins
  o Repeatedly winning by narrow margin
  o Predictable rotation of bid winners
• Losing bidders appear as subcontractors
• Bids from fictitious suppliers

Question 58

Something of Value

There are several ways for a vendor to “pay” an employee to surreptitiously aid the
vendor’s cause

o M___y
o Sl___ funds
o “Co___g f__s” or “re__al com___ns”
o Promises of f__re e__ent
o Promise of part ow___ip
o L__r, m___s, fr__ tr___l, c__s, and se__l favors
o Transfer of p___ty
o Paying o__ corrupt employee’s l__s or bi__s
o Offering of lo__s on very fa___e te__s

Answer 58

o Money
o Slush funds
o “Consulting fees” or “referral commissions”
o Promises of future employment
o Promise of part ownership
o Liquor, meals, free travel, cars, and sexual favors
o Transfer of property
o Paying off corrupt employee’s loans or bills
o Offering of loans on very favorable terms

Question 59

Module 3: Foreign Corrupt Practices Act (FCPA)

Question 60

Foreign Corrupt Practices Act (FCPA)

According to the Department of Justice, “the Foreign Corrupt Practices Act of 0) 1__ was enacted for the purpose of making it 1) un__l for certain cl____s of p___ns and en___s to make p__nts to fo__n gov___nt of___ls to assist in obtaining or re__ng bu___s”

Answer 60

0) 1977
1) unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business”

Question 61

Foreign Corrupt Practices Act (FCPA)

Specifically, the 1) a__i-b__y provisions of the FCPA 2) pr___t the willful use of the 3) m__s or any means of instrumentality of 4) in__te co__ce corruptly in furtherance of any
5) of___r, pa___nt, promise to p__, or a___ion of the payment of 6) m__y or an___ng of value to any pe__n

Answer 61

1) anti-bribery
2) prohibit
3) mails
4) interstate commerce
5) offer, payment, promise to pay, or authorization
6) money or anything of value to any person

Question 62

Foreign Corrupt Practices Act (FCPA)

• In recent years, FCPA enforcement has been ri____s, using so___d in___tive tec___es such as industry-wide sweeps and undercover sting operations
• Penalties for vi___ns of the FCPA can be h___

Answer 62

• In recent years, FCPA enforcement has been rigorous, using sophisticated investigative
  techniques such as industry-wide sweeps and undercover sting operations
• Penalties for violations of the FCPA can be harsh

Question 63

Reasons for the FCPA

• La___ of tr__y and a___ty, especially in developing na__
• Poor re___on of p___al contributions
• Low pu___c sector wages in many fo___n countries
• Weak en___nt of la___ and reg___ns by int___al governments
• Excessive di___ary a___ity of p__ic officials

Answer 63

• Lack of transparency and accountability, especially in developing nations
• Poor regulation of political contributions
• Low public sector wages in many foreign countries
• Weak enforcement of laws and regulations by international governments
• Excessive discretionary authority of public officials

Question 64

Payments Covered by the FCPA

• C___h
• Ch___s and/or fi___al instrument
• G__s, tr___l, and en____ent
• Hidden o___hip interests
• Lo__
• Cr__t c___d bills
• Tr___s at less than fair market value
• Em___nt
• Be___ts—health care, college
  tuition
• Cre___s and reduced pr___s
• Cha___e support for
  organizations associated with the official

Answer 64

• Cash
• Checks and/or financial instrument
• Gifts, travel, and entertainment
• Hidden ownership interests
• Loans
• Credit card bills
• Transfers at less than fair market value
• Employment
• Benefits—health care, college
  tuition
• Credits and reduced prices
• Charitable support for
  organizations associated with the official

Question 65

Facilitating Payments

In general, the 1) F__ d___s n__ apply to a 2) pa___nt made to a 3) fo___n of___l, p___al pa___y, or party of___l for the 4) pu___se of e____g or f___ng the performance of a routine gov____l action

Answer 65

1) FCPA does not apply
2) payment
3) foreign official, political party, or party official
4) purpose of expediting or facilitating the performance of a routine governmental action

Question 66

Facilitating Payments

Expenditures paid to expedite the following, generally, are not FCPA violations:

-Obtaining pe___s, li____s, or other official d___nts to qualify a pe___n to do b___ss in a fo___n country (i.e., work v___)

-Pr___ng p___rs—visas, work orders

-Providing p___e pr__n, m__l pi__ u__/de___y, ins____ns

Answer 66

-Obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country (i.e., work visa)

-Processing papers—visas, work orders

-Providing police protection, mail pick up/delivery, inspections

Question 67

UK Bribery Act

When the UK Bribery Act passed?

Answer 67

2010

Question 68

UK Bribery Act

It’s similar to ___

Answer 68

FCPA

Question 69

UK Bribery Act

• Apply to br___y of p___c of___ls, as well as those in the pr____e sector
• The UK Act also provides for ju___n over an ind___l conducting bu___ss in the United Kingdom, regardless of where the underlying act occurs
• No e____n for facilitating p___nts

Answer 69

• Apply to bribery of public officials, as well as those in the private sector
• The UK Act also provides for jurisdiction over an individual conducting business in the United Kingdom, regardless of where the underlying act occurs
• No exception for facilitating payments

Question 70

Red Flags Associated with Possible FCPA Violations

• Decentralized management control (in-country)
• Substantial payments to agents, consultants, or others for unspecified services
• Payments to offshore bank accounts, in cash or by wire transfer
• Unduly complex legal or banking structure
• Unusual payments for commissions, loans, temporary employees and directors’ fees
• Payments and wire transfers without chain of command approval
• Payments to agents with unusual addresses
• Payments in round dollar amounts
• Unusually low or high profit margins on projects
• Undocumented business entertainment expenses

Question 71

Risk Assessment and Detection Approaches

• Inte___g em___es
• Conducting co__er fo___cs
• Searching pu___c r___ds
• Te___g tr__ns with a focus on h__h-r___k ac__ts—ma__ng,
  tr__ng, __l, con__g
• Au___g transactions to ensure p___er do___on for dis___ts
• Reviewing co__ts, including compliance with F___

Answer 71

• Interviewing employees
• Conducting computer forensics
• Searching public records
• Testing transactions with a focus on high-risk accounts—marketing,
  training, legal, consulting
• Auditing transactions to ensure proper documentation for disbursements
• Reviewing contracts, including compliance with F CPA

Question 72

Antifraud Efforts Associated with Deterring and Preventing FCPA Violations

• Implement a code of conduct
• Monitor “tone at the top”
• Establish anticorruption policies and procedures
• Maintain due diligence for agents and other business partners
• Perform FCPA risk assessment
• Conduct annual reviews of F CPA compliance
• Establish senior management oversight and F CPA compliance reporting
• Develop FCPA anticorruption controls Institute F CPA training
• Provide on-going legal advice and guidance
• Impose appropriate discipline for violators
• Develop contractual compliance terms and conditions

Question 73

Module 4: Illegal Gratuities, Economic Extortion, and Conflicts of
Interest

Question 74

Illegal gratuities

o Similar to br___y schemes

o There is n___ necessarily in____t to in___e a p__ar bu___ss de___n

o Usually given as a “re__” AF____ a de___n has been m___e

Answer 74

o Similar to bribery schemes
o There is not necessarily intent to influence a particular business decision
o Usually given as a “reward” AFTER a decision has been made

Question 75

Economic Extortion

Economic extortion is basically the 1) f___ s__e of a bribery scheme.

Instead of a vendor 1.1) of___g a payment to an 2) em____e to influence a decision, the employee 3) de___ds a pa___t from a vendor in order to make a 4) d___n in that 5) v___r’s favor

Answer 75

1) flip side
1.1) offering a payment
2) employee to influence a decision
3) demands a payment
4) decision
5) vendor’s favor

Question 76

Economic Extortion

Economic extortion is common in b___ l___

Answer 76

bank loans

Question 77

Conflict of Interest

-Employee 1) m__t have 2) e__t in___t in the v___or that 3) su___s the in___e

-Any bribery scheme could 4) po__y be co___d a conflict of interest

Answer 77

1) must
2) employment interest in the vendor
3) submits the invoice
4) potentially be considered a conflict of interest

Question 78

Majority of conflict schemes fit into two categories:

o Pu___g schemes
o S__ schemes

Answer 78

o Purchasing schemes
o Sales schemes

Question 79

Purchasing Schemes

The 1) ma___y of conflict schemes are 2) pu___ng schemes, and the most common of these is the 3) ov___g sc__e

Answer 79

1) majority
2) purchasing
3) overbilling scheme

Question 80

Purchasing Schemes

For the scheme to be classified as a conflict of interest, the 1) em___e (or a f__d or re___e of the em___e) 2) m___t have some ow___p or employment int____t in the vendor that su___ts the in___e

Answer 80

1) employee (or a friend or relative of the employee)
2) must have some ownership or employment interest in the vendor that submits the invoice

Question 81

Purchasing Schemes

The mechanics of 1) bi___ scheme, c__t or fr__t dis__nt, 2) d__ n_ ch___e

Answer 81

1) billing scheme, conflict or fraudulent disbursement
2) do not change

Question 82

Purchasing Schemes

Fraudsters also engage in 1) b__ ri___g on behalf of th___ o___ co__s

o If the bill 2) o___s from a 3) r__ co___ny in which the fraudster has an 4) e___ic or personal interest, and if the fraudster’s interest in the company is 5) u___d to the victim company, then the scheme is a 6) c__t of i___st

Answer 82

1) bid rigging on behalf of their own companies
2) originates
3) real company
4) economic or personal interest
5) undisclosed
6) conflict of interest

Question 83

Purchasing Schemes

1) N__ a__ conflict schemes occur in the 2) t___al v__r–b___r re__ip.

Some cases involve employees negotiating for the purchase of some unique, typically large, asset such as land or a building in which the employee had an undisclosed interest.

Answer 83

1) Not all conflict schemes
2) traditional vendor–buyer relationship.

Question 84

Purchasing Schemes

A 1) s___l k___ of purchasing scheme is called the 2) tu___d s___ or f___

Answer 84

1) special kind
2) turnaround sale or flip

Question 85

Define Turnaround Sales

In this type of scheme, an employee 1) k___s his e___er is seeking to 2) pu___e a c___n a___t and takes 3) ad___e of the situation by 4) p___g the as___ h__f (usually in the n___e of an ac___e or s___l company).

The fraudster then 5) t__ns ar___d and resells the item to the 6) em__r at an 7) in__d p__e

Answer 85

1) knows his employer is seeking
2) purchase a certain asset
3) advantage
4) purchasing the asset himself (usually in the name of an accomplice or shell company).
5) turns around and resells
6) employe
7) inflated price

Question 86

Sales Schemes

Generally, fraudsters perpetrate two principal types of conflict schemes associated with the victim company’s sales

1. Underbillings - u___g of g___s and s__s (most h___l)
2. Writing-Off Sales - involves ta____g with the b___s of the vi___ co___y to de__e or wr__ o__ the amount o___d by an em__e’s b___s

Answer 86

1. Underbillings - underselling of goods and services (most harmful)
2. Writing-Off Sales - involves tampering with the books of the victim company to decrease or write off the amount owed by an employee’s business

Question 87

Sales Schemes
Under billings

-Sell 1) g__s or s___s be__ fa___ m__t v__e to vendor with a 2) h___n i___st

-Diminished 3) p__t m__

Answer 87

1) goods or services below fair market value to vendor with a 2) hidden interest
3) profit margin

Question 88

Sales Schemes
Writing-Off Sales

-Ta___ with vi__im company’s bo___to wr___e o__ a___t o__d by an employee’s business

-De___ bi___-

Answer 88

-Tamper with victim company’s books to write off amount owed by an employee’s business

-Delay billing

Question 89

Other Conflict of Interest Schemes
Business diversions

-Si___n e___r’s cl__s for o__n bus___

-St___ p___al cl_ts a__y from em____

Answer 89

-Siphon employer’s clients for own business

-Steer potential clients away from employer

Question 90

Other Conflict of Interest Schemes
Resource diversions

o Divert funds of their employers to the development of their own business

Question 91

Other Conflict of Interest Schemes
Financial disclosures

o Ma_____t o____n to di__e fr___ committed by employees in positions of tr___

o Ina___e di__re can be among the m__ se__s of fr_s

Answer 91

o Management obligation to disclose fraud committed by employees in positions of
trust

o Inadequate disclosure can be among the most serious of frauds

Question 92

Preventing and Detecting Conflicts of Interest

• Specifically a___ss co__ct of in___t i___s in company e___s policy
• A___l fi___al di__e st___nt
• Co____n with employees regarding their other business int___
• Establish a___us re__g me___m to receive t__s and co___
• Pe____y run c____ns between ve__r and e___e ad__s and ph__ nu____

Answer 92

• Specifically address conflict of interest illegalities in company ethics policy
• Annual financial disclosure statement
• Communication with employees regarding their other business interests
• Establish anonymous reporting mechanism to receive tips and complaints
• Periodically run comparisons between vendor and employee addresses and phone numbers

Question 93

Big Data and Data Analytic Techniques for Detecting
Corruption

• Stratify vendor payments by approval limits, especially directly under (i.e., 5%)
  the approval limit
• Stratify inventory actual to standard price
• Identify trends in obsolete inventory over two or more periods
• Age inventory by the date of last part issuance
• Calculate number of months of inventory that is on hand (on a part-by-part
  basis) and extract those with high number of months
• Extract all parts greater than zero in cost that have had no usage in the current
  year
• Identify inventory price greater than retail price (if inventory is for sale)

Question 94

Big Data and Data Analytic Techniques for Detecting
Corruption (cont.)

• Identify inventory receipts per inventory item that exceed the economic order quantity or maximum for that item
• Identify duplicate payments based on various means that would be made with intent by the employee and accepted with intent by the vendor
• Calculate the ratio of the largest purchase to the next-largest purchase by
  vendor
• Calculate the annualized unit price changes in purchase orders for the same product in the same year
• List all vendors who had multiple invoices immediately below an approval
  limit, highlighting a circumvention of the established control

Question 95

Big Data and Data Analytic Techniques for Detecting
Corruption (cont.)

• Extract round-dollar payments and summarize by vendor
• Review payments with little or no sequence between invoice numbers
• List payments to any vendor that exceed the twelve-month average payments to that vendor by a specified percentage
• List payments to any vendor that exceed the twelve-month average payments to any vendor within the purchase category by a specified
  percentage
• Summarize invoice payment general ledger activity by type of purchase
  and identify areas with fewer than three vendors

Question 96

Big Data and Data Analytic Techniques for Detecting
Corruption (cont.)

• Calculate the average payment by general ledger activity type and review
  for payments made that exceed that average by a large percentage
• Summarize by vendor the number of inferior goods based on number of
  returns
• Identify delivery of inventory to employee address by joining employee
  address to shipment address file
• Identify delivery of inventory to address that is not designated as a
  business address
• Match the vendor master file to the employee master file on various key fields

Question 97

Big Data and Data Analytic Techniques for Detecting
Corruption

• Identify vendor address that is not designated as a business address
• Review Internet resources, online newspaper archives, background check,
  and commercial credit databases for related parties of employees

Question 98

Module 5: The Human Factor

Question 99

The Art of Spinning:
How to Identify Possible White Collar Criminals or, at Least, Unethical and Deceitful People Whom You Should Avoid

Question 100

The Art of Spinning:

• Sell people hope
• Make excuses as long as you can
• “Take responsibility” but shift blame
• Accept underlying facts as true but rationalize your actions
• When you can’t defend your actions, attack the messenger
• Always show your kindness by doing favors
• Publicize good deeds

Question 101

The Art of Spinning (cont.)

• Build strong base of support
• Take “high road”, have surrogates do “dirty work”
• When you can no longer spin, shut up
• Have selective memory under oath
• Keep friends close and enemies closer
• If under investigation always say you will “cooperate”

Question 102

The Human Factor

Establish 1) c__r and re___e an___d standards

o Dr. Steve Albrecht said, “If you set standards too 2) h__, you may be inadvertently giving an employee two choices in his mind—to 3) f___ or to l__”

The diverse case studies in this text have a common element. That is, of course, the human 4) fa___s that led t___ed people to vi__ that tr__

Answer 102

1) clear and reasonable antifraud
2) high
3) fail or lie
4) failings that led trusted people to violate that trust.

Question 103

The Human Factor

In any antifraud effort, we must always keep in mind that 1) n__ o__ fa___r a___e will deter o___al fr___;

we must attack the problem on several fronts.

Answer 103

1) no one factor alone will deter occupational fraud

Question 104

The Human Factor
Greed

-Students of this subject are most likely to describe 1) em___s and their ilk by one single word: greedy

-Overall, there is 2) li___ we can say about greed as a 3) m___e that will help us 4) de___t or d___ oc___al fraud.

Answer 104

1) embezzlers
2) little
3) motive
4) detect or deter occupational fraud

Question 105

The Human Factor
Wages in kind

In many instances, those who chose to commit fraud against their employers felt 1) ju___d in doing so

For the purpose of detecting and deterring occupational fraud, it 2) d__ n__ m___r whether the employee is actually j___d, but whether he pe___s that he is

Answer 105

1) justified
2) does not matter whether the employee is actually justified, but whether he perceives that he is

Question 106

The Human Factor
Wages in kind

So employers must be educated in the concept of wages in kind. There are three basics that are absolutely necessary to minimizing (not eliminating) occupational fraud and abuse:

1. H__ the r___ pe___e.
2. T___ them w__l.
3. D___t s___ct them to un____le ex____s

Answer 106

1. Hire the right people.
2. Treat them well.
3. Don’t subject them to unreasonable expectations

Question 107

The Human Factor
Unreasonable Expectations

you should have 1) e___y with at least some of the situations that led to an employee deciding to 2) c___t fr___d.

Employers sometimes have 3) u____ble exp___s of their employees that may contribute to 4) occupational fr__ and ab___

Answer 107

1) empathy
2) commit fraud
3) unreasonable expectations
4) occupational fraud and abuse

Question 108

The Human Factor
Unreasonable Expectations

First, many employers 1) e___t their employees to be 2) ho___t in all situations.

-That belies the 3) h___n co___n.

Answer 108

1) expect
2) honest
3) human condition

Question 109

The Human Factor
Unreasonable Expectations

Our approach to deterrence, therefore, should 1) n_t be to 2) eli___ lying (since it 3) c__’t be done), but to keep 4) l__ from turning into 5) fr___s.

It is easy to see how anyone can confuse the two concepts of 6) ly__ and f__d.

Answer 109

1) not be
2) eliminate lying
3) can’t be done
4) lies
5) frauds
6) lying and fraud.

Question 110

Understanding Fraud Deterrence

1) De___e and pr___n are not the same, although we frequently use the terms interchangeably.

Answer 110

1) Deterrence and prevention

Question 111

Understanding Fraud Deterrence

Prevention, in the sense of crime, involves 1) re___g the r__ c__s of the p__m.

In this case, to prevent fraud, we would have to 2) e__te the m___n to c___it it, such as the societal injustices that lead to crime

Answer 111

1) removing the root causes of the problem
2) eliminate the motivation to commit it

Question 112

Understanding Fraud Deterrence

Define Deterrence

Mo___n of b___r through the per___n of ne___ve sa___ns

Answer 112

Modification of behavior through the perception of negative sanctions

Question 113

Understanding Fraud Deterrence

Fraud offenders are easier to deter than 1) r__-of-the-m__ street criminals

o Fraud offenders are very de____
o Fraud offenders’ conduct can be more e___y m___d

Answer 113

1) run-of-the-mill street

o Fraud offenders are very deliberate
o Fraud offenders’ conduct can be more easily modified

Question 114

Understanding Fraud Deterrence
The Impact of Controls

Many frauds could be prevented with the most basic control procedure: se___g the m___y from the re___-k___g function.

Answer 114

separating the money from the record-keeping function.

Question 115

Understanding Fraud Deterrence
The Impact of Controls

• Acc___s and au__s expect co___s to do t__ much
• Many controls have n___g to d_ with fraud
• Some controls are only in___y r__d
• Controls are only p__ of the
  ___ to fraud deterrence

Answer 115

• Accountants and auditors expect controls to do too much
• Many controls have nothing to do with fraud
• Some controls are only indirectly related
• Controls are only part of the answer to fraud deterrence

Question 116

Understanding Fraud Deterrence
The Perception of Detection

• Employees who perceive that they will be c___t en___g in oc__l fr___d and a___e are le__ likely to co___t it

-Deal with o___al f__d and abuse in an o__ f__

-If not handled correctly, it can cause more pr___s than it s___z

Answer 116

• Employees who perceive that they will be caught engaging in occupational
  fraud and abuse are less likely to commit it

-Deal with occupational fraud and abuse in an open forum

-If not handled correctly, it can cause more problems than it solves

Question 117

Six Steps to Increase Perception of Detection

1. Em___e e____n
2. Pr___e fr___ p___s
3. A hi____ s___ce
4. Inc____d u__ of a____al re___
5. Sur___ a__ts where f___le
6. A____e r___g p___ms

Answer 117

1. Employee education
2. Proactive fraud policies
3. A higher stance
4. Increased use of analytical review
5. Surprise audits where feasible
6. Adequate reporting programs

Question 118

Reporting Programs Should Emphasize…

1. Fraud, waste, and abuse occur at some level in nearly every organization
2. This problem costs j__, r__s, and p___ts
3. The organization actively en____s employees to come fo__ with inf___n
4. There are n__ pe__s for furnishing go____-fa___ in___on
5. There is an e___t me___d for re___g, such as a t___ne nu___r or ad___
6. A report of s___us activity d__s n__ have to be made to the employee’s im___e su___

Answer 118

1. Fraud, waste, and abuse occur at some level in nearly every organization
2. This problem costs jobs, raises, and profits
3. The organization actively encourages employees to come forward with
   information
4. There are no penalties for furnishing good-faith information
5. There is an exact method for reporting, such as a telephone number or address
6. A report of suspicious activity does not have to be made to the employee’s immediate supervisor

Question 119

Ch 7 - Financial Statement Fraud

Question 120

Module 1: Financial Reporting Fraud: Who, Why, and How

Question 121

Financial Statement Fraud

• Pre___e on up___r man__t to show ea___s

-Su___ve n__e of the way b__s and r__ds are ke___

Answer 121

• Pressure on upper management to show earnings

-Subjective nature of the way books and records are kept

Question 122

Financial Statement Fraud

Three general questions that go to the heart of these crimes

1. W___ co___s fi__l st___nt fr__d?
2. W__ do people co__it fi___l sta___ fr__?
3. H__ do people co__t fin___l st___nt fraud?

Answer 122

1. Who commits financial statement fraud?
2. Why do people commit financial statement fraud?
3. How do people commit financial statement fraud?

Question 123

Who Commits Financial Statement Fraud?

1. S___r m___nt
2. M___- and l__-level em___s
3. Or___d c____ls

Answer 123

1. Senior management
2. Mid- and lower-level employees
3. Organized criminals

Question 124

Who Commits Financial Statement Fraud?
Mid- and lower-level employees

-This category of employees may 1) fa___y fi___l st___ts for their respective 2) a__ of re___ty (su__ry, d___n, or other unit) to either c___al their p__r per__

Answer 124

1) falsify financial statements for their respective
2) area of responsibility (subsidiary, division, or other unit) to either conceal their poor performance

Question 125

Who Commits Financial Statement Fraud?
Organized criminals

This group may use such a scheme to 1) o___n fr___nt l___s from a fi___al ins___n, or to 2) h__e a s___ck they are selling as part of a Ponzi or “pump-and-dump” scheme

Answer 125

1) obtain fraudulent loans from a financial institution
2) hype a stock

Question 126

Why Do People Commit Financial Statement Fraud?

Senior managers and business owners may “cook the books” for several reasons

o To c___l tr__ b___ss per__
o To pr___e p___al st__/co__l
o To ma__n pe___al in__/w__th

Answer 126

o To conceal true business performance
o To preserve personal status/control
o To maintain personal income/wealth

Question 127

Why Do People Commit Financial Statement Fraud?

Senior managers and business owners may “cook the books” for several reasons

o To conceal true business performance - 1) The objective may be to overstate or understate results

o To preserve personal status/control - Senior managers with 2) str__g e__s may be un___g to a___t that their strategy has f__d and that business pe___e is b__d, since it may lead to their te__n

o To maintain personal income/wealth - 3) Flowing from s___y, b___s, st___, and stock op___

Answer 127

1) The objective may be to overstate or understate results
2) strong egos may be unwilling to admit that their strategy has failed and that business performance is bad, since it may lead to their termination
3) Flowing from salary, bonus, stock, and stock options

Question 128

Why Do People Commit Financial Statement Fraud?

-We can better 1) d__r and d__t fraud if we 2) understand the 3) dif__t pre___s se___r m___rs and bu___s owners face that might drive them to 4) c__t fr__

-5) Fin___al st___nt sc___s are generally tailored to the particular circumstances in the organization

Answer 128

1) deter and detect
2) understand
3) different pressures senior managers and business owners
4) commit fraud
5) Financial statement schemes

Question 129

Common Reasons Senior Management Might Overstate
Performance

• To meet or exceed the earnings or revenue growth expectations of stock analysts
• To comply with loan covenants
• To increase the amount of financing available from asset-based loans
• To meet a lender’s criteria for granting/extending loan facilities
• To meet corporate performance criteria set by the parent company
• To meet personal performance criteria
• To trigger performance-related compensation or earn-out payments
• To support the stock price in anticipation of a merger, acquisition, or sale of personal
  stockholding
• To show growth to support a securities offering or sale of the business

Question 130

Common Reasons Senior Management Might Understate
Performance

• To defer “surplus” earnings to the next accounting period
• To take all possible write-offs in one “big bath” now so future earnings will
  be consistently higher
• To reduce expectations now so future growth will be better perceived and
  rewarded
• To preserve a trend of consistent growth and avoid volatile results
• To reduce the value of an owner-managed business for purposes of a
  divorce settlement
• To reduce the value of a corporate unit whose management is planning a
  buyout

Question 131

How Do People Commit Financial Statement Fraud?

There are three general ways in which fraudulent financial statements can be generated.

1. Playing the accounting system
2. Beating the accounting system
3. Going outside the accounting system

Answer 131

1. Pl__ the ac___g s__m
2. B__g the a___ng s__m
3. Going o___e the ac___ng sy__

Question 132

How Do People Commit Financial Statement Fraud?
1. Playing the accounting system

The fraudster uses the accounting system as a 1) t__l to ge___e the d___d r__ts

Answer 132

1) tool to generate the desired results

Question 133

How Do People Commit Financial Statement Fraud?
2. Beating the accounting system

the fraudster feeds 1) f__e and fic___s in____on into the accounting system to 2) ma___e rep__d res___s by an amount greater than can be achieved by simply 3) “pl__g the ac___g s__m.”

Answer 133

1) false and fictitious information
2) manipulated reported results
3) “playing the accounting system.”

Question 134

How Do People Commit Financial Statement Fraud?
3. Going outside the accounting system

the fraudster produces 1) w___r fin___al s___nts he or she wi___s, perhaps using just a 2) pe__al co__er and a printer

Answer 134

1) whatever financial statements he or she wishes
2) personal computer

Question 135

Public versus Private Company Financial Reporting Fraud

• A st___r a__d en___nt in p__c companies appears to lead
  p___c company F__ perpetrators to use t__g dif__s to commit their
  fraud
• P___c company fraud, on average, involves l___er fraud teams to circumvent the st__r co___

Answer 135

• A stronger antifraud environment in public companies appears to lead
  public company FRF perpetrators to use timing differences to commit their
  fraud
• Public company fraud, on average, involves larger fraud teams to circumvent the stronger controls

Question 136

Public versus Private Company Financial Reporting Fraud (cont.)

• P___c company frauds are la___r than those in p___e companies
• The l___r size of p___c company F___ cases may make them m___ likely to
  be de___d by f___l means, rather than by ac__t

Answer 136

• Public company frauds are larger than those in private companies
• The larger size of public company FRF cases may make them more likely to
  be detected by formal means, rather than by accident

Question 137

Module 2: Accounting Principles and Fraud

Question 138

Conceptual Framework for Financial Reporting

The following is a conceptual framework for financial reporting:

1. Re__n and Me___nt Co__ts
2. Qu___e Ch___cs

Answer 138

1. Recognition and Measurement Concepts
2. Qualitative Characteristics

Question 139

Conceptual Framework for Financial Reporting

The following is a conceptual framework for financial reporting:
1. Recognition and Measurement Concepts

A. As____s
i. Eco___c e__y
ii. G___g c___n
iii. M___ry u__t
iv. Pe____y

B. Pr____s
i. H___l c___t
ii. R___e re___on
iii. M____g
iv. F__l di____ure

C. Co_____ts
i. C___t–be___t
ii. Ma__ty
iii. In____y p___e
iv. Con_____sm

Answer 139

A. Assumptions
i. Economic entity
ii. Going concern
iii. Monetary unit
iv. Periodicity

B. Principles
i. Historical cost
ii. Revenue recognition
iii. Matching
iv. Full disclosure

C. Constraints
i. Cost–benefit
ii. Materiality
iii.Industry practice
iv. Conservatism

Question 140

2. Qualitative Characteristics

A. Re___e and Reliability
B. Comparability and Consistency

Answer 140

A. Relevance and Reliability
B. Comparability and Consistency

Question 141

Conceptual Framework for Financial Reporting

Define Economic Entity

the a____y of a b____s e___se should be kept se____e and d___ct from its o___rs and other bus___s en___es

Answer 141

the activity of a business enterprise should be kept separate and distinct from its owners and other business entities

Question 142

Conceptual Framework for Financial Reporting
Going Concern

In valuing a firm’s assets for financial statement purposes, it is 1) as___ed that the bu____ss is one that will co___e into the f____e.

That is because the worth of any 2) go___ bu__ss will be hi___r than the va___ of its h___ a__ts

Answer 142

1) assumed that the business is one that will continue into the future
2) good business will be higher than the value of its hard assets

Question 143

Conceptual Framework for Financial Reporting
Going Concern

-Fraud usually results from 1) at___ts by an entity to 2) co___l its te___al business condition

Answer 143

1) attempts
2) conceal its terminal

Question 144

Conceptual Framework for Financial Reporting

Monetary Unit

To measure and analyze financial transactions, a common standard is necessary.

In our society, that common 2) de___or is m___y.

Answer 144

2) denominator is money.

Question 145

Conceptual Framework for Financial Reporting

Periodicity

This 1) “t__e p___d” assumption uses the principle of 2) di___g ec___ic activity into specific t___ in___s, such as m___ly, qu___y, and an___y.

Answer 145

1) “time period”
2) dividing economic activity into specific time intervals, such as monthly, quarterly, and annually.

Question 146

Conceptual Framework for Financial Reporting

Historical cost

o Generally accepted accounting principles require that assets be carried on the
1) fi____l st____s at the pr__e established by the e____ge transaction

o In recent years, there has been a movement in the accounting profession to move
toward 2) fa___ m___et va___

Answer 146

1) financial statements at the price established by the exchange transaction
2) fair market value

Question 147

Conceptual Framework for Financial Reporting

Revenue recognition

o According to generally accepted accounting principles, the 1) a___al b__s of accounting should be used for financial reporting

Answer 147

1) accrual basis

Question 148

Conceptual Framework for Financial Reporting

Matching

o This requires that the 1) b___s and records, and the resultant fi___al st___nts, m___h 2) re____e and e___se in the proper accounting period

Answer 148

1) books and records, and the resultant financial statements, match
2) revenue and expense

Question 149

Conceptual Framework for Financial Reporting

Transparent disclosure

o The principle is that any 1) material information required to understand the 2) numbers
presented in the financial statements, and any deviation from GAAP, 3) m__t be ex___d to the reader

Answer 149

1) material
2) numbers
3) must be explained

Question 150

Conceptual Framework for Financial Reporting

Cost-benefit

o In formulating standards for financial reporting, the 1) F__ considers the 2) t__e-o__
between the 3) c__t of providing certain i___n and the related b__it to be
derived by the users

Answer 150

1) FASB
2) trade-off
3) cost of providing certain information and the related benefit to be derived by the users

Question 151

Conceptual Framework for Financial Reporting

Industry practice

o Reporting practices within certain industries may 1) de___e from generally accepted
accounting principles as a matter of 2) fa__ and cl___r p__ion

Answer 151

1) deviate
2) fair and clear presentation

Question 152

Conceptual Framework for Financial Reporting

Materiality

o Financial statements are 1) n__ meant to be 2) p__tly ac___te, only re__e and f__r

o According to GAPP, materiality is a 3) u__r-o___d concept

Answer 152

1) not
2) perfectly accurate, only reasonable and fair
3) user-oriented concept

Question 153

Conceptual Framework for Financial Reporting

Conservatism

o This requires that, when there is any 1) d___t, one should 2) av__ overstating as___s and
inc___e, or understating li____s and e___es

Answer 153

1) doubt
2) avoid overstating assets and
income, or understating liabilities and expenses

Question 154

Conceptual Framework for Financial Reporting

Comparability and consistency

o For financial information to be useful for analytical purposes, it must possess the
1) se___y qu____ive characteristics of co____y and co___ncy

Answer 154

1) secondary qualitative characteristics of comparability and consistency

Question 155

Conceptual Framework for Financial Reporting

Relevance and reliability

o Qualitative Characteristics of Accounting Information,” outlined in Statement of
Financial Accounting Concepts No. 2, identifies 1) re___e and re___y as two primary q___es of us___s for de___n m___g

Answer 155

1) relevance and reliability as two primary qualities of usefulness for decision making

Question 156

Responsibility for Financial Statements

• Company 0) ma___nt is re___e

o It is hard to fathom how financial statement fraud can be committed without some
1) kn___e or co___t of ma___t.

Answer 156

0) management is responsible
1) knowledge or consent of management.

Question 157

Responsibility for Financial Statements

Fraud is generally instigated by members of 1) m___nt

Answer 157

1) management

Question 158

Users of Financial Statements

• Potential users of financial statements

o Co___’s o___s
o Le___g o____ns
o Ve___s / C___rs
o In___

Answer 158

o Company’s owners
o Lending organizations
o Vendors / Customers
o Investors

Question 159

Users of Financial Statements

Uses of financial statements

o In___e the ap___nt p____ty of the organization
o Dispel n____e per____ns
o Ju___e e___ee or ma___nt performance

Answer 159

o Increase the apparent prosperity of the organization
o Dispel negative perceptions
o Judge employee or management performance

Question 160

Responsibility for Financial Statements

1) B__d of d___rs and s___r ma___nt set the organization’s “c___e”

o “Tone at the top”
o 2) H___ in___ty leads to more honest employees

Answer 160

1) Board of directors and senior management set the organization’s “culture”
2) High integrity

Question 161

Other Comprehensive Bases of Accounting

• Go___t or re____y agency accounting
• T___ b___s accounting
• Cash r___ts and di_____ts, or mo_____d cash receipts and
  disbursements
• Any other basis with a definite s___ of cr___a applied to all m___l items

Answer 161

• Government or regulatory agency accounting
• Tax basis accounting
• Cash receipts and disbursements, or modified cash receipts and
  disbursements
• Any other basis with a definite set of criteria applied to all material items

Question 162

Types of Fraudulent Financial Statement Schemes

Financial statement frauds can be broken down into five distinct categories:

1. Co____d li___s and ex___s
2. Fi___s re___es
3. Improper a___t v___ns
4. Improper di___s
5. Ti___g di___es

and these are shown on the ___’s fraud tree

Answer 162

1. Concealed liabilities and expenses
2. Fictitious revenues
3. Improper asset valuations
4. Improper disclosures
5. Timing differences

ACFE’s fraud tree

Question 163

Define Financial Statement Fraud

D____e mi___ts or o___ns of amounts or disclosures of financial statements to d___e financial statement u___s, particularly in___s and cr___s

Answer 163

Deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly
investors and creditors

Question 164

Module 3: Fraudulent Financial Statement Schemes

Question 165

Financial Statement Fraud

Statement on Auditing Standards (S AS) No.99 “Consideration of Fraud in a
Financial Statement Audit”

o Misstatements arising from 1) fr___t fi___al re___g
o Misstatements arising from 2) mi____n of a___s

Answer 165

1) fraudulent financial reporting
2) misappropriation of assets

Question 166

Financial Statement Fraud may Involve the Following Schemes

1. F____on, a____n, or m____on of material financial re___s,
   su___g d___ts, or b___ss tra___ns

Answer 166

1. Falsification, alteration, or manipulation of material financial records,
   supporting documents, or business transactions

Question 167

Financial Statement Fraud may Involve the Following Schemes

4. Int___l omissions of disc___es or pr___ion of inadequate disclosures
   regarding accounting p__s and p__es and related financial amounts

Answer 167

4. Intentional omissions of disclosures or presentation of inadequate disclosures
   regarding accounting principles and polices and related financial amounts

Question 168

Financial Statement Fraud may Involve the Following Schemes

2. Material i___al om___s or mi___ns of ev__s, tr__ns,
   ac___s, or other significant info___on from which financial statements are
   prepared

Answer 168

2. Material intentional omissions or misrepresentations of events, transactions,
   accounts, or other significant information from which financial statements are
   prepared

Question 169

Financial Statement Fraud may Involve the Following Schemes

3. De____te misapplication of accounting pr___s, p___s, and p___es used to me___e, rec___e, re___t, and disclose ec__c e__ts and b___ess
   tra__s

Answer 169

3. Deliberate misapplication of accounting principles, policies, and procedures
   used to measure, recognize, report, and disclose economic events and business
   transactions

Question 170

Ways Financial Statement Fraud is Harmful

1. Undermines the re___y, qu___y, t____cy, and in___y of the fin___l r___ng process
2. Jeopardizes the i____ty and ob____ of the a___g profession
3. Dim___s the confidence of the c____l markets in r___ity of financial information
4. Makes the capital markets le___ ef____nt
5. Adversely af___ts the nation’s ec___ic g___h and p__ity
6. Results in huge li___on co___

Answer 170

1. Undermines the reliability, quality, transparency, and integrity of the financial reporting process
2. Jeopardizes the integrity and objectivity of the auditing profession
3. Diminishes the confidence of the capital markets in reliability of financial information
4. Makes the capital markets less efficient
5. Adversely affects the nation’s economic growth and prosperity
6. Results in huge litigation cost

Question 171

Ways Financial Statement Fraud is Harmful

7. De____s c___rs of in__ls involved in financial statement fraud
8. Causes b___cy or s__al economic losses by the company en___d in financial statement fraud
9. Encourages r___ry in___on
10. Causes de__n in the n___al op____ns and p___ce of alleged companies
11. Raises serious d___t about the e___y of f___l s___nt a__s
12. Erodes p___ic c___e and t___t in the ac___g and au___g profession

Answer 171

Ways Financial Statement Fraud is Harmful

7. Destroys careers of individuals involved in financial statement fraud
8. Causes bankruptcy or substantial economic losses by the company engaged in financial statement fraud
9. Encourages regulatory intervention
10. Causes devastation in the normal operations and performance of alleged
    companies
11. Raises serious doubt about the efficacy of financial statement audits
12. Erodes public confidence and trust in the accounting and auditing profession

Question 172

Define Fictitious Revenues

-R____g of s___s of g__s or se____s that d__ n___ o___r

-Artificially in__ or a___r in__s of le__te cu___rs

Answer 172

-Recording of sales of goods or services that did not occur

-Artificially inflate or alter invoices of legitimate customers

Question 173

Fictitious Revenues

Revenue is recognized when

1. R___ or r____
2. E___

Answer 173

1. Realized or realizable
2. Earned

Question 174

The SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (SAB 104), to update existing guidance on revenue recognition criteria. SAB 104 states that revenue is typically considered realized or realizable and earned when all of the following criteria are met:

1. Pe____e e__e of an a____t exi__
2. De__y has oc__d or s___es have been re___d
3. The s____r’s p__e to the buyer is f__d or d___ble
4. Co__y is re___ly as__ed

Answer 174

1. Persuasive evidence of an arrangement exists
2. Delivery has occurred or services have been rendered
3. The seller’s price to the buyer is fixed or determinable
4. Collectability is reasonably assured

Question 175

Fictitious Revenues

What are the current conceptual guidelines for revenue recognition?

o FASB Concepts Statement No. 1) __ “R____on and Me____t in Fi___al St___ts of Bu___s E___s”

o FASB Concepts Statement No. 2) ___ “E__ts of Fi__al S__ts”

Answer 175

1) 5 “Recognition and Measurement in Financial
Statements of Business Enterprises”

2) 6 “Elements of Financial Statements”

Question 176

Fictitious Revenues

1) F__ and I__ have partnered to tackle issue of revenue recognition

Answer 176

1) FASB and IASB

Question 177

Sales with Conditions

Sales with conditions are a form of fictitious revenue scheme in which a sale is booked even though

-some terms have n___ been co___d
-the ri___ts and r___s of o___p have n__ p___d to the pu__

Answer 177

-some terms have not been completed

-the rights and risks of ownership have not passed to the purchaser

Question 178

Sales with Conditions

These transactions 1) d__ n___qualify for recording as 2) re___e, but they may nevertheless be 3) re__d in an effort to 4) fr___tly boost a company’s 5) re___e

They do not qualify for recording as revenue until 6) co___ns are 7) s__ed

Answer 178

1) do not qualify
2) revenue
3) recorded
4) fraudulently boost
5) revenue
6) conditions
7) satisfied

Question 179

Pressures to Boost Revenues

1) E___l p___es to succeed often provide 2) m__on to commit fraud

Ex.
o L____ re___nts by b___

Answer 179

1) External pressures
2) motivation

Ex.
o Loan requirements by banks

Question 180

Presssures to Boost Revenues

Pressures to commit financial fraud may also be 1) in___l

Ex.
o De__al b__t requirements

Answer 180

1) internal

o Departmental budget requirements

Question 181

Red Flags Associated with Fictitious Revenues

• R___d g___h or u___al pr____y
• Ina__y to generate c__h f__s from op___s while re__ng e__s
• Significant transactions with related p__s or s__l-p___se entities n__ in the ordinary course of business
• Si____nt, u__al, or h__ly co__x tr__ns
• U___l gr__h in the number of d__s’ sales in re__s
• A significant volume of s___ to entities whose substance and ownership is
  n__ k__n
• U___l surge in s__s by a minority of u____s w___n a company

Answer 181

• Rapid growth or unusual profitability
• Inability to generate cash flows from operations while reporting earnings
• Significant transactions with related parties or special-purpose entities not
  in the ordinary course of business
• Significant, unusual, or highly complex transactions
• Unusual growth in the number of days’ sales in receivables
• A significant volume of sales to entities whose substance and ownership is
  not known
• Unusual surge in sales by a minority of units within a company

Question 182

Define Timing Differences

Re___g of r___s and/or e___es in im____r periods

Answer 182

Recording of revenues and/or expenses in improper periods

Question 183

Timing Differences

This can be done to 1) s__t re___es or e___es between one 2) pe___ and the next, 3) in___g or de__ng ea___s as d___d

Answer 183

1) shift revenues or expenses 2) period
3) increasing or decreasing earnings as desired

Question 184

Matching Revenues with Expenses

• Revenues and corresponding expenses should be 1) m___d in the 2) s__e accounting period

Failure to do so 3) v__s G___s m__ pr___e

Answer 184

1) matched
2) same
3) violates GAAP’s matching principle

Question 185

Matching Revenues with Expenses

Accounting principles champion a two-step process:

-Step 1—using re___e rec___n p__es, record re___s in the
ap____e period

-Step 2—m__h ex___es associated with those re__es in the s__. period

Answer 185

-Step 1—using revenue recognition principles, record revenues in the
appropriate period

-Step 2—match expenses associated with those revenues in the same period

Question 186

Revenue Recognition

• Generally, revenue should be 1) re___d in the accounting records when a 2) s__ is c__e

Answer 186

1) recognized
2) sale is complete

Question 187

Revenue Recognition

The four criteria set out in SEC Staff Accounting Bulletin No. 1) 1__

1. Pe___e e__ce of an ar____nt exists
2. D___y has o___ed or s___es have been r___ed
3. The seller’s p___e to the buyer is fi___ or d___le
4. Co___y is r___ly a___d

Answer 187

1) 104

1. Persuasive evidence of an arrangement exists
2. Delivery has occurred or services have been rendered
3. The seller’s price to the buyer is fixed or determinable
4. Collectability is reasonably assured

Question 188

Revenue Recognition

When revenues are recorded in the wrong period, they 1) in___e n__ i___e in the period in which they are 2) r___d, and 3) u__r-r___rt in___e in the period in which they 4) s___d have been re___d

Answer 188

1) inflate net income
2) reported
3) under-report income
4) should have been reported

Question 189

Persuasive Evidence of an Arrangement Does Not Exist

-No w___n or v___l a__t e__ts.

-A v___l a___t exists, but a wr___n a___nt is c___ry.

-A wr__n o__r e__s but is conditional upon s_e to end us___ (such as a consignment sale).

-A w___n o___r e___s but contains a right of return.

-A w___n o___r exists, but a s___ l___r a__s the t__s in ways that el___e the re____d el___s for an a___nt.

-The transaction is with a re___ p__ty, the fact of which has n__been di___d

Answer 189

-No written or verbal agreement exists.

-A verbal agreement exists, but a written agreement is customary.

-A written order exists but is conditional upon sale to end users (such as a consignment sale).

-A written order exists but contains a right of return.

-A written order exists, but a side letter alters the terms in ways that eliminate the required elements for an agreement.

-The transaction is with a related party, the fact of which has not been disclosed

Question 190

Delivery Has Not Occurred or Services Have Not Been Rendered

• Shipment has n__ been made and the c___a for recognizing re___e on “bi__-and-h___d” transactions has n__ been m__t
• Shipment has been made n__ to the customer but to the se___s a___t, to an in__er, or to a pu___c warehouse
• Some but n__ all of the components r___ed for o___n were s___ed
• Items of the w___g specification were s___ed

Answer 190

• Shipment has not been made and the criteria for recognizing revenue on “bill-and-hold”
  transactions has not been met
• Shipment has been made not to the customer but to the seller’s agent, to an installer, or to a public warehouse
• Some but not all of the components required for operation were shipped
• Items of the wrong specification were shipped

Question 191

Delivery Has Not Occurred or Services Have Not Been Rendered

• Delivery is n___ co___ete until ins___on and cu___er t__g and ac___e has occ___ed
• Se__s have n__ been p___d at all
• Services are being performed over an e___ed period, and only a p___n of the service rev__es should have been recognized in the c___nt period
• The mix of g___s and s___es in a contract has been m___ed in order to i___ly ac___ r___e recognition

Answer 191

• Delivery is not complete until installation and customer testing and acceptance has occurred
• Services have not been provided at all
• Services are being performed over an extended period, and only a portion of the service
  revenues should have been recognized in the current period
• The mix of goods and services in a contract has been misstated in order to improperly accelerate revenue recognition

Question 192

The Seller’s Price to the Buyer Is Not Fixed or Determinable

• The p___ is contingent on some f___e e___nt(s)
• A s___e or m___hip f__ is subject to u___ble c___ion during the co___t p__d

Answer 192

• The price is contingent on some future event(s)
• A service or membership fee is subject to unpredictable cancellation during
  the contract period

Question 193

The Seller’s Price to the Buyer Is Not Fixed or Determinable

• The transaction includes an option to e___e the p___ct for others
• Payment terms are e___ed for a s___l period and additional d___ts or up__es may be required to i___ continued u__ and
  pa___ as opposed to switching to alt___e p___s

Answer 193

• The transaction includes an option to exchange the product for others
• Payment terms are extended for a substantial period and additional discounts or upgrades may be required to induce continued use and
  payment as opposed to switching to alternative products

Question 194

Collectability Is Not Reasonably Assured

• Co____n is contingent on some fu___ e___(s)
• The customer d__ n__ have the a___y to p___

Answer 194

• Collection is contingent on some future event(s)
• The customer does not have the ability to pay

Question 195

What are the 2 methods of long term contracts?

-co___d contract method

-p___e of c___n method

Answer 195

-completed contract method

-percentage of completion method

Question 196

Long Term Contracts

Completed contract method

o Does n__ r___rd r__ue until completion of the project is ___% complete

o Co____n costs are held in an i____ry account until co____n of the project

Answer 196

o Does not record revenue until completion of the project is 100% complete

o Construction costs are held in an inventory account until completion of the project

Question 197

Long Term Contracts

Percentage of completion method

o Recognizes re___s and e___s as m___le progress on a project is made

o V____e to m___on

o Used to pr___ly recognize rev___s and c__al contract ov___s

Answer 197

o Recognizes revenues and expenses as measurable progress on a project is made

o Vulnerable to manipulation

o Used to prematurely recognize revenues and conceal contract overruns

Question 198

Channel Stuffing

Another difficult area of revenue recognition is channel stuffing, which is also known as 1) tr____e l____g

This refers to the 1.1) s___e of an un___ l__ (and 2) u___ry) quantity of a product to 3) di___s/r___rs, who are encouraged to 4) o___y through the use of deep 5) di___ts and/or ex__d p__nt t__s.

Answer 198

1) trade loading
1.1) sale of an unusually large
2) unnecessary
3) distributors/retailers
4) overbuy
5) discounts and/or extended payment terms.

Question 199

Channel Stuffing

• At___ in industries with h___ g__s m___
• S___ from n__t p__d’s s__s
• Raises q___ns about col__y of a___s re__ble

Answer 199

• Attractive in industries with high gross margins
• Steals from next period’s sales
• Raises questions about collectability of accounts receivable

Question 200

Recording Expenses in the Wrong Period

• Timely recording of expenses is often co___d due to pre___s to meet b___t p___ns and g__s
• As the expensing of certain costs is p___d into periods other than the ones in which they actually occur, they’re n__ pr___y m___d against the in__ that they help p___e

Answer 200

• Timely recording of expenses is often compromised due to pressures to meet budget projections and goals
• As the expensing of certain costs is pushed into periods other than the ones in which they actually occur, they’re not properly matched against the income that they help produce

Question 201

Red Flags Associated with Timing Differences

• Rapid gr___h or u__al p__y co___d to other c___es in the industry
• In___y to generate c___h fl___s from operations while reporting e___gs
• Sig___t, u___al, or h__y co___x transactions
• U___l in___e in gross margin or margin in excess of industry peers
• Unusual gr___h in the number of days’ sales in receivables
• Unusual d__ne in the number of d__s’ p___s in accounts pa__

Answer 201

• Rapid growth or unusual profitability compared to other companies in the
  industry
• Inability to generate cash flows from operations while reporting earnings
• Significant, unusual, or highly complex transactions
• Unusual increase in gross margin or margin in excess of industry peers
• Unusual growth in the number of days’ sales in receivables
• Unusual decline in the number of days’ purchases in accounts payable

Question 202

Concealed Liabilities and Expenses

• Significant impact on re___ e____s
• E___r to commit than f___ng s___ tr___s

Answer 202

• Significant impact on reported earnings
• Easier to commit than falsifying sales transactions

Question 203

Concealed Liabilities and Expenses

Three common methods for concealing liabilities and expenses

1. L___ty/e___se o___ns
2. Ca___ed expenses
3. F___re to d___se w___ty c
   __s and li__es

Answer 203

1. Liability/expense omissions
2. Capitalized expenses
3. Failure to disclose warranty costs and liabilities

Question 204

Out of the 3 methods to conceal liabilities and expenses, which one is the easiest method to conceal liabilities and expenses?

1. Liability/expense omissions
2. Capitalized expenses
3. Failure to disclose warranty costs and liabilities

Answer 204

1. Liability/expense omissions

Question 205

1. Liability/expense omissions

• Among the most 1) di___lt fi___al s___nt schemes to u__r
• Perpetrators often believe they can 2) co___l their fraud in f___e periods

Answer 205

1) difficult financial statement schemes to uncover

2) conceal their fraud in future periods

Question 206

Define Capitalized Expenses

• Costs that provide a 1) be___t to a company o___r m__e than o___ accounting period
• 2) O___e in___e in c__nt period, u____e in___e in su___nt periods

Answer 206

1) benefit to a company over more than one
2) Overstate income in current period, understate income in subsequent
periods

Question 207

Capitalized Expenses

Expensing capital expenditures

o M___e i__e in current year for t__ c___ons
o I___se i___e in f___e periods

Answer 207

o Minimize income in current year for tax considerations
o Increase income in future periods

Question 208

Improper Disclosures

• Disclosures are supposed to 1) p____t u___r of financial statements from being m___d

Answer 208

1) prevent user of financial statements from being misled

Question 209

Improper Disclosures

Improper disclosures relating to financial statement fraud:

o Li___y o___s
o S____t events
o M____nt fraud
o Related-p____y transactions
o Ac____g c___es

Answer 209

o Liability omissions
o Subsequent events
o Management fraud
o Related-party transactions
o Accounting changes

Question 210

Liability Omissions

What are 2 types of typical omissions?

-the f___e to d___se lo___ covenants
-co___nt li___es

Answer 210

-the failure to disclose loan covenants
-contingent liabilities

Question 211

Liability Omissions

Define failure to disclose loan covenants

o Ag____ts that bo___er has promised to keep as long as fi____g is in place

o R___o li___s or r___ons on other fi___al ag___nts

Answer 211

o Agreements that borrower has promised to keep as long as financing is in place

o Ratio limits or restrictions on other financial agreements

Question 212

Liability Omissions

Define failure to disclose contingent liabilities

Potential liabilities that will 1) ma____ze only if ce__n e__s occur in the fu___

Answer 212

1) materialize only if certain events occur in the future

Question 213

Define Subsequent Events

Events 1) oc___g or becoming k___n that may have si___nt effect on financial statements

Answer 213

1) occurring or becoming known that may have significant effect on
financial statements

Question 214

Subsequent Events

• Should be d____d
• Fraudsters often avoid dis___g c___rt ju___nts
• p___c re___d s___es often reveal this information

Answer 214

• Should be disclosed
• Fraudsters often avoid disclosing court judgments
• Public record searches often reveal this information

Question 215

Management Fraud

• Must disclose fraud committed by of__s, e___s, and others in p___n of t___t
• Wit____g such information likely involves l___g to a___rs, an i__al act

Answer 215

• Must disclose fraud committed by officers, executives, and others in
  position of trust
• Withholding such information likely involves lying to auditors, an illegal act

Question 216

Improper Asset Valuation

• Mi____n of l___-t__m assets as cu____t assets

Answer 216

Misclassification of long-term assets as current assets

Question 217

Improper Asset Valuation

• Improper asset valuation categories

o In___y v___on
o Ac____s re___le
o B___s co____ons
o Lo___-t___m as___s

Answer 217

o Inventory valuation
o Accounts receivable
o Business combinations
o Long-term assets

Question 218

Inventory Valuation

Since inventory must be valued at the 1) a___on cost, except when the cost is determine0d to be 2) hi___r than the 3) c___t market value, inventory should be written down to its current value, or 4) w___n o__ altogether if it has no value

Answer 218

1) acquisition
2) higher
3) current
4) written off

Question 219

Inventory Valuation

Inventory can also be improperly stated through the manipulation of the

-p___al in____y count
-by inf___g the unit costs used to p___e in____y
-by f____g to r___ce in___ry for c__ts of g___s s___
-or by other methods

Answer 219

-physical inventory count
-by inflating the unit costs used to price inventory
-by failing to reduce inventory for costs of goods sold

Question 220

Inventory Valuation

One of the most popular methods of overstating inventory is through fictitious (1) p____) inventory

Answer 220

(1) phantom)

Question 221

Accounts Receivable

The two most common schemes involving accounts receivable are

-fi____s r___le

-f____e to w__e o___ accounts receivable as b__ d___s (or f____e to establish an a___te al___e for b__ d___s).

Answer 221

-fictitious receivable

-failure to write off accounts receivable as bad debts (or failure to establish an adequate allowance for bad debts).

Question 222

Accounts Receivable

Accounts receivable should be reported at 1) n__ r___ble v___e, that is, the amount of the receivable 2) l__ am___s ex____ n__ to be c___d.

Answer 222

1) net realizable value
2) less amounts expected not to be collected.

Question 223

Fictitious accounts receivable

o Common at e__ of accounting period

o F___ co___ns of balances to auditors

Answer 223

o Common at end of accounting period

o False confirmations of balances to auditors

Question 224

Failure to write down

o Required to accrue lo__s on un____e re___es
-Financial Accounting Standards Board Statement No. 5

o Record impairment of long-lived as___s and g___ll
-Statement of Financial Accounting Standards No. 144
-Statement of Financial Accounting Standards No. 142

Answer 224

o Required to accrue losses on uncollectible receivables
-Financial Accounting Standards Board Statement No. 5

o Record impairment of long-lived assets and goodwill
-Statement of Financial Accounting Standards No. 144
-Statement of Financial Accounting Standards No. 142

Question 225

Business Combinations

• Required to allocate purchase price to t___e and i___e a___s
• Changes in g_____ll accounting

Answer 225

• Required to allocate purchase price to tangible and intangible assets
• Changes in goodwill accounting

Question 226

Long Term Assets

Booking fictitious assets
o One of the 1) e__st methods of 2) as___ mi___ion is the recording of 3) fi___us
assets

o Because company assets are often physically found in many different 4) lo___ns, this
fraud can sometimes be easily 5) o___ed

Answer 226

1) easiest
2) asset misrepresentation
3) fictitious
4) locations
5) overlooked

Question 227

Long Term Assets

Misrepresenting asset value

o Long-lived assets should be recorded at 1) c___

o Many financial statement frauds have involved the reporting of long-lived assets at
2) m__t v___s instead

Answer 227

1) cost
1) cost

Question 228

Long Term Assets

Understating assets

o In some cases, it may be 1) ad___us to u____e assets

o Can be done directly or through improper 2) de____n

Answer 228

1) advantageous to understate
2) depreciation

Question 229

Long Term Assets

Capitalizing nonasset cost

o 1) E____d from the cost of a purchased asset are 2) i___st and fi___e charges

o Should be charged to 3) i____t e___e

Answer 229

1) Excluded
2) interest and finance
3) interest expense

Question 230

Long Term Assets

Misclassifying assets

o Assets are sometimes misclassified into 1) g___al le___r accounts in which they do not belong

o 2) m___on can skew financial 3) ra___s and h___ in complying with loan covenants or other borrowing requirements

Answer 230

1) general ledger
2) manipulation
3) ratios and help

Question 231

Red Flags Associated with Improper Asset Valuation

• Recurring n____e cash flows from operations or an i____ty to ge___e cash flows from operations while reporting e___s and earnings g___
• Significant d___s in c____r demand and increasing business f_____s in
  either the i___y or the overall economy
• Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective j____s or u___s that are di__t to corroborate
• N____l management’s excessive p___on in, or p____on with, the selection of accounting principles or the determination of significant estimates

Answer 231

• Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth
• Significant declines in customer demand and increasing business failures in
  either the industry or the overall economy
• Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or uncertainties that are difficult to corroborate
• Nonfinancial management’s excessive participation in, or preoccupation with, the selection of accounting principles or the determination of significant estimates

Question 232

Red Flags Associated with Improper Asset Valuation

• Unusual i___e in g___s margin or m___in excess of industry peers
• Unusual g___h in the number of d___’ s___ in re____s
• Unusual g___ in the number of days’ p____s in in____y
• Allowances for b___ d___s, excess and obsolete inventory, and similar measures that are sh____g in percentage terms or are otherwise out of line with those of their industry peers
• Unusual c___e in the relationship between long-term a___s and d____n
• A___g to a___s while competitors are re___g ca___l tied up in assets

Answer 232

• Unusual increase in gross margin or margin in excess of industry peers
• Unusual growth in the number of days’ sales in receivables
• Unusual growth in the number of days’ purchases in inventory
• Allowances for bad debts, excess and obsolete inventory, and similar measures that are shrinking in percentage terms or are otherwise out of line with those of their industry peers
• Unusual change in the relationship between long-term assets and depreciation
• Adding to assets while competitors are reducing capital tied up in assets

Question 233

What are the ways for detection of Fraudulent Financial Statement?

Schemes: Financial Statement Analysis

• V____l analysis
• H____l analysis
• R___o analysis
• Analysis of c___h f___s
• Analysis of n____ n____

Answer 233

• Vertical analysis
• Horizontal analysis
• Ratio analysis
• Analysis of cash flows
• Analysis of nonfinancial numbers

Question 234

What are the 2 types of percentage analysis?

V____l and H____l Analysis

Answer 234

Vertical and Horizontal Analysis

Question 235

Percentage Analysis

Define Vertical Analysis

a technique for analyzing the relationships between the
items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages

o Often referred to as common sizing

Question 236

Chapter 8

Question 237

Eight Steps in Considering the Risk of Fraud

1. S___ di_____
2. O___n in____n needed to identify r____
3. Id____y r___
4. A___ identified r___ and p___al s___es after co___ing in___l co___
5. R____d to the r___lt of the r___k assessment
6. E___e the au_ ev__ce
7. C___te a___ut fraud
8. Do__t pr___ures undertaken in s__s
   _ to __

Answer 237

1. Staff discussion
2. Obtain information needed to identify risks
3. Identify risks
4. Assess identified risks and potential schemes after considering internal controls
5. Respond to the result of the risk assessment
6. Evaluate the audit evidence
7. Communicate about fraud
8. Document procedures und

Question 238

Documentation of the Procedures Undertaken in Steps 1 through 7

a. S___f di__n
b. Inf____n used to id___y the ri__ of fraud
c. Any fraud r____s id___
d. The ri__ as___d a___r considering pr___s and co___ls
e. R___ts of assessment of fraud risk
f. E___n of audit e____e
g. C____on requirements

Answer 238

a. Staff discussion
b. Information used to identify the risk of fraud
c. Any fraud risks identified
d. The risks assessed after considering programs and controls
e. Results of assessment of fraud risk
f. Evaluation of audit evidence
g. Communication requirements

Question 239

The Role of the External Auditor

The perception of the public—particularly with regard to asset misappropriation, corruption, and misstated financial statements—is that independent auditors are responsible for 1) f___ d___on.

Answer 239

1) fraud detection.

Question 240

The Role of the External Auditor

However, an auditor’s responsibility, according to 1) ge____y ac___ ___ng st___s (GAAS), is to provide reasonable 2) as___e that the financial statements are 3) f___e from m___al mis__nt whether caused by e___or fr___d

Answer 240

1) generally accepted auditing standards
2) assurance
3) free from material misstatement whether caused by error or fraud

Question 241

The difference between the public’s perception of the role of the auditor and the role that audit professionals actually serve has led to an 1) “expectations gap.”

Answer 241

1) “ex___ons g__.”

Question 242

Define Earnings Management

1) De___e actions by m____nt to meet s___ic ea___s ob___es for p___e g____

Income smoothing is a specific type of earnings management whereby revenues or expenses are shifted between periods to minimize naturally occurring year-to-year fluctuations in net income

Answer 242

1) Deliberate actions by management to meet specific earnings objectives for private gain

Question 243

What are the responsibilities of the board of directors?

The board of directors and/or an audit committee, if one exists, has a primary responsibility to

-o____e m____nt
-direct the i____al a___it
-direct the e___l a___or with regard to the organization’s 1) i___al co___s over fi___al re___ng and the company’s i___al co___ pr____ses

Answer 243

-oversee management
-direct the internal audit -direct the external

1) internal controls over financial reporting and the company’s internal control processes

Question 244

One of the central duties of the audit committee with regard to fraud and fraudulent financial reporting is to carefully assure

—with the assistance of the organization’s 1) in___l a____t st___e—

that management has 2) a____y assessed the risk of i____al c___l o___de or col___n among t__-l___l ma___rs and e___es that may lead to 3) a___t mi___n, c___n, or fraudulent fi___al s___s.

Answer 244

1) internal audit structure
2) adequately assessed the risk of internal control override or collusion
3) asset misappropriation, corruption, or fraudulent financial statements.