Fraud Prevention Programs

Question 1

Managers should be instructed to observe employees’ lifestyles for warning signs of fraud, and employees should know that supervisors are watching for unexplained or suspicious anomalies of this nature.
T/F

Answer 1

True
It is common for employees who steal to use the proceeds for lifestyle improvements. Some examples include more expensive cars, extravagant vacations, expensive clothing, new or remodeled homes, expensive recreational property, and outside investments. Managers should be educated to be observant of these signs. To further increase the deterrent effect, employees should know that supervisors are watching for unexplained or suspicious anomalies of this nature.

Question 2

Unless specific unacceptable conduct is detailed in a fraud prevention policy, there can be legal problems in discharging a dishonest employee. T/F

Answer 2

True
Many companies have learned that it is best to spell out specific unacceptable conduct in a fraud prevention policy. If the type of conduct that is considered unacceptable is not accurately detailed, there might be legal problems in discharging a dishonest employee. Check with legal counsel regarding any legal considerations with respect to a fraud policy. One of the most important legal considerations is to ensure everyone and every allegation is handled in a uniform manner.

Question 3

For analytical procedures performed during an audit to be most effective in uncovering fraud, the scheme must materially impact the financial statements. T/F

Answer 3

True
Some internal fraud is discovered as a result of analytical procedures performed during a financial statement audit. To uncover fraud using such techniques, however, the scheme must materially impact the financial statements. Auditors should be especially mindful of the following trends:
• Increasing expenses
• Increasing cost of sales
• Increasing receivables/decreasing cash
• Increasing inventories
• Increasing sales/decreasing cash
• Increasing returns and allowances
• Increasing sales discounts

Question 4

Which of the following should be covered in employee anti-fraud training?

A. A detailed explanation of the company’s anti-fraud controls

B. Examples of past transgressions and how they were handled

C. The exact procedures management uses to detect fraud

D. All of the above

Answer 4

B. Examples of past transgressions and how they were handled

The content covered by the organization’s anti-fraud programs should focus on the specific risks faced by the organization to provide employees with practical, implementable knowledge. However, it should not give employees the information they need to “beat the system” by explaining the details of controls and procedures used to detect fraud. In that regard, the following topics form the basis of an effective program:
• What fraud is, including examples of what behavior is acceptable and what is not
• How fraud hurts the organization
• How fraud hurts employees
• Common characteristics that lead individuals to commit fraud (i.e., pressure, opportunity, and ability to rationalize the act)
• How to identify fraud (i.e., specific examples of financial, transactional, behavioral, and other red flags to watch for)
• How to report fraud
• The punishment for dishonest acts, including examples of past transgressions and how they were handled

Question 5

An entity’s corporate culture is most effectively assessed using a checklist of initiatives to make sure all the elements of a strong tone at the top are in place. T/F

Answer 5

False
A strong corporate culture can most often be observed by its outcome, rather than by any individual component. Fostering a culture of ethics and compliance runs deeper than simply implementing a checklist of initiatives; similarly, a culture of corruption can exist even in companies with seemingly sound policies in place.

Question 6

Most experts agree that it is much easier to detect fraud than it is to prevent it. t/f

Answer 6

f

Question 7

Of the following, which is the most effective method of preventing fraud?
A. Screening employees INCORRECT
B. Having an open-door policy
C. Increasing the perception of detection
D. Conducting covert audits

Answer 7

C

Question 8

Management of Blue Top, Inc. is implementing a formal background check policy for its employees. Which of the following is NOT a best practice that it should implement as part of this initiative?
A. Check the background of any employee who will have constant access to cash, checks, and credit card numbers.
B. Ask a candidate’s previous employers whether the individual is eligible for rehire.
C. Run a background check on existing employees who are being promoted or moved to positions that include access to easily stolen assets.
D. Place a low priority on checking professional references, since most people won’t provide a bad reference.

Answer 8

D