Mid-term Flashcards
It is the_____ and _____of existing controls, not the _____of controls, that allows most frauds to be perpetrated.
overriding, ignoring, lack
Which of the following is not a proactive way for a company to eliminate fraud opportunities?
a. Severely punishing fraud perpetrators.
b. Implementing appropriate preventive and detective controls.
c. Creating widespread monitoring of employees.
d. Assessing risks.
a. Severely punishing fraud perpetrators.
“Predication of fraud” is defined as:
c. Reasonable belief that fraud has occurred or is occurring.
Which of the following is not a common type of fraud?
a. Direct employee embezzlement.
b. Executives embezzling from petty cash.
c. Investment scams.
d. Employee bribes.
b. Executives embezzling from petty cash.
Civil law performs which of the following functions?
a. Monetary fines for federal damages.
b. Remedy for violations against society as a whole.
c. Punishment for guilt “beyond reasonable doubt.”
d. Remedy for violation of private rights.
d. Remedy for violation of private rights.
Which of the following is an example of legitimate power?
a. Your boss tells you to do something.
b. The offer of valuable stock options.
c. You do something because your colleague is more knowledgeable than you are in that particular subject matter.
d. A decision to participate in fraud based upon fear.
a. Your boss tells you to do something.
Which of the following is not a common vice that motivates people to commit fraud?
a. Gambling.
b. Drugs.
c. Expensive extramarital relationships.
d. Alcohol.
e. All of these are vices that motivate people to commit fraud.
e. All of these are vices that motivate people to commit fraud.
Fraud fighting can include which of the following type(s) of careers?
a. Professors.
b. Lawyers.
c. CPA firms.
d. All of these.
d. All of these.
Which of the following is not one of the three elements of the fraud triangle?
a. Rationalization.
b. Perceived pressure.
c. Intelligence.
d. Perceived opportunity.
Intelligence
Because of the ability to override internal controls, it is usually most difficult to prevent which type of fraud?
b. Fraud committed by a company president.
Who generally has the highest risk of becoming a fraud victim?
a. Businessperson.
b. College students.
c. None of the above.
d. Older, less educated people.
d. Older, less educated people.
“The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” is the definition of which of the following types of fraud?
a. Employee embezzlement or occupational fraud.
b. Vendor fraud.
c. Investment scams.
d. Management fraud
a. Employee embezzlement or occupational fraud.
Drawbacks to establishing a hotline for employees to report fraud include all of the following except:
a. This method for finding fraud is outdated.
b. Some symptoms reported are caused by non-fraud factors.
c. Many incidents reported are hoaxes motivated by grudges and other non-fraud reasons.
d. The expense of having a hotline.
a. This method for finding fraud is outdated.
The best argument for taking legal action against fraud perpetrators is:
a. Prosecution of perpetrators is a way to keep lawyers busy.
b. Prosecution of perpetrators discourages future occurrences of fraud.
c. Legal action usually results in positive publicity for the company.
d. Huge cash settlements from prosecuting fraud are an excellent source of revenue.
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b. Prosecution of perpetrators discourages future occurrences of fraud.
Which of the following is the least reliable resource for fraud statistics?
a. Fraud perpetrators.
b. Health agencies.
c. FBI agencies.
d. Insurance organizations.
a. Fraud perpetrators.
Factors that are usually associated with high levels of employee fraud include all of the following except:
a. Perceived inequalities in an organization.
b. Negative feedback and lack of recognition of job performance.
c. High turnover and absenteeism.
d. Long and difficult hours shared equally by everyone in the organization.
d. Long and difficult hours shared equally by everyone in the organization.
Opportunities to commit fraud can be eliminated by identifying sources of fraud, by implementing controls, and through independent checks. One other effective way of eliminating opportunities is:
a. Terminating and punishing employees who commit fraud.
b. Failing to terminate or punish employees who commit fraud.
c. Identifying indicators of fraud or red flags.
d. Teaching employees to monitor and report fraud.
d. Teaching employees to monitor and report fraud.
Future careers in fraud will most likely be:
a. In low demand.
b. In moderate demand.
c. Low paying.
d. In high demand and financially rewarding.
d. In high demand and financially rewarding.
On what element of the fraud triangle do most fraud-fighters usually focus all or most of their fraud preventive efforts?
a. Perceived opportunity.
b. Power structure.
c. Rationalization.
d. Perceived pressure.
a. Perceived opportunity.
Which of the following is not an internal control activity (procedure)?
a. System of authorizations.
b. Appropriate hiring procedures.
c. Independent checks.
d. Documents and records.
e. All of the above are internal control activities.
b. Appropriate hiring procedures.
According to the text, when one Fortune 500 company changed its stance on fraud from “The CEO is to be informed when someone is prosecuted for fraud” to “The CEO is to be informed when someone who commits fraud is not prosecuted,” the number of frauds in the company decreased significantly.
Fraud research has consistently shown that legal action has been taken against perpetrators who commit fraud against organizations in more than 90 percent of fraud cases.
False
Nancy is the receptionist and office manager at a local doctor’s office where you are working as a doctor’s assistant. The doctor leaves Nancy to handle all office duties, including collecting cash receipts, billing patients, depositing checks, and the monthly bank reconciliation. The doctor doesn’t have any training in accounting or collecting insurance payments and wants to be able to focus on treating his patients. Because the work in the office doesn’t require an additional employee, Nancy has been given all office managing responsibility. The receptionist could share the office managing duties, but she is too busy greeting patients, pulling charts, and answering phone calls. Nancy is also a single mother of four. She likes to give her children the best possible care and enjoys having the finer things of life to the extent that she can afford them. Nancy also works a second job because her job as office manager “just never seems to pay the bills.”
Most patients visiting the doctor have insurance and are only required to pay a co-payment for the services that they receive. As you are filling out some patient information during a routine visit, you overhear the patient say to her husband. “Honey, do you have any cash with you today? This office prefers the copayment to be paid in cash and I have forgotten to stop by the ATM this morning.” You thought that this was an interesting comment because you had never heard of the office having a cash co-payment preference. In addition, you haven’t seen a written sign or ever heard that the doctor prefers cash co-payments. You are aware that in addition to a co-payment, Nancy bills the entire remaining cost of service. The remaining amount is then billed directly to the patient. As you have been filing patient records, you have often heard Nancy complain that “full payment cannot be collected from yet another patient.” You are aware that several accounts are written off each month due to the high amount of uncollectible accounts. A high percentage of bad debts seems to be a common and expected occurrence in the physician/ patient business. You are currently taking a fraud class and realize that several opportunities for fraud exist.
Which of the following control activities or procedures would be most effective in reducing the risk of fraud in this situation?
a. Documents and records.
b. System of authorizations.
c. Segregation of duties.
d. Physical safeguards.
c. Segregation of duties.
You are the owner of a local department store in a small town. Many of your employees have worked for your company for years, and you know them and their families very well. Because your business is relatively small, and because you know your employees so well, you haven’t worried about establishing many internal controls. You do set a good example for how you wish your employees to work, you are actively involved in the business, and you provide adequate training to new employees. One day, you become suspicious about an employee at a checkout desk. You fear that he may be stealing from the company by altering the day’s totals at his register. He has worked for you for 15 years, and he has always been honest and reliable. After several weeks of investigation, you discover that your fears are correct—he is stealing from the company. You confront him with the evidence, and he admits to stealing $25,000 over several years. He explains that, at first, he stole mainly to pay for small gifts for his wife and young children, not for himself. But then last year, his wife lost her job, they had another child, and he wasn’t sure how to pay all of the bills, so he took more money, which he intended to repay.
What elements of fraud are present in this case?
a. Opportunity and pressure. b. Pressure, motivation, and opportunity. c. Opportunity and rationalization. d. Pressure, opportunity, and rationalization.
d. Pressure, opportunity, and rationalization.
Peter Jones, a senior accountant, and Mary Miller, a junior accountant, were the only accountants for XYZ Company, a medium-sized business. Peter had been with the company for over four years and was responsible for the Purchasing Department. Mary had been working at the company for a little over five years, and she had neither applied for a vacation nor taken any days off in the last three years. She was responsible for cash receipts and disbursements. She also collected the cash from the cash register, counted it and matched it with cash register receipts, made a record of daily receipts, and then put the money in the safe. Once a week, she would take the paperwork to her supervisor, Susan Lowe, one of the managers, who would check it. Mary later resigned from the company. At the time of her resignation, Peter was asked to handle Mary’s responsibilities while the company looked for a person to replace her. Peter soon realized that there had been some manipulation of accounting records and embezzlement of funds. Investigations revealed that approximately $30,000 had been stolen.
What could the management of XYZ Company have done to prevent Mary’s embezzlement or to detect the fraud earlier?
a. Require Mary to take vacation time each year. b. Implement appropriate preventive and detective controls. c. Communicate to employees what behavior is expected of them and the consequence of committing fraud. d. All of these actions could have been taken to prevent Mary's fraud.
d. All of these actions could have been taken to prevent Mary’s fraud.
You have recently graduated from college with an MBA. Upon graduation, you start working for Roosevelt Power Plant. The boss, Mr. Jones, invites you into his office. Mr. Jones describes to you a large fraud that has recently taken place in the company. He asks you what actions should be taken to ensure that fraud does not occur again. After analyzing the company, you compile a list of actions that will be needed to prevent fraud from occurring again. Upon presenting the necessary steps and controls to be taken, Mr. Jones notices your suggestion: “Create a culture of honesty and create a positive work environment for employees.” Mr. Jones is enraged and wants to know what a positive work environment has to do with the prevention and detection of fraud.
Which of the following factors detracts from a positive work environment?
a. Organizational focus on long-term market share. b. Vertical communication within an organization. c. Lack of clear organizational responsibilities. d. Highly detailed budget expectations.
c. Lack of clear organizational responsibilities.
The chapter stressed that fraud prevention, fraud detection, and investigation are approaches used by organizations to mitigate losses from fraud.
Fraud prevention is more cost effective than fraud detection or investigation.
True
“But I intended to pay it all back, I really did,” Joseph Swankie said as he talked to his manager. How did I ever get into this situation, he thought. Two years ago, Joe received the promotion for which he had been working so hard. In addition, Joe’s new manager told him that Joe had a very promising future at the company. Joe and his wife Janae quickly purchased a new home. Not long after, Joe and Janae had their fourth child, and life was great. After having their fourth child, Janae quit work to spend more time with her kids.
Suddenly, things started to turn upside down. The economy took a downturn and had a negative impact on Joe’s company. His pay, which was based on commission, was reduced nearly 50 percent. Joe still worked hard but thought he should be paid more. Unable to find another job, Joe resentfully decided he would stay with the company even with the lower pay.
Not long after he started receiving lower commissions, Joe noticed that the internal controls over the petty cash fund weren’t very strong. The records were not reviewed very often, and small shortages were usually written off. One week, Joe took $50. When questioned by his wife, Joe said he had found a few odd jobs after work. Joe continued this habit of taking small amounts for a couple of weeks. After realizing that no one had noticed the shortage, he started to take up to $100 a week.
One day, another employee noticed Joe taking some cash from the fund and putting it in his wallet. When questioned, he simply stated that it was a reimbursement the company owed him for supplies. An investigation began, and Joe’s fraud was discovered.
Two of the three elements of fraud are present in this scenario.
False - only opportunity and pressure
You are a new summer intern working for a major professional services firm. During your lunch break each day, you and a fellow intern Bob eat at a local sandwich shop. One day, Bob’s girlfriend joins you for lunch. When the bill arrives, Bob pays with a company credit card and writes the meal off as a business expense. Bob and his girlfriend continue to be “treated” to lunch for a number of days. You know Bob is well aware of a recent memo that came down from management stating casual lunches are not valid business expenses. When you ask Bob about the charges, he replies, “Hey, we’re interns. Those memos don’t apply to us. We can expense anything we want. “
Which of the following statements regarding Bob’s use of the company credit card is not true?
a. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud. b. Bob's use of the credit card is a form of asset misappropriation. c. You should encourage Bob to change his behavior and correct the fraudulent charges. d. Bob is committing occupational fraud.
a. The amount charged for the nonbusiness lunches does not meet the minimum threshold for fraud.
You are a student at ABC University. You recently read in the school’s daily newspaper about a terrific investment opportunity that promises to pay you a 44 percent annual return on your investment. Although you don’t understand the complicated nature of the investment, several of your friends are investing money. You have an extra $5,000 that you earned last summer that you would like to invest, but you are a bit skeptical about the unusually high rate of return.
An annual return of 44 percent is higher than average, but not unusual for investments that are highly complicated, suggesting that this probably is a good investment opportunity.
False
Predication refers to circumstances that would lead a reasonable professional to believe that fraud has occurred.
You should not conduct a fraud investigation without predication.
True
People will often be dishonest if they are placed in an environment of:
a. Poor controls.
b. High pressure.
c. Low integrity.
d. Loose accountability.
e. All of these.
e. All of these.
Not prosecuting fraud perpetrators is cost-effective both in the short run and the long run.
False
Which of the following is usually the most effective tool in preventing and detecting fraud?
a. Effective investigations of fraud symptoms.
b. Creating an expectation of punishment in the company.
c. Having a good system of internal controls.
d. Discouraging collusion between employees and customers or vendors.
c. Having a good system of internal controls.
A company’s control environment includes:
a. The tone that management establishes toward what is honest and acceptable behavior.
b. Corporate hiring practices.
c. Having an internal audit department.
d. All of these.
d. All of these.
A good internal control system within a company can ensure the absence of fraud.
False
Even a good system of internal controls will often not be completely effective because of fallibilities of the people applying and enforcing the controls.
True
Two of the three elements in creating a positive work environment include assistance and honesty.
True
Which of the following is not a recognized method of eliminating fraud opportunities?
a. Creating an expectation of punishment.
b. Engendering employee goodwill by having lax rules.
c. Having good internal controls.
d. Monitoring employees.
b. Engendering employee goodwill by having lax rules.
Studies show that a positive and honest work culture in a company does little to prevent fraud.
False
When fraud is committed, the problem is often not a lack of controls, but the overriding of existing controls by management and others.
True
Which of the following is the typical fraud model that describes most firms?
a. Fraud incident, investigation, action, resolution.
b. Fraud incident, assessing risk, investigation, reporting.
c. Assessing risk, fraud incident, investigation, resolution.
d. Assessing risk, investigation, implementing a fraud program, reporting.
a. Fraud incident, investigation, action, resolution.
Which of the following factors contribute to creating a corporate culture of honesty and openness?
a. Hiring honest people.
b. Performing criminal background checks.
c. Not having an open-door policy.
d. Having a well-understood and respected code of ethics.
e. Both hiring honest people and having a well-understood and respected code.
f. All of these.
e. Both hiring honest people and having a well-understood and respected code.
The major role of employee assistance programs is to help employees recover from the damaging psychological effects of fraud.
False
Which of the following factors generally results in a high-fraud environment?
a. Hiring honest people.
b. Providing an EAP.
c. Autocratic management.
d. Both hiring honest people and providing an EAP.
c. Autocratic management.
