Topic 5 Data Driven Fraud Detection

Question 1

Fraud is best detected through financial statements by focusing on:
a. Unexplained changes in financial statement balances.
b. Consistencies.
c. Intuition.
d. Management’s behavior when financial state-ments are released.

Answer 1

a)

Question 2

A detection method that focuses on the kinds of frauds that can occur and then uses technology to determine whether those frauds actually exist is called:
a. Fishing fraud detection.
b. Data mining.
c. Data-driven fraud detection.
d. Benford’s Law.
7

Answer 2

c)

Question 3

When vertical analysis is performed:
a. Ratios are used to detect fraud.
b. Changes in significant balance totals are examined.
c. Financial statement balances are converted to percentages.
d. Total revenues are compared to total expenses

Answer 3

c)

Question 4

Which of the following ratios can be used to assess a company’s solvency?
a. Current ratio
b. Return on assets’
c. Times-interest-earned ratio
d. Inventory turnover

Answer 4

C)

Question 5

Once a buyer starts accepting kickbacks from a supplier:
a. Prices often increase.
b. Purchases from other vendors often decrease. c. The supplier usually takes control of the pur-chasing relationship.
d. All of the above.

Answer 5

d)

Question 6

Kickbacks from vendors to buyers might
generate which one of the following
symptoms?
a. Buyer not relating well to other
buyers and vendors
b. Decreasing purchases from favored
vendorI
c. Increasing purchases from other
vendors
d. Decreasing prices and increasing quality

Answer 6

a)

Question 7

Which of the following is the most important step in data analysis?
a. Gathering the right data in the right format in the right time period
b. Understanding the available data
c. Learning the basics of table structure and field types
d. Learning the basics of key relationships and query syntax

Answer 7

A)

Question 8

T or F: Digital analysis using Benford’s Law can be per-formed on databases of any size.

Answer 8

True

Question 9

T or F: When using Benford’s Law, potential suspects are less likely to know you are trying to detect fraud than if you use more direct detection techniques.

Answer 9

True

Question 10

Which of the following is true of most accounting errors?
a. They are primarily caused by lack of training.
b. They represent intentional sabotage of controls.
c. They are problems caused by failures in systems, procedures, and policies.
d. They represent fraud.

Answer 10

c)

Question 11

______ are at wo-dimensional view with cases in one dimension and the calculations in the other.
a. N-grams
b. Z-scores
c. Pivot tables
d. Soundex algorithms

Answer 11

C)

Question 12

Specific implementations of delimited text are called TSV. What does TSV stand for?
a. toxicity screening value
b. time segmented volume
c. tab separated values
d. tactical secure voice

Answer 12

C)

Question 13

If a search reveals that an employee and a vendor have the same telephone number, this result may indicate that:
a. Vendors are overcharging for goods purchased. b. Employees may be establishing dummy vendors.
c. Contractors are billing at the wrong rates.
d. A vendor is receiving kickbacks or other favors.

Answer 13

b)

Question 14

Which of the following is similar to ACL and is ACL’s primary competitor?
a. Picalo
b. IDEA
c. MicrosoftOffice + ActiveData
d. Z-score

Answer 14

B)

Question 15

Which of the following statements is NOT true?
a. Accounting errors are usually spread evenly throughout a data set.
b. Traditional auditing methods are more suited to finding errors than fraud.
c. Accounting anomalies indicate fraud has occurred or is occurring.
d. Fraud investigation involves determining who committed the fraud, the schemes used, and how much money or assets were taken.

Answer 15

c)

Question 16

While using n-grams, a match percentage of ________ or ________ generally indicates very similar values.
a. 10 percent, smaller
b. 20 percent, greater
c. 5 percent, smaller
d. 40 percent, greater

Answer 16

b)

Question 17

T or F: Data-driven analysis uses the company’s database to search for normal relationships between numbers.

Answer 17

False: CFE’s are looking for unusual numbers and patterns

Question 18

Which of the following is an advantage of using data analysis software to detect fraud?
a. It is a static approach, and results cannot be recombined in different ways.
b. Data analysis software can only be used to analyze small data sets.
c. Data analysis software can analyze entire populations rather than just samples.
d. Significant numbers of hits can occur, requiring iterative refinement of analyses.

Answer 18

c)

Question 19

A red flag search to detect kickbacks would include:
a. invoices without valid purchase order.
b. employee and vendor telephone numbers are the same.
c. purchase orders with zero dollar amounts by buyer.
d. price increases greater than 20% for several consecutive years

Answer 19

D)

Question 20

The proactive method of fraud detection is a six-step process . Which of the following is the correct process
sequence?
a. Identify possible frauds that could exist; catalog possible fraud symptoms; understand the business ;use technology to gather data about symptoms; automotive detection procedures ; analyzeresults; and investigate symptoms
b. Catalog possible fraud symptoms; understand the business; identify possible frauds that could exist; analyze
results; use technology to gather data about symptoms; and investigate symptoms
c. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; investigate
symptoms; use technology to gather data about symptoms; and analyze results
d. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; use
technology to gather data about symptoms; analyze results; and investigate symptoms

Answer 20

d)

Question 21

Which of the following statements is true about ODBC?
a. It allows use of the powerful SQL language for searching and filtering data.
b. It is generally slower and less robust than text files.
c.IT departments are very comfortable in giving out ODBC connections.
d. It is an application level setting rather than a system-wide setting.

Answer 21

A)

Question 22

From the select balance sheet items
below, calculate the quick ratio.
Item Amount Item Amount
Cash $20,000 Accounts payable
$11,000
Notes receivable 15,000 Wages payable 5,000
Stock 5,000 Retained earnings 20,000
Inventory 6,000 Notes payable
8,000
a. 0.83
b. 1.25
c. 1.63
d. 1.08

Answer 22

B)

Question 23

The most obvious disadvantage of the data-driven approach is:
a. Databases are very large and often cannot be analyzed using analysis packages like ACL, IDEA, or ActiveData.
b. High cost.
c. The decrease in employee morale.
d. None of the above.

Answer 23

b)

Question 24

When deciding which detection method to use, it is important to:
a. Determine the advantages and disadvantages of each approach.
b. Identify the costs involved.
c. Determine which method will meet the client’s
objectives.
d. All of the above.

Answer 24

d)

Question 25

T or F: Data-driven fraud detection can pay large dividends and is an effective way to reduce the cost of fraud in any organization.

Answer 25

True

Question 26

For enhanced data analysis, which of
the following is a good option for users who want a familiar interface and
a less expensive alternative to ACL and IDEA?
a. ActiveData
b. Pearl
c. DataSource
d. Excel

Answer 26

a)

Question 27

T or F: Vertical analysis is a useful detection technique because percentages are easily understood.

Answer 27

True

Question 28

Which of the following records data for each case in a graph and analyzes the slope?
a. summarization analysis
b. time trend analysis
c. fuzzy matching method
d. cross tables method

Answer 28

B)

Question 29

According to Benford’s Law, the first digit of random data sets will most often begin with which number?
a. 7
b. 1
c. 3
d. 4

Answer 29

B)

Question 30

When conducting financial statement analysis, which ratio will be the most useful in determining whether a company has erroneously inflated accounts receivable?
a. Current ratio.
b. Profit margin.
c. Accounts receivable turnover.
d. Debt percentage.

Answer 30

c)

Question 31

T or F: Unusual patterns always indicate the existence of fraud.

Answer 31

False: ususual patterns might be caused by non fraud factors

Question 32

One of the most common errors investigators make when analyzing time trends is:
a. incorrect data preparation.
b. focusing only on one variable, time (the x -axis if graphed). V
c. not monitoring the time taken.
d. not standardizing for time.

Answer 32

D)

Question 33

Benford’s Law can help detect fraud by:
a. establishing weaknesses in the accounting control system.
b. identifying accounting anomalies.
c. focusing on unexplained changes.
d. identifying possible attempts by fraudsters to make stolen amounts look random

Answer 33

D)

Question 34

Identify the true statement about detecting fraud using financial statement reports.
a. Performing horizontal analysis requires converting the income statement balances into percentages of gross sales.
b. Vertical analysis is the most direct method of focusing on changes from period to period.
c. Before performing any data-driven analysis that targets fraud and corruption in financial statements, the
numbers in all three types of financial statements need to be converted to percentages.
d. Small frauds may not affect the summarized financial statements significantly enough to be detected.

Answer 34

D)

Question 35

Horizontal analysis is performed when:
a. total assets are set at 100% and all other balances are shown as a percentage of total assets.
b. financial statement data are shown for two periods with the amount and percentage of change for each line
item.
c. there is a need to calculate and compare key ratios from period to period.
d. income statement amounts are shown as a percentage of total sales.

Answer 35

B)

Question 36

_____ has been adopted by most major accounting firms and is a powerful platform for data analysis.
a. ACL Audit Analytics
b. CaseWare’s IDEA
c. Microsoft Office + ActiveData
d. SAS

Answer 36

a)

Question 37

Which statistical approach is one of the most powerful and yet simple methods for identifying outliers?
a. N-grams
b. Z-score
c. Time-trend analysis
d. Soundex algorithm

Answer 37

B)

Question 38

Which of the following proactive fraud detection methods use Benford’s Law to detect fraud?
a. Vertical analysis
b. Digital analysis
c. Real-time analysis
d. Time trend analysis

Answer 38

b)

Question 39

T or F: Unexplained changes are common in financial statements.

Answer 39

False

Question 40

One of the disadvantages of Benford’s Law in detecting fraud is:
a. potential suspects are more likely to know you are trying to detect fraud than if you didn’t use such detection
techniques.
b. users must be thoroughly trained in its complexities to implement and use.
c. that those cases with the lowest probabilities do not match Benford’s Law and may need further investigation.
d. it only broadly identifies the possible existence of fraud; it fails to narrow possibilities to a manageable field of
promising leads.

Answer 40

D)

Question 41

T or F: A single symptom (red flag) is almost always enough information to identify the type of fraud scheme occurring.

Answer 41

False

Question 42

Identify the formula used to calculate z- score.
a. (Mean − Value)/Standard Deviation
b. (Mean − Value)/(Mean + Value)
c. (Value − Mean)/ Standard Deviation)
d. (Value − Mean)/Median)

Answer 42

C)

Question 43

Profit margin, return on assets, and return on equity are all examples of:
a. Vertical analysis.
b. Key financial statement ratios.
c. Horizontal analysis.
d. None of the above.

Answer 43

b)

Question 44

While methods like high-low slope, average slope, handshaking, and Box-Jenkins exist, one of the most popular
techniques for summarizing the slope of a graphi s:
a. summarization.
b. stratification.
c. statistical regression.
d. arithmetic progression.

Answer 44

C)

Question 45

T or F: The z-score calculation is the best way to stratify data.

Answer 45

False

Question 46

____ is the splitting of complex data sets into case-specific tables.
a. Deviation
b. Stratification
c. Data mining
d. Soundex

Answer 46

B)

Question 47

The Soundex algorithm:
a. Uses consonants but ignores vowels.
b. Creates a numerical score representing how a word sounds.
c. Is useful when fuzzy matching values.
d. All of the above.

Answer 47

d)

Question 48

An advantage of using ODBC to import data into a data warehouse is that:
a. ODBC doesn’t require the use of corporate database servers.
b. ODBC compresses data when stored on a CD or DVD.
c. ODBC automatically retrieves column names and types from the database.
d. ODBC keeps the investigator from dealing with the difficult SQL language.

Answer 48

c)

Question 49

Which of the following financial statements can be used to answer the question, “Where did the cash come
from to pay dividends?”
a. Income statement
b. Balance sheet
c. Statement of cash flows
d. Trial balance

Answer 49

C)

Question 50

Which of the following is a true statement regarding the United States Social Security Administration (SSA)?
a. The SSA publishes a monthly list of newly issued Social Security numbers.
b. The SSA publishes a monthly list of Social Security numbers that are no longer in use.
c. The SSA database of valid numbers can be accessed by interested parties.
d. The SSA database can be used to create mailing lists

Answer 50

B)

Question 51

According to Benford’s Law , 5 will be the first digit of a random number set:
a. more often than 1.
b. less often than 4.
c. about the same as 6.
d. more often than 3.

Answer 51

B)

Question 52

Benford’s Law:
a. applies to numbers that have built-inl imits.
b. is most effectively used with assigned numbers.
c. applies best to numbers that occur naturally.
d. uses ratios to detect fraud.

Answer 52

C)

Question 53

When trying to identify outliers, what is one of the best statistical approaches?
a. A pie graph indicating the relative amounts.
b. Stratification of cases by value.
c. Time trending using the high-low slope method. d. The z-score calculation.

Answer 53

d)

Question 54

While using financial statement analysis, which ratio will be most useful in assessing the company’s operational
efficiency?
a. Current ratio
b. Quick ratio
c. Cost of goods sold percentage
d. Inventory turnover

Answer 54

D)

Question 55

Which of the following is an extension of stratification?
a. Matosas matrix
b. A pivot table
c. Summarization
d. Soundex

Answer 55

C)

Question 56

T or F: Vertical analysis is a more direct method than horizontal analysis in focusing on changes in financial statements from one period to another.

Answer 56

False

Question 57

One way to view the results of multiple indicators is to use a chart called a:
a. Soundex algorithm.
b. summarization chart.
c. Pareto chart.
d. Matosas matrix

Answer 57

D)

Question 58

What is the primary drawback of the data-driven approach?
a. It is more expensive and time intensive than the traditional approach.
b. It requires tips and other indicators to become glaring before the approach can be used.
c. It cannot highlight frauds while they are still small.
d. The investigator loses control of the fraud investigation process.

Answer 58

a)

Question 59

T or F: According to Benford’s Law, the first digit of natural sets of numbers will begin with a 9 more often than with an 8.

Answer 59

False

Question 60

Which of the following may result from a careful review of a Matosas matrix?
a. This action identifies indicators that have been circumvented.
b. This action identifies indicator information that has been incorrectly input.
c.This helps investigators improve the set of indicators utilized.
d. This helps investigators identify fraud perpetrators.

Answer 60

C)

Question 61

Which of the following is least effective while searching for anomalies?
a. Comparing account balances in the statements from one period to the next.
b. Calculating key ratios and comparing them from one period to the next.
c. Performing horizontal analysis.
d. Performing vertical analysis.

Answer 61

A)

Question 62

Benford’s Law:
a. Is usually unsuccessful as a fraud detection tool. b. Predicts that the first digit of random number sets will begin with a 1 more often than a 2, a 2 more often than a 3, and so on.
c. Applies to personal ID numbers.
d. All of the above.

Answer 62

b)

Question 63

T or F: Understanding the kinds of frauds that can occur is not important when using a data-driven detection method.

Answer 63

False

Question 64

In a Matosas matrix, there is a ___ for each indicator , and there may be as
as many as _____.
a. row; 50 rows
b. column; 10 columns-
c. column; 100 columns
d. row; 1,000 rows

Answer 64

C)

Question 65

The red flag that is generally identified when employee and vendor telephone numbers are the same is:
a. dummy vendors.
b. employees purchasing goods for personal use.
c. billing more than once for the same purchase.
d. providing poor-quality goods.

Answer 65

A)

Question 66

Digital analysis is:
a. the art of analyzing the digits that make up number sets like invoice amounts, reported hours, and costs.
b. a technique which calculates the average probability for each grouping of data.
c. the searching for expected relationships between numbers.
d. the use of numeric values for decision making.

Answer 66

A)

Question 67

Which of the following is true?
a. Stratification is the splitting of data into case-specific tables.
b. Stratification is an extension of summarization.
c. Summarization provides detail for each grouping into tables.
d. Stratification is utilized to create a z-score across data sets.

Answer 67

A)

Question 68

When detecting fraud, it is important that fraud investigators:
a. Remain objective and neutral.
b. Assume guilt.
c. Assume innocence.
d. None of the above.

Answer 68

A)

Question 69

What is the primary advantage of the data-driven approach?
a. The investigator makes hypotheses and tests to see if each one holds true.
b. It is less expensive and time intensive than the traditional approach.
c. The investigator takes charge of the
fraud investigation process.
d. Data–driven fraud detection is
proactive in nature.

Answer 69

C

Question 70

Which of the following statements regarding ODBC is NOT accurate?
a. ODBC stands for Open Database Communications.
b. ODBC is a standard method of querying data from corporate relational databases.
c. ODBC is a connector between the front- end analysis and the back-end corporate database.
d. ODBC is alreadyi ncluded with most operating systems.

Answer 70

D)

Question 71

Horizontal analysis is different from vertical analy-sis in that:
a. There is no difference between horizontal and vertical analysis.
b. Horizontal analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next, while vertical analysis converts balances in a single period to percentages.
c. Horizontal analysis converts balances in a single period to percentages, while vertical analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next.
d. Key ratios are compared from one period to the next.

Answer 71

b)

Question 72

Most software packages have functions for generating _____ about columns of data, which include statistical
summaries like control totals, mean,
maximum, minimum, standard deviation, number of zero values, number of empty records, and so on.
a. captions
b. histograms
c. headings
d. descriptives

Answer 72

D)

Question 73

Data-driven fraud detection:
a. Determines the cost of fraud.
b. Identifies possible fraud suspects.
c. Looks for errors in databases.
d. All of the above.

Answer 73

c)

Question 74

Which approach converts financial statement numbers to percentages of total assets or total sales?
a. Horizontal analysis
b. Vertical analysis
c. Ratio analysis
d. Variance analysis

Answer 74

B)

Question 75

Benford’s Law is:
a. The most expensive of all the digital analysis methods
b. The most effective way to identify actual frauds.
c. A method that uses vertical financial statement analysis.
d. An effective way to identify errors in data sets.

Answer 75

d)

Question 76

Which of the following is the most direct method of focusing on changes in the company’s balance sheet and income statement?
a. Calculating key ratios and comparing them from period to period
b. Comparing account balances in the statements from one period to the next
c. Performing a vertical analysis
d. Performing a horizontal analysis

Answer 76

d)

Question 77

Which of the following is an analytical symptom of kickbacks?
a. Decreasing purchases from other vendors
b. Charging normal price for goods supplied
c. Providing better-quality goods
d. Smaller purchase quantities and more frequent orders

Answer 77

a)

Question 78

Which of the following statements is true about the characteristics of real-time analysis?
a. With real time analysis in place, there is no need for continual improvement and updating of indicators.
b. It is a distinct technique because it specifically analyzes each transaction for correctness rather than for fraud.
c. Effective real-time analysis allows real-time modification and deletion of less-effective indicators.
d. The most effective real time analysis uses indicators that are hard coded into the system.

Answer 78

C)

Question 79

T or F ODBC is the best approach to import because it achieves a direct, rich connection to the source database.

Answer 79

True

Question 80

T or F: Balance sheets must be converted to change statements before they can be used in detecting fraud.

Answer 80

True

Question 81

The most effective way to convert balance sheets and income statements from position and period statements to change statements is to:
a. Compare balances in the statements from one period to the next.
b. Calculate key ratios and compare them from period to period.
c. Perform horizontal and vertical analyses.
d. All of the above.

Answer 81

c)

Question 82

A______ is a financial statement that reflects account balances at aspecific point in time like a snapshot.
a. periodic statement
b. position statement
c. change statement
d. static statement

Answer 82

b)