Principles of Fraud Examination, 4th Edition Well Test Bank

Principles of Fraud Examination, 4th Edition By

Wells

Chapter 1 – Introduction

1. Which of the following best describes the objective of a fraud examination? a. To make recommendations to management about how to prevent fraud b. To determine whether financial statements are free of misstatements due to fraud c. To express an opinion on the guilt or innocence of a suspect d. To determine whether a crime has been committed, and if so, who is responsible 2. Which of the following is not a part of the fraud theory approach? a. Analyze available data. b. Develop “what-if” scenarios. c. Identify who committed the fraud. d. Refine the hypothesis.

3. Once sufficient predication has been established, what is the first step a fraud examiner following the fraud theory approach should take? a. Create a hypothesis. b. Analyze data. c. Interview witnesses. d. Interview the suspect.

4. The discipline of fraud examination includes all of the following except: a. Writing investigative reports b. Determining the guilt of the suspect c. Testifying to findings d. Interviewing witnesses 5. Fraud examination differs from auditing in that fraud examination is: a. Recurring b. Adversarial c. General in scope d. All of the above 6. Predication, although important, is not required in a fraud examination. a. True b. False 7. In a fraud examination, evidence is usually gathered in a manner that moves from general to specific. a. True b. False

8. Which of the following is the correct order for a fraud examiner to interview witnesses? a. Corroborative witnesses, neutral third-parties, co-conspirators, suspect b. Suspect, co-conspirators, corroborative witnesses, neutral third-parties c. Neutral third-parties, corroborative witnesses, co-conspirators, suspect d. Suspect, corroborative witnesses, co-conspirators, neutral third-parties 9. In order to prove that fraud occurred, four elements must be present. Which of the following is not one of those elements? a. A material false statement b. Knowledge that the statement was false c. Reliance on the false statement by the victim d. Intent to cause the victim damages 10. The basic tenet of Edwin Sutherland’s theory of differential association is that crime is passed on genetically; that is, the offspring of criminals commit crimes because their parents did. a. True b. False 11. Who developed the Fraud Scale? a. Joseph T. Wells b. W. Steve Albrecht c. Richard C. Hollinger d. Donald R. Cressey 12. Which of the following is not one of the legs of the Fraud Triangle? a. Situational environment b. Perceived non-sharable financial need c. Perceived opportunity d. Rationalization 13. According to Cressey, the perceived opportunity to commit fraud consists of two elements: general information and technical skill. a. True b. False 14. In a study by Steve Albrecht, Marshall Romney, and Keith Howe, participants were asked to rank personal characteristics as motivating factors that contributed to fraud.

The highest ranked factor was: a. Undue family or peer pressure b. Lack of recognition of job performance c. Living beyond one’s means d. Lack of appreciation by management

15. In a study by Steve Albrecht, Marshall Romney, and Keith Howe, participants were asked to rank characteristics of the organizational environment that contributed to fraud. The highest ranked factor was: a. Lack of clear lines of authority b. Inadequate attention to detail c. Lack of an internal audit function d. Placing too much trust in key employees 16. Research in the Hollinger-Clark study suggests that the best way to deter employee theft is by: a. Increasing sanctions imposed on occupational fraudsters b. Increasing the perception of detection c. Strengthening internal controls d. Communicating the organization’s fraud policies to employees 17. According to the results of the Hollinger-Clark study, employees steal primarily because of: a. Job dissatisfaction b. Greed c. Informal organizational structures d. Economic pressures 18. In the 2012 Report to the Nations on Occupational Fraud and Abuse, the category that committed the smallest percentage of occupational fraud was: a. Managers b. Employees c. Owners/Executives d. External parties 19. In the 2012 Report to the Nations on Occupational Fraud and Abuse, the median loss in schemes committed by males was higher than the median loss in schemes committed by females. a. True b. False 20. In the 2012 Report to the Nations on Occupational Fraud and Abuse, most frauds were initially detected during an external audit. a. True b. False 21. In the 2012 Report to the Nations on Occupational Fraud and Abuse, financial statement fraud had a higher median loss than asset misappropriation and corruption schemes. a. True b. False

22. In the 2012 Report to the Nations on Occupational Fraud and Abuse, most perpetrators of fraud had been previously charged with or convicted of a fraud-related offense. a. True b. False 23. Joel Baker, a customer of ABC Electronics, stole a box containing computer games while the sales associate waited on another customer. Which of the following could Joel be charged with? a. Larceny b. Embezzlement c. Fraud d. All of the above 24. While conducting a routine internal audit, Sally Franks overheard one of the company’s purchasing agents bragging about receiving a substantial discount on a new SUV from the company’s supplier of fleet cars. Is there sufficient predication to initiate a fraud examination? a. Yes b. No 25. When Jill Michaels, an assistant to the director of procurement, moved into her new home, she used the company’s flat bed truck to move her furnishings on an afternoon when her boss was out of town. Which of the following best describes Michael’s act? a. Fraud b. Abuse c. Embezzlement d. Larceny 26. Eddie Dolan is the manager of shipping and receiving and has been working at the UFA Company for twenty years. He rarely calls in sick and gets good performance reviews every year. For the past year, his wife’s company, ABC Co., has been in serious financial trouble. ABC Co. likely will not be able to make the payroll for next month and may have to close down. Which leg of the Fraud Triangle best applies to Dolan’s situation? a. Motive b. Perceived opportunity c. Rationalization d. Non-sharable financial need

27. Alice Durant works in the accounts payable department for the BC Group. She recently found out that Della Granger, another A/P clerk, received a bigger raise than she did, even though Durant has been with the company longer and frequently has to correct Granger’s errors. Which leg of the Fraud Triangle best applies to Durant’s situation? a. Motive b. Perceived opportunity c. Rationalization d. Non-sharable financial need 28. Arthur Baxter, a manager in records retention for SWC Company, has ordered seven laptop computers for his department, even though he only has five employees. In addition to each laptop, he ordered extra copies of several software programs. When the equipment arrives, Baxter sends one of the extra laptops to his son who is a freshman at Eastern University and sells three of the original software packages to friends. Which of the following offenses could Baxter be charged with? a. Larceny b. Embezzlement c. Conversion d. All of the above 29. Richard Moore is the controller for Ajax Company. Recently, he suffered several large losses at the race track, causing him to incur enormous personal debts. Which type of non-sharable financial problem best describes Richard’s situation? a. Business reversal b. Physical isolation c. Violation of ascribed obligations d. Status gaining 30. Samantha Lewis, CFE, is conducting an investigation into possible skimming of the accounts receivable at Southwest Paint and Supply Co. If Lewis plans to interview all of the following parties, whom should she interview first? a. Marie Riley, the primary suspect b. Jose Rodriguez, an accounts receivable clerk who filled in for Riley while she was on vacation c. Sean Miles, a regular customer of the company, whose complaint about his account balance prompted the investigation d. Thomas Banks, Riley’s supervisor, who is suspected of helping Riley cover up the fraud in exchange for a portion of the proceeds

Chapter 2 – Skimming

1. ____________________ is the theft of cash from a victim entity prior to its entry in an accounting system. a. A fictitious disbursement b. Skimming c. Larceny d. Conversion 2. To a fraudster, the principle advantage of skimming is the difficulty with which the scheme is detected. a. True b. False 3. Peggy Booth is the bookkeeper for an equipment rental company. After recording the cash sales and preparing the bank deposit, she takes $200 dollars from the total. This is an example of a skimming scheme. a. True b. False 4. In the Fraud Tree, asset misappropriations are broken down into cash and non-cash schemes. Which of the following is not considered a misappropriation of cash? a. Larceny b. Skimming c. Concealed expenses d. Fraudulent disbursements 5. Methods of skimming sales include which of the following? a. Conducting unauthorized sales after hours b. Rigging the cash register so that the sale is not recorded c. Posting a sale for less than the amount collected d. All of the above 6. Skimming can be either an on-book scheme or an off-book scheme, depending on whether cash or a check is stolen. a. True b. False 7. Which of the following procedures would not be useful in preventing and detecting sales skimming schemes? a. Comparing register tapes to the cash drawer and investigating discrepancies b. Summarizing the net sales by employee and extracting the top employees with low sales c. Installing video cameras at cash entry points d. Offering discounts to customers who do not get receipts for their purchases

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8. To cover up a skimming scheme in which the employee takes cash from the register, the employee must make a voided sale in order for the register to balance. a. True b. False 9. Which of the following techniques is not used to conceal sales skimming schemes? a. Lapping b. Inventory padding c. Destroying records of transaction d. Recording false voids 10. The customer service department at JNC, Inc. has been receiving phone calls from customers for whom there is no record. This is a red flag of what type of scheme? a. Receivables skimming b. Shell company c. Unrecorded sales d. None of the above 11. Skimming receivables is generally more difficult to conceal than skimming sales. a. True b. False 12. The concealment of receivables skimming can be difficult because: a. The audit trail must be destroyed. b. The incoming payments are expected. c. Inventory must be padded to conceal shrinkage. d. All of the above 13. Receivables skimming can be concealed through: a. Lapping b. Force balancing c. Document destruction d. All of the above 14. A method of concealing receivables skimming by crediting one account while abstracting money from a different account is known as: a. Account substitution b. Kiting c. Lapping d. Plugging 15. Procedures that can be used to prevent and/or detect receivables skimming include which of the following? a. Reconciling the bank statement regularly b. Mandating that employees take annual vacations c. Performing a trend analysis on the aging of customer accounts d. All of the above -2-

16. Mandating supervisory approval for write-offs or discounts can help prevent receivables skimming schemes. a. True b. False 17. Which of the following computer audit tests can be used to detect skimming schemes? a. Summarizing by employee the difference between the cash receipt report and the sales register system b. Identifying unique journal entries to the cash account c. Joining the customer statement report file to the accounts receivable and reviewing for balance differences d. Extracting invoices paid by cash 18. Computing the percentage of assigned time to unassigned time for employees is one method to detect an employee skimming scheme. a. True b. False 19. Asset misappropriations are broken down into two categories: cash schemes and noncash schemes. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash schemes are much more common than non-cash schemes. a. True b. False 20. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, skimming schemes are both the most common and the most costly type of cash misappropriation scheme. a. True b. False 21. George Albert was a property manager for a large apartment complex while he was going to college. One of his duties was to collect rent from the tenants. If rent was paid after the third of the month, a late fee was tacked on to the amount due. When a tenant paid his rent late, George would backdate the payment, record and remit only the rent portion to his employers, and pocket the late fee. This is an example of what type of fraud? a. Larceny b. Sales skimming c. Fraudulent write-offs d. Plugging 22. Anne Mullens is the bookkeeper for DWG Refrigeration Repair. One afternoon while she was preparing the bank deposit, a customer came in to the office and paid his account in full with a $57 check. Rather than adding the check to the deposit, Anne pocketed $57 cash from the previously recorded amount and included the customer’s check in the money to be taken to the bank. What type of scheme did Anne commit? a. Larceny -3-

b. Kiting c. Skimming d. Currency balancing 23. Sue Meyers was an accounts receivable clerk for an insurance broker. When premium payments were received, she would steal the check of every tenth customer and cash it at a liquor store. To conceal her scheme, she would credit the account of the customer that she stole from with a payment that was received from another customer’s account. This is an example of: a. Force balancing b. Lapping c. Understating sales d. A forged endorsement scheme 24. Jason Herman works part-time as a retail clerk at a local bookstore. One night while his manager was out of town, Jason decided to keep the store open for a few extra hours. He reset the cash registers at the normal closing time, but continued making sales. Two hours later, when he closed for the night, he reset the registers again, removing all evidence that any extra transactions had been made, and pocketed the money from the after-hours sales. What kind of scheme did Jason commit? a. Register disbursement b. Force balancing c. Receivables skimming d. Unrecorded sales 25. Myra Manning, CFE, was hired to investigate some suspicious activity at Arizona Medical Supply after one of the company’s largest customers complained several times that its account statements do not reflect all the payments it has made. While examining the accounts receivable activity, Myra noticed a significant rise in the volume of overdue accounts during the last 6 months. What type of scheme might this situation indicate? a. Cash larceny b. Shell company c. Receivables skimming d. False refunds 26. In one of the case studies in the textbook, Brian Lee, a top-notch plastic surgeon, collected payments from his patients without giving a cut to the clinic where he practiced. How was his fraud discovered? a. Through a routine audit of the clinic’s records b. Through an anonymous tip to the clinic c. By accident d. None of the above 27. In one of the case studies in the textbook, Brian Lee, a top-notch plastic surgeon, collected payments from his patients without giving a cut to the clinic where he practiced. What was his motivation for committing the fraud? a. He needed to repay his student loan.

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b. He was greedy. c. He felt that the clinic was taking too much of a cut from his income. d. He wanted to use the proceeds to fund his “doctors without borders” practice.

28. In one of the case studies in the textbook, Brian Lee, a top-notch plastic surgeon, collected payments from his patients without giving a cut to the clinic where he practiced. How was he punished? a. He was convicted of grand larceny and sentenced to probation. b. He was sued in civil court for the amount of the loss. c. He was terminated from the practice and was required to make full restitution in lieu of prosecution. d. He was allowed to continue to practice at the clinic but was required to make full restitution.

29. In one of the case studies in the textbook, Stefan Winkler was the controller for a beverage company in south Florida. Money was collected by either the delivery drivers who brought in the cash and checks from their route customers (route deposits), or by credit customers who mailed in their payments (office deposits).

Winkler stole cash from the route deposits and made up for it by using checks from the office deposits. How did Winkler conceal his crime? a. He altered electronic files b. He stole cash receipt journals, copies of customer checks, and deposit slips c. He removed his personnel file d. All of the above 30. In one of the case studies in the textbook, Stefan Winkler was the controller for a beverage company in south Florida. Money was collected by either the delivery drivers who brought in the cash and checks from their route customers (route deposits), or by credit customers who mailed in their payments (office deposits).

Winkler stole cash from the route deposits and made up for it by using checks from the office deposits. Which of the following red flags were present that could have alerted the company to the fraud? a. Missing deposit slips b. Customer complaints c. Winkler never took vacations d. All of the above

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Chapter 3 – Cash Larceny Schemes 1. Cash misappropriations are divided into two broad groups: fraudulent disbursements schemes and cash receipts schemes. a. True b. False 2. The two categories of cash receipts schemes are: a. Lapping and skimming b. Lapping and cash larceny c. Cash larceny and skimming d. Skimming and billing schemes 3. What is the primary difference between cash larceny and skimming? a. Cash larceny is an on-book scheme; skimming is an off-book scheme. b. Cash larceny is an off-book scheme; skimming is an on-book scheme. c. Cash larceny is a disbursement scheme; skimming is a cash receipts scheme. d. Cash larceny involves cash only; skimming can involve either cash or checks.

4. Skimming involves the theft of money that has already appeared on a victim’s books, while cash larceny involves stealing money before it has been recorded. a. True b. False 5. Where do most larceny schemes involving cash occur? a. In the accounting department b. In the mailroom c. At the point of sale d. At off-site locations 6. Larceny schemes are generally more difficult to detect than skimming schemes. a. True b. False 7. Which of the following methods can be used to conceal a larceny scheme that occurred at the point of sale? a. Falsifying the cash count b. Destroying the register tape c. Stealing from another employee’s register d. All of the above 8. If discrepancies are found between the sales records and the cash on hand, which of the following schemes might be occurring? a. Cash larceny at the point of sale b. Cash larceny from the deposit c. Fraudulent disbursements d. Sales skimming -1-

9. The central weakness of a cash larceny scheme is the resulting imbalance in the organization’s accounting records. a. True b. False 10. To prevent cash larceny through falsification of cash counts, an independent employee should verify the cash count in each register or cash box at the end of each shift. a. True b. False 11. Methods for concealing larceny of receivables include which of the following? a. Lapping b. Stolen statements c. Reversing entries d. All of the above 12. Deposit lapping is considered an off-book scheme. a. True b. False 13. All of the following are ways a fraudster might conceal cash larceny from the deposit except: a. Posting missing money as “deposits in transit” b. Deposit lapping c. Falsifying the bank copy of the deposit slip d. Destroying customer statements 14. The most important factor in preventing cash larceny from the deposit is: a. Separating the duties of the deposit function b. Having two employees deliver the deposit to the bank c. Having a visible management presence in the mailroom d. None of the above 15. Which of the following antifraud controls can help prevent and detect cash larceny from the deposit? a. Having two copies of the bank statement delivered to different persons in an organization b. Comparing the bank authenticated deposit slip with the general ledger posting of the day’s receipts c. Preparing the deposit slip to show each individual check and money order along with currency receipts d. All of the above

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16. Which of the following computer audit tests would be the least useful in detecting a cash larceny scheme? a. Summarizing the difference between the cash receipt report and the sales register system by employee b. Summarizing the top sales producers by employee c. Summarizing discounts, returns, and cash receipt adjustments by employee d. Reviewing all unique journal entries in the cash accounts 17. Running a report that summarizes user access for the sales, accounts receivable, cash receipt, and general ledger systems during non-business hours might identify a cash larceny scheme. a. True b. False 18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash larceny schemes had the largest median loss of all cash misappropriations. a. True b. False 19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash larceny schemes were the least common form of cash misappropriations. a. True b. False 20. Jan Ashley worked for the R&S Department Store as a sales associate in the fine linens department. As she would give change back to a customer for cash sales, she would also pull out a $10 bill and slip it in her pocket. She concealed her scheme by issuing one false refund at the end of her shift for the total amount she stole that day.

This is an example of what type of scheme? a. Sales skimming b. Larceny at the point of sale c. Lapping d. Larceny at the deposit 21. Dorothy McNally stole $232 from the company deposit while on the way to the bank.

She can conceal the theft by recording the missing amount on the bank reconciliation as a(n): a. Deposit in transit b. Outstanding check c. Credit memo d. None of the above 22. Jeff Lewis is an accounts receivable clerk for FTB Industries. As customers pay off their balances, Lewis posts the payments but pockets the money. He can conceal his theft by: a. Making unsupported entries for the amount stolen b. Adjusting the account with a discount -3-

c. Destroying the records d. All of the above 23. Mel Turner, the runner for a small bookstore, had a bad habit of helping himself to cash from the deposit on the way to the bank. He covered his tracks by substituting a check from the next day’s deposit for the amount he stole from the previous day’s deposit. This is an example of what type of concealment? a. Deposits in transit b. Deposit lapping c. Force balancing d. None of the above 24. Victor Jackson, CFE, was hired by BRS Carpet and Tile to investigate possible cash larceny at the point of sale. Which of the following red flags should he look for? a. Large differences between sales records and cash on hand b. Unusual journal entries to the cash accounts c. A large number of small differences between sales records and cash on hand d. All of the above 25. Danielle Boyle, CFE, was hired to investigate some suspicious activity in the accounts receivable department at Red Technologies. While examining the company’s accounting records, she noticed several payments posted to customers’ accounts that were later reversed with journal entries to “courtesy discounts.” What type of scheme might this situation indicate? a. Receivables skimming b. Deposit lapping c. Cash larceny of receivables d. Shell company 26. In one of the case studies in the textbook, Laura Grove was the head teller at a bank in Tennessee. As the head teller, she had the authority to open the night depository along with another teller. For security reasons, each teller only had half of the combination to the vault. In the end, Grove opened the vault and stole two deposit bags worth approximately $16,000. Which of the following red flags made the investigators suspect Laura? a. The security system showed that she was the last one to leave the bank on the day before the bags were stolen. b. She broke out in a rash when she was interviewed. c. During the interview she made a point of mentioning that the other teller had been having financial problems. d. All of the above 27. In one of the case studies in the textbook, Laura Grove was the head teller at a bank in Tennessee. As the head teller, she had the authority to open the night depository along with another teller. For security reasons, each teller only had half of the combination to the vault. In the end, Grove opened the vault and stole two deposit bags worth approximately $16,000. How was she ultimately caught?

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a. She broke down and confessed to the investigators during a routine interview of all tellers. b. Her husband found the bank’s money and turned her in. c. The bank found some of the checks in the dumpster near her house with her fingerprints on them. d. None of the above 28. In one of the case studies in the textbook, Laura Grove was the head teller at a bank in Tennessee. As the head teller, she had the authority to open the night depository along with another teller. For security reasons, each teller only had half of the combination to the vault. In the end, Grove opened the vault and stole two deposit bags worth approximately $16,000. How was the case settled? a. She paid the bank back in lieu of prosecution. b. She was prosecuted and sentenced to eighteen months in jail. c. She was dismissed and signed a promissory note to repay the money. d. She was prosecuted but received probation in lieu of prison time.

29. In one of the case studies in the textbook, Bill Gurado was a branch manager for a consumer-loan finance company in New Orleans who decided to help himself to the daily deposits. Instead of depositing the money into the company’s bank account, he deposited the money into his own personal account. How was Gurado’s fraud discovered? a. He suspected he was on the verge of being caught, called the company’s president, and confessed that he had taken the money. b. The auditors found it during a surprise audit of the branch Gurado managed. c. His assistant suspected him and reported him to the company’s audit committee. d. A customer called to complain about receiving an overdue notice.

30. In one of the case studies in the textbook, Bill Gurado was a branch manager for a consumer-loan finance company in New Orleans who decided to help himself to the daily deposits. Instead of depositing the money into the company’s bank account, he deposited the money to his own personal account. How was the case settled? a. The company pursued civil action for the repayment of the stolen funds. b. Gurado was terminated and he immediately paid back the money. c. Gurado was convicted of grand theft and scheming to defraud, and he was placed on probation. d. Gurado was placed on deferred adjudication and required to make restitution.

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Chapter 4 – Billing Schemes 1. Categories of billing schemes include which of the following? a. Shell company schemes b. Larceny billing schemes c. Fictitious disbursements schemes d. All of the above 2. When a billing scheme is occurring, the company’s expenses appear lower than they should, causing the financial statements to show falsely inflated profits. a. True b. False 3. In a ______________ scheme, the perpetrator uses false documentation to cause a payment to be issued for a fraudulent purpose. a. Purchasing b. Skimming c. Larceny d. Billing 4. In the Fraud Tree, all of the following are categories of fraudulent disbursements except: a. Payroll schemes b. Cash larceny c. Check tampering d. Billing schemes 5. Fictitious entities created for the sole purpose of committing fraud are called: a. Ghost companies b. Non-accomplice vendors c. Shell companies d. “Rubber stamp” companies 6. Most shell company schemes involve the purchase of goods rather than services. a. True b. False 7. Invoices that are submitted by shell companies can be for fictitious goods or services or for items that were actually sold to the victim company. a. True b. False 8. In order to start up a shell company, the fraudster will most likely need which of the following? a. Certificate of incorporation b. Mailing address

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c. Bank account d. All of the above 9. Producing an invoice that looks professional is the most difficult part of a shell company scheme. a. True b. False 10. Warning signs of a shell company scheme include which of the following? a. Invoices lacking details of the items purchased b. A vendor that is not listed in the phone book c. An unexpected and significant increase in “consulting expenses” d. All of the above 11. A pass-through scheme is usually undertaken by someone who works in which department? a. Accounts payable b. Receiving c. Purchasing d. Accounts receivable 12. Which of the following actions is least likely to help prevent and detect schemes involving fraudulent invoices from non-accomplice vendors? a. Marking “paid” on every voucher that has been paid b. Verifying vendor address changes before disbursements are issued c. Matching all bank statement items to canceled checks d. Separating the duties of purchasing, authorizing, and distributing payments 13. ____________________ are schemes in which the employee intentionally mishandles payments that are owed to legitimate vendors. a. Pass-through schemes b. Pay-and-return schemes c. Shell company schemes d. Switch-and-swap schemes 14. In a shell company scheme, which of the following methods might a fraudster use to get a phony invoice approved for payment? a. Collusion b. A “rubber stamp” supervisor c. Falsification of purchase orders and receiving reports d. Any of the above 15. Purchasing personal items using an organization’s money is what type of scheme? a. Larceny scheme b. Billing scheme c. Pay-and-return scheme

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d. Skimming scheme 16. Which of the following controls can be used to prevent or detect personal purchases on company credit cards? a. Having credit card statements sent directly to someone with signature authority on the account for review and payment b. Requiring employees to receive store credits rather than cash when returning items they purchased with the company’s credit card c. Monitoring credit card expenses for unexplained increases in purchasing levels d. All of the above 17. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the most common fraudulent disbursement schemes were: a. Billing schemes b. Check tampering schemes c. Payroll schemes d. Register disbursement schemes 18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, billing schemes were the second most costly type of fraudulent disbursements schemes. a. True b. False 19. Which of the following computer audit tests can be used to detect billing schemes? a. Extracting manual checks and summarizing by vendor and issuer b. Extracting a sample of vendor open invoices for confirmation with the vendor c. Extracting delivery addresses that do not correspond to company locations d. All of the above 20. Sally Fuller is a buyer for GWA publishing company. Her job is to purchase supplies and services for the printing of technical manuals. Her brother sets up a printing company, and Sally hires him to print most of these manuals for GWA. However, rather than actually printing the manuals, her brother hires another printer to do the work, then sells the printed manuals to GWA at a 50 percent markup. As a result, his prices are much higher than the other printers who serve GWA. This type of scheme is most likely a: a. Pay-and-return scheme b. Pass-through scheme c. Inventory-markup scheme d. Non-accomplice vendor scheme 21. Eli Adams is an accounts payable clerk for MJF Productions. By forging signatures, he was able to procure a company credit card. He recently bought home stereo equipment and put it on his company credit card. When the credit card statement

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arrived at MJF, Eli prepared a check to the credit card company and buried the purchase in the monthly expenses of the company’s largest cost center, knowing that his manager is generally inattentive when approving payments. What type of fraud is this? a. Larceny b. Pass-through scheme c. Personal purchases scheme d. Forged maker scheme 22. Charles Dieter and Joey Davis worked together to steal nearly $50,000 from Valdosta Medical Supply. Charles, an accounts payable clerk, deliberately overpaid a few of the company’s vendors. He then called the vendors, explained the “mistake,” and asked for the excess to be refunded. Joey, a mailroom employee, intercepted the incoming refund checks and cashed them. The two men split the proceeds. What type of scheme did Charles and Joey commit? a. Shell company b. Larceny c. Pass-through d. Pay-and-return 23. Abby Watkins works in the accounts payable department for SVX Company.

Recently, she set up a payment to Pacific Industries for invoice number 7001a, which is unlike any invoice number she has seen from Pacific in the past. The voucher contains a purchase order that backs up the invoice, but it looks like a photocopy.

Additionally, the accounting system shows that invoice number 7001 from Pacific was for a slightly different amount and has already been paid. Pacific Industries is an established vendor with SVX, but the payment address has recently been changed to a P.O. Box in the vendor file. What type of fraud does this situation most likely indicate? a. Personal purchases scheme b. Shell company scheme c. Non-accomplice vendor scheme d. False purchase requisition scheme 24. The internal auditor for the Bremer Group recently ran a computer audit test that showed that Ouetzen Company, one of the company’s listed vendors, doesn’t have a telephone number or a tax ID number. Of the choices given, what type of fraud does this situation most likely indicate? a. Larceny scheme b. Shell company scheme c. Non-accomplice vendor scheme d. Personal purchases scheme 25. Nicolas Hill, CFE, has been hired to look into suspicious activity at Mason & Jefferson, LLC. The company’s controller has reason to believe that the company has

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fallen victim to a shell company scheme. As part of his investigation, Nicolas should do which of the following? a. Match the vendor master file to the accounts receivable file b. Review payments with little or no sequence between invoice numbers c. Extract all employees without a social security number d. All of the above 26. In one of the case studies in the textbook, a Southeastern medical college was plagued with fraudulent activity. What started as an investigation into some suspicious expense reimbursement activity eventually led to the discovery of a fictitious company that was set up to fraudulently bill the college for supplies that never existed. What was the first sign that there were more problems than the initial expense reimbursement fraud? a. The auditors found an usually high number of new unapproved vendors. b. The administrative assistant suddenly left town when requested to be interviewed. c. The supervisor resigned his position immediately. d. A tip was received by internal auditors.

27. In one of the case studies in the textbook, a Southeastern medical college was plagued with fraudulent activity. What started as an investigation into some suspicious expense reimbursement activity eventually led to the discovery of a fictitious company that was set up to fraudulently bill the college for supplies that never existed. Which of the following red flags were found during the investigation? a. Some vendors didn’t have street addresses or telephone numbers. b. Invoices were received for just under the amount that required two authorized signatures. c. Some of the checks were cashed at check cashing companies. d. All of the above 28. In one of the case studies in the textbook, a Southeastern medical college was plagued with fraudulent activity. What started as an investigation into some suspicious expense reimbursement activity eventually led to the discovery of a fictitious company that was set up to fraudulently bill the college for supplies that never existed. How was the case resolved? a. The perpetrator was terminated, and the funds were recovered. b. The perpetrator was convicted and placed on probation, and partial restitution was ordered. c. The perpetrator left the state and was caught pulling the same scam at another company. d. A civil suit was filed and restitution was ordered.

29. In one of the case studies in the textbook, Albert Miano, the facilities supervisor for a popular magazine, submitted phony invoices. When Miano received the checks for the phony invoices, he forged the contractor’s signature. He then endorsed the check in his own name. How was the fraud caught?

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a. The auditors found a discrepancy in the invoices that were submitted. b. The new chief of internal audit found it by accident. c. A vendor received a check by mistake and called the accounts payable department. d. The external audit found it in an audit sample of canceled checks.

30. In one of the case studies in the textbook, Albert Miano, the facilities supervisor for a popular magazine, submitted phony invoices. When Miano received the checks for the phony invoices, he forged the contractor’s signature. He then endorsed the check in his own name. What controls weaknesses did the company have that facilitated Miano’s scheme? a. Employees in the accounts payable department did not follow departmental procedures. b. Accounts payable never checked signatures on the invoices against the authorized signatures on file. c. Miano was allowed to pick up the approved invoices from the administrative vicepresident’s office and deliver them to the accounts payable department. d. All of the above

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Chapter 5–Check Tampering 1. Check tampering is unique from other fraudulent disbursement schemes because in a check tampering scheme: a. The perpetrator physically prepares the fraudulent check. b. The perpetrator must have access to a signature stamp in order to conceal the crime. c. The perpetrator submits a phony document in order to generate the fraudulent payment. d. The perpetrator must endorse the check in order to cash or deposit it.

2. Check tampering includes both fraudulently preparing a company check for one’s own benefit and intercepting a company check that is intended for a third party and converting it for one’s own benefit. a. True b. False 3. To successfully carry out and conceal a check tampering scheme, the fraudster must have: a. Access to the check stock b. Access to the bank statements c. The ability to forge signatures or alter other information on the check d. All of the above 4. Check tampering schemes involving checks made payable to “cash” are extremely difficult to resolve, as there is no way to tell who converted the check. a. True b. False 5. Which of the following choices is not a category of check tampering? a. Forged maker schemes b. Altered payee schemes c. Unauthorized endorsement schemes d. Concealed check schemes 6. The person who prepares and signs the check is known as the ______________ of the check. a. Author b. Endorser c. Payer d. Maker 7. In which of the following schemes does the fraudster intercept and convert a company check made payable to a third party? a. Forged maker scheme b. Authorized maker scheme c. Altered payee scheme -1-

d. Concealed check scheme 8. In a forged maker scheme, the perpetrator fraudulently affixes the signature of an authorized maker to a check. a. True b. False 9. Producing a counterfeit check using the company’s logo and bank account number is one type of concealed check scheme. a. True b. False 10. Which of the following is not an effective control mechanism to safeguard an organization’s check stock? a. Boxes of blank checks should be sealed with security tape. b. Organizations should use check stock that is high-quality and distinctly marked. c. The employee in charge of the check preparation function should periodically verify the security of unused checks. d. Voided checks should be promptly destroyed.

11. To prevent and detect forged maker schemes, an organization should: a. Separate the duties of check preparation and check signing. b. Rotate authorized check signers. c. Maintain a usage log for the signature stamp. d. All of the above 12. Which of the following procedures can help prevent and detect the theft and conversion of outgoing company checks? a. Train employees to look for dual endorsements on canceled checks. b. Chart the date of mailing for every outgoing check. c. Track changes made to vendor records. d. All of the above 13. Which of the following is not a type of altered payee scheme? a. “Tacking” on b. Forged maker c. Using erasable ink d. Leaving the payee designation blank 14. To prevent altered payee schemes, the person who prepares the check should also review the check after it has been signed. a. True b. False 15. Which of the following computer audit tests can be used to detect forged maker schemes? a. Extract checks that are out of sequence -2-

b. Extract manual checks and summarize by vendor and issuer c. Extract all checks payable to “cash” and summarize by issuer for reasonableness d. All of the above 16. Which type of check tampering scheme is usually the most difficult to defend against? a. Authorized maker b. Forged endorsement c. Concealed check d. Altered payee 17. Concealing a check tampering scheme generally means hiding both the identity of the perpetrator and the fact that the fraud ever occurred. a. True b. False 18. Methods used to conceal check tampering schemes include all of the following except: a. Falsifying the disbursements journal b. Forced reconciliation c. Check kiting d. Re-altering the canceled checks 19. Methods used to manipulate electronic payments include which of the following? a. Abusing legitimate access to the employer’s payment system b. Gaining access to the employer’s payment system through social engineering c. Exploiting weaknesses in the employer’s internal control over its electronic payment system d. All of the above 20. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, check tampering is the most common fraudulent disbursement fraud. a. True b. False 21. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, check tampering has the lowest median loss of all fraudulent disbursement frauds. a. True b. False 22. Mavis Bosman works as an accounts receivable clerk at Brooks Publishing. She steals an incoming check from a customer and cashes it at a grocery store by forging the endorsement on the back of the check. This is an example of a check tampering scheme. a. True b. False

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23. Kristen Diamond worked in the mailroom at B&R Industries. When attaching postage to the outgoing mail, she would search for payments being sent to a specific vendor, K. D. Sand. She intercepted these checks and carefully changed them to appear payable to K. Diamond. She then endorsed the checks with her own name and deposited them into her personal bank account. What type of scheme did Kristen commit? a. Concealed check b. Payables skimming c. “Tacking on” d. Forged endorsement 24. Vicky Rogers works in the accounts payable department at HDU, Inc. When checks are returned to the company for incorrect vendor addresses, she is supposed to research them, correct them, and then forward them to the proper address. Instead, Rogers decided to convert some of the returned checks for her own use. Based on the information provided, what type of check tampering scheme is this likely to be? a. Forged maker b. Forged endorsement c. Concealed check b. Authorized maker 25. Melanie Diggers is an internal auditor for Atlantic Equipment Rental and Sales.

While performing a routine review of one of the company’s bank accounts, she noticed an unusual “adjusting entry” to the account on the general ledger. She also found that several checks that had cleared the bank in the last few months were absent from the stack of canceled checks. She requested copies of these checks from the bank and discovered that they were all made payable to the company’s controller who has check signing authority on the account. The controller is also responsible for performing the bank reconciliation and recording month-end journal entries. Which of the following schemes do these signs most likely indicate? a. Concealed check scheme b. False voids scheme c. Authorized maker scheme d. Forged maker scheme 26. Billy Hodges was in charge of preparing checks for the Lightner Company. He entered the payment information into the accounting system, and the completed checks were sent back to him to review. He then forwarded the checks to his supervisor for signing. In each batch of legitimate checks, Hodges would insert checks made payable to himself. When his supervisor was busy, he would take the stack of checks to him and ask him to sign them immediately in order to meet their cycle time deadline. The supervisor would inattentively sign the checks, and then Hodges would extract the checks he made payable to himself. This is an example of what type of check tampering scheme? a. Concealed check scheme b. Forged endorsement scheme c. Forged maker scheme -4-

d. Altered payee scheme 27. Mary Duncan is an internal auditor for the Western Realty Group. Recently, she ran a program that extracted checks that were out of the normal sequence. She found that four or five checks were written every month that fit this category. Based on the information given, which of the following schemes is likely occurring? a. Multiple reimbursement scheme b. Shell company scheme c. Personal purchases scheme d. Forged maker scheme 28. In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children’s school, was also a thief. As one of two people allowed to sign checks on the organization’s bank accounts, she learned early on that she could forge the second person’s signature without anyone becoming suspicious. How was she finally caught? a. A co-worker contacted the organization’s executive director when she found that a company check had been written to the children’s school for Robinson’s personal items. b. New officers were elected, and they took the accounting books from her. c. The auditors discovered her fraud during an annual audit of the books. d. Robinson’s husband tipped off the audit committee after he became suspicious of some of Robinson’s purchases.

29. In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children’s school, was also a thief. As one of two people allowed to sign checks on the organization’s bank accounts, she learned early on that she could forge the second person’s signature without anyone becoming suspicious. What red flags were present that indicated that something wasn’t appropriate? a. Robinson would not take vacation leave. b. There were a lot of missing files that the auditors couldn’t locate during their annual audit. c. Robinson would not release any financial information when requested and gave excuses for why it wasn’t available. d. All of the above 30. In one of the case studies in the textbook, Melissa Robinson, who worked as an executive secretary for a worldwide charitable organization and was active in her children’s school, was also a thief. As one of two people allowed to sign checks on the organization’s bank accounts, she learned early on that she could forge the second person’s signature without anyone becoming suspicious. How was Robinson punished? a. She was allowed to resign and agreed to pay the money back. b. She resigned, and a civil suit was filed to recover the loss. c. She was found guilty and ordered to make restitution to the organization and its insurance company.

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d. Charges were dismissed with prejudice when the evidence was thrown out on a technicality.

31. In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company.

Within a short period of time Phillips began writing checks to himself that had nothing to do with payroll. How was the fraud discovered? a. The president received a bank statement containing canceled checks that had been written to Phillips. b. The receiver received a call from the bank asking him to verify a check. c. A vendor received a check in error and reported it to the operations manager. d. The operations manager found a check made payable to Phillips while searching Phillips’ desk for some accounting records.

32. In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company.

Within a short period of time Phillips began writing checks to himself that had nothing to do with payroll. Control weaknesses that facilitated the commission of this fraud include which of the following? a. The bank statements were sent directly to Phillips. b. Phillips had check signing authority. c. There was no separation of duties between accounts payable and the treasury department. d. All of the above 33. In one of the case studies in the textbook, Ernie Phillips was a CPA who had fallen on hard times both financially and personally. He eventually got a job as a controller for a friend who had just been named as the receiver for a financial services company.

Within a short period of time Phillips began writing checks to himself that had nothing to do with payroll. What happened to Phillips? a. He quit his job and moved to another state. b. He pleaded guilty to fraud and grand theft and spent 24 months in prison. c. He paid the money back by mortgaging his home. d. He was charged criminally, and while out on bail, he fled with his family.

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Chapter 6 – Payroll Schemes 1. A _______________ is an individual on the payroll who does not actually work for the organization. a. Falsified employee b. Phantom employee c. Ghost employee d. Shell employee 2. Which of the following is not a type of payroll scheme? a. Ghost employee scheme b. False deduction scheme c. Falsified hours and salary scheme d. Commission scheme 3. Marsha Wood added her one-year-old niece, Jackie, to the payroll at JNC Company and began issuing paychecks in Jackie’s name, even though Jackie did not work for the organization. Marsha’s niece is not considered a ghost employee because she is a real individual rather than a fictitious person. a. True b. False 4. Which of the following is not necessary for a ghost employee scheme to succeed? a. Timekeeping and wage rate information must be collected. b. The ghost must be added to the payroll. c. The perpetrator must have access to a bank account in the ghost employee’s name. d. A paycheck must be issued to the ghost.

5. To safeguard against ghost employee schemes, the person in charge of entering new employees in the payroll system should also distribute the paychecks so that he or she can look for payments to unauthorized employees. a. True b. False 6. If a fraudster fails to remove a terminated employee from the payroll and collects the former employee’s fraudulent paychecks, he or she is committing a: a. Payroll larceny scheme b. Falsified hours and salary scheme c. Forged endorsement scheme d. Ghost employee scheme 7. Salaried ghost employees are generally easier to create and more difficult to conceal than hourly ghost employees a. True b. False

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8. Which of the following analyses can be used to identify ghost employee schemes? a. Identifying employees who have no withholding taxes taken out b. Comparing actual payroll expenses to budgeted expenses c. Comparing employees who have the same Social Security number, bank account, or physical address d. All of the above 9. Which of the following procedures will not help prevent ghost employee schemes? a. The personnel records are maintained separately from the payroll and timekeeping functions. b. The personnel department conducts background and reference checks on all prospective employees before hiring them. c. The person responsible for hiring new employees also supervises the payroll function. d. The personnel department verifies all changes to the payroll.

10. The most common method of misappropriating funds from the payroll is: a. Overpayment of wages b. Using a ghost employee c. Overstating commissions d. Theft of payroll deductions 11. Which of the following is not a method typically used by an employee to fraudulently inflate his or her hours in a manual timekeeping system? a. Collusion b. “Lazy manager” method c. Forging the supervisor’s signature d. Manipulating the pay grade 12. If an employee generates a much higher percentage of uncollected sales than his coworkers, what type of scheme might he be committing? a. Sales skimming b. Commission scheme c. Multiple reimbursement scheme d. Shell company scheme 13. Which of the following controls will help prevent and detect falsified hours and salary schemes? a. The duties of payroll preparation, authorization, and distribution are segregated. b. Sick leave and vacation time are monitored for excesses by the payroll department. c. Supervisors return authorized timecards to the employees for review before they are sent to the payroll department. d. All of the above 14. Which of the following computer audit tests can be used to detect ghost employee schemes?

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a. Extract users who can write checks and also add new employees in the payroll and timecard system. b. Extract all employees without a social security number. c. Compare employees reported per timecard system to the payroll system. d. All of the above 15. Which of the following can be used to test for commission schemes? a. Extract manual checks and summarize by salesperson and amount. b. Compare hours reported per timecard system to payroll system. c. Extract customer sale balances that exceed the customer credit limit. d. None of the above 16. Comparing actual payroll expenses to budget projections can help identify falsified hours and salary schemes. a. True b. False 17. Comparing salaried employees’ gross pay from one pay period to the next is one way of testing for payroll fraud. a. True b. False 18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the most common type of fraudulent disbursement schemes. a. True b. False 19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, payroll frauds are the least costly type of fraudulent disbursement schemes. a. True b. False 20. Jim Stevens is a payroll manager for a mid-sized insurance company in the southeast.

Last year, his performance review was conducted late, so he received a retroactive pay increase. Because he was not authorized to access his own employee records, Stevens stole another employee’s password and logged into the payroll system. He manipulated his records to keep the retroactive pay increase in effect in future periods, effectively doubling his intended pay raise. What type of fraud is this? a. Larceny of wages b. Falsified hours and salary scheme c. Commission scheme d. Ghost employee scheme 21. Ellie Weaver works for the JAG Group as the customer service supervisor. When Joel Carter was hired into her department, she listed his start date as one month before he actually began work. Accordingly, the payroll department generated an extra paycheck for Carter, which Weaver intercepted and cashed at a liquor store. What type of fraud is this?

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a. Forged endorsement scheme b. Ghost employee scheme c. Altered payee scheme d. Falsified wages scheme 22. Jed Butler is an internal auditor for Billings Industries. Recently he ran a program that identified customer accounts which had previously been dormant for six months or more but had sales in the last two months of the year. What type of fraud would this test most likely reveal? a. Shell company scheme b. Pay-and-return scheme c. Commission scheme d. Personal purchases scheme 23. During a review of A+ Service’s payroll records, Judy Penney, an internal auditor, noticed that Bradley Banks has no deductions taken from his paychecks for withholding taxes or insurance. She then searched for Banks in the personnel records, but could not locate him. Based on this information, what type of scheme did Penney most likely uncover? a. Ghost employee scheme b. Falsified salary scheme c. Fictitious vendor scheme d. None of the above 24. Orange Publishing hired Moe McDonnell, CFE, to investigate some large variances in the company’s labor costs. While looking through the payroll records for the shipping department, McDonnell noticed several employees who claimed extensive overtime during pay periods in which the company’s incoming and outgoing shipments were minimal. McDonnell pulled the timesheets for these pay periods and noticed that those belonging to the suspect employees had signatures that didn’t match the signatures on the other timesheets. What type of fraud might these findings indicate? a. Ghost employee scheme b. Commission scheme c. Falsified hours and salary scheme d. Overstated expenses scheme 25. Allison Duval, CFE, has been retained by National Mortgage Company to investigate some suspicious activity. As part of her examination, Duval compares the company’s payroll expenses to budgeted projections and to prior years’ totals. She also runs an exception report looking for any employees whose compensation has increased disproportionately over the prior year. She then compares the payroll files to the human resource files to test for differing salary rates. What type of scheme is Duval most likely looking for? a. Ghost employee scheme b. Payroll tampering scheme c. Commission scheme d. Falsified hours and salary scheme -4-

26. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. How was his scheme detected? a. An exception report showed that Harkanell had claimed overtime hours for a period when there was no need to work overtime. b. The payroll department sent the timesheets for one pay period back to the supervisor for review when a suspicious number of hours had been indicated. c. An overtime audit was conducted revealing that Harkanell had worked an unusual number of hours compared to others in the department. d. The internal auditors received an anonymous tip.

27. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. What red flag was present that should have made someone suspicious? a. He used erasable ink to record the hours on the timesheets. b. He showed up for work on a day he had off so he could personally turn in the timesheets. c. No one else in the department had overtime hours but Harkanell. d. All of the above 28. In one of the case studies in the textbook, Jerry Harkanell worked as an administrative assistant for a large San Antonio hospital, where his clerical duties included the submission of the payroll information for his unit. He found that he could add hours to the timesheets and receive extra pay. He continued to alter his timesheets until he was finally caught. How was the case resolved? a. He confessed to falsifying the overtime and was terminated. b. A civil suit was filed to recover the loss. c. He was convicted and sentenced to prison. d. None of the above 29. In one of the case studies in the textbook, Katie Jordon was the “All-American Girl Next Door” working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What was her motivation for stealing? a. Her boyfriend, a professional motocross racer, was injured in a race. b. She was getting married and needed money for the wedding. c. She blew the engine in her car and didn’t have the money to replace it.

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d. She wanted to pay off her college loan early so she could save for a house.

30. In one of the case studies in the textbook, Katie Jordon was the “All-American Girl Next Door” working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. How was her scheme discovered? a. An employee tipped off the main office when she saw the timesheets listing an employee that she had never heard of. b. When Jordon’s boss made a routine visit to the office, he noticed that there was no sign of an assistant in the office. c. She was splitting the proceeds with her boyfriend, and he contacted the home office when she broke up with him. d. The auditors found it when they conducted a routine audit of all new acquisitions after being in business for one year.

31. In one of the case studies in the textbook, Katie Jordon was the “All-American Girl Next Door” working her first job out of college. As an on-site manager for an apartment complex in Dallas, she did such a good job that when her employer purchased a huge apartment complex in Houston, she was asked to run it. All was well until a member of the maintenance crew resigned. She continued to keep him on the payroll and pocketed his wages. She later added a non-existent assistant once she saw how easy it was to add an employee without being questioned. However, her scheme eventually came to light, and her days of bonus pay were over. What happened to Jordon? a. The company terminated her employment but failed to press charges against her in order to keep things quiet. b. She was convicted but served no jail time. c. She skipped town and a warrant was issued for her arrest. d. She took out a loan for the amount stolen and paid the company back in lieu of the company pressing charges against her.

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Chapter 7 – Expense Reimbursement Schemes 1. Because they leave a solid audit trail, expense reimbursement schemes are generally easier to detect than other types of fraud schemes. a. True b. False 2. Expense reimbursement schemes include which of the following? a. Multiple reimbursements b. Mischaracterized expenses c. Overstated expenses d. All of the above 3. Claiming personal travel as a business expense is an example of what type of expense reimbursement scheme? a. Multiple reimbursements b. Overstated expense reimbursements c. Mischaracterized expense reimbursements d. Altered expense reimbursements 4. Which of the following procedures can be used to prevent mischaracterized expense reimbursement schemes? a. A policy should be established and communicated to employees regarding what types of expenses will and will not be reimbursed. b. Employees should be required to sign their expense reports before being reimbursed. c. The internal audit department should review all expense reports under a certain dollar amount. d. None of the above 5. Which of the following procedures can be used to detect mischaracterized expense reimbursement schemes? a. Compare the dates of claimed reimbursable business expenses to the employees’ work schedules. b. Compare current expense reimbursement levels to amounts for prior years. c. Compare current expense reimbursement levels to budgeted amounts. d. All of the above 6. If an employee submits a photocopy of a receipt as support for a business expense, the expense should be independently verified before it is reimbursed. a. True b. False 7. An altered or forged receipt can indicate what type of expense reimbursement scheme? a. Mischaracterized expense reimbursements

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b. Fictitious expense reimbursements c. Overstated expense reimbursements d. All of the above 8. Permitting employees to book their own travel using their own credit card is an effective internal control over expense reimbursement schemes. a. True b. False 9. Which of the following methods can be used to perpetrate a fictitious expense reimbursement scheme? a. Creating counterfeit receipts b. Stealing blank receipts c. Submitting expenses that were paid by a third party d. All of the above 10. What type of expense reimbursement scheme occurs when an employee submits a receipt for an entertainment expense that a client paid for? a. Mischaracterized expense reimbursement b. Overstated expense reimbursement c. Fictitious expense reimbursement d. Duplicate reimbursement scheme 11. Which of the following is not considered a red flag of a fictitious expense reimbursement scheme? a. An employee repeatedly uses the company credit card for business travel expenses. b. An employee’s reimbursement requests are always for round-dollar amounts. c. An employee submits reimbursement requests that consistently fall just below the reimbursement limit. d. An employee frequently requests reimbursement for high-dollar items that he claims were paid for in cash.

12. To safeguard against expense reimbursement schemes, organizations should require that employee expense reports be reviewed and approved by a supervisor outside the requestor’s department. a. True b. False 13. According to the 2010 2012 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement schemes are the least common type of fraudulent disbursement schemes. a. True b. False

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14. According to the 2010 2012 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement schemes have a lower median loss than check tampering schemes. a. True b. False 15. Donna Holbrook, an administrative assistant at Mason Enterprises, charged some office supplies to the company credit card. Several weeks later, she attached the store receipt from the purchase to an expense report and requested reimbursement from the company. This is an example of which type of expense reimbursement scheme? a. Overstated expense b. Multiple reimbursement c. Mischaracterized expense d. Over-purchased reimbursement 16. Daniel Isley works as an internal auditor for Atlantic Insurance Co. While reviewing the company’s travel and entertainment expenses, Isley noticed that one employee had submitted several receipts from Chase’s Restaurant for round-dollar amounts just under the company’s reimbursement limit. Further, the receipts were consecutively numbered, but were submitted over a six-month period. What type of scheme did Isley most likely uncover? a. Fictitious expense reimbursement b. Multiple reimbursement c. Mischaracterized reimbursement d. None of the above 17. Charlene DiAngelo is a sales manager for Northwest Paper & Plastics. On April 11, she took some clients out for a business lunch to discuss a potential contract. When she returned to the office, she made a photocopy of her restaurant receipt. Using correction fluid, she changed the date on the photocopy to read June 11. She submitted the original restaurant receipt with a reimbursement request on April 11 and held on to the photocopy for 2 months. On June 12, she submitted the altered photocopy along with a second reimbursement request. What type of fraud scheme did DiAngelo commit? a. Altered receipt b. Fictitious expense reimbursement c. Billing d. Multiple reimbursement 18. Kevin Chitry, a sales executive for CIT Manufacturing, frequently took clients out for dinner and shows when they came to town to tour the plant. He usually paid for these expenses himself and submitted the receipts to his supervisor for approval and reimbursement. Occasionally, however, he also took his family out to restaurants and rock concerts and included these expenses in his reimbursement requests by indicating that he was entertaining a client. This type of fraud is known as a(n): a. Overstated expense reimbursement

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b. Mischaracterized expense reimbursement c. Fictitious expense reimbursement d. Altered receipt reimbursement 19. Linda Dudley, an employee of Bingham Company, was sent to an out-of-state conference to learn about the latest innovations in computer security. While she was at the seminar, her meals were picked up by a vendor hoping to get business from Bingham. Dudley also turned in receipts and requested reimbursement from her company for the same meals that the vendor paid for. What type of expense reimbursement fraud is this? a. Mischaracterized expense b. Overstated expense c. Fictitious expense d. None of the above 20. Daisy McMillan works as the office manager for Timball and Lewis, a medium-sized law firm. One afternoon, she went to the hardware store to purchase a few maintenance items for the office. While there, she also bought her husband a hammer as a birthday present. At the register, the items, including the hammer, totaled $63.

She paid for all the items together and received both a carbon copy receipt and a separate credit card receipt. Back at the office, she carefully scratched additional numbers on to the carbon copy receipt to increase the total price to $168 and turned in the altered receipt for reimbursement. Several weeks later, she turned in the credit card receipt along with another reimbursement request for the $63. What type of expense reimbursement fraud did she commit? a. Overstated expense reimbursement b. Multiple reimbursements c. Mischaracterized expense reimbursement d. All of the above 21. As the manager of a local auto-parts store, Manny Ortega was responsible for reimbursing employees when they purchased supplies for the store with their own money. When employees brought Ortega their receipts for reimbursement, he would often alter the receipts to show a larger amount. Then he would ring a “no sale” on the cash register, remove the full amount per the altered receipt, and pocket the excess. Because the employee received the expected amount and the register totals remained in balance, Ortega was able to continue this scheme for nearly 2 years before being caught. What type of fraud did Ortega commit? a. Overstated expense reimbursement scheme b. Mischaracterized expense reimbursement scheme c. Register disbursement scheme d. None of the above 22. Phil O’Hara is an internal auditor for the Shield Corporation. Recently he ran a report that listed payments to employees for business expenses that occurred while the employee was on vacation. What type of fraud scheme is Phil most likely to find?

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a. Cash larceny b. Forged expenses c. Overstated expense reimbursement d. Mischaracterized expense reimbursement 23. Remy Lewis has just started working as a marketing research analyst for Commercial Casting Company in New York City. He is relocating his family to New York from North Carolina, but they haven’t moved yet. Twice a month, the company pays for Lewis to travel to North Carolina to visit his family and help with the move. During the month of September, Lewis only visited his family once; however, he submitted expense reports for mileage for two separate trips to North Carolina and back. What type of scheme is this? a. Mischaracterized expense reimbursement b. Billing c. Fictitious expense reimbursement d. None of the above 24. In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements.

Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. How was his scheme detected? a. The internal auditor discovered it during a routine audit of expense reimbursements. b. The department’s administrative assistant took a message from the travel agency about a trip that she knew Lane didn’t take. c. Lane’s manager received an anonymous tip. d. The external auditors discovered it while sampling expenses during their annual audit.

25. In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements.

Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. What changes to internal controls were made as a result of Lane’s fraud? a. Enforcement of a new policy that business expenditures other than travel be charged to personal credit cards only b. Clarification and better enforcement of the policy that all travel be booked through the company travel agent using a designated company credit card

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c. Enforcement of a new policy that employees submit their travel expense reports for reimbursement within five days of returning from a trip d. All of the above 26. In one of the case studies in the textbook, Marcus Lane, a geologist for an environmental management and engineering services firm, traveled all over North and South America as part of his job, resulting in numerous expense reimbursements.

Unfortunately, Lane went too far and began to double book his air travel using his personal credit card. He booked two separate flights to the same location, but with a huge cost difference. He used the cheaper ticket for the actual flight and returned the more expensive ticket for credit. And, of course, he submitted the more expensive ticket for reimbursement. How was he punished? a. He was convicted of grand theft and received probation. b. He resigned from the company and a civil suit was filed against him. c. He was terminated and agreed to pay the money back. d. He was allowed to resign and the company agreed not to seek a refund if it was kept quiet.

27. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. How was he caught? a. He purchased one too many high-ticket items for his son and this was brought to the attention of the CEO. b. A new president was hired and he found Chesterly out while reviewing the accounting records. c. Chesterly became ill and the receipts for personal items were found while he was out sick. d. The internal auditors found Chesterly out during an audit of his cost center’s expenses.

28. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. What other frauds turned up in the investigation? a. Chesterly put his girlfriend on the payroll as a ghost employee. b. Chesterly skimmed some of the cash sales. c. Chesterly falsified sales figures to collect unearned bonuses. d. Chesterly cut special deals to his customers and received kickbacks in return.

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29. In one of the case studies in the textbook, Cy Chesterly was the vice president in charge of sales for one of the largest machine parts manufacturers in the Midwest. He was an excellent salesman and helped build the company into one of the most successful in the industry. While Chesterly was known to go overboard on the entertainment expenses, he really went wild when it came to buying personal items— vacations, furniture, and jewelry to name a few. He was caught, however, and his lifestyle came to a halt. What was the most likely reason that the company didn’t have Chesterly prosecuted? a. Chesterly was well liked by everyone and, with new management coming in, the company thought that prosecuting him would have a negative impact on morale. b. Chesterly’s wife became seriously ill and the company felt that it would have been too much of a blow to her recovery if he were in prison. c. Some of the company’s customers were believed to have been involved in Chesterly’s schemes. d. He agreed to mortgage his home to repay the money.

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Chapter 8 – Register Disbursement Schemes 1. Register disbursement schemes are different from skimming and larceny at the register in that they: a. Are on-book schemes, where as skimming and larceny are off-book schemes b. Require the use of an accomplice c. Leave a record of the removal of money on the register tape d. All of the above 2. Which of the following is a type of register disbursement scheme? a. Fictitious refunds b. Overstated refunds c. False voids d. All of the above 3. When an employee perpetrates a credit card refund scheme, the perpetual inventory will show a greater amount than the physical inventory. a. True b. False 4. An excessive number of reversing sales transactions at the register is an indicator of which of the following schemes? a. Skimming b. Register disbursement c. Pass-through scheme d. Multiple reimbursements 5. Register disbursement schemes are difficult to conceal because they cause the cash drawer to be out of balance with the cash register tape. a. True b. False 6. Which of the following can be used to conceal a false refund scheme? a. Destroying register tapes b. Issuing refunds below the review limit c. Forcing inventory totals d. All of the above 7. For the perpetrator, the most dangerous part of a typical register disbursement scheme is often: a. Physically removing the cash from the register and carrying it out of the store b. Adjusting the cash register tape to match the cash count c. Replacing the returned merchandise in the physical inventory d. Forging the customer receipt as documentation for the reversing transaction

8. To safeguard against false voids schemes, companies should require a copy of the customer’s receipt from the initial purchase as documentation for voided sales. a. True b. False 9. Which of the following tests can be used to detect register disbursement schemes? a. Extract the top 10 employees with the lowest sales activity. b. Identify and examine unique journal entries in the cash accounts. c. Identify customer sales posted to one credit card and refunds posted to another credit card. d. None of the above 10. Running a computer program that compares adjustments to inventory to the void/refund transactions summarized by employee can detect which of the following schemes? a. Register disbursement schemes b. Cash larceny schemes c. Skimming schemes d. All of the above 11. According to the textbook, the best way for an organization to prevent fraudulent register disbursements is to: a. Have each employee compare the cash in his or her register drawer to the register tape at the end of each shift. b. Maintain appropriate separation of duties. c. Have a policy requiring photocopied receipts for sales refunds. d. All of the above 12. Which of the following procedures can be used to prevent and detect a register disbursement scheme? a. Randomly call customers who have returned merchandise or voided sales. b. Restrict access to the control key or management code that authorizes reversing transactions. c. Place signs around the store encouraging customers to ask for and examine their receipts. d. All of the above 13. Sara Michaels works as a sales associate in the shoe department at a large chain department store. To supplement her income, Sara processed multiple fictitious refunds on sales made to customers. This is an example of what type of asset misappropriation? a. Register disbursement fraud b. Pay and return scheme c. Skimming scheme d. Cash larceny scheme

14. Billy Mitchell is the head cashier for a clothing store that specializes in men’s silk suits. After losing big at the local dog track, Billy was in the hole financially. To cover his gambling debts, he started issuing numerous refund credits to his own credit card for amounts just below the store’s review limit. This is an example of a __________________ scheme. a. Cash larceny b. Credit card skimming c. Fictitious refunds d. Understated reimbursement 15. Leslie White, CFE, was called in to investigate suspicious activity at Anderson’s Department Store. During her investigation, she ran a test to search for customer sales and refunds that occurred on the same day. She also summarized refunds by employee and extracted the names of all employees who can post both refunds and inventory adjustments. What type of scheme is Leslie most likely looking for? a. Skimming b. Unconcealed larceny c. Fraudulent reimbursements d. Fictitious refunds 16. Meredith Chapman works as a retail clerk at a children’s clothing store. When a customer returns an item for a cash refund, Meredith enters an amount greater than the actual refund into the register, pays the customer the amount owed for the returned merchandise, and keeps the excess cash for herself. What type of scheme is Meredith committing? a. Overstated expenses b. Cash larceny c. Overstated refunds d. Skimming 17. Greg Manor is the sales manager at County Arts & Crafts Supply. Recently he has received several complaints from customers who claim they were not given a receipt for their purchases. What type of scheme might this situation indicate? a. Skimming b. False refunds c. False voids d. All of the above 18. Nicolas Barrens conspired with his manager to steal nearly $6,000 over 2 months from the grocery store where they worked. Each time Nicolas rang up a customer at the register, he asked the customer if he’d like a receipt. When a customer said no, Nicolas pretended to discard the receipt in the trash, but actually slipped the receipt into his pocket. At the end of his shift, he filled out a void slip for each of these sales and submitted them to his supervisor for approval. With the original receipt and the approved void slip, Nicolas removed cash from the register in the amount of the

voided sales and split the proceeds with his supervisor. Nicolas committed what type of fraud scheme? a. Fictitious expenses b. False voids c. Skimming d. None of the above 19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, register disbursement schemes were the most frequently reported type of fraudulent disbursement scheme. a. True b. False 20. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, median losses due to register disbursement schemes were the highest of all the fraudulent disbursement schemes. a. True b. False 21. In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds.

What was Walker’s motive for committing the crime? a. His wife became ill and needed money to pay for prescription drugs. b. He had been demoted from a management position and wanted to get back at the store. c. He lost a lot of money gambling and was too embarrassed to tell his wife. d. He had accumulated nearly $60,000 in credit card debt and was about to lose his house.

22. In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds.

How was the fraud discovered? a. The bookkeeper noticed an unusually large number of policy overrides by Walker. b. The internal auditor developed a computer program that identified cashiers with an unusually high number of returns. c. The store manager caught Walker pocketing cash. d. An anonymous tip from the company’s hotline came into the asset protection department.

23. In one of the case studies in the textbook, Bob Walker was the head cashier for a discount drug store who perpetrated his fraud scheme by issuing fictitious refunds.

What happened to Walker? a. He was placed on probation and ordered to make full restitution. b. The store terminated his employment and accepted a promissory note for the amount stolen in return for not turning him over to the police.

c. His parole for a previous conviction was revoked and he was returned to prison. d. He was arrested, but disappeared after making bail.

24. In one of the cases in the textbook, Joe Anderson, a part-time shoe salesperson at a department store, perpetrated a fictitious returns scheme using third-party credit cards. Why was a fraud examination initiated? a. Another employee witnessed Anderson pocketing cash and reported the incident. b. The shoe department was losing money and had a high rate of returns on its shoes. c. The store’s surveillance camera caught Anderson pocketing the money. d. Anderson credited the wrong account and the customer called up to inquire as to why her credit card had been credited.

25. In one of the cases in the textbook, Joe Anderson, a part-time shoe salesperson at a department store, perpetrated a fictitious returns scheme using third-party credit cards. What happened as the result of the investigation? a. Anderson was terminated and promised to pay back all the fraudulent proceeds. b. The department store recovered most of its losses through its bonding company. c. Local and federal charges for embezzlement and financial transaction card fraud were brought against Anderson and 27 co-conspirators. d. All of the above

Chapter 9 – Non-Cash Assets

1. Borrowing a company asset for personal use without permission, even if it is returned unharmed, is a form of non-cash asset misappropriation. a. True b. False 2. Which of the following is not a red flag in a fraudulent shipment scheme? a. An increase in bad debt expense b. An unexplained decrease in the scrap account c. Unusually high levels of reorders for inventory items d. Shipments with missing sales documents 3. Manually altering entries in an organization’s books in order to conceal fraud is called: a. Padding the books b. Forced reconciliation c. Shrinkage d. Fictitious reconstruction 4. To prevent fraudulent shipments of merchandise, organizations should: a. Match every receiving slip to an approved purchase order. b. Match every outgoing shipment to a sales order. c. Make sure that all increases to perpetual inventory records are supported by proper source documents. d. All of the above 5. Which of the following methods can be used to conceal inventory shrinkage on a company’s books? a. Creating fictitious sales and receivables b. Writing off inventory as obsolete c. Physical padding d. All of the above 6. An employee causes his organization to purchase merchandise that it does not need.

This is an example of what type of scheme? a. Purchasing and receiving scheme b. False billing scheme c. Unconcealed larceny scheme d. Asset requisition scheme 7. An unexplained increase in uncollectible accounts receivable may be a warning sign of a non-cash asset misappropriation scheme involving false shipments of inventory.

a. True b. False 8. Of the following, which is the best method for detecting the theft of inventory? a. Have the warehouse manager personally oversee bi-monthly inventory counts. b. Have someone from purchasing conduct inventory counts every quarter. c. Have a designated person in customer service follow-up with customers who have complained about short shipments. d. Match vendor addresses against employee addresses.

9. To deter inventory theft schemes, organizations should install security cameras in the warehouses without the employees’ knowledge. a. True b. False 10. Which of the following procedures would be least helpful in preventing larceny of non-cash assets? a. Segregating the duties of sales and accounts payable b. Installing surveillance cameras in the warehouse and on sales floors c. Creating access logs to track employees that enter restricted areas d. Employing security guards at the entrance of the warehouse 11. The unaccounted-for reduction in the company’s inventory that results from theft is called: a. Physical defalcation b. Spoilage c. Shrinkage d. Misappropriation of intangible assets 12. Unexplained increases in inventory shrinkage can be a red flag that signals which type of fraud scheme? a. Fictitious refunds b. Inventory larceny c. Sales skimming d. All of the above 13. Which of the following computer audit tests can be used to detect purchasing and receiving schemes? a. Identifying dormant customer accounts for the past six months that show a sale in the last two months of the year b. Calculating the ratio of the largest sale to the next largest sale by customer c. Extracting all inventory coded as obsolete and possessing reorder points within the inventory system d. All of the above

14. Which of the following computer audit tests can be used to detect an inventory misappropriation scheme? a. Identifying inventory receipts in the receiving system that do not agree to the receipts per the accounts payable system b. Identifying inventory shipments delivered to an address that is not designated as a business address c. Identifying inventory with a negative quantity balance d. All of the above 15. Running a computer program that identifies shipping documents with no associated sales order can detect which of the following non-asset cash misappropriation schemes? a. False shipments b. Purchasing and receiving schemes c. Unconcealed inventory larceny d. Asset requisition schemes 16. Which of the following is not a method used to conceal false shipments of inventory? a. Creating false sales orders b. Falsely increasing the perpetual inventory c. Writing off the inventory as scrap d. Physical padding 17. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, noncash schemes occur more frequently than cash schemes. a. True b. False 18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash schemes have a higher median loss than non-cash schemes. a. True b. False 19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the theft of which type of non-cash asset was the least common but caused the highest median loss? a. Equipment b. Proprietary information c. Securities d. Inventory 20. Andy Kaplan is a foreman for JCP Enterprises, a regional construction company. He recently ordered some plumbing supplies from the company warehouse for an office building project he is overseeing. When the supplies arrived at the job site, however, he loaded them in his truck and took them home to use in remodeling his master bathroom. What kind of inventory theft scheme did Andy commit?

a. b. c. d.

False shipments Unconcealed larceny Asset requisition Misappropriation of intangible assets

21. Nicolette Garrison works part-time at an independent record store. Whenever her friend, Jacob Barker, comes into the store during one of her shifts, he picks up a CD and brings it to the register where Nicolette is stationed. After ringing a “no sale” transaction on the cash register, Nicolette pretends to swipe Jacob’s credit card for payment. She puts the CD in a bag and gives it to Jacob, who walks out without actually paying for the merchandise. What kind of scheme is being committed? a. Fake sale b. False refund c. Sales skimming d. Cash larceny 22. Ben Rogers works as a cashier for Tillis Sporting Goods. One afternoon, he asked his sister Dawn to come into the store. When she arrived, Ben put three watches, two fishing reels, and four pairs of sunglasses in a sack and gave it to her. Dawn walked out of the store, sold two of the watches, and returned to the store later to return the other items for a refund. What type of asset misappropriation has been committed? a. Sales skimming b. Pay-and-return scheme c. False refund scheme d. Inventory larceny scheme 23. Ace Electronics is a company that sells computers, televisions, home entertainment centers, DVD players, and other electronic equipment. A downturn in the market has caused severe financial problems in the company. In order to fool the auditors as they begin their inventory count, several of Ace’s managers have begun stacking empty boxes in the warehouse to create the illusion of extra inventory. This scheme is known as: a. Forced reconciliation b. Physical padding c. Inventory shuffling d. Misappropriation of intangible assets 24. To supplement her income, Jeanne Lester decided to start her own bookkeeping business while still working as an office assistant at Howe & Lyon, a small CPA firm.

Not having much start-up capital for her new business, she used her phone at work to contact clients and her work computer to print invoices and client letters. However, she ordered and paid for her own office supplies and used her own postage stamps to mail the invoices and letters. From the information given, has Jeanne misappropriated any of the firm’s assets?

a. Yes b. No 25. In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend’s father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was the theft discovered? a. A security guard found the chips in a routine check of his work cart. b. An inventory manager filling an order noticed that many of the chips were missing. c. The auditors found the shortage when they conducted the annual inventory count. d. His co-worker notified the loss prevention department in exchange for a cash award.

26. In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend’s father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was Gunter punished? a. He was arrested, charged with grand theft and embezzlement, and sentenced to prison. b. He was indicted for receiving stolen property, placed on probation, and ordered to repay the company for the value of the stolen chips. c. The company fired him but agreed not to prosecute him if he repaid the money and did not go to the media. d. He wasn’t, because he found out about the investigation and skipped town on the day he was to be arrested.

27. In one of the cases in the textbook, Swainler’s Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its theft insurance policy, the company had to show that the theft was an outside job.

Before the insurance company paid Swainler’s claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler’s marketing manager, Frederic Boucher. How did the investigator identify Boucher’s involvement? a. Boucher’s ex-wife found out and contacted Swainler’s board of directors. b. A former employee of Swainler’s went to work for a competitor and told his manager about Boucher’s involvement. c. The investigator found telephone calls made by Boucher to a warehouse where some of the stolen drives had been traced. d. Investigators found a large cash deposit in Boucher’s bank account around the time that the drives went missing.

28. In one of the cases in the textbook, Swainler’s Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its

theft insurance policy, the company had to show that the theft was an outside job.

Before the insurance company paid Swainler’s claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler’s marketing manager, Frederic Boucher. Which of the following control weaknesses were present in the company? a. Because the company was run primarily on trust, many transactions were conducted without any documentation or controls. b. The surveillance cameras on the loading dock didn’t work. c. Background checks were required only on senior executives and accounting personnel. d. All of the above

Chapter 10 – Corruption 1. Which of the following is not a type of corruption scheme? a. Bribery b. Conflict of interest c. Illegal gratuities d. Concealed payments 2. ___________________ is the offering, giving, receiving, or soliciting of something of value as a reward for a favorable decision. a. Business diversion b. Economic extortion c. Illegal gratuity d. Commercial bribery 3. The offering, giving, receiving, or soliciting of something of value for the purpose of influencing a business decision without the knowledge or consent of the principal is known as: a. Official bribery b. Commercial bribery c. Conflict of interest d. Illegal gratuity 4. Which of the following is a type of kickback scheme? a. Improper disclosure b. Overbilling c. Turnaround sale d. Extortion 5. A corruption scheme in which several bidders conspire to split contracts, thereby ensuring that each gets a certain amount of work, is known as: a. Bid pooling b. Bid rigging c. Bid division d. Bid diversion 6. To deter kickback schemes, an organization should implement which of following procedures? a. Separate the purchasing, authorization, and cash disbursements functions. b. Track purchase levels by vendor. c. Compare the prices paid for goods and services to market rates. d. All of the above

7. The key component to most kickback schemes is: a. Forged endorsements b. Counterfeit invoices c. Price inflation d. Stealing customer statements 8. Which of the following is a red flag indicating that an employee may be receiving kickbacks? a. The purchase of inferior-quality inventory or merchandise b. An unusually high volume of purchases from a particular vendor c. The payment of purchase amounts that are frequently above market rates d. All of the above 9. To facilitate a bribery scheme, a fraudster might divert company funds to a noncompany account from which the illegal payments can be made. This account is called a: a. Slush fund b. Petty cash fund c. Bid pool d. None of the above 10. To safeguard against kickback schemes, which of the following procedures should an organization implement? a. Have an employee in the purchasing department review the organization’s payment patterns on a quarterly basis. b. Establish a written policy specifying that employees cannot accept more than $500 annually in gifts from customers or suppliers. c. Prohibit employees from engaging in any transaction on behalf of the organization when they have an undisclosed personal interest in the transaction. d. All of the above 11. Which of the following would likely not be a potential target for accepting bribes in a big-rigging scheme? a. A product assurance representative b. An accounts payable clerk c. A contracting official d. The engineer in charge of the project’s technical specifications 12. The typical bid-rigging scheme committed during the need recognition phase of the contract negotiation process involves defining a “need” that can be met only by a certain supplier or contractor. a. True b. False 13. Which of the following is a red flag that might indicate that a bid-rigging scheme is occurring?

a. b. c. d.

The contract price is unusually low.

A high bid is followed by amendments that reduce the payments to the contractor.

The losing bidders become sub-contractors on the project.

Many more bidders responded to the request for proposals than expected.

14. If a government employee agrees to award a contract to a vendor in exchange for a promise of future employment, this is considered to be an illegal gratuity. a. True b. False 15. The primary approach for preventing conflicts of interest schemes is to develop and implement which of the following? a. A voucher system b. A company ethics policy c. A document retention program d. An anonymous reporting mechanism to receive tips and complaints 16. If an employee approves payment on an invoice that originates from a real company in which he or she has a hidden economic interest, this is considered to be a conflict of interest scheme. a. True b. False 17. Which of the following schemes can be detected by identifying vendor addresses that are not designated as a business address? a. Shell company schemes b. Kickback schemes c. Conflicts of interest d. All of the above 18. Extracting round-dollar payments and summarizing them by vendor can help detect both corruption and billing schemes. a. True b. False 19. Identifying trends in over-purchased and/or obsolete inventory over several periods is a proactive computer audit test that can be used to detect which of the following schemes? a. False purchases b. Corruption c. Overstated expenses d. None of the above 20. Matching the vendor master file to the employee master file is a proactive computer audit test that can be used to detect which type of fraud scheme(s)? a. Bribery b. Shell company

c. Both bribery and shell company d. None of the above 21. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, schemes involving corruption were the least common of the three types of occupational fraud schemes. a. True b. False 22. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the median loss due to corruption schemes was the highest of the three types of occupational fraud schemes. a. True b. False 23. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, bribery schemes occurred more often than other types of corruption schemes. a. True b. False 24. Stanley Block works in the IT department at Towery, Inc. After finding out that the company is planning to purchase four more computers for the accounting department, Stanley bought four computers from a friend for $1,200. Then, using his brother’s name and address as vendor information, he resold the computers to Towery for $2,300. This type of scheme is known as a(n): a. Over-purchase sale b. Resource diversion sale c. Double-sided sale d. Turnaround sale 25. Johanna Pye is a hair stylist at Mamon Salon. The salon’s policy states that stylists receive 40 percent of the revenue they generate as their compensation. Johanna grew tired of sharing her income with the salon and decided she wanted to make more money. She continued seeing her existing clients at the salon, but when new clients called for an appointment, Johanna lied and told them the salon was completely booked for the next few months. She then offered to come to their homes and cut their hair for 10 percent less than what the clients would be charged at the salon. She did not report the house call appointments to the salon, and was therefore able to keep all the income she generated from these side clients. This is an example of what type of scheme? a. Shell company b. Resource diversion c. Business diversion d. Double dealing

26. Fred Weaver is the contracts manager for a city government. In order for anyone to do business with the municipality, he or she must pay Fred 10 percent of the total amount of the contract. This type of corruption is known as: a. Bribery b. Economic extortion c. A conflict of interest d. Bid-rigging 27. Abe Wilson works as a city councilman in large city on the east coast. As part of his duties, he negotiated the purchase of some land in order to build a new water treatment plant for the city. The land was sold to the city by Jake Bryan for terms that were favorable to the city. After the sale was finalized, Bryan treated Abe and his wife to an all-expenses-paid Alaskan cruise. This type of fraud is known as: a. A conflict of interest b. Bribery c. An illegal gratuity d. Economic extortion 28. John Clark works as a land buyer for a city government. After negotiating the purchase of a parcel of land to be used for a new library, he asked the seller out for a coffee date, and she accepted. This situation is an example of an illegal gratuity. a. True b. False 29. Julius Smith is a purchasing agent for a Louisiana state agency. He has a project budgeted for $24,000 that he would like to hire RGS Consultants to handle.

Unfortunately for Julius and RGS Consultants, the state has a requirement that all projects over $10,000 must be sent out for competitive bids. In order to avoid the bidding process, Julius breaks the project into three component projects worth $8,000 each. RGS Consultants is subsequently awarded the contracts for all three projects.

What type of bid-rigging scheme is this? a. Bid pooling b. Underbidding c. Bid splitting d. Bid diversion 30. Donna Boyd is an internal auditor for GDP, Inc., an electronics manufacturer. While conducting a routine review of the company’s inventory costing, she discovers that the cost of one of the parts they use in manufacturing DVD players has been steadily increasing over the last six months and is now much higher than the general market price. Additionally, she notices that the company has been heavily favoring one specific supplier for that part. Based on these circumstances, what type of fraud scheme may be occurring at GDP? a. Kickbacks b. Conflict of interest c. Shell company d. Any of the above

31. In one of the case studies in the textbook, the General Services Administration (GSA), the federal government’s bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. How did the investigation get started? a. A whistleblower called the GSA’s hotline to report that inspectors in New Jersey were receiving bribes for certifying the furniture. b. A series of articles in a Washington, D.C., newspaper led to a congressional investigation. c. An audit conducted by the GSA found a high rate of return of modular furniture during a six-month period. d. A senator had his desk collapse when he threw his sub-committee’s budget on his desk after a hearing.

32. In one of the case studies in the textbook, the General Services Administration (GSA), the federal government’s bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. The investigators eventually focused on one particular regional inspector because: a. He vacationed in Europe with the vendor and charged the trip back to the government as a business related trip. b. He paid cash for a new home on the Jersey shore. c. He purchased eleven race horses. d. He had credit card charges of more than twice his annual salary during a sixmonth period.

33. In one of the case studies in the textbook, the General Services Administration (GSA), the federal government’s bookkeeping agency, purchased more than $200 million worth of defective and useless furniture from a New Jersey furniture manufacturer. After reviewing the books of the furniture manufacturer, it was clear that the company was paying off GSA inspectors. What happened to the furniture manufacturing company? a. It was charged with making false certifications and fined $2 million. b. It lost its contract with the GSA and went bankrupt. c. It was bought by another company. d. All of the above 34. In one of the case studies in the textbook, Rita Mae King was a purchasing agent at an electronics and appliance chain. She frequently worked with travel vendors and managed to put Spicewood Travel on the top of the preferred vendor list. Upon investigation, the fraud examiners discovered that she ran her own travel agency out of her office at the store and received kickbacks from Spicewood Travel in return for having her company use them to book trips. What triggered the investigation of Rita Mae King’s activities?

a. Her supervisor found an invoice for a trip that she booked showing she received an employee discount from Spicewood Travel. b. An employee from Spicewood Travel called King’s office and left an urgent message for King to call them concerning a travel problem with a group she booked to the Cayman Islands. c. Another employee of her company found a business card that she had left in a fishbowl for a drawing showing that she was an employee of Spicewood Travel. d. Her former boyfriend called the loss prevention department’s hotline and informed them that she was receiving kickbacks from Spicewood Travel.

35. In one of the case studies in the textbook, Rita Mae King was a purchasing agent at an electronics and appliance chain. She frequently worked with travel vendors and managed to put Spicewood Travel on the top of the preferred vendor list. Upon investigation, the fraud examiners discovered that she ran her own travel agency out of her office at the store and received kickbacks from Spicewood Travel in return for having her company use them to book trips. Why didn’t the company pursue legal action against King? a. The company didn’t want the publicity so they quietly let her resign. b. The vice president of loss prevention recommended against criminal action because of King’s age and her husband’s ill health. c. There was not enough evidence to pursue a conviction. d. Spicewood Travel agreed to reimburse the company for overcharges if they wouldn’t pursue criminal action against King.

Chapter 11 – Accounting Principles and Fraud 1. According to COSO’s study, Fraudulent Financial Reporting: 1998-2007, which of the following is the most likely to commit financial statement fraud? a. Organized criminals b. Mid-level employees c. The chief exective officer and/or chief financial officer d. Lower-level employees 2. Which of the following is a reason that a chief executive officer might commit financial statement fraud? a. To receive or increase a performance bonus b. To avoid termination due to poor performance c. To conceal the company’s true performance d. All of the above 3. Senior management is most likely to understate business performance in the financial statements for which of the following reasons? a. To reduce the value of an owner-managed business for purposes of a divorce settlement b. To comply with loan covenants c. To increase the value of a corporate unit whose management is planning a buyout d. To trigger performance-related compensation or earn-out payments 4. Which of the following is not a reason that senior management would overstate business performance to meet certain objectives? a. To meet a lender’s criteria for granting/extending loan facilities b. To meet or exceed the earnings or revenue growth expectations of stock market analysts c. To reduce current expectations so that future growth will be better perceived and rewarded d. To increase the amount of financing available from asset-based loans 5. If a fraudster manipulates the assumptions used to calculate depreciation charges in order to increase earnings to a desired figure, which general method of financial statement fraud is the fraudster using? a. Going outside the accounting system b. Beating the accounting system c. Going around the accounting system d. Playing the accounting system 6. When a fraudster feeds fictitious information into the accounting system in order to manipulate reported results, this is called: a. Going outside the accounting system b. Beating the accounting system c. Going around the accounting system d. Playing the accounting system

7. If a fraudster uses his computer to produce fictitious financial statements while completely ignoring the data in the accounting system, this is an example of what general financial statement fraud method? a. Beating the accounting system b. Playing the accounting system c. Going outside the accounting system d. None of the above 8. The conceptual framework for financial reporting includes several assumptions that underlie generally accepted accounting principles. Which of the following is one of these assumptions? a. Economic entity b. Relevance c. Matching d. Comparability 9. Fraudulent manipulation of the going concern assumption usually results from an organization trying to conceal its terminal business situation. a. True b. False 10. Intentionally reporting product sales in the financial statements for the period prior to when they actually occurred is a violation of which generally accepted accounting principle? a. Periodicity b. Matching c. Historical cost d. Revenue recognition 11. The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation? a. Full disclosure b. Revenue recognition c. Materiality d. Cost-benefit 12. Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of: a. Materiality b. Full disclosure c. Matching d. Cost-benefit

13. The conservatism constraint for financial reporting states that, if there is any doubt, companies should aim to avoid overstating assets and income. a. True b. False 14. A company’s financial statements are the responsibility of: a. The independent auditors b. The shareholders c. The accounting department d. Management 15. The term “financial statement” does not include a statement of cash receipts and disbursements, because this type of presentation violates the required use of accrual accounting under GAAP. a. True b. False 16. Which of the following is not one of the provisions established under the SarbanesOxley Act? a. Code of ethics for senior financial officers b. Management assessments of internal controls c. The creation of the Public Accounting Standards Board d. Criminal penalties for altering documents 17. As the result of the Sarbanes-Oxley Act, the Securities Exchange Commission has implemented which of the following rules? a. New standards of professional conduct for attorneys b. Insider trades during pension fund blackout periods c. Conditions for use of non-GAAP financial measures d. All of the above 18. Which of the following is a duty of the Public Company Accounting Oversight Board? a. Registering accounting firms that audit publicly traded companies b. Establishing or adopting standards relating to audits of publicly traded companies c. Enforcing compliance with professional standards and securities laws relating to public company audits d. All of the above 19. Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and imposing sanctions where justified are duties of which of the following bodies? a. General Accounting Office’s Oversight Board b. Public Company Accounting Oversight Board c. AICPA’s Accounting Standards Board d. SEC’s Subcommittee on Corporate Governance

20. Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to personally certify annual and quarterly SEC filings. Which of the following is an item that they must certify in their reports? a. They have disclosed to the audit committee any material control weakness. b. The financial statements were prepared in conformity with GAAP. c. The company’s internal controls have prevented or detected all material instances of fraud during the last year. d. All of the above 21. The Sarbanes-Oxley Act provides that members of the audit committee may receive compensation for consulting or advisory work only if approved by a majority of the board members. a. True b. False 22. The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting firms are allowed to perform for audit clients. Which of the following services are public audit firms now expressly prohibited from performing for their audit clients? a. Quarterly review services b. Tax services c. Bookkeeping services d. All of the above 23. Under Sarbanes-Oxley, pubic accounting firms must rotate the lead partner or the partner reviewing the audit every year. a. True b. False 24. The civil and criminal protections for whistleblowers under Sarbanes-Oxley apply only to employees of publicly traded companies. a. True b. False 25. Vanessa Armstrong was the chief financial officer for D&G Technologies, a publicly traded corporation. During the 20X1 fiscal year, she caused the company’s financial statements to violate reporting requirements by including a significant overstatement of revenue so that she would receive a large performance bonus. When her transgression came to light, the company was required to issue restated financial statements for 20X1. Under the provisions of Sarbanes-Oxley, Vanessa must reimburse the company for any bonus she received during the 12 months after the 20X1 financials were initially filed. a. True b. False 26. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the most common type of occupational fraud is financial statement fraud. a. True

b. False 27. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, losses due to financial statement frauds are higher than other occupational fraud schemes. a. True b. False

Chapter 12 –Financial Statement Fraud Schemes 1. Which of the following is not an example of financial statement fraud? a. Falsification of material financial records, supporting documents, or business transactions b. Unintentional misapplication of accounting principles c. Deliberate omission of material disclosures d. All of the above are examples of financial statement fraud 2. Staff Accounting Bulletin Topic 13, “Revenue Recognition,” indicates that revenue is considered realized or realizable and earned when four criteria are met. Which of the following is one of these criteria? a. Collectibility is reasonably assured. b. Goods have been scheduled to be delivered or services have been scheduled to be rendered within the current fiscal period. c. The seller has located alternate buyers. d. All of the above are criteria for revenue recognition.

3. Recording revenue from a sale even though the rights and risks of ownership have not yet passed to the purchaser is an example of what type of fictitious revenue scheme? a. Partial sale b. Circumstantial sale c. Tentative sale d. Sale with conditions 4. Which of the following is a red flag associated with fictitious revenues? a. An unusual decrease in gross margin b. An unusual decline in the number of days’ purchases in accounts payable c. Several unusual and highly complex sales transactions recorded close to the period end d. Recurring losses while reporting increasing cash flows from operations 5. While conducting the annual audit of Bluebird Company’s financial statements, Elsie Finnegan, CFE, CPA, came across some fishy findings. The company recorded several large and unusual sales at the end of the fiscal year to customers Elsie had never heard of. Further, all of these sales occurred within the company’s specialty division, which had previously been in danger of closing due to recurring losses.

Based on these findings, what type of financial statement fraud is likely occurring? a. Expense omission b. Unrecorded warranties c. Fictitious revenues d. All of the above 6. An unusual growth in the number of days’ sales in receivables can be a red flag for which of the following financial statement fraud schemes?

a. Timing differences b. Fictitious revenues c. Improper asset valuation d. All of the above 7. Sharpe Medical Supply, Inc. has suffered a recent slow-down in sales and is in danger of showing a loss for the 20X1 fiscal year. To boost income, the sales manager encourages two of the company’s largest customers to overbuy several slow-moving products at deep discounts. He also offers them extended payment terms, some of which delay payment until the end of 20X2. This is an example of what type of scheme? a. Channel stuffing b. Discount extension c. Sales re-routing d. Long-term contracts 8. The preferred and easiest method of concealing liabilities and expenses is to simply fail to record them. a. True b. False 9. An organization that seeks to fraudulently minimize its net income due to tax considerations may do so by: a. Recording fictitious revenues b. Omitting existing liabilities c. Expensing capitalized expenditures d. Underestimating warranty repairs expense 10. It is more difficult to manipulate construction contracts that use the percentage of completion method than contracts that use the completed contract method. a. True b. False 11. Capitalizing revenue-based expenses as depreciable assets will cause income to be ____________ in the current period and _______________ in future periods. a. Understated; overstated b. Understated; understated c. Overstated; understated d. Overstated; overstated 12. Which of the following is a red flag associated with concealed liabilities and expenses? a. Gross margin significantly lower than industry average b. An unusual increase in the number of days’ purchases in accounts payable c. An unusual change in the relationship between fixed assets and depreciation

d. Significant reductions in accounts payable while competitors are stretching out payments to vendors 13. An inability to generate cash flows from operations while reporting earnings and earnings growth is a red flag for which of the following financial statement fraud schemes? a. Improper asset valuation b. Fictitious revenues c. Concealed liabilities and expenses d. All of the above 14. GAAP strictly prohibits companies from engaging in all related-party transactions because, without an arm’s-length business negotiation process, the company may suffer economic harm and ultimately injure unsuspecting shareholders. a. True b. False 15. Management has an obligation to disclose to the shareholders any fraud that is committed by the company’s employees or vendors. a. True b. False 16. At the suggestion of the external auditors, the audit committee of Alpha Technologies called in Bryce Miller, CFE, to investigate some suspected improprieties. During his investigation, Bryce learns that the company has been involved in several highlycomplex transactions with related parties that do not appear to have any logical business purpose. Further, Alpha’s organizational structure is overly complex and involves some unusual legal entities with overlapping lines of authority. Bryce also discovers four large bank accounts in the Cayman Islands that have no clear business justification. When questioned about these situations, the company’s CEO treats them as unimportant and refuses to provide any further explanation. What type of financial statement fraud scheme do Bryce’s findings most likely indicate? a. Fictitious revenues b. Improper asset valuation c. Improper disclosures d. Concealed expenses 17. Recurring attempts by management to justify marginal or inappropriate accounting treatments on the basis of materiality is a red flag associated with which type of financial statement fraud? a. Improper disclosures b. Fictitious revenues c. Concealed liabilities d. None of the above 18. Which of the following is a common target for improper asset valuation schemes?

a. Accounts receivable b. Business combinations c. Inventory valuation d. All of the above 19. An unusual change in the relationship between fixed assets and depreciation is a red flag associated with which type of financial statement fraud scheme? a. Timing differences b. Improper asset valuation c. Improper disclosure d. All of the above 20. Which of the following is an example of improper asset valuation? a. Fictitious accounts receivable b. Understating assets c. Misclassifying assets d. All of the above 21. According to SAS 99 (AU 240), “Consideration of Fraud in a Financial Statement Audit,” the auditor should ask management about the risks of fraud and how they are addressed. Which of the following is not described as an issue that the auditor should ask management about? a. Whether management has knowledge of fraud or suspected fraud b. Management’s understanding of the risk of fraud c. Whether and how management communicates the company’s financial results to its employees d. Programs that the entity has established to prevent, deter, or detect fraud 22. According to AU 240, fraud involving senior management should be reported directly to the shareholders as soon as the fraud is documented. a. True b. False 23. AU 240 requires auditors to document: a. Any specific risks of material misstatement due to fraud that were identified b. The discussion among engagement personnel regarding the susceptibility of the entity’s financial statements to material misstatement due to fraud c. The reasons supporting the auditor’s conclusion if the auditor has not identified improper revenue recognition as a risk d. All of the above 24. Vertical analysis is also known as “common sizing” of financial statements. a. True b. False

25. In the vertical analysis of an income statement, _____________ is assigned 100 percent, with all other items expressed as a percentage thereof. a. Gross sales b. Net sales c. Net income d. Gross margin 26. The technique for analyzing the percentage change in individual financial statement items from one accounting period to the next is known as: a. Ratio analysis b. Vertical analysis c. Horizontal analysis d. Correlation analysis 27. The textbook lists several ways to reduce the pressures to commit financial statement fraud, including: a. Avoiding setting unachievable financial goals b. Maintaining accurate and complete internal accounting records c. Having confidential reporting mechanisms to communicate inappropriate behavior d. Maintaining accurate personnel records including background checks on new employees 28. Establishing clear and uniform accounting procedures with no exception clauses can help reduce financial statement fraud by addressing which side of the fraud triangle? a. Pressures to commit fraud b. Opportunity to commit fraud c. Rationalizations of financial statement fraud d. Non-sharable problems 29. Promoting strong values, based on integrity, throughout the organization can help reduce financial statement fraud by addressing which side of the fraud triangle? a. Non-sharable financial needs b. Opportunity to commit fraud c. Pressure to commit fraud d. Rationalization of fraud 30. Bill Raymond is the CEO of the Drummond Group, a consulting group in the Carolinas. Sales have increased at least five percent every year for the past seven years. Unfortunately, the company has hit a slump this year, and revenue is far less than anticipated. However, in order to receive his performance bonus, Bill must show a sales increase of at least seven percent. When the financials are released, sales have increased by exactly seven percent. Which of the following ratio analyses would be most helpful in revealing that Bill included bogus sales in the company’s financials? a. Inventory turnover b. Receivable turnover

c. Debt-to-equity ratio d. Quick ratio 31. Sally Lauren is the external auditor for Modus Industries, a public company that manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What type of financial statement fraud scheme could be occurring? a. Inflated inventory b. Omitted expenses c. Fictitious accounts receivable d. None of the above 32. Scott Ruskin is the CEO of Decatur Materials. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants.

Scott is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Scott undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light? a. Quick ratio b. Collection ratio c. Inventory turnover d. Profit margin 33. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What financial statement fraud scheme did Eddie commit? a. Overstatement of inventory b. Improper disclosures c. Fictitious revenues d. All of the above 34. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. How was the fraud caught? a. His ex-wife contacted the SEC. b. Eddie lost a proxy battle for ownership, and the company’s new owners quickly discovered the fraud as they reviewed the books.

c. The audit committee received an anonymous tip which led them to the fraud. d. The auditors found that the inventory count had been changed.

35. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What happened to Eddie Antar? a. He fled the country and is still at large. b. He repaid the money and was placed on probation. c. He was convicted of racketeering and sentenced to prison. d. He became a witness for the SEC against his cousin, the CFO, in exchange for a reduced sentence.

36. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What type of financial statement fraud was committed? a. Fictitious assets b. Fictitious sales c. Improper disclosures d. Concealed expenses 37. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. Which of the following was a red flag that a fraud was being perpetrated? a. A single check was used to pay off several different customer accounts. b. The company experienced extremely rapid growth even while its competitors’ growth was flat. c. The company kept changing auditors every other year. d. The bank account had been overdrawn on at least four occasions in one year.

38. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What happened to Weinstein? a. After the bankruptcy, he raised new capital and started another fabric coating company.

b. He was convicted, sentenced to prison, and ordered to make restitution. c. He cooperated with the government and became an informant against his partners who had been siphoning cash off of government contracts. d. He was placed on probation after reimbursing the shareholders with the profits he had made on investments in the stock market.

Chapter 13 – External Fraud Schemes 1. Which of the following is NOT one of the three sources of external fraud discussed? a. Vendors b. Customers c. Auditors d. Unrelated third parties 2. Which of the following statements is true with regard to external fraud threats? a. Unrelated third parties pose the greatest threat to an organization b. Only companies that contract with vendors are at a risk of external fraud c. A member of an organization’s board of directors committing fraud against that organization is an example of external fraud d. Companies that house large amounts of customer payment data are especially vulnerable to external fraud threats 3. What is a paperhanger? a. A person who is an expert in check fraud b. A person who counterfeits money c. A person who specializes in e-commerce check scams d. A person who is an expert in credit card fraud 4. Which of the following statements is true with regard to credit cards? a. Less than half of the U.S. population has a credit card b. The chances of being caught using an unauthorized card are small c. Counterfeit credit cards are known as “black plastic” cards d. The hologram is the easiest part of a credit card to duplicate 5. Taylor is a procurement specialist for Hillside Corporation. He is reviewing contracts, and notices a pattern between three particular contractors. Contractor A bid the lowest on the first job, Contractor B bid the lowest on the second job, and Contractor C bid the lowest on the third job. All three contractors bid on all three jobs. Which of the following is a potential scheme perpetrated by these contractors? a. Bid tailoring b. Bid rotation c. Complementary bids d. Phantom bids 6. Which of the following is NOT one of the four phases of the procurement process? a. The presolicitation phase b. The solicitation phase c. The performance phase d. The project review phase 7. A caterer has been contracted by Austin Corp. to provide the food for a large banquet.

The catering contract explicitly states that the caterer will serve a fish entrée and a

chicken entrée, and the fish entrée will consist of red snapper. The caterer decides to use tilapia instead, which costs about a third as much as red snapper, but is also a white fish and looks quite similar. He figures that no one at the banquet will be able to tell the difference. Austin Corp. is charged the price of the red snapper. What type of scheme has the caterer perpetrated? a. Product substitution b. Cost mischarging c. Material deception d. Contract falsification 8. Which of the following is the best way to prevent vendor fraud? a. Conduct vendor audits b. Perform services in-house rather than using vendors c. Disallow any contract modifications d. Require a minimum of three vendors to be considered for any project 9. Which of the following is a key finding from the 2010/2011 Computer Crime and Security Survey? a. Data manipulation is one of the most commonly seen attacks. b. Almost 80% of the survey respondents experienced at least one security incident. c. Respondents believed that the activities of outsiders accounted for much of their losses from cybercrime. d. All companies surveyed had a technical expert on staff.

10. Why are computer fraud cases difficult for a fraud examiner to investigate? a. They lack a traditional paper audit trail. b. They require an understanding of the technology used to commit the crime. c. They require the use of one or more specialists to assist the fraud examiner. d. All of the above are reasons why computer fraud cases are difficult to investigate.

11. ________________ is the use of technology to gain unauthorized access to sensitive information on a computer system. a. Data manipulation b. Computer hacking c. Social engineering d. Computer crime

12. Password cracking, social engineering, and phishing are all: a. Methods used to gain unauthorized access b. Data manipulation tactics c. Corporate espionage tactics d. None of the above

13. Max Reynolds is trying to obtain customer payment data from Stella Corporation. He wanders around Stella’s offices pretending to be a confused intern, looking for someone who can help him get on his computer. An unsuspecting employee gives him her login information, not realizing the amount of data she has just given him access to. He downloads several spreadsheets of customer payment data and takes off.

What type of scheme has Max committed against Stella Corporation? a. Phishing b. Password cracking c. Social engineering d. Employee hijacking 14. Which of the following is commonly used to perpetrate data manipulation and destruction schemes? a. Wire tapping b. Data dumps c. Network infiltration d. Malware 15. If an organization offers wireless or remote access, its server software should terminate any connection: a. From a foreign country b. Cash larceny c. After a certain number of unsuccessful attempts to enter an invalid password d. Skimming 16. All of the following are examples of malware EXCEPT: a. Blackware b. Virus c. Trojan horse d. Botnet 17. What is encryption? a. Impersonating one of the organization’s computers to get access to the network b. A type of intrusion detection system c. A company’s criteria for password selection d. Procedures used to convert information using an algorithm that makes it unreadable 18. Which of the following does corporate espionage include? a. Legitimate intelligence collection b. Acquisition of information through clandestine means c. Intelligence analysis using legal means d. All of the above 19. According to the textbook, which of the following is NOT one of a corporate spy’s favorite departments to target?

a. b. c. d.

Research and development Legal Marketing Human resources

20. What is a recommended preventative measure a company should take to protect its physical property? a. Send and receive all mail from company premises b. Ensure outdoor waste receptacles are locked and guarded c. Keep sensitive documents out of sight and in employees’ drawers d. Ensure the cleaning staff only works after business hours

Chapter 14 – Fraud Risk Assessment 1. Factors that influence the level of fraud risk faced by an organization include which of the following? a. The nature of the business b. The effectiveness of the organization’s internal control c. The ethics and values of the organization and the people in it d. All of the above 2. _________ controls are designed to stop an undesirable event from occurring, whereas _________ controls are designed to identify an undesirable event that has already occurred. a. Preventive; detective b. Internal; external c. Risk; discovery d. Operating; review 3. The objective of a fraud risk assessment is to help management recognize factors that make an organization most vulnerable to fraud so that management can address those factors to reduce the exposure. a. True b. False 4. In general, management should avoid sharing the fraud risk assessment process and results with employees. a. True b. False 5. Fraudulent financial reporting risks include which of the following? a. Payment of bribes or gratuities b. Aiding and abetting of fraud by outside parties c. Inappropriately reflected balance sheet amounts d. Misappropriation of intangible assets 6. Effective internal controls can eliminate the need for a fraud risk assessment. a. True b. False 7. Which of the following factors should be considered when selecting a sponsor for the fraud risk assessment? a. Seniority b. Independence c. Ability to elicit cooperation d. All of the above

8. Which of the following factors should be considered in assessing the likelihood of occurrence of each fraud risk? a. Financial statement and monetary significance b. Internal control environment of the organization c. Criminal, civil, and regulatory liabilities d. Financial condition of the organization 9. Management is not likely to have sufficient knowledge of controls to override them. a. True b. False 10. Risks resulting from ineffective or nonexistent controls are known as which of the following? a. Residual risks b. Inherent risks c. Control risks d. Audit risks 11. Assessing an area as having a high fraud risk means that fraud is occurring there. a. True b. False 12. Which of the following is not one of the three interrelated elements that enable someone to commit fraud? a. Opportunity b. Non-sharable financial need c. Ability to rationalize d. Fraud risk 13. The results of a fraud risk assessment can help auditors design programs and procedures in a way that enables the auditors to look for fraud in known areas of high risk. a. True b. False 14. It is not important to consider reputation risk in performing a fraud risk assessment since this risk cannot easily be mitigated. a. True b. False 15. The vulnerability of an organization to those capable of overcoming the three elements of the fraud triangle is known as which of the following? a. Inherent risk b. Fraud risk assessment c. Fraud risk d. Control risk

16. Which of the following is a type of detective control? a. Segregating duties b. Performing background checks c. Performing surprise audits d. Ensuring proper alignment between an individual’s authority and level of responsibility 17. In assessing the significance to the organization of identified fraud risks, the fraud risk assessment team should first consider them on an inherent basis. a. True b. False 18. Which of the following information-gathering techniques enables the fraud risk assessor to observe the interactions of employees as they discuss a question or issue? a. Interviews b. Surveys c. Focus groups d. Anonymous feedback mechanisms 19. When assessing the potential incentives, pressures, and opportunities to commit fraud, the fraud risk assessment team should evaluate which of the following? a. Incentive programs and how they may affect employees’ behavior when conducting business or applying professional judgment b. Highly complex business transactions and how they might be used to conceal fraudulent acts c. Opportunities for collusion d. All of the above 20. Which of the following is not a true statement regarding the fraud risk assessment process? a. It is more of a science than an art b. To be most effective, it should be an ongoing, continuous process c. It should be influenced by the culture of an organization d. It is aimed at proactively identifying an organization’s vulnerabilities to fraud 21. Which of the following is not true regarding fraud risk? a. It can be analyzed quantitatively b. It results exclusively from sources internal to the organization c. It can be analyzed qualitatively d. It encompasses reputation risk 22. Which of the following is not a potential corruption risk? a. Payment of bribes to public officials, companies, or private individuals b. Inadequate disclosures pertaining to related-party transactions c. Receipt of kickbacks, bribes, or gratuities

d. Aiding and abetting of fraud by customers or vendors 23. Which of the following techniques can be used to evaluate the effectiveness and efficiency of internal controls? a. Review of the accounting policies and procedures in place b. Interviews with management and employees c. Consideration of the risk of management’s override of controls d. All of the above 24. Both management and auditors have a responsibility for fraud risk management. a. True b. False 25. Management should consider which of the following in establishing an acceptable level of fraud risk for the organization? a. The organization’s business objectives b. The organization’s risk tolerance level c. Both A and B d. Neither A nor B 26. Which of the following factors enhances a fraud risk assessment? a. Collaboration between management and auditors b. Independence and objectivity of those leading and conducting the work c. Inclusion of people’s perceptions at all levels of the organization d. All of the above 27. One of the first steps in a fraud risk assessment involves identifying potential fraud risks inherent to the organization. a. True b. False 28. To maximize the effectiveness of the fraud risk assessment process, the fraud risk assessment team should include both facts and opinions in its report. a. True b. False 29. Which of the following actions might management take in order to transfer a residual fraud risk? a. Eliminate the related asset b. Exit the related activity c. Purchase fidelity insurance d. Implement countermeasures 30. Internal control is a process aimed at proactively identifying and addressing an organization’s vulnerabilities to internal and external fraud. a. True

b. False

Chapter 15 – Conducting Investigations and Report Writing 1. A company may need to undertake an internal investigation into alleged employee fraud for which of the following reasons? a. To mitigate the company’s vicarious liability for the wrongful conduct b. To determine the source and amount of loss c. To guard against wrongful termination accusations d. All of the above 2. Officers and directors of companies are bound by the duties of _________ and _________ in overseeing the operations of their companies. a. loyalty; reasonable care b. due process; loyalty c. reasonable care; imputed practice d. loyalty; implicit care 3. The failure to adequately investigate an allegation of employee fraud may be a violation of legal and regulatory requirements. a. True b. False 4. When choosing a fraud examination team, it is important to include as many parties as possible to ensure that all investigatory perspectives are covered. a. True b. False 5. In most cases, which of the following parties should be primarily responsible for directing a fraud examination? a. The external auditors b. The head of the security department c. The company’s legal counsel d. The human resources manager 6. Fraud examination teams should be broken down into two segregated groups: one that focuses on the financial side of the investigation and one that performs the investigatory field work. a. True b. False 7. Which of the following factors should be considered when determining whether to employ outside consultants during a fraud examination engagement? a. Company politics b. The degree of expertise required for specific tasks c. Potential threats of retaliation against internal investigators d. All of the above

8. Which of the following statements is true regarding the use of undercover operations as part of a fraud examination? a. Undercover operations are never legal and should not be used in fraud examinations. b. Undercover operations should be used only if there is sufficient probable cause that a crime has been committed. c. There are no restrictions governing the use of undercover operations as part of fraud investigations. d. None of the above 9. Able is a fraud examiner who works for XYZ, a private company. While investigating an allegation of employee embezzlement, Able calls Baker, a suspected co-conspirator, and pretends to be a member of the local police force. Able tells Baker that if he turns over his financial records to Able, that he will be provided immunity from prosecution. Is Able’s use of impersonation in this situation legally acceptable? a. Yes b. No 10. _____________ involves obtaining information through the use of falsehoods or deception. a. Pretexting b. Subject manipulation c. Forensic investigation d. Surveillance 11. While investigating an alleged conflict of interest scheme, Green, an internal investigator, is contacted by the ex-wife of Brown, the primary suspect. After calling her ex-husband some unsavory names and telling Green that Brown hasn’t paid a dime of his court-ordered alimony, the jilted former spouse informs Green that she has some dirt on Brown. She tells Green that she’d be more than happy to spill the beans about Brown’s misdeeds if Green can ensure that she receives half of any money recovered as a result of the investigation. Because Brown’s ex-wife is clearly seeking a financial reward for supplying information, Green should discontinue speaking with her and should not rely on any information she provides. a. True b. False 12. Baker, CFE, is on a stakeout at the home of Potter, the prime suspect in a large false billing scheme. When Baker arrives at Potter’s street, she notices Potter’s garbage has been placed on the curb for pickup. Baker believes she could obtain much of the information she needs by going through Potter’s garbage. In order to legally sift through Potter’s trash and seize discarded documents to be used as evidence, Baker must: a. Obtain a search warrant b. Obtain a subpoena duces tecum

c. Obtain Potter’s consent d. None of the above 13. To be valid, a search warrant must be issued by a judge and must be served by a law enforcement official. a. True b. False 14. Lloyd, CFE, has asked Betsy for access to her bank records as part of an investigation into an alleged embezzlement scheme. If Betsy agrees, her consent must be written, signed, and dated in order for it to be binding. a. True b. False 15. Which of the following statements about handling and storing documentary evidence is not true? a. Documents received should be initialed and dated by the fraud examiner. b. The original document should be preserved for forensic examinations. c. Photocopied documents should be stored in transparent plastic envelopes. d. Documents should never be stapled or paper-clipped.

16. _________________ refers to establishing how and when a piece of evidence was received; how it was maintained or stored while in each person’s possession; what changes, if any, it underwent in that person’s custody; and how it left that person’s custody. a. Authentication b. Forensic examination c. Chain of custody d. None of the above 17. If, during the handling of a piece of documentary evidence, an investigator inadvertently holds the document with bare hands and leaves fingerprints on it, the document should be destroyed and a new copy should be obtained. a. True b. False 18. Of the following, which is the preferred method of organizing documentary evidence? a. Chronological order b. Alphabetical order c. By witness d. Order received 19. When organizing documentary evidence, it is recommended that investigators keep which of the following? a. Chronologies b. To-do lists

c. A separate file for key documents d. All of the above 20. Jackson, CFE, is investigating a suspected embezzlement by one of XYZ Corp.’s employees. As part of this investigation, she is assembling a financial profile of the suspect. Among other things, she wants to know if the suspect has made any significant real estate purchases since the embezzlement scheme began. Information on real estate transactions such as deeds, grants, transfers, and mortgages is located: a. With the county recorder b. With the state tax assessor c. With the secretary of state d. With the U.S. Department of Land Management 21. Which of the following information is typically not included in a corporate registration? a. The location of the corporation’s principal office b. The tax returns and quarterly reports for the corporation c. The names of the corporation’s directors and officers d. The date of incorporation 22. Information concerning a corporation’s name, ownership, stock value, initial shareholders, directors, and officers is registered and maintained at which of the following levels? a. Federal b. State c. Municipal d. County 23. McCloud, an internal investigator for a private company, has reason to believe that LaRue, the company’s controller, has been embezzling cash and living the high life on the company’s dime. McCloud has just discovered that LaRue bought a mansion on the edge of town last year and McCloud wants to find out more about the purchase. Information about whether LaRue took out a mortgage on the property may be found by searching: a. LaRue’s income tax return b. County real property records c. LaRue’s bank account transactions d. All of the above 24. To obtain information about an auto loan, such as where and when the loan originated and the current address of the debtor, an investigator should search the Uniform Commercial Code documents filed with the Secretary of State. a. True b. False

25. To find the names of the parties who have an interest in the estate of a deceased individual, an investigator should search the records of which court? a. County civil court b. U.S. District court c. Probate court d. None of the above 26. Fraud examinations conclude with: a. A conviction of the guilty party b. A report of the investigation findings c. A confession from the suspect d. An opinion on the guilt or innocence of the implicated party 27. A well-written, accurate, and understandable investigation report will: a. Convey all pertinent evidence b. Add credibility to the investigation c. Accomplish the objectives of the case d. All of the above 28. When preparing an investigative report, the fraud examiner should assume that it will be read by outside parties. a. True b. False 29. Bob Taylor, CFE, is writing a report on his findings from an investigation into an alleged inventory larceny scheme. During his investigation, he was unable to accurately quantify the amount of the loss to the victim company, but he assumes that the loss falls between $100,000 and $200,000. In the report, Bob should report the amount of the loss as $200,000 so that the company can recoup as much money as possible from the perpetrator. a. True b. False 30. In which section of the standard fraud examination report should the investigator discuss the identity and background information obtained about the individuals implicated in the matter under investigation? a. Summary b. Introduction c. Body d. Results 31. In a written fraud examination report, the fraud examiner’s conclusions about how the fraud occurred should be explicitly stated. a. True b. False

Chapter 16 – Interviewing Witnesses 1. Which of the following question types will generally not be asked during an information-gathering interview of a neutral witness? a. Introductory b. Informational c. Assessment d. Closing 2. While conducting an interview, you have reason to believe that the respondent is not being truthful. What type of questions will help you establish the respondent’s credibility? a. Open b. Non-leading c. Admission-seeking d. Assessment 3. ______________ questions are asked if you have a reasonable cause to believe that the respondent is responsible for the fraud under investigation. a. Admission-seeking b. Assessment c. Leading d. Closing 4. Which of the following is not one of the primary purposes of asking introductory questions during an interview? a. Establishing rapport between the interviewer and the subject b. Asking sensitive questions before the subject has the ability to go on the defensive c. Observing reactions to questions d. Establishing the theme of the interview 5. During the introductory phase of an interview, the respondent states that he won’t provide any information unless he is promised confidentiality. In this situation, you should give in to his request to ensure that you get the information you are seeking. a. True b. False 6. Which of the following is a rule that the interviewer should follow when asking questions during the introductory phase of the interview? a. Promise confidentiality to the respondent. b. Give the interviewee the opportunity to respond to the source of the allegations. c. Question only one person at a time. d. All of the above

7. The purpose of informational questions is to gather unbiased, factual information.

Which of the following is a type of informational question? a. Assessment b. Norming c. Closing d. Leading 8. When asking informational questions, you should start with general questions and then proceed to specific questions. a. True b. False 9. An open question is a question that is worded in a way that makes it difficult to answer with a simple “yes” or a “no.” a. True b. False 10. During an interview, you ask the respondent a question that contains the answer as part of the question. This is called a(n): a. Open question b. Closed question c. Assessment question d. None of the above 11. A(n) _____________ interview is one that has the potential to bring about strong emotional reactions in the respondent. a. Explosive b. Aggressive c. Volatile d. Emotive 12. During a potentially volatile interview, there should be only one person in the room with the respondent in order to prevent intimidation. a. True b. False 13. At the conclusion of an interview, closing questions should be asked for which of the following purposes? a. Reviewing key facts to ensure that they have not been misunderstood b. Gathering previously unknown facts c. Asking the respondent if he or she has been treated fairly d. All of the above 14. Assessment questions are worded so that dishonest people will likely agree with many of the statements, while honest people likely won’t. a. True

b. False 15. The question “Do you think someone around here might be justified in making a secret arrangement with one of the company’s vendors?” is an example of what type of interview question? a. Allusive b. Admission-seeking c. Assessment d. Alternative 16. In an interview situation, the process of observing behavior before critical questions are asked is called: a. Calibrating b. Leading c. Attribution d. None of the above 17. Respondents in an interview give both verbal and nonverbal clues that can be used to determine whether they are being deceptive. Which of the following is generally not considered a verbal clue to deception? a. Changes in speech patterns b. Tolerant attitude c. Feigned unconcern d. Overuse of emotive words 18. During an interview, when an interviewee repeatedly fiddles with a pen or picks lint from her clothing, she is giving non-verbal clues called: a. Illustrators b. Manipulators c. Exemplifiers d. None of the above 19. During an interview, the respondent frequently uses the phrases “honestly” and “I swear to God.” The respondent is giving a type of verbal clue known as: a. Character testimony b. Illustrators c. Oaths d. Manipulators 20. Melinda Speed, CFE, was conducting an interview of Charles Fuhrman, the shipping manager at B&D Supply Co. During the interview, Charles sat with his arms crossed over his chest and his legs aimed awkwardly at the door. Charles’ nonverbal clues indicate that he is probably being deceptive. a. True b. False

21. During an admission-seeking interview, Andrew Douglas, the primary suspect, repeatedly began his responses with the phrase “to tell the truth.” Additionally, he had trouble remembering several key facts regarding the events in question, even though his memory of the small details was excellent. Andrew’s verbal clues likely indicate that he is being truthful. a. True b. False 22. Private employers conducting an internal investigation are generally required to give Miranda warnings before commencing an admission-seeking interview with a nonunion employee. a. True b. False 23. Oral confessions are as legally binding as written confessions. a. True b. False 24. Generally, there is nothing illegal about accusing an innocent person of misdeeds as long as: a. The accuser has predication to believe the accused has committed an offense. b. The accusation is made under reasonable conditions and in private. c. The accuser does not take any action that is likely to make an innocent person confess. d. All of the above 25. During an admission-seeking interview in which an accusation has been made, the respondent will normally object to the accusation and attempt to deny it. When you are convinced of the respondent’s guilt, it is important to: a. Interrupt the denial. b. Ask the respondent to put the denial in writing. c. Repeat the denial for confirmation of understanding. d. None of the above 26. When the subject of an investigation has been accused of misconduct, establishing a morally acceptable rationalization might allow the accused to reconcile his actions with his conscience. Which of the following is not an example of an acceptable rationalization? a. The accused has been unfairly treated by his management. b. The accused felt that he needed to get back at someone in the organization. c. The accused is a bad person by nature. d. The accused engaged in the misconduct for the benefit of others.

27. During an admission-seeking interview, the accused individual will likely present reasons why he or she could not have committed the offense. When this occurs, the fraud examiner should step in and diffuse these alibis by:

a. Discussing the accused’s deceptions b. Displaying the physical evidence c. Discussing the testimony of other witnesses d. Any of the above 28. In an admission-seeking interview, once the accused has provided a verbal confession, the interviewer should focus on obtaining: a. An estimate of the total amount of money involved b. A motive for the offense c. The names of other people who are involved d. All of the above 29. When obtaining a written confession during an admission-seeking interview, which of the following is not an item that should be included in the written statement? a. Willingness to cooperate b. Promise of leniency c. Excuse clause d. Intent to perpetrate the crime 30. When obtaining a written statement during an admission-seeking interview, the investigator should prepare the statement for the confessor to sign. a. True b. False 31. All notes taken by the interviewer should be preserved, as they may be needed if the case goes to trial. a. True b. False 32. James Turner, CFE, was called in to investigate a sales skimming case at Durant Hardware. During an admission-seeking interview of Nadia Brown, the primary suspect, James asked, “Did you just want some extra money, or did you do this because you had financial problems?” Nadia began crying and nodded yes. This small admission as a response to James’ question is called a: a. Provisional admission b. Point-of-reference confession c. Benchmark admission d. Tentative confession

Chapter 17 – Occupational Fraud and Abuse: The Big Picture 1. The terms deterrence and prevention mean the same thing and can be used interchangeably. a. True b. False 2. Fraud prevention involves removing the root cause of fraudulent behavior, such as economic deprivation or social injustice. a. True b. False 3. Modification of behavior through the perception of negative sanctions is called: a. Deterrence b. Prevention c. Preclusion d. Dissuasion 4. The axiom that states “employees who believe that they will be caught engaging in occupational fraud and abuse are less likely to commit it” is called: a. Cognitive choice b. Preventive selection c. Perception of detection d. None of the above 5. For the past several months the Adams Shop, a mom and pop retail store, has suffered costly losses due to the theft of merchandise. Putting in a comprehensive surveillance system that covers all of the entrances and exits at all four of their locations is not feasible at this time. Nevertheless, they have decided to install several surveillance cameras in their flagship store. They notified their employees that the cameras were being installed and placed posters at the store entrances notifying their customers of the new security. Not surprisingly, thefts decreased dramatically within a month and continued to decline over the next six months. Without the cash to install cameras in all the stores, Adams installed fake cameras at the other three stores and let employees and customers at those locations know about the cameras. Thefts dropped at the other stores as well. The concept that most likely explains why the thefts decreased is known as: a. Pre-emptive anti-fraud strikes b. Surreptitious detection c. Proactive deterrence d. Perception of detection 6. Which of the following choices is not an action that will increase the perception of detection within an organization? a. Conducting clandestine audits b. Increasing the use of analytical reviews c. Developing employee anti-fraud education programs d. Establishing a reporting program

7. Vigorously prosecuting fraud perpetrators is considered to be the best proactive way to deter fraud. a. True b. False 8. The implementation of hidden controls is a crucial component of an effective proactive fraud deterrence plan. a. True b. False 9. Having an adequate program to report fraud is vital to the success of an organization’s efforts to detect and deter fraud. Which of the following is a key point that should be emphasized in such a program? a. If everyone works together, fraud, waste, and abuse can be completely eliminated within the organization. b. There is an exact method for reporting suspected wrongdoing. c. Penalties may be assessed on employees who report inaccurate information, regardless of intent. d. All of the above 10. Although hotlines are an essential part of an effective fraud reporting system, only about 5 percent of hotline calls are actually developed into solid cases. a. True b. False 11. The concept of ______________ provides that corporations can legally be held criminally responsible for the acts of their employees if those acts were done in the course and scope of their employment and for the apparent benefit of the corporation. a. Civil responsibility b. Displaced criminal sanctions c. Imputed liability d. Connected accountability 12. Dean Crawley is a foreman for the Albuquerque Construction Co. As part of his duties, Dean often must run to the hardware store to purchase supplies when they are needed immediately for a building project. One afternoon, Dean’s building crew ran out of a particular sized nail and needed 35 more right away to meet their tight project deadline. Dean went to the nearest hardware store to restock, but quickly realized he had forgotten his wallet. Rather than waste precious time retrieving his wallet, he slipped 40 nails into his pockets and walked out without paying for them. Even though Dean’s actions specifically violated company policies, the company may still be held criminally responsible for his theft. a. True b. False

13. The Corporate Sentencing Guidelines allow organizations that have an effective fraud prevention and detection program in place to receive more lenient criminal sentences than those without such a program. a. True b. False 14. As it relates to Corporate Sentencing Guidelines, corporations are required to perform certain minimum steps for due diligence. Which of the following is not one of the required steps? a. Consistently enforce standards through appropriate discipline. b. Have policies defining standards and procedures to be followed by the organization’s agents and employees. c. Assign internal audit personnel to ensure compliance. d. Use due care not to delegate significant authority to people who are known to have a propensity to engage in illegal activities.

15. The school of ethical thought that advocates concrete ethical principles that cannot be violated is the: a. Fundamental ethical principle b. Utilitarian ethical principle c. Modern ethical principle d. Imperative ethical principle 16. The school of ethical thought that advocates situational ethics, i.e., each behavior should be evaluated on its own merits, is the: a. Imputed ethical principle b. Circumstantial ethical principle c. Utilitarian ethical principle d. Imperative ethical principle 17. Brian Ferguson is a cashier at a 24-hour convenience store. He has worked the night shift for the last year and a half, and often fills in for other employees at the last minute, but has never received a raise. Furthermore, Brian just got passed over for a promotion to store manager, which would have nearly doubled his pay.

Understandably, he is outraged. Because his employer is so “cheap” and “unfair,” Brian begins taking cases of beer and snacks home to supplement his income. The term that best describes Brian’s theft as retribution for his inadequate pay is: a. Involuntary breach b. Wages in kind c. Actionable rationalization d. Imperative ethics 18. Which of the following should be included in an organization’s formal ethics policy? a. Specific conduct that violates the policy b. A statement that dishonest acts will be punished c. Information on how unethical conduct can be reported d. All of the above

19. The “tone at the top” that is set by management is more important in providing a strong ethical message to employees than having a formal organizational ethics policy in place. a. True b. False 20. All organizations, regardless of size, should institute a formal ethics policy. a. True b. False