Transcript Slide 1

Fraud Awareness
Association of Government Accountants
Northern Utah Chapter
Lealan Miller, CGFM, CPA
May 2014
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The “Fraud Triangle”
Motive
Perceived
Opportunity
Rationalization
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Factors effective in fraud prevention
and detection
Factor
Prevention
Detection
Internal controls
1
1
Management review
2
4
Internal audit
3
3
External audit
4
6
Tips/complaints
5
2
Accident
6
5
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3
Question 1
1. Assessing whether financial statement fraud
has occurred includes determining the intent of
the parties responsible for the contents of the
financial statements.
a) True
b) False
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Question 2
2. Which of the following might be a red flag of a
concealed liabilities and expenses scheme?
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
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Question 3
3. Which of the following is NOT a required
element of an audit conducted in accordance
with AU section 316, Consideration of Fraud in
a Financial Statement Audit?
a) Professional skepticism
b) Knowledge of the company's business
c) Use of a fraud risk factor checklist
d) Brainstorming session
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Question 4
4. Which of the following steps would be most
helpful in determining whether reported revenue
includes fictitious sales?
a) Analyzing credits to accounts receivable
recorded during the subsequent period
b) Examining vendor complaints
c) Consulting with sales management about the
validity of the sales
d) Performing a search for unrecorded liabilities
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Question 5
5. During the annual audit of Carp Pharmaceuticals Inc.'s
financial statements, Edward Lasher, the company's auditor,
came across some fishy findings. The company's accounts
receivable were higher than expected, and, upon further
investigation, Lasher discovered that the company recorded
several unusually large sales at the end of the fiscal year, all
with extended payment terms and generous return policies.
Since the company has been experiencing some serious
financial challenges, Lasher is suspicious of these
transactions. Based on these findings, which of the following
types of financial statement fraud schemes might be
occurring?
a) Expense omission
b) Channel stuffing
c) Unrecorded warranties
d) Factoring fraud
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Question 6
6. Which of the following audit procedures would
be most helpful in detecting contingent liabilities
that have been fraudulently omitted from the
company's financial statements?
a) Computing the number of days' purchases in
accounts payable
b) Reviewing the bank cutoff statement
c) Examining correspondence with and invoices
from attorneys
d) Observing the inventory count
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Question 7
7. An unusual relationship between sales and
which of the following can provide an indicator
of a fictitious revenues scheme?
a) Cost of goods sold
b) Sales returns
c) Shipping expense
d) All of the above
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Question 8
8. Lorinda Dawson is the external auditor for Nealson
Industries, a public manufacturing company. As she
performs the preliminary analytical procedures, she
finds that the quick ratio, which has typically
remained fairly consistent, increased from 1.3 to
3.7 during the previous year. Based on this
information, what type of financial statement fraud
scheme might be occurring?
a) Inflated inventory
b) Capitalized expenses
c) Fictitious accounts receivable
d) Overstated fixed assets
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Question 9
9. An unusual growth in the number of days'
sales in accounts receivable can be a red flag
for which of the following financial statement
fraud schemes?
a) Improper asset valuation
b) Timing differences
c) Fictitious revenues
d) All of the above
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Question 10
10. DB Enterprise Inc. has been struggling for the last few
years and is in danger of defaulting on several loan
covenants. The company's CEO, Nathaniel Silver, is
facing significant pressure from the board of directors to
turn the company around. To improve the company's
financial appearance, Silver undertakes a scheme to
capitalize some of the company's operating expenses.
Which of the following procedures would likely be most
helpful in bringing this scheme to light?
a) Obtaining a bank confirmation
b) Analyzing depreciation and amortization expenses
c) Computing the collection ratio
d) Performing a search for unrecorded liabilities
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The Future of Fraud
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Part 2 – Question 1
1. The data analysis technique that involves
testing whether, within a given data set, digits
appear in certain positions in the numbers in
the expected proportion is known as:
a)
b)
c)
d)
Digit occurrence matching
Benford’s law analysis
Correlation analysis
One-to-One checking
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Question 2
2. Lester Van Andel suspects that one of the
purchasing agents at Clint Industries is funneling
orders—complete with inflated purchase prices—to
small companies run by his family members in
exchange for kickbacks. Van Andel knows that
these vendors' business filings with the Secretary
of State should contain enough information to help
him confirm the companies' ownership and thus the
conflict of interest. However, to access the filings
with the Secretary of State, he will need to obtain a
subpoena.
a) True
b) False
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Question 3
3. In an interview situation, which of the following
behaviors is often a sign of deception?
a) Repeating each question
b) Starting each answer with "honestly" or "to tell
the truth"
c) Answering each question with another
question, such as "Why would I do something
like that?"
d) All of the above
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Question 4
4. According to the ACFE's 2008 Report to the
Nation on Occupational Fraud and Abuse,
which of the following is the most common
behavioral red flag exhibited by fraudsters?
a) Divorce or family problems
b) Unwillingness to share duties
c) Living beyond their means
d) Unusually close association with a vendor or
customer
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Question 5
5. If a desktop computer is believed to contain
evidence of a fraud, what is the first step that
should be taken in securing it for analysis?
a) Turning it off using the shutdown process
b) Unplugging it
c) Sorting through the files to make a note of
where on the hard disk the pertinent evidence
is located
d) Copying all files on the computer to a portable
hard drive
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Question 6
6. Sherry Elkins, an accounts payable clerk, has
been embezzling money from her employer by
manipulating the company's billing function.
Which of the following data analysis techniques
would be helpful in identifying fraudulent NP
transactions?
a) Identifying vendors with no contact name
b) Identifying the least-used vendor accounts
c) Identifying the most-used vendor accounts
d) All of the above
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Question 7
7. While reviewing sales invoices, Michelle Starle,
CPA, comes across a document with some odd
markings. Based on several other suspicious things
she's noticed, her initial hunch is that it has been
altered as part of a fraud scheme. What is the first
thing she should do with the document?
a) Circle the suspicious writing on it
b) Fold it, put it in an envelope, and mail it to the
police
c) Make a copy of it and put the original in a folder
d) Paperclip it to a legitimate invoice for comparison
by her supervisor
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Expense Report – Busted!
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Part 3 - Question 1
1. Which of the following fraud schemes
generally does not leave an audit trail and,
consequently, is among the hardest to detect?
a) Sales skimming
b) False billing
c) Check tampering
d) Inventory theft
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Question 2
2. The employee hotline for Aspiring Inc. received an
anonymous call alleging that several employees
are receiving kickbacks from a local vendor.
Management has decided to launch a formal
investigation into the allegations. Who should be
primarily responsible for directing the fraud
examination?
a) The head of the company's security department
b) The partner of the company's external audit firm
c) The company's legal counsel
d) The company's human resources manager
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Question 3
3. Charlotte Grey, CPA, is conducting the annual audit of
XYZ Corp.'s financial statements. While performing the
yearend inventory procedures, she notices that several
inventory items are regularly purchased at prices above
the industry standard. These same items are also
frequently purchased well before the typical reorder
point and are, therefore, consistently overstocked. She
notes that XYZ has recently changed vendors for these
items, and she can't locate the new vendor on the
company's approved vendor list. Which of the following
fraud schemes might these findings indicate is
occurring?
a) Inventory theft
b) Asset overvaluation
c) Bribery
d) Lapping
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Question 4
4. Thoroughly examining canceled checks that
are returned with the bank statement and
reviewing vendor complaints regarding
nonpayment are both proactive tests that can
help detect:
a) Shell company schemes
b) Forged endorsement schemes
c) Skimming schemes
d) Fictitious refund schemes
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Question 5
5. Lincoln Bartuska is investigating some suspicious
activity at ZX & Co., a regional office supply store.
As part of his investigation, Bartuska compared
inventory adjustments to refund transactions by
employees. He also looked for any sales
transactions where the sale was posted to one
credit card and a refund was posted to another
credit card. What type of scheme is Bartuska most
likely looking for?
a) Cash larceny
b) Inventory theft
c) Credit card skimming
d) Fictitious refunds
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Question 6
6. Which of the following may be a sign that an
organization is being victimized by a falsified hours
scheme?
a) Several employees appear on the personnel
employee roster but are not on the most recent
payroll check list.
b) The payroll expenses for the company unexpectedly
exceed budgeted projections and prior years' totals.
c) One employee consistently submits more requests for
expense reimbursements than all other employees
within the department.
d) The FICA tax withheld on several employees'
paychecks does not equal 7.65% of the employees'
gross pay.
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Question 7
7. When returning a stapler he borrowed from a coworker, Johannes Kiebler noticed a notebook on
the coworker's desk that contained what appeared
to be a second set of accounts receivable records.
Kiebler managed to quickly read among the
scribbles: "Sept. 2, Customer Q, $3,200," "Sept. 3,
Customer R, $2,900," and "Sept. 5, Customer S,
$2,650—need $2,400." What type of scheme did
Kiebler most likely catch the co-worker
perpetrating?
a) Lapping
b) Kiting
c) Altered payee
d) Falsified billing
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Question 8
8. An unexplained increase in bad debt expense
can be a red flag that an employee is stealing
inventory from the company warehouse.
a) True
b) False
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Question 9
9. Which of the following might be a warning sign
of a shell company scheme?
a) A vendor that is not listed in the phone book
b) An unexpected and significant increase in
"consulting expenses"
c) Invoices lacking details of the items
purchased
d) All of the above
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Question 10
10. Gerri Alderman is an internal auditor for
Steen Corp. She 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
Alderman most likely to find?
a) Petty cash larceny
b) Concealed expenses
c) Mischaracterized expense reimbursement
d) Falsified salary
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Part 4 – Question 1
1. Under the concept of
_____________________, corporations can 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)
b)
c)
Connected accountability.
Civil responsibility
Imputed liability
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Question 2
2. Larry Holt is the lead auditor for Modus Industries, a company that
manufactures technological components. With the economic downturn,
company management has been under increased pressure to meet
earnings expectations, and the company is in danger of violating its loan
covenants. Because of these factors, Larry is concerned that management
may be fraudulently concealing liabilities and expenses to improve the
company's financial statements. He performs his preliminary analytical
procedures with these factors in mind. Which of the following is a red flag
that might reaffirm Larry's suspicions?
a)
The company's gross margin is significantly lower than industry
average.
b)
The company has experienced an unusual increase in the number of
days' purchases in accounts payable.
c)
The financial statements reflect an unusual change in the relationship
between fixed assets and depreciation.
d)
The company shows a significant reduction in accounts payable, even
though its competitors are stretching out payments to vendors.
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Question 3
3. Which of the following is considered a fraud
preventive internal control?
a) Employee support programs
b) Segregation of duties
c) Employee background checks
d) All of the above
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Question 4
4. The concept of the fraud triangle states that,
for a fraud to occur, three factors generally are
present. Which of the following is NOT one of
the three sides of the fraud triangle?
a) Criminal predisposition
b) Incentive or pressure
c) Perceived opportunity
d) Rationalization
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Question 5
5. In general, the best way to prevent fraud is to:
a) Implement harsh penalties for perpetrators
b) Outsource all possible functions
c) Increase the perception of detection
d) Conduct covert audits
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Question 6
6. ________ is defined as "the totality of
circumstances that would lead a reasonable,
professionally trained, and prudent individual to
believe a fraud has occurred, is occurring,
and/or will occur.“
a) Proof
b) Evidence
c) Suspicion
d) Predication
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Question 7
7. Which of the following is NOT an element
generally included as part of a fraud risk
assessment?
a) Risk identification
b) Formal fraud policy development
c) Assessment of likelihood and significance of
risks
d) Risk response
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Question 8
8. The three primary categories of occupational
fraud are:
a) Corruption, financial statement fraud and
asset misappropriation
b) Skimming, money laundering and bid rigging
c) Asset misappropriation, identity theft and
fictitious revenues
d) Financial statement fraud, inventory theft and
cash larceny
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Question 9
9. Sarah Ludner is conducting an investigation into a
possible accounts receivable lapping scheme at Horace
Paper Supply Co. If Ludner plans to interview all of the
following parties, whom should she interview first?
a) Chuck Pensky, the primary suspect
b) Julia Rodriguez, an accounts payable clerk who filled
in for Pensky when he was on vacation
c) Stephen Milton, a regular customer of the company
whose complaint about his account balance prompted
the investigation
d) Kathryn Beatty, Pensky's supervisor, who is
suspected of helping Pensky cover the fraud in
exchange for a portion of the proceeds
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Question 10
10. Most employees who commit fraud have a
history of fraudulent misconduct.
a) True
b) False
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Part 5 – Question 1
1. In terms of preventing fraud, which of the
following components of the Committee of
Sponsoring Organizations of the Treadway
Commission’s (COSO) Internal Control –
Integrated Framework most adequately
embodies an organization’s tone at the top?
a) Control activities
b) Monitoring
c) Control environment
d) Information and communication
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Question 2
2.
Stability Inc. is a publicly held software company
with 3,500 employees in locations on three
continents. As part of the company’s fraud risk
assessment, the company’s auditors are
examining the organizational structure. Which of
the following characteristics of the organizational
structure would be least likely to help prevent
fraud?
a)
b)
c)
The chief audit executive reports directly to the audit
committee.
The company’s reporting structure is a complex matrix,
with many layers of oversight for each functional area.
There is an open, informal flow of communication
between employees and management.
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Question 3
3. Which of the following internal controls would
likely be most effective in helping to prevent
fraud?
a) Hidden surveillance
b) Secret cash counts
c) Covert email monitoring
d) Fake surveillance cameras
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Question 4
4. Hots and Hams, a chain of quick-service
restaurants with locations in all 50 states, is
revamping its employee background check policy to
ensure that the company is not allowing known
thieves in through the front door. Which of the
following statements in NOT true?
a) Hots and Hams’ policy should include a provision
for running credit checks on all potential employees
at the time of hire.
b) Hots and Hams’ policy should include provisions
for running criminal background checks both on
new and existing employees.
c) Hots and Hams’ policy should extend to
employees at all levels throughout the organization.
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Question 5
5. According to the U.S. Department of Justice,
which of the following is considered an element
necessary to monitor compliance with the
antibribery provisions of the Foreign Corrupt
Practices Act (FCPA)?
a) A formal risk assessment
b) An antibribery policy
c) Employee anticorruption training
d) All of the above
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Question 6
•
Southwind Inc. was recently the victim of a fraud
scheme in which the employee in charge of reconciling
the bank account used the company’s routing number
and checking account number to initiate fraudulent
electronic check payments for her mortgage and
personal credit cards, and then falsified the bank
reconciliation to cover her tracks. To prevent this from
happening again, Southwind’s accounting manager
suggest implementing a positive pay system. The use of
positive pay would most likely:
• a) Be helpful in preventing this type of fraud in the
future.
• b) NOT be helpful in preventing this type of fraud in the
future.
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Question 7
7. An effective hotline serves as:
a) A fraud detection control
b) A fraud prevention control
c) Both a fraud detection and prevention control
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Question 8
8. Which of the following is true regarding
employee antifraud training?
a) Employees at all levels of the organization
should receive identical antifraud training.
b) The training should be catered to the specifics
of the organization.
c) Training all employees at the time of hire is
sufficient.
d) All of the above.
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Question 9
9. The management of Jaxx Inc. has asked Thom
Sanderson, CPA, to assess the company’s antifraud
internal controls. During his assessment, Thom
discovers that the company is particularly susceptible to
data breaches in its customer service center. To help
address this risk, Thom should recommend that Jaxx:
a) Institute a clean policy among employees who collect
sensitive customer data.
b) Provide secure trash bins for documents that need to
be shredded.
c) Disable the USB ports on certain computer
workstations.
d) All of the above.
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Question 10
10. Which of the following is NOT true regarding
ethics policies?
a. If an organization doesn’t truly value integrity,
its ethics policy might do more harm than
good.
b. A thorough, well-designed ethics policy is a
surefire way to prevent fraud.
c. An ethics policy should address the specific
risks of employee misconduct that were
identified in the organization’s risk
assessment process.
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QUESTIONS
Lealan Miller
Eide Bailly LLP
877 W. Main Street, Suite 800
Boise, Idaho 83702
208.383.4756
[email protected]
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