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Association of Government AccountantsNorthern Utah Chapter

Lealan Miller, CGFM, CPAMay 2014

Fraud Awareness

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The “Fraud Triangle”

Motive

Rationalization

PerceivedOpportunity

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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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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) Trueb) 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 skepticismb) Knowledge of the company's businessc) Use of a fraud risk factor checklistd) 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 complaintsc) Consulting with sales management

about the validity of the salesd) 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 omissionb) Channel stuffingc) Unrecorded warrantiesd) 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 statementc) Examining correspondence with and

invoices from attorneysd) 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 soldb) Sales returnsc) Shipping expensed) 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 inventoryb) Capitalized expensesc) Fictitious accounts receivabled) 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 valuationb) Timing differencesc) Fictitious revenuesd) 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 confirmationb) Analyzing depreciation and amortization expensesc) Computing the collection ratiod) 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) Digit occurrence matchingb) Benford’s law analysisc) Correlation analysisd) 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) Trueb) 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 questionb) 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 problemsb) Unwillingness to share dutiesc) Living beyond their meansd) 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 processb) Unplugging itc) 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 nameb) Identifying the least-used vendor accountsc) Identifying the most-used vendor accountsd) 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 itb) Fold it, put it in an envelope, and mail it to the

policec) Make a copy of it and put the original in a folderd) 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 skimmingb) False billingc) Check tamperingd) 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 departmentb) The partner of the company's external audit

firmc) The company's legal counseld) 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 theftb) Asset overvaluationc) Briberyd) 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 schemesb) Forged endorsement schemesc) Skimming schemesd) 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 larcenyb) Inventory theftc) Credit card skimmingd) 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 co-worker, 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) Lappingb) Kitingc) Altered payeed) 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) Trueb) 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 larcenyb) Concealed expensesc) Mischaracterized expense reimbursementd) 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) Connected accountability.b) Civil responsibilityc) 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 programsb) Segregation of dutiesc) Employee background checksd) 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 predispositionb) Incentive or pressurec) Perceived opportunityd) 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 functionsc) Increase the perception of detectiond) 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) Proofb) Evidencec) Suspiciond) 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 identificationb) Formal fraud policy developmentc) Assessment of likelihood and

significance of risksd) 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 suspectb) Julia Rodriguez, an accounts payable clerk who

filled in for Pensky when he was on vacationc) 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) Trueb) 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) Monitoringc) Control environmentd) 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) The chief audit executive reports directly to the audit committee.

b) The company’s reporting structure is a complex matrix, with many layers of oversight for each functional area.

c) 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 countsc) Covert email monitoringd) 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 assessmentb) An antibribery policyc) Employee anticorruption trainingd) 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 controlb) A fraud prevention controlc) 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 MillerEide Bailly LLP877 W. Main Street, Suite 800Boise, Idaho 83702208.383.4756lmiller@eidebailly.com