Chapter 02
1. Which of the following is NOT a primary control procedure to minimize the occurrence of fraud?
a.
Dual custody
b.
Systems of authorization
c.
Internal audit department
d.
Documents and records
Incorrect. Dual custody, or segregation of duties, is a control activity.
Incorrect. Systems of authorization are a control activity.
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2. Which of the following is NOT a common rationalization of fraud perpetrators?
a.
The organization owes me
b.
I’m only borrowing the money
c.
No one will get hurt
d.
No one will care
Incorrect. This is a common rationalization for committing fraud.
Incorrect. This is a common rationalization for committing fraud.
Incorrect. This is a common rationalization for committing fraud.
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3. Each of the following is an example of an abuse of a control environment EXCEPT:
a.
The HR department failed to check an applicant’s background and hired someone who had committed fraud in
the past.
b.
A manager instructs employees not to share passwords, and then shares her passwords with her immediate
assistant.
c.
A company has established codes of conduct and conducts training meetings to teach employees to distinguish
between acceptable and unacceptable behavior. Attendance is voluntary.
d.
The employees know who has responsibility for each business activity. Procedures to follow are in place.
4. A fraud perpetrator uses the float time between banks to give the impression that he had money in his accounts. Which
crime is he committing?
a.
Floating
b.
Strip
c.
Spinning
d.
Kiting
Moderate
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5. Which is following observations is TRUE?
a.
Research shows that only people with a criminal mind set commit fraud.
b.
Fraud perpetrators usually can be distinguished from others on the basis of psychological characteristics.
c.
Most fraud perpetrators have profiles that are similar to those of other people.
d.
When fraud does occur, the most common initial reaction by those involved in the fraud is confession.
c
Easy
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b.
c.
Moderate
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6. When management fraud occurs, companies usually:
a.
overstate assets and net income.
b.
understate assets and net income.
c.
overstate assets and understate net income.
d.
understate assets and overstate net income.
a
Easy
LO: 2-2
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7. Which of the following is NOT one of the key elements common to all frauds?
a.
Perceived pressure
b.
Perceived inequality
c.
Perceived opportunity
d.
Rationalization
Incorrect. This is a key element common to all frauds.
Incorrect. This is a key element common to all frauds.
Incorrect. This is a key element common to all frauds.
Easy
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8. What is the most important element in a control environment?
a.
Management’s communication
b.
Management’s role and example
c.
The hiring process
d.
The internal audit department
Bloom’s: Remembering
9. Which of the following statements about accounting systems is incorrect?
a.
An effective accounting system provides an audit trail that allows frauds to be discovered.
b.
An effective accounting system makes concealment difficult.
c.
An effective accounting system can effectively prevent “kickbacks.”
d.
Without a good accounting system, it is often difficult to distinguish between actual fraud and unintentional
error.
c
Incorrect. This statement is true.
Incorrect. This statement is true.
Moderate
10. Greed, living beyond one’s means and high bills all describe what type of fraud-related pressure?
a.
Financial
b.
Peer
c.
Environmental
d.
Work-Related
a
Correct. These are financial pressures.
b.
Challenging
11. An effective accounting system is designed to provide which of the following to help discover fraud?
a.
An audit trail
b.
Matching of expenses to revenues
c.
Set of controls
d.
Set of accounting procedures
a
Incorrect. Controls are used to prevent fraud, not to discover fraud.
Easy
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12. When fraud occurs, the most common reaction to those affected by the fraud is:
a.
Anger
b.
Acceptance
c.
Denial
d.
Retribution
c
Easy
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13. Which of the following is NOT an element of a good control environment?
a.
Trust
b.
Modeling
c.
Appropriate hiring
Easy
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Chapter 02
d.
Management’s communication
a
Incorrect. Examples of management strongly influence employees.
Incorrect. Basic screening can help prevent hiring fraudsters.
Easy
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Bloom’s: Understanding
14. The fraud triangle includes all of the following EXCEPT:
a.
Validation
b.
Perceived opportunity
c.
Rationalization
d.
Perceived pressure
a
Incorrect. This is part of the fraud triangle.
Incorrect. This is part of the fraud triangle.
Incorrect. This is part of the fraud triangle.
Easy
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Bloom’s: Remembering
15. Poor credit could become a ____ that could lead to fraud.
a.
Financial pressure
b.
Social pressure
c.
Family pressure
d.
Financial threat
a
Incorrect.
Incorrect.
Incorrect.
Easy
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16. Modeling and labeling are sub-components of which fraud-related element of an organization?
a.
Control environment
b.
Accounting system
c.
Audit procedures
d.
Review procedures
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17. ___________ requires every public company to have a code of ethics to help deter wrongdoing.
a.
The Glass Steagall legislation
b.
The Sarbanes-Oxley legislation
c.
The Securities Act
d.
Generally Accepted Auditing Standards
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18. Which of the following is NOT a possible control activity?
a.
Having separate authorization, bookkeeping, and custody functions.
b.
Protecting access to important information with a password.
c.
Requiring two individuals to work on the same task.
d.
Supervisory review of each task completed by employees.
Bloom’s: Understanding
19. Financial statement fraud is typically committed by:
a.
Employees with access to company assets
b.
Top management
c.
Customers
d.
Vendors
Incorrect. Customers usually commit fraud against the organization.
Incorrect. Vendors usually commit fraud against the organization.
Easy
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Bloom’s: Remembering
20. An employee who has the responsibilities of both writing checks and making bank deposits would have ____.
a.
Financial pressure
b.
Perceived opportunity
c.
Rationalization
Easy
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Bloom’s: Understanding
21. Most fraud perpetrators have profiles that look like:
a.
Those of other honest people
d.
Moderate
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Chapter 02
b.
Those with criminal records
c.
Those who are uneducated
d.
Those who use alcohol and drugs
a
Easy
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22. According to the Sarbanes-Oxley legislation, current changes to, or waivers of codes of ethics should be disclosed in:
a.
Form 10–K.
b.
Form 1120.
c.
Form 8-K.
d.
Form 10–Q.
c
Moderate
LO: 2-2
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Bloom’s: Remembering
23. What is the strongest factor in deterring future fraud activity?
a.
Legal prosecution.
b.
Sanctions.
c.
Termination.
d.
Counseling.
a
24. Which of the following is NOT a true statement?
a.
Almost every fraud involves rationalization.
b.
All frauds involve financial or vice-related pressures.
c.
Perceived opportunity diminishes when fraud perpetrators are prosecuted.
Incorrect. This statement is true.
Easy
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25. A smart fraudster usually manipulates which financial record in order to better avoid an audit trail?
a.
Income statement.
b.
Balance sheet.
c.
Statement of cash flows.
d.
Statement of retained earnings.
a
Moderate
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26. Which of the following factors creates an opportunity for fraud?
a.
Greed
b.
Living beyond one’s means
Easy
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Bloom’s: Remembering
Chapter 02
c.
Lack of an audit trail
d.
The organization owes it to me
c
Easy
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27. Which of the following is NOT a common financial pressure associated with fraud?
a.
Living beyond one’s means
b.
High bills or personal debt
c.
Personal financial losses
d.
Desire to hurt employer financially
Incorrect. This is a common financial pressure associated with fraud.
Incorrect. This is a common financial pressure associated with fraud.
Incorrect. This is a common financial pressure associated with fraud.
Easy
LO: 2-5
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Bloom’s: Remembering
28. Generally, internal controls are implemented in a corporation to help prevent which element of the fraud triangle?
a.
Perceived opportunity
b.
Perceived pressure
c.
Rationalization
d.
Authorization
a
Easy
LO: 2-6
29. Which racial group is most likely to commit fraud?
a.
Caucasian
b.
African American
c.
Asian
d.
Hispanic
e.
People of every race commit fraud
e
Easy
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Bloom’s: Remembering
30. According to the study mentioned in the text, which of the following is true about fraud perpetrators compared to
property offenders?
a.
Fraud perpetrators are more likely to be caught than property offenders
b.
Fraud perpetrators are more educated than property offenders
c.
Fraud perpetrators are more likely to be men than property offenders
d.
Fraud perpetrators are much younger than property offenders
Moderate
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31. Which of the following creates opportunities for fraud?
a.
Requirement to change passwords on a regular basis
b.
Inability to judge quality of performance
c.
Controls that prevent or detect fraud
d.
Segregation of duties
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Bloom’s: Remembering