possible exam 1 questions - forensics

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Possible Exam 1 Questions Chapter 1:

3. The scribes of ancient Egypt were the forerunners of today's accountants.

a. True b. False

13. Arthur Andersen created a CPA firm that eventually disappeared.

a. True b. False

21. Forensic‐type fieldwork refers to an attitudinal shift in an auditor's degree of skepticism.

a. True b. False

22. Consulting standards may apply to a forensic accountant.

a. True b. False

23. Peremptory refers to the fact that a forensic accountant can be proactive.

a. True b. False

24. A forensic audit is generally a sampling activity.

a. True b. False

27. The smoking gun to convict Al Capone was a cash receipts journal with Capone's name on it.

a. True b. False

29. Plagiarism is considered to be fraud.

a. True b. False

30. A forensic accountant uses interviews and leveraging techniques designed to elicit sufficient information to prove or disapprove a hypothesis.

a. True b. False

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31. A forensic accountant does not search public records.

a. True b. False

32. Like on television shows, a forensic accountant may have to keep a chain of custody.

a. True b. False

47. Which is not one of the six areas of litigation services that the AICPA committee suggested in 1986?

a. Damages. b. Valuation. c. Accounting. d. Analyses. e. All the above were suggested.

50. Peremptory refers to:

a. Be there first. b. Not requiring any cause to be shown. c. One who strives to be the best. d. Take the place of. e. None of the above.

51. What was the smoking gun to convict Al Capone?

a. An accountant's cash receipts ledger. b. Lavish lifestyle. c. Murdering a competitor. d. Wholesaling alcoholic beverages. e. None of the above.

53. Which would not be included in the AICPA's definition of forensic accounting?

a. Auditing. b. Investigative skills. c. Quantitative methods. d. Accounting. e. None of the above.

61. Which would probably not be an added procedure in a forensic audit?

a. Extensive use of interviews. b. Not accepting sampling as evidence. c. Mending evidential matter standards with the rules of evidence.

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d. Searching for legal evidence. e. All would be used.

64. Which white‐collar crimes does the FBI investigate?

a. Money laundering. b. Bank fraud. c. Health care fraud. d. Environmental crimes. e. All of the above.

Chapter 2: 3. A forensic accountant can normally assume that the books and records are true and correct.

a. True b. False

5. Knowledge of both statute law and case law may be relevant to the goals or objectives of a forensic accountant.

a. True b. False

6. Criminology is one area of the forensic accountant's knowledge base.

a. True b. False

8. A psychology course would not be helpful for a forensic accountant.

a. True b. False

19. Data‐driven forensic techniques will always detect fraud schemes, including bribery and kickbacks.

a. True b. False

28. A kick‐back scheme can normally be caught by a data‐driven approach.

a. True b. False

29. Fraud is much like an iceberg: many of the behavioral factors lurk on top of the water ready to sink a corporation.

a. True b. False

30. A bribery scheme can best be caught by behavioral factors.

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a. True b. False

31. Just like termites, fraud can destroy an organization.

a. True b. False

32. Recessions often increase fraud and abuse.

a. True b. False

35. According to the FBI’s definition of fraud, there should be an application or threat of physical force or violence.

a. True b. False

36. One need not be a CPA to obtain the Certified in Financial Forensics (CFF).

a. True b. False

37. Forensic accountants need an understanding of:

a. Accounting. b. Law. c. Criminology. d. Investigative auditing. e. All of the above.

45. Which task probably would not be required of a Certified Fraud Examiner?

a. Gather evidence. b. Write reports. c. Assist in investigating fraud. d. Testify in the courtroom. e. All of the above may be required.

Chapter 3: 3. The audit committee is one leg of the six‐legged stool of the financial reporting process.

a. True b. False

4. Misrepresentation is one of the three M's of financial reporting fraud.

a. True b. False

5. The bill‐and‐hold practice involves selling inventory to customers and holding the merchandise, with an agreement to deliver the goods later.

a. True

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b. False

7. A restaurant may reduce income (and expenses) if its lease agreement payments are based upon restaurant sales.

a. True b. False

8. Booking income before receiving payments is called "channel stuffing" by the SEC.

a. True b. False

10. A KPMG survey breaks fraud into internal and external fraud.

a. True b. False

12. Under the KPMG survey scheme of fraud, check forgery is always an external fraud.

a. True b. False

13. The older fraud pyramid of Edwin Sutherland had these three factors of fraud: motive, opportunity, and rationalization.

a. True b. False

14. A gambling problem would be considered an example of the rationalization factor in the fraud pyramid.

a. True b. False

15. Ineffective internal controls are a tempting open door or opportunity for fraud.

a. True b. False

16. Effective internal controls will always stop fraud.

a. True b. False

19. A business in a declining industry would be an example of a motivation risk factor.

a. True b. False

20. High turnover of senior management would be an example of a motivation risk factor.

a. True b. False

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21. The control environment is one of the five interrelated components of internal controls.

a. True b. False

22. In an Ernst & Young study, 50% of the most serious fraud was committed by the organization's own management.

a. True b. False

23. An exact profile has been developed of a potential fraudster by several large CPA firms.

a. True b. False

24. Senior‐level management fraudsters often surround themselves with "yes people."

a. True b. False

26. An ethical "tone at the top" helps deter white‐collar crime.

a. True b. False

29. Forensic investigators uncover financial statement fraud by looking for unusual red flags or patterns.

a. True b. False

30. Wildcatting is an investigative technique adopted by the SEC to investigate a specific company for check forgery.

a. True b. False

31. Large companies tend to more frequently manage earnings to avoid losses than small companies.

a. True b. False

32. Financial fraud is more likely to occur if a company has a poor management control philosophy.

a. True b. False

33. Check forgery can be both an internal and external fraud.

a. True b. False

34. Credit card fraud is generally an internal fraud.

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a. True b. False

35. Continuing presence of a firm's founder is a red flag of a poor management philosophy.

a. True b. False

36. Obtaining national stock exchange listing status is not a major motive for fraud.

a. True b. False

41. The FBI has developed a profile of a fraudster.

a. True b. False

42. Firms sacrifice on the average 8 cents in additional income taxes per dollar by cooking their books.

a. True b. False

45. The turmoil in the financial markets in 2008 and 2009 caused a number of pension funds to be underwater.

a. True b. False

46. Behavioral psychologists call rationalizing white collar crime “reframing.”

a. True b. False

47. Stamping down the desire to steal is an excellent way to prevent fraud.

a. True b. False

48. Poor controls or missing controls cause loss of assets and poor business decisions.

a. True b. False

52. Reconciliations of bank statements would be considered a detective control.

a. True b. False

53. A drug testing program would be considered a preventive control.

a. True b. False

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54. One research study found that the number one reason for fraud was pressure to do whatever it takes to meet goals.

a. True b. False

55. A second surprise cash count would be a preventive type control.

a. True b. False

56. Counting the inventory by an auditor would be a corrective control.

a. True b. False

57. Restatements of earnings fell in 2008.

a. True b. False

59. Which is not one of the three M's of financial statement fraud?

a. Missing general ledger. b. Manipulation. c. Misrepresentation. d. Intentional misapplication. e. None of the above.

60. Which group is not one of the members of corporate governance in the six‐legged stool as outlined by Professor Zab Razaee?

a. Board of Directors. b. Audit Committee. c. Internal auditors. d. Employees of the company. e. All of the above are one of the six groups.

62. Which would be an example of the bill‐and‐hold strategy?

a. Books are kept open beyond the appropriate time. *b. Sell products and hold them, with an agreement to bill customers later. c. Combine restricted fund account with the general fund account. d. Inflate revenues with phony software sales. e. None of the above.

63. An example of "channel stuffing" would be:

a. Keeping books open beyond the appropriate time. b. Combining restricted fund account with the general fund account. c. Booking income before receiving payments. d. Inflating revenues with phony software sales.

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e. None of the above.

68. The proving guilt pyramid does not contain this factor:

a. Motive. b. Rationalization. c. Opportunity. d. Means. e. Both c and d.

69. The older fraud pyramid does not contain this factor:

a. Means. b. Motive. c. Rationalization. d. Opportunity. e. Both c and d.

70. Which is not a factor, according to Professor Razaee, present in a company that explains the fraud triangle with respect to financial statement fraud?

a. Conditions. b. Transparency. c. Corporate structure. d. Choice. e. Factors a and d.

71. COSA defines "internal controls" as a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories except:

a. A reasonable degree of transparency. b. Effectiveness and efficiency of operations. c. Reliability of financial reporting. d. Compliance with applicable laws and regulations. e. All of the above.

72. Which statement is false?

a. The flexibility in GAAP gives management discretion to use its professional opinion to choose from a range of guidelines and standards in selecting those that suit the needs of a company (e.g., FIFO or LIFO inventory methods). b. Nonfraudulent earnings management is accomplished within the GAAP framework. c. Fraudulent earnings management does not follow GAAP. d. Transparency is one of the five interrelated components of internal controls. e. All of the above are true.

73. Which item would not be a fraud identifier to spot fraudsters?

a. Large ego. b. Gambling addiction.

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c. Hard worker. d. Takes few or no vacations. e. All of the above are fraud identifiers.

74. Based upon KPMG studies, what factor is most likely to cause fraud?

a. Management override. b. Employee collusion. c. High risk industry. d. Poor internal controls. e. Some other factor is most likely.

75. Employee fraud can be discovered by considering:

a. Behavioral habits. b. Employee stress factors. c. Lifestyle of the employee. d. Assets owned by the employee. *e. All of the above.

76. COSO suggests which of the following are major motives for fraud?

a. To obtain national stock exchange listing status. b. To cover up assets misappropriated for personal gain. c. To increase stock prices and benefit inside traders. d. All of the above.

78. What is an industry conditions risk factor?

a. Company in a declining industry. b. Significant accounts based upon estimates. c. Significant related‐party transactions. d. Aggressive incentive programs. e. None of the above.

79. What is an operating and financial stability risk factor?

a. New accounting requirements for the company. *b. Substance over form questions. c. Company declining in the industry. d. High degree of competition. e. All of the above.

80. What is an industry risk factor?

a. Aggressive incentive programs. b. Significant related‐party transactions. c. New accounting requirements. d. Significant accounts based upon estimates. e. All of the above.

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81. What is an investigative technique used by the SEC to investigate specific companies for cooking the books?

a. Lapping. b. Kiting. c. Wildcatting. d. Ghosting. e. Channeling.

82. Which variable is in the fraud pyramid but not in the fraud diamond?

a. Opportunity. b. Motive. c. Rationalization. d. Capacity. e. None of the above.

83. Elements in the fraud triangle can be restated as all of the following except:

a. Individual is either dishonest or able to rationalize theft. b. Notices or creates an opportunity to commit fraud. c. Generally acts alone, out of embarrassment. d. Feels some sort of pressure or incentive to commit fraud. e. None of the above.

84. A typical lower‐level employee in a public business would engage mostly in which type of crime?

a. Fraud. b. Misappropriation of assets. c. Error. d. Embezzlement. e. Lapping.

85. Which financial statement should be studied to determine if a company has the ability to pay a significant debt?

a. Balance sheet. b. Shareholder's equity. c. Income statement. d. Cash flow statement. e. Annual budget.

86. Which is not one of the classic "red flags" of "cooking the books"?

a. Double billing a customer. b. Personal expenses paid with company funds. c. Sudden raises or bonuses to employees. d. Unnecessary use of collection services. e. Income increasing faster than cash.

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87. Which would be a good name for the scheme of listing investment income as operating revenue?

a. Period shift. b. Expense manipulation. c. Liability trap. d. Revenue trick. e. Asset scam.

88. What is an equitable remedy that allows a person to win a dispute against a company that does not have standing to suit?

a. Equity doctrine. b. Alter ego. c. Two‐prong test. d. Division analysis. e. Dominance doctrine.

89. Which would be a preventive control?

a. Segregation of duties. b. Reconciliations. c. Surprise cash count. d. Surprise inventory count. e. All of the above.

90. Which would be a detective control?

a. Required approvals. b. Job rotation. c. Passwords. d. Surprise cash account. e. All of the above.

91. Which would be a corrective control?

a. Training. b. Event notifications. c. Perpetual inventory system. d. Job rotation. e. Alarm system.

92. Which is not one of the three types of controls?

a. Minimizing. b. Corrective. c. Preventive. d. Detective. e. Both a and b.

93. Which would be a non‐fraudulent earnings management scheme?

a. Bill‐and‐hold technique. b. Channel stuffing.

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c. Cookie‐jar reserves. d. Backdating stock options. e. None of the above.

94. Corruption would not include:

a. Bribery of a government official. b. Kickbacks to a purchasing agent. c. Free vacation to an acquisition agent. d. Stealing petty cash by a purchasing agent. e. None of the above.

95. Which is not a detective control?

a. Reconciliations. b. Training of employees. c. Reviews. d. Surprise cash count. e. None of the above.

96. Which is not a preventive control?

a. Process redesign. b. Segregation of duty. c. Passwords on a computer. d. Job rotation. e. Requiring approvals.

Chapter 4: 2. One of the two fieldwork stages of gathering audit evidence is the account balance‐testing phase.

a. True b. False

3. A detection risk is a risk that an account or transactions contain material misstatements before the effects of the controls.

a. True b. False

4. A control risk is a risk that a material error in the balance or transaction class will not be prevented or detected.

a. True b. False

5. Substantive auditing tests do not include analytical procedures.

a. True

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b. False

8. Generally accepted audit standards are designed to catch most material fraud.

a. True b. False

11. There is a gap between user expectations and the product that independent auditors deliver.

a. True b. False

18. A leading internal auditing textbook says fraud is an unusual occurrence.

a. True b. False

19. The COSO report said that the Chief Executive Officer was involved in approximately 72% of fraudulent financial reporting cases.

a. True b. False

20. According to a leading internal auditing textbook, a fraud audit is common because fraud occurs often.

a. True b. False

22. Technical accounting knowledge is stressed in the Internal Auditor's Competency Framework for Internal Auditing.

a. True b. False

23. An internal auditor director should report directly to the audit committee of the Board of Directors.

a. True b. False

24. The Sarbanes‐Oxley Act mandates that CEOs and CFOs must certify the appropriateness of financial statements and disclosures.

a. True b. False

25. A CPA forensic investigator is required to follow both the Statement of Standards for Consulting Services and the Code of Professional Conduct.

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a. True b. False

26. Reactive auditing occurs when there are reasons to suspect that fraud may have occurred.

a. True b. False

27. Proactive auditing occurs when there are reasons to suspect that fraud may have occurred.

a. True b. False

28. Tests of controls may not be effective in detecting fraud, because management can override controls.

a. True b. False

31. Pro forma financial statements refer to "as if" adjustments to financial information, moving them away from GAAP.

a. True b. False

32. The trend in operating income is not as important as the trend in earnings.

a. True b. False

33. The amount of stockholders or owners' equity should significantly exceed the amount of debt.

a. True b. False

35. Inventory, sales, and receivables should move in tandem.

a. True b. False

37. Reversing reserves is sometimes called "cookie jar" accounting.

a. True b. False

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38. Auditor switching and financial condition of a company are not correlated.

a. True b. False

42. Falling reserves for bad debts in relation to accounts receivable may falsely boost revenues.

a. True b. False

43. Analytics can tell you where to go to audit and for what to search.

a. True b. False

44. Ratio analysis is a subset of trend analysis that can be used to compare relationships among financial statements accounts over time to find the fakes.

a. True b. False

46. A significant deficiency or material weakness that is corrected before the balance sheet date does not need to be reported in the external auditor's report.

a. True b. False

48. When using round‐robin brainstorming, everyone in the room sits in a circle and shouts out ideas while someone writes them down.

a. True b. False

49. The equity method is a technique used to hide debts or liabilities from the balance sheet.

a. True b. False

50. An interview and an interrogation are the same thing.

a. True b. False

51. Two‐thirds of interviewees who cross their legs are lying.

a. True

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b. False

53. The public generally believes that external auditors should find fraud.

a. True b. False

54. Undercover operations would be considered one of the seven investigative techniques available to forensic accountants.

a. True b. False

55. Forensic accounting is based upon the materiality concept.

a. True b. False

57. Imaging a computer is considered to be laboratory analysis.

a. True b. False

58. One of the three phases of fraud is the act itself.

a. True b. False

60. The Available for Sale method is used to hide liabilities.

a. True b. False

61. In a fraud, a victim suffers or the perpetrator achieves a gain.

a. True b. False

63. Pursuing an insurance claim is a possible action when a company discovers a fraud.

a. True b. False

64. Restatement of previously issued financial statements is an indicator of material weakness in internal control.

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a. True b. False

66. Control related to the control environment is an entry‐level control.

a. True b. False

68. Older women are more likely to report fraudulent activities.

a. True b. False

69. An employee complaining about inadequate pay is a behavioral red flag for possible fraud.

a. True b. False

70. Control risk is:

a. A risk that a material error in the balance or transaction class will not be prevented or detected. b. The risk that an account or transactions contain material misstatements before the effects or the controls. c. The measure of whether something is significant enough to change an investor's investment decision is a prime consideration in how the audit is conducted. d. The risk that audit procedures will not turn up material error when it exists. e. None of the above.

71. Which is not one of the factors in SAS No. 99's pyramid of fraud?

a. Incentives. b. Pressures. c. Opportunities. d. Attitudes/rationalization. e. All of the above are SAS No. 99 factors.

75. Which statement is false regarding SAS No. 99?

a. SAS No. 99 places more emphasis on misappropriation of assets. b. SAS No. 82 was replaced by SAS No. 99. c. Three conditions are generally present when fraud occurs. d. Fraud is an intentional act that results in a material misstatement in financial statements. e. None of the above.

76. An example of rationalization, an essential element of fraudulent activity (e.g., the fraud triangle), would be:

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a. Report better than actual performance in order to help your stock options. b. Needing to pay a large gambling debt. c. A weak internal control. d. "Borrowing" the petty cash fund on a temporary basis. e. None of the above.


a. Accounting is the language of business, and internal controls set the ethical standards that govern business activities. b. The internal auditor's standard states that the auditor must consider the possibility of material irregularities or noncompliance during an internal audit. c. Tests of controls are always effective in detecting fraud. d. The internal auditor's competency framework does not stress technical accounting knowledge. e. None of the above.

79. If an internal auditor finds fraud, what communication step should not be taken?

a. Notify management or the Board of Directors. b. A written report should be prepared. c. Draft of written report should be submitted to legal counsel for review. d. Report the offense to the appropriate authority. e. None of the above.


a. Reactive auditing occurs when there are reasons to suspect that fraud may have occurred. b. Fraudsters often make up a company name with three letters. c. Proactive auditing occurs when there are reasons to suspect that fraud may have occurred. d. Tests of controls may not be effective in detecting fraud, because management can override controls. e. None of the above is false.

81. What best describes auditing that occurs when there are reasons to suspect that fraud may have occurred and appropriate audit steps are taken?

a. Internal auditing. b. Top down auditing. c. Reactive auditing. d. Proactive auditing. e. Items b and d.


a. External auditors take a big picture, macro view of the books and records of a company. b. Forensic accountants take a micro view of a business. c. Recounts of inventory and unannounced visits to locations are forensic techniques.

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d. Forensic accountants look for small errors and irregularities. e. None of the above is false.

83. Which statement is generally false?

a. Neither inventory nor accounts receivable should grow faster than sales. b. The trend in operating income is as important as the trend in earnings. c. If net income is moving up while cash flow from operations is drifting downward, something may be wrong. d. Horizontal analysis is commonly used with the Statement of Cash Flow. e. None of the above is false.

84. Which scheme does not inflate sales?

a. Recognizing sales on disputed claims against customers. b. Recognizing sales without shipping the goods. c. Understanding allowances for sales discounts. d. Recognizing full sales amount for partial shipments. e. All inflate sales.


a. WorldCom reversed a cookie jar of reserves to increase income. b. Xerox increased its earnings by placing into income so‐called cushion reserves. c. Enron had more than 2,500 special purpose entities. d. Making write‐offs directly against earnings is called the big bath. e. None of the above is false.


a. Analytics can lie. b. Vertical analysis can be used for all basic financial statements. c. Horizontal analysis is often referred to as common‐sized statements. d. When deferred revenues (on the balance sheet) rise sharply, a company may be having trouble delivering its products as promised. e. None of the above.

87. Which would not be considered an analytical procedure?

a. Comparison with other operating information. b. Vertical analysis. c. Variance analysis. d. Ratio analysis. e. All of above are analytical procedures.

88. Given these facts, compute inventory turnover:

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Total assets $10,000,000 Cost of goods sold 2,200,000 Average inventory 1,300,000 Interest expense 850,000

a. .59. b. 1.69. c. 2.59. d. 7.69. e. Not enough information is given.

89. Given these facts, calculate return on assets: Sales $8,200,000 Net income 3,050,000 Average total assets 7,100,000 Average total liabilities 3,500,000

a. 22%. b. 43%. c. 85%. d. 87%. e. Not enough information is given.

90. Given these facts, calculate return on equity: Sales $8,200,000 Net income 2,050,000 Average total assets 7,100,000 Average total liabilities 3,500,000

a. .29. b. .58. c..60. d. .71. e. Not enough information is given.

92. Which of the following is a type of brainstorming?

a. Open brainstorming. b. Closed brainstorming. c. Lightning brainstorming. d. All of the above.

93. Which of the following ratios works well as a red flag for reporting problems and financial performance?

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a. Return on assets and price earnings. b. Return on assets and return on equity. c. Gross margins and return on equity. d. None of the above.

97. Laboratory analysis would not include:

a. Checking for altered documents. b. Analyzing fingerprints. c. Checking for forged signatures. d. Checking vendors. e. All of the above.

98. Which is not considered to be public document review?

a. Mirror imaging a computer. b. Checking for a criminal record. c. Checking vendors. d. An internet search for real estate records. e. None of the above.

100. What is not considered one of the three phases of fraud?

a. The act itself. b. The concealment. c. Conversion of the stolen asset to personal use. d. Searching for the fraudster. e. None of the above.

101. Which is not a common opinion on the effectiveness of internal control over financial reporting?

a. Neutral Opinion. b. Unqualified Opinion. c. Adverse Opinion. d. Disclaimer Opinion. e. None of the above.

102. Which statement is not true about a material weakness?

a. It must be reported to the public. b. The likelihood that a company will misstate its annual report is remote (e.g., no more than 1 out of 20). c. A significant deficiency that results in a more than remote likelihood that a material misstatement of an annual report will not be prevented or detected. d. A strong indicator of a material weakness is an inadequate internal auditor risk assessment function. e. None of the above.

103. The most common account‐specific material weakness occurs in which account?

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a. Current accrual account. b. Accounts receivable. c. Revenue accounts. d. Inventory accounts. e. None of the above.

104. The COSO model of control:

a. Encompasses best practice control perspectives from a number of professional associations. b. Focuses on documented control procedures as the most important aspects of control. c. Acknowledges that management behaviors are not important, provided employees are given clear direction on conduct. d. States that a "risk assessment" is a good idea, but only really necessary for banks. e. None of the above.

105. Monitoring controls do not include:

a. Management reports that identify nonconforming transactions. b. Monitoring the system of internal control through internal audit activities. c. The preparation of an audit by a licensed CPA firm. d. A company's ethics policy signed by all company employees and executives. e. None of the above.

107. Which level of criminal intent is most commonly required in prosecutions of white‐collar crime?

a. Purposely. b. Knowingly. c. Recklessly. d. Negligently. e. None of the above.

108. A "debit" to assets in a double‐entry accounting system has what effect?

a. A decrease in an assets account and an increase somewhere else. b. An increase in an assets account and a decrease somewhere else. c. A decrease in income and an increase in equity. d. An increase in expenses and a decrease in liabilities. e. A decrease in a shareholder equity account.

109. Which is a false statement?

a. A "day's sales in receivable index" for manipulators is 1.5 to 1. b. The "gross margin index" for manipulators is 1.2 to 1. c. The "asset quality index" for manipulators is 1.25 to 1. d. The "sales growth index" for manipulators is 60 percent. e. The "total accruals to total assets index" for manipulators is .018.

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110. Which of the following organizational changes may have a significant impact on risks and controls?

a. Change in external auditing firms. b. Change in banking institutions. c. New or revised information systems. d. Plant expansion. e. None of the above.

111. According to the COSO model of control, each of the following is a component integrated with the management process except:

a. Monitoring. b. Information and communication. c. Rationalization. d. Risk assessment. e. None of the above.

112. Implementing a code of ethics is a Sarbanes‐Oxley requirement related to which component of the management process?

a. Control activities. b. Information/communication. c. Control environment. d. Monitoring. e. None of the above.

113. SAS No. 99 states that the auditor has the responsibility to plan and perform the audit to obtain reasonable assurance about whether financial statements are free of material misstatement, whether caused by error or fraud. SAS No. 99 also requires all of the following except:

a. Obtaining the information needed to identify risks of material misstatement due to fraud. b. Preparation of a fraud prevention plan. c. Description and characteristics of fraud. d. Importance of exercising professional skepticism. e. None of the above.

114. Horizontal analysis typically involves what?

a. Comparison of companies by market share in the industry. b. Comparison of cash value at a predictable moment in liquidity. c. Comparison of year‐to‐year changes in financial statements. d. Comparison of organizational structure best suited for a planned business venture. e. Both a and b.

115. Which type of auditor opinion is probably the most common?

a. Unqualified. b. Unqualified with explanation. c. Qualified.

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d. Adverse. e. Disclaimer.

116. Once a fraud is discovered, what is probably not a likely action?

a. Pursue criminal prosecution. b. Bring civil action against the perpetrator. c. Internal disciplinary action. d. Pursue an insurance claim. e. None of the above.

117. Which is not an entity‐level control?

a. Controls related to the control environment. b. Controls over management override. c. Controls to monitor results of operations. d. Controls over the period‐end financial reporting process. e. None of the above.


a. Older employees are more likely to report fraudulent activities. b. Skepticism means that even trusted employees or executives may be a fraudster. c. Controls over management overrides are entity‐level controls. d. Auditors should use a bottom‐up approach to determine which controls to test. e. None of the above.

119. Which would not be a behavioral red flag?

a. Close association with a vendor. b. Executive has a wheeler‐dealer attitude. c. Material weakness not corrected. d. Employee does not take vacations. e. None of the above.

Chapter 5: 1. Misappropriation of assets means obtaining something of value or avoiding an obligation by deception.

a. True b. False

2. The most common method of detecting occupational fraud is by internal auditors.

a. True b. False

3. The second most common method of detecting occupational fraud is by accident.

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a. True b. False

4. Discovering fraud is like using a metal detector at a city dump to find some rare coins.

a. True b. False

5. Fraudsters and embezzlers may be the nicest people in the world.

a. True b. False

6. A pressing financial obligation is an example of an opportunity for an employee to embezzle funds.

a. True b. False

7. A large amount of cash on hand presents an opportunity for an employee to embezzle funds.

a. True b. False

8. Theft is similar to embezzlement.

a. True b. False

9. Account receivables are the favorite target of fraudsters.

a. True b. False

10. Skimming is an "off‐book" technique to remove cash before a company records the receipts.

a. True b. False

11. Gross profit analysis can help find both skimming and money laundering.

a. True b. False

12. Embezzlement is the fraudulent appropriation of money or property lawfully in one's possession to be used personally by that person.

a. True

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b. False

13. Most cases go to trial, and pre‐trial activities can be a significant opportunity for a forensic accountant.

a. True b. False

14. Lapping is building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks.

a. True b. False

15. A Kessler study found that 42% of employees were fundamentally dishonest.

a. True b. False

16. Catch skimming by comparing receipts with deposits and surprise cash counts.

a. True b. False

17. Vouching the reconciling items on a cut‐off bank statement can help find lapping and kiting.

a. True b. False

18. A cut‐off bank statement is a normal bank statement except that it covers a shorter time period.

a. True b. False

19. Kiting involves recording of payment on a customer's account some time after the receipt of the payment.

a. True b. False

20. Lapping is sometimes called "robbing Peter to pay Paul."

a. True b. False

21. Fictitious receivables involve covering a fictitious sale with a fictitious receivable, which may be eventually written off.

a. True

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b. False

22. To catch fictitious disbursements, compare the returned checks to the checkbook ledger.

a. True b. False

23. There is no data‐mining software that may be used to help find kickbacks from vendors.

a. True b. False

25. Using direct deposit can help to eliminate ghost employees.

a. True b. False

26. Pump and dump refers to a person purchasing land and then increasing the price of the land before selling it to his or her company.

a. True b. False

30. In the 2002 Wells Report, strong internal controls were ranked number 1 in being most effective for preventing fraud.

a. True b. False

31. Canceled checks should be sent directly from the bank to the business owner.

a. True b. False

32. Background checks of new employees is the best way to prevent fraud.

a. True b. False

33. Adding up the accounts receivable subsidiary does not help to find fraud.

a. True b. False

34. Matching payroll with addresses helps to find multiple persons at the same address.

a. True

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b. False

35. Not‐for‐profit entities do not face incentives and pressures to achieve a given level of financial performance.

a. True b. False

36. Bankruptcy of governmental units is common.

a. True b. False General Feedback:

They are rare. 37. Chapter 11 bankruptcy is for municipalities.

a. True b. False

39. A negative trend for a municipality would be a declining surplus over time.

a. True b. False

40. If the ratio Cash and Investments divided by Current Liabilities is increasing over time, this trend would be a negative sign for a municipality.

a. True b. False

41. If the ratio Unreserved Fund Balance divided by Gross Expenditures is decreasing over time, this trend is a negative sign for a municipality.

a. True b. False

42. If Long Term Debt divided by Population is decreasing over time, this sign would be a negative trend.

a. True b. False

43. Using the fraud hypothesis testing approach, a forensic accountant attempts to detect fraud by formulating and testing null hypotheses.

a. True b. False

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44. A walkthrough is a form of risk assessment of a business' significant processes and is required by the PCAOB.

a. True b. False

45. Rotation of duties can help prevent skimming schemes.

a. True b. False

46. Segregation of duties helps prevent cash larceny.

a. True b. False

47. Missing cash may mean shoplifting by employees.

a. True b. False

49. Write‐offs to bad debt can conceal inventory thefts and kickback schemes.

a. True b. False

50. Kiting is called "robbing Peter to pay Paul."

a. True b. False

51. Two windows in the drive through lane at fast food restaurants have little fraud protection value.

a. True b. False

52. An effective audit procedure for detecting fraud in the sales and collection cycle is to observe the proper and appropriate segregation of duties.

a. True b. False

53. Gap analysis refers to the difference between actual internal controls and the stated internal controls.

a. True b. False

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54. One of the most effective audit procedures for detecting fraud in the payroll cycle is to examine the bank reconciliations.

a. True b. False

55. One of the most effective audit procedures for detecting fraud in the warehousing cycle is to look for related party transactions.

a. True b. False

58. The accounting department has, in general, more fraud than any other division in a company.

a. True b. False

59. Females are more likely to commit a fraud than a male.

a. True b. False

62. At least 15 percent of all bank check‐related losses is from counterfeit checks.

a. True b. False

63. There is automated signature verification technology available to financial institutions to detect and prevent fraud.

a. True b. False

65. A perfectionist like Martha Stewart is considered a fraud red flag.

a. True b. False

66. The U.S. Federal Reserve has a history of clean financial statements.

a. True b. False

67. A financial model may be used to develop planning concepts in a client’s organization.

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a. True b. False


a. Accountants are perhaps the most valuable employee‐fraud fighters. b. Fighting fraud calls for prevention as the first step and the preferred tactic. c. Government entities are generally not targets for fraudsters. d. Often misappropriation is accomplished by false or misleading records or documents. e. None of the above.

69. The most common method of detecting occupational fraud is:

a. External auditors. b. Internal auditors. c. Accident. d. Tips. e. Some other method.

70. A company has a 22% profit margin and has employee fraud of $220,000. Calculate the additional revenue needed to offset this lost income.

a. $540,000. b. $720,000. c. $820,000. d. $1,000,000. e. Some other amount.

71. You are told that a company has a 20% profit margin and the discovered fraud has caused $1,400,000 more needed revenue to cover the fraud. How much was stolen?

a. $280,000. b. $560,000. c. $1,400,000. d. $7,000,000. e. Some other amount.

72. Which is an incorrect statement?

a. Cash flow analysis may indicate fraud and embezzlement. b. Cash is the favorite target of fraudsters. c. Gross profit analysis may catch skimming and money laundering. d. Theft is similar to embezzlement. e. None of the above is incorrect.

73. Which technique is considered to be an "off‐book" fraud?

a. Skimming.

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b. Unrecorded sales. c. Understated sales. d. Theft of incoming checks. e. All of the above.

74. Which scheme is considered to be skimming?

a. Unrecorded sales. b. Understated sales. c. Theft of incoming checks. d. Swapping checks for cash. e. All of the above.

75. Building up balances in bank accounts based upon floating checks drawn against similar accounts in other banks is best called:

a. Skimming. b. Kiting. c. Money laundering. d. Lapping. e. None of the above.

76. Skimming can be caught by:

a. Gross profit analysis. b. Comparing receipts with deposits. c. Surprise cash counts. d. Investigating customers' complaints. e. All of the above.

77. What is a red flag of kiting?

a. Frequent deposits and checks in the same amount. b. Large deposits on Fridays. c. Short time lag between deposits and withdrawals. d. Only a and c. e. Items a, b, and c.

78. What audit step would be most appropriate for finding accounts receivables fraud?

a. A bank reconciliation audit. b. Gross profit analysis. c. Reviewing customer complaints. d. Surprise cash counts. e. All of the above.

79. A person on the payroll who does not work for that company is generally called:

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a. Lapping. b. Ghost employee. c. Missing employee. d. Kiting. e. None of the above.

80. A person finds land, buys it, increases the price, and sells it to his company. What is this scheme?

a. A ghost scheme. b. Land flip. c. Ponzi scheme. d. Bid rigging. e. All of the above.

82. Select the true answer. To prevent fraud, the entity may choose to:

a. Develop a written code of ethics. b. Use background checks when hiring employees. c. Require an annual interview by internal auditors, security, or others of suspicious employees. d. Prosecute discovered fraud, as an example to other employees. e. All of the above are true.

84. Which factor would not indicate a fraud warning sign for not‐for‐profit organizations?

a. Increase in amount owed to creditors. b. Deterioration of key ratio. c. Expense accounts are decreasing. d. Non‐payment of insurance premiums. e. Regular deferral of capital expenditures. General Feedback:

The reverse of c would be a warning sign. 85. Which factor would not indicate a fraud warning sign for not‐for‐profit organizations?

a. No separation of check writing and check signing. b. Qualification in the auditor's report. c. Resignation of key staff member. d. Significant decline in turnover. e. Employee morale is high.

87. Which would be considered a negative trend for a municipality?

a. Fixed Costs less Personal Services and Debt Services is decreasing over time. b. Operating Surplus is increasing over time. c. Unreserved Fund Balance divided by Gross Expenditures ratio is decreasing over time. d. The ratio of Cash and Investments divided by Current Liabilities is increasing over time.

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e. All of the above.

88. Which would be considered a negative trend for a governmental unit?

a. Long‐term Debt divided by Assets ratio is increasing. b. General Revenues plus Transfers divided by Expenses ratio is increasing. c. Unrestricted Net Assets divided by Expenses ratio is increasing. d. Change in Net Assets divided by Total Net Assets ratio is increasing. e. All of the above.

89. Which would be considered a negative trend for a governmental unit?

a. Property taxes greater than 65% of the tax limit. b. Short‐term interest and current year‐end service greater than 15% of total revenue. c. Debt outstanding greater than 90% of the debt limit. d. Unreserved fund balance percentages increasing over time. e. None of the above is a negative trend.


a. The quick ratio omits receivables and amounts due from other funds and governments. b. A large state government considers a quick ratio of more than 50% as an indicator of potential fiscal stress. c. The greater the fund balance as a percentage of revenue, the more likely the government will be able to overcome problems caused by revenue shortfalls. d. The combined financial statement is the main focus of the Comprehensive Annual Financial Report (CAFR). e. None of the above.

92. Forensic accountants should compare travel and expense vouchers to employment records and tax records in order to find:

a. Kiting schemes. b. Lapping. c. Layering schemes. d. Ghost employees. e. All of the above.

93. You should trace bank transfers for the latter part of an audit period and the early part of the subsequent period to determine whether:

a. The cash balances were overstated because of kiting. b. The cash receipts journal was held open for a few days after the end of the year. c. Any unusual payments to or receipts from related parties occurred. d. The last checks recorded before the year‐end were really mailed by year‐end. e. None of the above.

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94. What audit procedures would not be highly effective for detecting fraud in the sales and collection cycle?

a. Ascertain appropriate segregation of duties. b. Review monthly bank reconciliations. c. Verify accounts receivable balances. d. Observe the actual distribution of payroll checks to employees. e. None of the above.

95. What audit procedure would not be highly effective for detecting fraud in the payroll cycle?

a. Verify accounts receivable balances by positive confirmations. b. Observe the actual distribution of payroll checks to employees. c. Sample personnel files and physically observe personnel. d. Observe the duties of employees being performed. e. None of the above.

96. Cash fraud, inventory fraud, fixed asset fraud, payables and disbursement fraud, and payroll fraud are all examples of:

a. Financial reporting fraud. b. Management fraud. c. Misappropriation of assets. d. The fraud triangle. e. None of the above.

98. Lapping is defined as:

a. Replacing new inventory with old. b. Stealing a customer's payment and concealing the theft by applying subsequent payments from other customers to the first customer's account. c. Taking kickbacks. d. False credits, discounts, and write‐offs. e. None of the above.

99. Kickbacks commonly occur in all of the following except:

a. Construction and property management companies. b. Shipping department in which a customer pays an employee to ship a higher quality of goods than ordered. c. Purchasing agent in charge of awarding contracts. d. Accounts receivable department records returns. e. None of the above.

100. Accounts receivable fraud prevention controls include all of the following except:

a. Placing a credit limit on customer accounts to immediately flag when exceeded. b. Requiring supervisory approval for all credit memos and write‐offs. c. Requiring supervisory approval before customers are added to or deleted from the master file.

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d. Requiring investment documents to be sent only to upper management for safekeeping. e. None of the above.

101. Which of the following might produce an investigative "lead" or "red flag"?

a. Laboratory analysis of physical evidence. b. Anonymous letter or e‐mail about the crime. c. The suspicions of an internal auditor. d. Item found on the Internet. e. All of the above.

102. Which type of investigative technique works best at accumulating evidence to build a legal case against a financial fraudster?

a. Interviewing. b. Surveillance. c. Informants. d. Invigilation. e. All of the above.

103. The typical audit trail connects what to what?

a. Source documents to cross‐referenced documents. b. Transaction documents to summary documents. c. Horizontal analysis to vertical analysis. d. Balances to payables and receivables. e. Both b and c.

104. Which is not a journal entry fraud symptom?

a. Out‐of‐balance. b. Lacking supporting documents. c. Unexplained adjustments. d. Lost cash register tapes. e. None of the above.

105. Which is a unique factor for solving a white‐collar crime?

a. Tracing of assets. b. Availability of witnesses. c. Desires of victims. d. Financial losses. e. Both c and d.

106. Which item would a forensic accountant go to first in order to investigate the source of a suspicious transaction?

a. Budget.

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b. Journal. c. Cash register receipts. d. Ledger. e. Either a or b.

107. Payroll and employee reimbursement fraud schemes include all of the following except:

a. Ghost employees. b. Embezzling withholding. c. Company credit card fraud. d. Unauthorized borrowing. e. None of the above.

108. Misappropriation of inventory may be detected by one of the following:

a. Analyzing the year‐end bank reconciliation for outstanding checks. b. Calculating and analyzing the gross profit margin. c. Reconciling the accounts receivable subsidiary ledger to the general ledger. d. Increasing the integration of technology into the business process. e. None of the above.

109. ____________ requires keeping detailed records before and after the ____________ period to determine the amount of fraud.

a. Tracing, entity. b. Invigilation, invigilation. c. Genogram, genogram. d. Entity, entity. e. Timeline, entity.

110. What information is not needed to perform a check spread?

a. Date. b. Payee. c. Check number. d. Amount. e. All are needed.

111. A ____________ chart is a pictorial display of personal relationships among related or unrelated parties.

a. Link. b. Invigilation. c. Entity. d. Genogram. e. None of the above.

112. A fraud investigation should not be commenced without proper ____________.

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a. Conviction. b. Predication. c. Timing. d. Motivation. e. Some other event.

113. Which group is the source of more tips on a hotline?

a. Vendors. b. Employees. c. Customers. d. Competitors. e. Shareholders/owners.

114. Which department or division in an organization probably has more fraud?

a. Marketing. b. Operating. c. Sales. d. Accounting. e. Purchasing.

115. Which is the highest fraud industry?

a. Financial services. b. Mining. c. Global manufacturing. d. Computer. e. Petroleum.

117. Which group probably is not an important element of a fraud risk program?

a. Board of Directors. b. Audit Committee. c. Internal Audit Department. d. Management. e. None of the above.

Chapter 7: 1. The Treasury Department is the U.S. government agency charged with enforcing the most specific statutes against money laundering in the United States.

a. True b. False

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2. Correspondent banks allow citizens from all over the world to have bank accounts within any U.S. bank.

a. True b. False

3. Banks file their official reports about suspected money laundering activities with the Federal Trade Commission.

a. True b. False

4. Traceroute will show the web server path taken by a message over the Internet.

a. True b. False

6. A static IP address is easier to trace than a dynamic IP address.

a. True b. False

7. Bearer stock allows the owner of the shares to remain unidentified.

a. True b. False

9. Since the passage of the Patriot Act, shell banks without any physical presence in any jurisdiction are prohibited from operating in the United States.

a. True b. False

10. The purpose of money laundering is to:

a. Take illegitimate funds and make them look like they were earned from legitimate business activities. b. Purposefully transfer restricted grant monies into discretionary accounts through confutation. c. Secretly take suitcases full of money from one country to another. d. All of the above. e. Only a and b.

11. A first step in a money laundering operation is to:

a. Obtain legal money. b. Deposit illegal money into the banking system. c. Open a correspondent account.

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d. Send a money wire transfer to another country. e. None of the above.

14. To avoid detection by law enforcement authorities, money launderers will only send a maximum money transfer that is:

a. $5,000 or less. b. $10,000 or less. c. $15,000 or less. d. $20,000 or less. e. None of the above.

15. Banks must file which of the following forms when they become aware of suspicious customer activity related to possible money laundering?

a. Currency Transaction Report. b. Over‐Currency Report. c. International Transportation of Currency and Money Report. d. None of the above.

16. The difference between an off‐shore bank and a shell bank is that:

a. The shell bank has a physical presence in the country in which it is licensed whereas the off‐shore bank does not. b. The off‐shore bank specifically cannot carry on business in the jurisdiction in which it is licensed whereas such restrictions do not specifically affect shell banks. c. Only shell banks use correspondent services. d. U.S. banks have more access to client account information in a shell bank than in an off‐shore bank. e. None of the above.

17. Which one of the following businesses would a money launderer most want to acquire?

a. Travel agency. b. Broker. c. Series of newspaper/magazine stands. d. Gas station. e. None of the above.

18. Which one of the following is the easiest to falsify?

a. Web logs. b. Paper documents. c. Wire transfer reports. d. Hard drive files.

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19. All of the following would be found in HTTP log files except:

a. Size of the requested files. b. Address of the website that the current visitor came from. c. IP address of the visitor. d. Speed of transfer from the previous website. e. None of the above.

20. Which one of the following statements about web logs is true?

a. Logs can show unencrypted passwords. b. Logs provide an audit trail of evidence about activities occurring on a website. c. Log entries are so expansive on a busy website that they are virtually impossible to use for forensic purposes. d. Log files are easy for hackers to erase. e. Both a and b.

21. Logs provide which of the following?

a. Name of the visitor entering the website. b. Name of the country where the visitor's PC is located. c. The web page the visitor was at before entering the website. d. The route taken over the Internet to arrive at the current website. e. All of the above.

23. After entering an IP address into a traceroute program, how long does it normally take to trace the IP address back to its originating source?

a. 1‐2 hours usually. b. 30 minutes on average. c. About 1 minute. d. A few seconds. e. None of the above.

25. In order to avoid working with a money launderer, due diligence in relationship to a new business partner means:

a. Becoming familiar with the background of the potential new partner. b. Checking pay stubs of the new partner. c. Reviewing the original copies (not photocopies) of verification documents. d. All of the above.

26. One of the most important legislative acts restricting the activities of money launderers in recent years is the:

a. Bank Secrecy Act.

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b. Currency Transportation Act. c. International Money Laundering Abatement and Financial Anti‐Terrorism Act. d. Bankers' Money Laundering Act. e. None of the above.

27. In a family trust, if the trust documents provide for the automatic transfer of the trust to another jurisdiction if the trust comes under investigation, such a clause is called the:

a. Escape clause. b. Removal clause. c. Flee clause. d. Nondemential excel clause. e. None of the above.

28. Money launderers prefer to establish business relationships with a company whose operations are characterized by:

a. Being located in a foreign country. b. Large cash flows. c. Low inventories. d. Being run by one entrepreneur. e. None of the above.

30. Many times auditors do not believe they should report possible money laundering activities that they find in their audits because:

a. Money laundering, per se, does not materially affect the company's financial reports. b. Client confidentiality should be maintained. c. There is no auditing requirement for the reporting of money laundering. d. All of the above.

32. Which one of the following business events or transactions is most likely a sign of money laundering operations?

a. Prepayments on a credit card. b. Kiting checks. c. Smoothing net income on the financial statements. d. Stealing passwords.

33. Which of the following is NOT a nonfinancial institution?

a. Broker/dealers b. Credit card companies c. Pawn shops d. Correspondent banks

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34. Concentration accounts:

a. Were eliminated by the Patriot Act. b. Are used by banks to temporarily hold the cash deposits that they receive. c. Is a term that relates to activities that were followed in Germany before WWII. d. Are a way money launderers gain access to the U.S. banking system.

35. If bearer shares are used as means to identify ownership in a company, it means:

a. Only that all owners of the company are identified. b. Only the person presenting the bearer shares is identifiable. c. The company is in receivership. d. The company is a foreign company.

36. If I am using my online checking account to transfer money to another online checking account at another bank, it is called:

a. A wire transfer. b. An electronic fund transfer. c. An underground transfer. d. None of the above.

38. A keylogger is used to:

a. Break into a computer. b. Steal passwords. c. Record all keystrokes on the keyboard.

d. Physically copy keys to locks.

possible exam 1 questions - forensics

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