Fraud Awareness

1. Fraud Awareness Association of Government Accountants Northern Utah Chapter Lealan Miller, CGFM, CPA May 2014

2. The “Fraud Triangle” Motive Perceived Opportunity Rationalization

3. Factors effective in fraud prevention and detection

4. 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. • True • False

5. Question 2 2. Which of the following might be a red flag of a concealed liabilities and expenses scheme? • Gross margin significantly lower than industry average • An unusual increase in the number of days' purchases in accounts payable • An unusual change in the relationship between fixed assets and depreciation • Significant reductions in accounts payable while competitors are stretching out payments to vendors

6. 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? • Professional skepticism • Knowledge of the company's business • Use of a fraud risk factor checklist • Brainstorming session

7. Question 4 4. Which of the following steps would be most helpful in determining whether reported revenue includes fictitious sales? • Analyzing credits to accounts receivable recorded during the subsequent period • Examining vendor complaints • Consulting with sales management about the validity of the sales • Performing a search for unrecorded liabilities

8. 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? • Expense omission • Channel stuffing • Unrecorded warranties • Factoring fraud

9. 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? • Computing the number of days' purchases in accounts payable • Reviewing the bank cutoff statement • Examining correspondence with and invoices from attorneys • Observing the inventory count

10. Question 7 7. An unusual relationship between sales and which of the following can provide an indicator of a fictitious revenues scheme? • Cost of goods sold • Sales returns • Shipping expense • All of the above

11. 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? • Inflated inventory • Capitalized expenses • Fictitious accounts receivable • Overstated fixed assets

12. 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? • Improper asset valuation • Timing differences • Fictitious revenues • All of the above

13. 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? • Obtaining a bank confirmation • Analyzing depreciation and amortization expenses • Computing the collection ratio • Performing a search for unrecorded liabilities

14. The Future of Fraud

15. 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: • Digit occurrence matching • Benford’s law analysis • Correlation analysis • One-to-One checking

16. 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. • True • False

17. Question 3 3. In an interview situation, which of the following behaviors is often a sign of deception? • Repeating each question • Starting each answer with "honestly" or "to tell the truth" • Answering each question with another question, such as "Why would I do something like that?" • All of the above

18. 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? • Divorce or family problems • Unwillingness to share duties • Living beyond their means • Unusually close association with a vendor or customer

19. 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? • Turning it off using the shutdown process • Unplugging it • Sorting through the files to make a note of where on the hard disk the pertinent evidence is located • Copying all files on the computer to a portable hard drive

20. 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? • Identifying vendors with no contact name • Identifying the least-used vendor accounts • Identifying the most-used vendor accounts • All of the above

21. 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? • Circle the suspicious writing on it • Fold it, put it in an envelope, and mail it to the police • Make a copy of it and put the original in a folder • Paperclip it to a legitimate invoice for comparison by her supervisor

22. Expense Report – Busted!

23. 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? • Sales skimming • False billing • Check tampering • Inventory theft

24. 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? • The head of the company's security department • The partner of the company's external audit firm • The company's legal counsel • The company's human resources manager

25. 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? • Inventory theft • Asset overvaluation • Bribery • Lapping

26. 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: • Shell company schemes • Forged endorsement schemes • Skimming schemes • Fictitious refund schemes

27. 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? • Cash larceny • Inventory theft • Credit card skimming • Fictitious refunds

28. Question 6 6. Which of the following may be a sign that an organization is being victimized by a falsified hours scheme? • Several employees appear on the personnel employee roster but are not on the most recent payroll check list. • The payroll expenses for the company unexpectedly exceed budgeted projections and prior years' totals. • One employee consistently submits more requests for expense reimbursements than all other employees within the department. • The FICA tax withheld on several employees' paychecks does not equal 7.65% of the employees' gross pay.

29. 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? • Lapping • Kiting • Altered payee • Falsified billing

30. 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. • True • False

31. Question 9 9. Which of the following might be a warning sign of a shell company scheme? • A vendor that is not listed in the phone book • An unexpected and significant increase in "consulting expenses" • Invoices lacking details of the items purchased • All of the above

32. 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? • Petty cash larceny • Concealed expenses • Mischaracterized expense reimbursement • Falsified salary

33. 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. • Connected accountability. • Civil responsibility • Imputed liability

34. 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? • The company's gross margin is significantly lower than industry average. • The company has experienced an unusual increase in the number of days' purchases in accounts payable. • The financial statements reflect an unusual change in the relationship between fixed assets and depreciation. • The company shows a significant reduction in accounts payable, even though its competitors are stretching out payments to vendors.

35. Question 3 3. Which of the following is considered a fraud preventive internal control? • Employee support programs • Segregation of duties • Employee background checks • All of the above

36. 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? • Criminal predisposition • Incentive or pressure • Perceived opportunity • Rationalization

37. Question 5 5. In general, the best way to prevent fraud is to: • Implement harsh penalties for perpetrators • Outsource all possible functions • Increase the perception of detection • Conduct covert audits

38. 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.“ • Proof • Evidence • Suspicion • Predication

39. Question 7 7. Which of the following is NOT an element generally included as part of a fraud risk assessment? • Risk identification • Formal fraud policy development • Assessment of likelihood and significance of risks • Risk response

40. Question 8 8. The three primary categories of occupational fraud are: • Corruption, financial statement fraud and asset misappropriation • Skimming, money laundering and bid rigging • Asset misappropriation, identity theft and fictitious revenues • Financial statement fraud, inventory theft and cash larceny

41. 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? • Chuck Pensky, the primary suspect • Julia Rodriguez, an accounts payable clerk who filled in for Pensky when he was on vacation • Stephen Milton, a regular customer of the company whose complaint about his account balance prompted the investigation • Kathryn Beatty, Pensky's supervisor, who is suspected of helping Pensky cover the fraud in exchange for a portion of the proceeds

42. Question 10 10. Most employees who commit fraud have a history of fraudulent misconduct. • True • False

43. 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

44. Question 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? • 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.

45. Question 3 3. Which of the following internal controls would likely be most effective in helping to prevent fraud? Hidden surveillance Secret cash counts Covert email monitoring Fake surveillance cameras

46. 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.

47. 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 formal risk assessment An antibribery policy Employee anticorruption training All of the above

48. 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.

49. Question 7 7. An effective hotline serves as: A fraud detection control A fraud prevention control Both a fraud detection and prevention control

50. Question 8 8. Which of the following is true regarding employee antifraud training? Employees at all levels of the organization should receive identical antifraud training. The training should be catered to the specifics of the organization. Training all employees at the time of hire is sufficient. All of the above.