Deck 7: Conducting a Fraud Investigation

Question 1

Journal entries can potentially undermine the validity of financial statements and the financial reporting process.

Answer 1

True

Question 2

Red Ram,Corp.suspected that the revenues of the company are being overstated.Which of the following conditions can confirm the reasonableness of this suspicion?

A) The competition faced by the company increased due to the entry of a new competitor in the market.
B) The labor-force doubled over the previous year resulting in higher salaries and wages cost.
C) The expenses of the company increased by 150% as compared to the previous year.
D) The finance head has to show high turnover in order to avail a loan for the company's next project.

Answer 2

D

Question 3

Mediation is less expensive than arbitration.

Answer 3

True

Question 4

An arbitration panel should include at least three lawyers.

Question 5

A hypothesis is simply a statement of fact.

Question 6

The interview sequence should always start with possible co-conspirators.

Question 7

Financial statements analysis may reveal unexpected relationships or the absence of expected relationships.

Question 8

Under the periodic inventory method

A) inventory account is used to record the changes in inventory.
B) cost of goods sold is recorded after each purchase.
C) beginning inventory remains unchanged during the period.
D) inventory account is adjusted only once in three accounting periods.

Question 9

Dylan,the accountant of Skylar Constructions,is being suspected for altering entries in the books of accounts and transferring the difference to a separate account.Dylan has recently bought a luxury car.You are appointed to investigate the fraud.Which of the following is a good preliminary hypothesis for the case?

A) Skylar uses perpetual inventory method which reduces the probability of detection of fraud.
B) Dylan shares a good rapport with the auditor of the company, enhancing the opportunity to commit fraud.
C) Dylan recently bought a luxury car, the sources of funds for which is yet to be determined.
D) The financial statements of the company are reported quarterly, increasing the probability of detection.

Question 10

Which of the following journal entries is most likely a fraudulent journal entry?

A) an entry involving debit to Accounts Receivable and credit to Sales Revenue
B) an adjusting entry involving debit to Sales and credit to Loans to Employees
C) an entry involving debit to Cash and credit to Notes Receivable
D) an adjusting entry involving debit to Depreciation Expense and credit to Furniture

Question 11

Which of the following is the objective of journal entry testing in a forensic accounting engagement?

A) to create a preliminary hypothesis
B) to identify and assess any inappropriate or unusual activity
C) to confirm the reasonableness of the suspicions of fraud
D) to determine the reliability of the recorded journal entries

Question 12

Ariel,the CFO of Zaria,Corp.,suspects that the profits of the company are being overstated.Ariel suspects that someone from the mid-level management is behind this.The bonus of the mid-level managers is directly linked to the growth of net profit.The mid-level managers have received no bonus since three years as the reported profit of Zaria has been declining.The books of accounts are only accessible to Ariel.Which of the following elements of the fraud triangle is missing in this case?

A) need
B) rationalization
C) opportunity
D) integrity

Question 13

Stealing cash revenue after it has been recorded in the accounting system is called cash larceny.

Question 14

Diverting proceeds of business loans for personal use is known as unauthorized disbursements.

Question 15

Which of the following is a characteristic of fraudulent journal entries?

A) These contain exact numbers or inconsistent ending numbers.
B) These are generally recorded at the beginning of the period.
C) These are made to regularly used accounts.
D) These are applied to intercompany or related parties.

Question 16

John Ambre has just accepted a forensic investigative engagement.Which of the following should be the first step to be taken by John?

A) Create a fraud hypothesis.
B) Confirm the reasonableness of the suspicions of fraud.
C) Conduct interviews and gather relevant data and evidence.
D) Test and refine the fraud hypothesis via financial statements analysis.

Question 17

The rate prescribed by the applicable state (or federal)statute to be applied to a determined amount of economic loss is called a penal interest.

Question 18

The internal auditor of Trinity,Inc.suspected that the books of accounts did not show a true and fair value of the business.On his advice,the management of the company appointed Ravenwood to investigate into the matter.Ravenwood found that the suspicions of the internal auditor were reasonable.He created a fraud hypothesis and tested and refined the hypothesis via financial statement analysis and journal entry analysis.Which of the following should be Ravenwood's immediate next step?

A) Present recommendations for resolution and remediation of fraudulent activities.
B) Draw conclusions and communicate results of the analysis.
C) Test and refine the hypothesis via interactive evidence gathering.
D) Determine misappropriations if any and the specific scheme employed.

Question 19

Which of the following enhances client understanding and acceptance through interim (phase)reporting?

A) integrated approach
B) unit approach
C) incremental approach
D) phased approach

Question 20

Under the accrual method of accounting,income is accounted for (recognized)when earned.

Question 21

Which of the following is true of arbitration?

A) It is formal as compared to a trial.
B) It is focused on fact finding.
C) It is less expensive than mediation.
D) It is a nonbinding structured process.

Question 22

Which of the following scenarios involves skimming?

A) Ian deducted cash from check deposits of the company.
B) Keith removed cash from the safe after it had been entered into the cash book.
C) Natalie removed cash from the register before the entries were made into the books of accounts.
D) Olivia made false entries in a cash register to conceal the cash she removed without authorization.

Question 23

An artful plot or plan,usually to deceive others is called a

A) fraud scheme.
B) fraud hypothesis.
C) fraud arbitration.
D) fraud mediation.

Question 24

How does horizontal analysis of financial statements help forensic accountants in their investigations?

A) It compares key financial statement items over time to identify changes.
B) It uses Dupont model to calculate and compare the return on equity.
C) It helps forensic accountants in identifying fraudulent journal entries.
D) It allows the comparison of financial statements regardless of firm size.

Question 25

Which of the following statements comparing alternative dispute resolution (ADR)with litigation is true?

A) ADR is more expensive than litigation.
B) ADR is more time-consuming than litigation.
C) Litigation is public whereas ADR maintains privacy.
D) Litigation has complete flexibility whereas ADR has limited flexibility.

Question 26

What are the two alternative dispute resolution strategies which are available?

Question 27

Which of the following terms describes the act of stealing cash revenue after it has been recorded in the accounting system?

A) cash larceny
B) register disbursement
C) less cash scheme
D) skimming

Question 28

Fraud is not an accounting problem - it is a social phenomenon.Explain.

Question 29

What are the common characteristics of fraudulent journal entries outlined in SAS No.99?

Question 30

Which of the following is an example of false credits/discounts?

A) Bjorn issued many sales invoices in the name of "Power Top Agency." However, no such agency existed, and the invoices were raised for overstating the revenue of the company.
B) Russell recorded a sale of $10,000 as sale of $9,000 and $1,000 as sales discount. However, no such discount was provided to the customer.
C) Shun altered a few adjusting entries in the company's cash books to conceal $4,000 that he had removed from the cash register.
D) Armin is given a reimbursement for the medical expenses incurred by her and her family. She inflated her hospital bills to the extent of $1,500 to obtain a higher amount from the company.

Question 31

Which of the following is a rate of interest,prescribed by the applicable state (or federal)statute,that is applied to a determined amount of economic loss?

A) federal rate
B) economic rate
C) statutory rate
D) penal rate

Question 32

Which of the following terms describes a fraud scheme in which two conspiring companies exchange payments and services for the sole purpose of inflating revenues?

A) billing scheme
B) kickback
C) switch contract
D) swap transaction

Question 33

Shiny Toys had failed to meet the projected revenues for the third year in a row.Yin,the owner,suspects Ginny,his long-time attendant,of skimming cash from the cash register with possible assistance from Aton,the cashier.Ginny is the only person apart from Yin and Anton who has the key to the shop.Rita,who comes to sweep the shop every morning,had seen Ginny hover around the cash register when Aton was at lunch.Yin enlists the help of a forensic accountant to investigate the possibility of a fraud.Which of the following statements are true?

A) Rita will be considered a neutral third party.
B) Ginny will be considered a suspected co-conspirators.
C) Yin will be considered the target.
D) Aton will be considered a corroborative witness.

Question 34

Which of the following is a difference between mediation and arbitration?

A) Mediation is a nonbinding structured process, whereas arbitration is a binding process.
B) Mediation is done in front of a panel, whereas arbitration is facilitated by an independent third party.
C) Mediation is generally time-consuming, whereas arbitration takes significantly less time.
D) Mediation is completely flexible, whereas arbitration is comparatively rigid.

Question 35

A ________ is a payment back by a seller of a portion of the purchase price to a buyer to induce purchase or influence future purchases.

A) false discount
B) expense reimbursement
C) kickback
D) check tampering