Chapter 12—Business Ethics, Fraud, and Fraud Detection

TRUE/FALSE

1. The
The ethi
ethica
call prin
princi
cipl
plee of jus
justi
tice
ce ass
asser
erts
ts tha
thatt the
the bene
benefi
fits
ts of
of the
the deci
decisi
sion
on sho
shoul
uld
d be
distributed fairly to those who share the risks.

ANS: T PTS: 1

2. The
The ethi
ethica
call prin
princi
cipl
plee of inf
infor
orme
med
d cons
consen
entt sugg
sugges
ests
ts tha
thatt the
the deci
decisi
sion
on sho
shoul
uld
d be
implemented so as to minimize all of the risks and to avoid any unnecessary risks.

ANS: F PTS: 1

3. Empl
Employ
oyee
eess sho
shoul
uld
d be
be mad
madee awa
aware
re of the
the fir
firm’
m’ss com
commi
mitm
tmen
entt to
to eth
ethic
ics.
s.

ANS: T PTS: 1

4. Busine
Business
ss ethics
ethics is the analys
analysis
is of the nature
nature and social
social impact
impact of comput
computer
er techno
technolog
logy
y,
and the corresponding formulation and justification of policies for the ethical use of such technology.
technology.

ANS: F PTS: 1

5. Para
Para compu
computer
ter ethics
ethics is the exposu
exposure
re to storie
storiess and
and report
reportss foun
found
d in
in the
the pop
popula
ularr media
media
regarding the good or bad ramifications of computer technology.
technology.

ANS: F PTS: 1

6. Comp
Compu
uter
ter prog
rograms
rams are
are intel
ntelllectu
ectual
al pro
propert
perty
y.

ANS: T PTS: 1

7. Copy
Copyri
righ
ghtt laws
laws and
and com
compu
pute
terr indu
indust
stry
ry sta
stand
ndar
ards
ds hav
havee been
been dev
devel
elop
oped
ed joi
joint
ntly
ly and
and
rarely conflict.

ANS: F PTS: 1

8. Busi
Busine
ness
ss bank
bankru
rupt
ptcy
cy case
casess alw
alway
ayss inv
invol
olve
ve frau
fraudu
dule
lent
nt beha
behavi
vior
or..

ANS: F PTS: 1

9. Defa
Defallcati
cation
on is ano
anoth
ther
er word
word for
for fin
finan
anci
cial
al frau
fraud.
d.

ANS: T PTS: 1

10. The trend

trend towa
toward
rd dist
distrib
ribute
uted
d data
data proc
process
essing
ing increa
increases
ses the exposu
exposure
re to
to fraud
fraud from
from
remote locations.

ANS: T PTS: 1

11.
11. Of the
the three
three fraud
fraud fact
factors
ors (sit
(situat
uation
ional
al press
pressure
ure,, ethics
ethics,, and oppo
opportu
rtunit
nity),
y), situ
situati
ationa
onall
 pressure is !"# factor that actually facilitates the act.
 ANS: F PTS: 1

12. Ethical issues and legal issues are essentially the same.

ANS: F PTS: 1

13. Internal control systems are recommended but not required to prevent fraud.

ANS: F PTS: 1

14. Collusion among employees in the commission of a fraud is difficult to prevent but
easy to detect.

ANS: F PTS: 1

15. Database management fraud includes altering, updating, and deleting an

organization’s data.

ANS: F PTS: 1

16. The fraud triangle represents a geographic area in Southeast Asia where international
fraud is prevalent.

ANS: F PTS: 1

17. Situational pressure includes personal or job related stresses that could coerce an
individual to act dishonestly.

ANS: T PTS: 1

18. Opportunity involves direct access to assets and/or access to information that controls
assets.

ANS: T PTS: 1

19. Cash larceny involves stealing cash from an organization before it is recorded on the organiza-
tion’s books and records.

ANS: F PTS: 1

20. Skimming involves stealing cash from an organization after it is recorded on the organization’s
 books and records

ANS: F PTS: 1

21. The most common access point for perpetrating computer fraud is at the data collection stage.

ANS: T PTS: 1
22. Changing the Hours Worked field in an otherwise legitimate payroll transaction to increase the
amount of the paycheck is an example of data collection fraud.

ANS: T PTS: 1

23. Scavenging  is a form of fraud in which the perpetrator uses a computer program to search for
key terms in a database and then steal the data.

ANS: F PTS: 1

24. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud
into all phases of the audit process.

ANS: T PTS: 1

MULTIPLE CHOICE

1. Which ethical principle states that the benefit from a decision must outweigh the risks,
and that there is no alternative decision that provides the same or greater benefit with less risk?
a. minimize risk  
 b. justice
c. informed consent
d. proportionality
ANS: D PTS: 1

2. Individuals who acquire some level of skill and knowledge in the field of computer
ethics are involved in which level of computer ethics?
a. para computer ethics
 b. pop computer ethics
c. theoretical computer ethics
d. practical computer ethics
ANS: A PTS: 1

3. All of the following are factors in the fraud triangle except

a. Ethical behavior of an individual
 b. Pressure exerted on an individual at home and job related
c. Materiality of the assets
d. Opportunity to gain access to assets
ANS: C PTS: 1

4. Which characteristic is not associated with software as intellectual property?

a. uniqueness of the product
 b. possibility of exact replication
c. automated monitoring to detect intruders
 d. ease of dissemination
ANS: C PTS: 1

5. For an action to be called fraudulent, all of the following conditions are required
except
a. poor judgment
 b. false representation
c. intent to deceive
d. injury or loss
ANS: A PTS: 1

6. One characteristic of employee fraud is that the fraud

a. is perpetrated at a level to which internal controls do not apply
 b. involves misstating financial statements
c. involves the direct conversion of cash or other assets to the employee’s personal benefit
d. involves misappropriating assets in a series of complex transactions involving third parties
ANS: C PTS: 1

7. Forces which may permit fraud to occur do not include

a. a gambling addiction
 b. lack of segregation of duties
c. centralized decision making environment
d. questionable integrity of employees
ANS: C PTS: 1

8. Which of the following best describes lapping?

a. applying cash receipts to a different customer’s account in an attempt to conceal previous
thefts of funds
 b. inflating bank balances by transferring money among different bank accounts
c. expensing an asset that has been stolen
d. creating a false transaction
ANS: A PTS: 1

9. Skimming involves
a. %!#&'()* +&%" ,-./ &) .-*&)(0&1.) 2#,.-# (! (% -#+.-3#3
 b. 4!#&'()* +&%" ,-./ &) .-*&)(0&1.) &5#- (! "&% 2##) -#+.-3#3
c. /&)6,&+!6-()* ,&'%# 76-+"&%# .-3#-%8 -#+#(9()* -#7.-!%8 &)3 ()9.(+#%
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: A PTS: 1

10. Which of the following controls would best prevent the lapping of accounts
receivable?

a. Segregate duties so that the clerk responsible for recording in the accounts receivable
subsidiary ledger has no access to the general ledger.
 b. Request that customers review their monthly statements and report any unrecorded
cash payments.
c. Require customers to send payments directly to the company’s bank.
d. Request that customers make the check payable to the company.
ANS: C PTS: 1

11. In balancing the risks and benefits that are part of every ethical decision, managers
receive guidance from each of the following except
a. justice
 b. self interest
c. risk minimization
d. proportionality
ANS: B PTS: 1

12. Cash larceny involves

a. %!#&'()* +&%" ,-./ &) .-*&)(0&1.) 2#,.-# (! (% -#+.-3#3
 b. 4!#&'()* +&%" ,-./ &) .-*&)(0&1.) &5#- (! "&% 2##) -#+.-3#3
c. /&)6,&+!6-()* ,&'%# 76-+"&%# .-3#-%8 -#+#(9()* -#7.-!%8 &)3 ()9.(+#%
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: B PTS: 1

13. Employee fraud involves three steps. Of the following, which is not involved?
a. concealing the crime to avoid detection
 b. stealing something of value
c. misstating financial statements
d. converting the asset to a usable form
ANS: C PTS: 1

14. What fraud scheme is similar to the “borrowing from Peter to pay Paul” scheme?

a. expense account fraud

 b. kiting
c. lapping
d. transaction fraud
ANS: C PTS: 1

15. A shell company fraud involves

a. %!#&'()* +&%" ,-./ &) .-*&)(0&1.) 2#,.-# (! (% -#+.-3#3
 b. 4!#&'()* +&%" ,-./ &) .-*&)(0&1.) &5#- (! "&% 2##) -#+.-3#3
c. /&)6,&+!6-()* ,&'%# 76-+"&%# .-3#-%8 -#+#(9()* -#7.-!%8 &)3 ()9.(+#%
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: C PTS: 1

16. When certain customers made cash payments to reduce their accounts receivable, the
 bookkeeper embezzled the cash and wrote off the accounts as uncollectible. Which control procedure
would most likely prevent this irregularity?
a. segregation of duties
The use of inappropriate accounting techniques is a characteristic common to m any financial statement
fraud schemes. Enron made elaborate use of Special Purpose Entities (SPE) to hide liabilities through
off balance sheet accounting. WorldCom management transferred transmission line costs from current
expense accounts to capital accounts. This allowed them to defer some operating expenses and report
higher earnings. Also, they reduced the book value of hard assets of MCI by $3.4 billion and increased
goodwill by the same amount. Had the assets been left at book value, they would have been charged
against earnings over four years. Goodwill, on the other hand, was amortized over much longer period.

PTS: 1

15. Computer fraud is easiest at the data collection stage. Why?

ANS:
Computer fraud is easiest at the data collection stage because much of what occurs after the data
collection or input stage is not visible to human eyes. Once entered, the system will presume that the
input is legitimate and will process it as all others.

PTS: 1

16. Describe the factors that constitute the fraud triangle. Why is it important to auditors?

ANS:
The fraud triangle  consists of three factors that contribute to or are associated with manage-
ment and employee fraud. These are:
(1) situational pressure, which includes personal or job related stresses that could coerce an
individual to act dishonestly;
(2) opportunity, which involves direct access to assets and/or access to information that
controls assets, and;
(3) ethics, which pertains to one’s character and degree of moral opposition to acts of
dishonesty.

An individual with a high level of personal ethics, who is confronted by low pressure and
limited opportunity to commit fraud, is more likely to behav e honestly than one with weaker
 personal ethics, who is under high pressure and exposed to greater fraud opportunities.

Research by forensic experts and academics has shown that the auditor’s evaluation of fraud is
enhanced when the fraud triangle factors are considered.

PTS: 1

17. Distinguish between errors and irregularities. Which are of greatest concern to auditors?

ANS:
Errors are unintentional mistakes; while irregularities are intentional misrepresentations to perpetrate a
fraud or mislead users of financial statements. Errors are a concern if they are numerous or sizable
enough to cause the financial statements to be materially misstated. All processes that involve human
actions are highly susceptible to human error. Computer processes are subject to program errors,
faulty systems operating procedures and system malfunction. Errors are typically easier to uncover
than misrepresentations, thus auditors typically are more concerned about detecting all irregularities.
Also, under SAS No. 99 and Sarbanes-Oxley, auditors are specifically charged with fraud detection.

PTS: 1