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Fall 2009 Fraud Examinations Final
Fraud Examinations
322
Accounting
12/07/2009
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Term
3 Types of Accounting Changes
 Definition
1) Accounting principles
2) Estimates
3) Reporting entities
Term
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.
 Definition
Debt-to-Equity
Term
A memo of interview with the custodian of the records should state…
 Definition
What items/When received/From whom/Where they are maintained
Term
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. Measures how much out of every dollar of sales is actually kept in earnings.
 Definition
Profit Margin
Term
A ratio showing how many times a company's inventory is sold and replaced over a period.
 Definition
Inventory Turnover
Term
A statement on federal law which prohibits contributions by corporations to political parties and candidates.
 Definition
Political Contributions.
Term
A type of fraud where an individual or individuals purposefully misreport financial information about an organization in order to mislead those who read it.
 Definition
Financial Statement Fraud
Term
A type of revenue scheme in which a sale is booked even though some terms have not been completed and the rights and risks of ownership have not passed to the purchaser (not a revenue)
 Definition
Sales with Conditions
Term
According to the 2006 Nation Fraud Survey, what are the 3 most effective mechanisms for reducing the cost/duration of frauds?
 Definition
1. Surprise Audits
2. Anonymous Reporting
3. Fraud Training
Term
Actual ethical principle that can not be violated (black or white); The ends does not justify the means.
 Definition
Imperative Principle
Term
Allows company to protect the confidentiality of the investigation under the attorney-client privilege.
 Definition
Legal counsel
Term
An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.
 Definition
Receivable Turnover
Term
An innocent person....
 Definition
generally will not accept the premise that he or she is responsible
Term
Analyzes the percentage change in individual F/S items.
 Definition
Horizontal Analysis
Term
Analyzes the relationships between the items on the F/S by expressing components as percentages.
 Definition
Vertical Analysis
Term
Another way to increase income and assets since they are amortized over a period of years rather than expensed immediately.
 Definition
Capitalizing Revenues-based Expenses
Term
Any deviation from GAAP must be explained, sufficient details that make a difference in the decision making process.
 Definition
Full Disclosure Principle
Term
Are private employers required to give Miranda warnings?
 Definition
Generally no. However, there are some exceptions to this rule (see an attorney for details)
Term
Can be defined as deliberate misstatements or omissions of amounts or disclosures of F/S to deceive F/S users, particularly investors and creditors.
 Definition
Financial Statement Fraud
Term
Capable of making a difference in a decision.
 Definition
Relevance
Term
Cash receipt schemes generally fall into which 2 categories?
 Definition
1. Skimming
2. Cash larceny
Term
Corporations can be held accountable for the acts of its employees. The corporation can be held criminally responsible for the collective knowledge of several of its employees even if no single employee intended to commit an offense.
 Definition
Various or Imputed Liability
Term
Cost of F/S fraud determined by survey
 Definition
50% of US corporations were victims of frauds with the loss of more than $500,000 on average.
Term
Costs that provide a benefit to a company over more than one accounting period.
 Definition
Capitalized Expenditures
Term
Court clerks maintain files on all active and closed lawsuits.
 Definition
Litigation History
Term
Differentiate between skimming and larceny
 Definition
Skimming is theft of off-book funds and larceny involves the theft of money that has already appeared on a victim's books
Term
Documents filed to show the dispersal of assets after a subject’s death.
 Definition
Probate Records
Term
Economic activity that can be identified with a particular unit of accountability.
 Definition
Economic entity assumption
Term
Embezzlers in Cressey's study rationalized their crimes by viewing them in what 3 ways?
 Definition
1. As essentially noncriminal
2. As justified
3. As part of a general irresponsibility for which they were not completely accountable
Term
Events occurring or becoming known after the close of the period that may have a significant effect in the F/S and should be disclosed.
 Definition
Subsequent Events
Term
Every situation must be looked at separately aka "Situational Ethics". The ends justifies the means.
 Definition
Utilitarian Principle
Term
Examples include accepting gifts from suppliers, unethical communication with suppliers, employment/ownership in another company, and family relationships with suppliers.
 Definition
Conflicts of Interest
Term
Expecting employees to be honest in all situations belies the human condition. 91% of people surveyed admitted to lying on a regular basis. The goal is to keep lies from turning into frauds.
 Definition
Unreasonable Expectations
Term
Factual accuracy of the information.
 Definition
Reliability
Term
Failure to disclose loan covenants or contingent liabilities.
 Definition
Liability Omissions
Term
Fraud Triangle
 Definition
1) Incentives/Pressures
2) Opportunities
3) Attitudes/Rationalization
Term
From the moment evidence is received, this must be maintained for it to be accepted by the court.
 Definition
Chain of Custody
Term
Give a basic example of a sales skimming scheme.
 Definition
Employee makes a sale, collects payment at the point of sale, but makes no record of the transaction and pockets the payment
Term
Hard to classify as a motive because it is such a subjective term.
 Definition
Greed
Term
How are employees able to commit unconcealed cash larceny schemes without being noticed? (4 Elements)
 Definition
1. Theft is done in plain sight
2. Employees are trusted and sometimes given access to restricted areas, safes, supply rooms, or keys
3. Illegal conduct is often ignored by coworkers
4. Fraudsters sometimes mail company assets to a location where they can later pick them up
Term
How can the credibility of the respondent be evaluated in the assessment phase?
 Definition
by observing verbal and nonverbal responses
Term
How can time clocks and other automated systems be abused?
 Definition
Employees can have a coworker puch-in for them
Term
How do people commit F/S fraud?
 Definition
1) Playing the accounting system
2) Beating the accounting system
3) Going outside of the accounting system
Term
How does GAAP require assets to be recorded?
 Definition
Historical (acquisition) cost
Term
How does one create a shell company?
 Definition
A perp creates a checking account in the name of the Shell for which papers are filed for incorporation with the state and/or local governments
Term
How is the cash register manipulated to conceal skimming?
 Definition
-Ring up a "no-sale"
-Rig cash register to not record sales on register tapes
Term
How should accounts receivable be reported?
 Definition
At net realizable value
Term
How should accusations be made?
 Definition
In the form of a statement of fact; the subject’s guilt should already be assumed in the form of the question
Term
How should an auditor conduct an engagement?
 Definition
Professional Skepticism
Term
How will a perp disguise himself as a shell company?
 Definition
1. He may place the co under: a fictitious name, the name of another employee, or the maiden name of a spouse
2. Shell might have a PO Box for its mailing address
Term
If suspect is powerful or popular, it might be useful to employ outside specialists who are relatively immune from company politics or threats or reprisals.
 Definition
Outside Consultants
Term
Implies that a company can divide its economic activities into artificial time periods.
 Definition
Periodicity assumption
Term
In ________________ fraudsters use invoices from existing vendors to manufacture fake payments
 Definition
Non-accomplice Vendor (Billing) Schemes
Term
In a forged endorsement scheme, how might a fraudster intercept a check after it is signed but befor it is delivered? (4 Ways)
 Definition
1. Interception in the mailroom
2. Steal signed check off of someone's desk
3. Steal checks returned because of incorrect address
4. Alter address of payee
Term
In fraudulent disbursement schemes, fun can be obtained by _____, ______, or ______.
 Definition
-forging checks
-submiting false invoices
-falsifying time records
Term
In this fraud, this is usually either omitted or substantially understated…
 Definition
Warranty Liability Fraud
Term
In which questioning "phase" should the interviewer establish a baseline of the respondents reactions?
 Definition
Introductory
Term
Information on file at his/her place of business
 Definition
In-house sources
Term
Information that is measured and reported in a similar manner for different companies.
 Definition
Comparability
Term
Inventory must be recorded at the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory.
 Definition
Lower of cost or market value
Term
Lapping continues indefinately until one of what 3 things happens?
 Definition
1. Fraudster is caught
2. Restitution is made to the accounts, or
3. a concealing entry is made
Term
Legal action is needed before attempting to obtain evidence held by other parties or in uncontrolled locations.
 Definition
Subpoenas
Term
List 3 categories of Falsified Hours & Salary Schemes
 Definition
1. Manually Prepared Timecard Schemes
2. Time clock "schemes"
3. Rate of Pay "schemes"
Term
List 3 ways of preventing receivables skimming
 Definition
1. Independent checks of transactions
2. Require employees to take vacations or rotate duties
3. Mandate supervisory approval for write-offs or discounts to A/R
Term
List 3 ways of preventing/detecting Overstated Expense Reimbursement schemes
 Definition
1. Require all original receipts
2. Require all travel ticket stubs
3. Compare expense reports of employees with similar travel schedules
Term
List 4 common methods of used in Overstated Expense Reimbursements
 Definition
1. Altered Receipts
2. Overpurchasing
3. Overstating Another Employee's Expenses
4. Orders to Overstate Expenses by Supervisors
Term
List 4 controls to prevent altered payee schemes
 Definition
1. Separation of Duties
2. Never endorse blank checks
3. Match bank statement to canceled checks
4. Requie that checks are written in permanent ink
Term
List 4 controls to prevent/detect commission schemes
 Definition
1. Verify there is a linear relationship between sales and commission expense
2. Compare commissions earned by each sales person
3. Track uncollected sales generated on a per-salesperson basis
4. Randomly select customers and verify that they exist
Term
List 4 vulnerabilities of manually prepared Timekeeping Systems
 Definition
1. Forging supervisor's signature
2. Collusion with supervisor
3. Rubber stamp supervisors
4. Poor custody procedures
Term
List 4 ways of preventing/detecting Multiple Reimbursement Schemes
 Definition
1. Policies against accepting photocopies of expense support documents
2. Accounting system should be set up to red flag duplicate payment amounts that are coded as travel/entertainment expenses
3. Require supervisor review of all Expense Reimbursement requests
4. Require that Expense Reimbursement requests be submitted within a certain time frame
Term
List 4 ways of preventing/detecting Personal Purchase Schemes.
 Definition
1. Conduct thorough reviews of each credit card statement
2. Two copies of each statement should be sent to different individuals within the org
3. Establish spending limits for credit card users
4. Compare credit card statements to employee vouchers
Term
List 4 ways to detect mischaracterized expense reimbursement
 Definition
1. Compare expense reports to work schedules
2. Require detailed disclosure for Expense Reimbursements (ie. supporting docs, dates and times, descriptions)
3. Review of all travel and entertainment expenses by supervisor
4. Establish organization policies defining what is/isnt reimbursable
Term
List 5 controls that can prevent/detect falsified hours and salary schemes
 Definition
1. Segregate payroll duties
2. Require overtime and time-off to be pre-approved by supervisors
3. Monitoring of leave and vacation time by HR department
4. Require authorization for all of all wage rate changes by HR
5. Tests should be run actively seeking out fraudulent payroll activities
Term
List 5 controls to prevent authorized maker schemes
 Definition
1. Separation of duties in check writing function
2. Do not allow check signers access to blank checks
3. Require dual signatures for disbursements over threshold amounts
4. Maintain up-to-date vendor lists and confirm all disbursements
5. Canceled checks should be spot checked for proper support and to verify the business purpose of the disbursements
Term
List 5 ways of preventing/detecting Non-accomplice Vendor Schemes
 Definition
1. Watch for invoice address and vendor address differences
2. Duplicate checking system to ensure no invoices can be paid twice
3. All incoming mail should be opened in the mail room and checks should be copied and attached to remittance advice
4. Instruct bank not to CASH any checks made out to the organization
5. Routine payables spot checks for overpayment
Term
List 5 ways of preventing/detecting Shell Co Schemes.
 Definition
1. Segregation of Duties
2. Watch for red flags
3. Routinely crossreference vendor addresses with employee addresses
4. Look for consecutive invoice numbers
5. Watch for payments just under the limit of authorization
Term
List 6 controls to prevent forged endorsement schemes
 Definition
1. Separate duties
2. Contact vendors to confirm receipt of payments
3. Restrict authority to change vendor address
4. Investigate canceled checks with more than one endorsement
5. Log when checks are mailed out
6. Install surveillance in mailroom
Term
List 6 examples of bribery (what is given).
 Definition
1. Money
2. Slush funds
3. Promises of future employment
4. Percentage of ownership in the supplier
5. Payoff of loans or debts
6. Other (travel, merchandise, "favors")
Term
List 6 ways of preventing/detecting Unconcealed Cash Larceny Schemes
 Definition
1. Separate duties for requisitioning, purchasing, and receiving
2. Separate payables function from all purchasing & receiving
3. Lock up merchandise and create an access log
4. Install security cameras and hire guards
5. Conduct physical inventory counts on periodic basis
6. Implement a mechanism for receiving customer complaints about "short" shipments
Term
List 6 ways of preventing/detecting kickback schemes
 Definition
1. separation of duties
2. Maintenance of updated vendor list
3. Proper matching of support documents
4. Routinely monitoring the price of goods vs. market rates
5. Enforce price thresholds
6. Authorize only purchases made with approved vendors
Term
List 6 ways of preventing/detecting kickback schemes
 Definition
1. separation of duties
2. Maintenance of updated vendor list
3. Proper matching of support documents
4. Routinely monitoring the price of goods vs. market rates
5. Enforce price thresholds
6. Authorize only purchases made with approved vendors
Term
List 6 ways to prevent/detect fraudulent register disbursement
 Definition
1. Separation of duties
2. Properly document voided transactions
3. Require distinct log-in codes for each clerk
4. Look for large numbers of voids and refunds just under amounts requiring approval
5. Institute policies that encourage customers to ask for/review receipts
6. Random customer service calls to customers with voided transactions
Term
List 7 controls to prevent forged maker schemes
 Definition
1. keep blank checks locked away
2. seal boxes of blank checks with security tape
3. use checks with a watermark
4. watch for out of sequence or duplicate check #s
5. separate duties
6. rotate authorized check signers
7. limit access to signature stamp
Term
List controls to detect/prevent Ghost Employee Schemes
 Definition
1. Conduct all hiring through centralized HR department
2. Personnel department should verify any changes to payroll accounting records
3. Perform background checks on all perspectinve employees
4. Watch for employees on file without a social security #s, deductions on paychecks, or physical address or telephone #s
5. Proper paycheck distribution
Term
List red flags that indicate Fictitious Expense Reimbursement schemes
 Definition
1. Employees who pay cash for high-dollar items
2. Expenses are consistently rounded off (end in 0 or 5)
3. Expenses consistently for the same amount
4. Expense reimbursement request consistently fall at or just below the reimbursement limit
5. Consecutively numbered receipts
6. Support documents that do not look professional or lack common information such as phone numbers, addresses etc.
Term
List the 5 categories of check tampering
 Definition
1. Forged Maker Schemes
2. Forged Endorsement Schemes
3. Altered Payee Schemes
4. Concealed Check Schemes
5. Authorized Maker Schemes
Term
List the 5 major types of Fraudulent Disbursements
 Definition
1. Billing Schemes
2. Check Tampering
3. Payroll Schemes
4. Expense Reimbursement Schemes
5. Register Disbursement Schemes
Term
Measures the relationship between two different F/S amounts.
 Definition
Ratio Analysis
Term
Misclassifying into general ledger accounts in which they don't belong.
 Definition
Misclassifying assets
Term
Money is the common denominator of economic activity.
 Definition
Monetary unit assumption
Term
Most larceny schemes involve theft of cash in what 3 areas?
 Definition
-At Point of Sale
-From Incoming Receivables
-From the Victim's Bank Deposits
Term
Name 2 methods of concealing larceny from the victim org's bank deposits
 Definition
-Deposit lapping
-Deposits in Transit
Term
Name 3 types of conflicts of interest
 Definition
1. Purchasing schemes
2. Sales schemes
3. Other (business diversions, resource diversions, inadequate finacial disclosures)
Term
Name 3 typical oversights in procedure that allow employees to commit cash larceny from the victim's bank deposits
 Definition
1. Failure to reconcile the bank copy of the deposit slip with the office copy
2. Entrusting the deposit to the wrong person
3. The handling of the deposit on the way to the bank
Term
Name 3 ways of preventing/detecting larceny at the Point-of-Sale
 Definition
1. Stronger internal controls
2. Enforce separation of duties in the cash receipt process
3. Independent checks over the receipting and recording of incoming cash
Term
Non-shareable financial problems can be subdivided into what 6 categories?
 Definition
1. Violation of ascribed obligations
2. Problems resulting from personal failure
3. Business reversals
4. Physical isolation
5. Status gaining
6. Employer-Employee relations
Term
Occur when customers agree to keep such merchandise in return for a reduction in the selling price.
 Definition
Sales Allowance
Term
Occur when customers return defective, damaged, or otherwise undesirable products to the seller.
 Definition
Sales Returns
Term
Often assigned to the “field work” stage of the investigation, including interviewing outside witnesses and obtaining public records and other documents from third parties.
 Definition
Security Personnel
Term
Often the simplest means to obtain documentation, and therefore the preferred method in many fraud examinations.
 Definition
Voluntary Consent
Term
Only the original cost of the asset should be capitalized, not the costs such as interest and finance not included in purchase price.
 Definition
Capitalizing Non-asset Cost
Term
Open questions are the primary type of Q that should be used during which phase?
 Definition
Informational
Term
Opinions or conclusions in report?
 Definition
Other than opinions on technical matters, no opinions of any kind should be included in the written report.
Term
People steal for different reasons. To deter fraud, several causes need to be addressed: Greed, wages in kind, unreasonable expectations.
 Definition
The Human Factor
Term
People who commit fraud because they feel justified to do so (to get even because they aren't paid enough, etc.)
 Definition
Wages in Kind
Term
People will confess to matters when....
 Definition
they perceive that the benefits of confession outweigh the penalties
Term
Perps may attempt to lap daily receipts or list missing deposits as _____ to conceal larceny
 Definition
deposits in transit
Term
Persons who have specific knowledge of a criminal activity.
 Definition
Informants
Term
Potential obligations that will materialize only if certain events occur in the future.
 Definition
Contingent Liabilities
Term
Pressures to succeed are placed on business owners and managers by bankers, stockholders, families, and even communities often provide the motivation to commit fraud.
 Definition
Pressures to Boost Revenues
Term
Problems with Premature Revenue Recognition:
 Definition
1) Persuasive evidence of an arrangement does not exist.
2) Delivery has not occurred or services have not been rendered.
3) The seller's price to the buyer is not fixed or determinable.
4) Collectability is not reasonably assured.
Term
Provides information that is of sufficient importance to influence the judgment and decisions of an informed user.
 Definition
Principle of Full Disclosure
Term
Recognition of revenue when these criteria are met:
 Definition
1) Persuasive evidence of an arrangement
2) Delivery has occurred or services have been rendered
3) Seller's price to the buyer is fixed or determinable
4) Collectability is reasonably assured
Term
Recognized revenues and expenses as measurable progress is made. This is vulnerable to manipulation as estimation is involved.
 Definition
Percentage Complete Method
Term
Recording of sales of goods or services that did not occur.
 Definition
Fictitious Revenues
Term
Records revenues when a project is 100% complete…
 Definition
Completed Contract Method
Term
Refers to the sale of an unusually large quantity of a product to distributors, who are encouraged to overbuy through the use of deep discounts and/or extended payment terms.
 Definition
Channel Stuffing (trade loading)
Term
Regardless of the _________ of an organization, a formal ethics policy should be put in place.
 Definition
Size
Term
Relates to an item's impact on a company's overall financial operations.
 Definition
Materiality
Term
Removing the root causes of the problem. This relates mostly to the motivation to commit a crime, such as the societal injustices that lead to a crime.
 Definition
Prevention
Term
Set out proper procedures for cash and bank accounts, company assets and transactions, expense reimbursement, corporate credit cards, and software and computers.
 Definition
Company Assets
Term
Shifts revenues or expenses between one period and the next, increasing or decreasing earnings as desired. Recording revenue and/or expenses in improper periods.
 Definition
Timing Differences
Term
Sifting through a suspect’s trash to obtain evidence and leads.
 Definition
Dumpster Diving
Term
Standards for conduct on company business. Include reporting violations and disciplinary actions.
 Definition
Employee Conduct
Term
The 2006 National Fraud Survey estimated taht workplace fraud cost organizations ______ per year
 Definition
$670 billion
Term
The amount of sales generated for every dollar's worth of assets.
 Definition
Asset Turnover
Term
The assumption that the company will have a long life.
 Definition
Going-concern assumption
Term
The branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which a person is to be guided, and of the goods toward which it may ultimately be directed.
 Definition
Ethics
Term
The easiest way to conceal liabilities and expenses is to ____________...
 Definition
...fail to record it.
Term
The false creation of assets affects account totals on a company's balance sheet.
 Definition
Booking Fictitious Assets
Term
The guilty person...
 Definition
knows he has committed the act and is not shocked by the premise
Term
The management of the organization will set the standards.
 Definition
Tone at the Top
Term
The modification of behavior through the perception of negative sanctions.
 Definition
Deterrence
Term
The objection of a guilty party is __________________________.
 Definition
more likely to focus on excuses rather than outright denial
Term
The timely recording of expenses is often compromised due to pressures to meet budget projections and goals or due to lack of proper accounting controls.
 Definition
Recording Expenses in the Wrong Period
Term
The typical attitude of a respondent who is being TRUTHFUL is: (7 characteristics)
 Definition
– Calm
– Relaxed
– Cooperative
– Concerned
– Sincere
– Inflexible
– Cordial
Term
The typical attitude of a respondent who is being UNTRUTHFUL is: (7 characteristics)
 Definition
– Impatient
– Tense
– Defensive
– Outwardly unconcerned
– Overly friendly/polite
– Defeated
– Surly
Term
These are agreements, in addition to or part of a financing arrangement, which a borrower has promised to keep as long as the financing is in place.
 Definition
Loan Covenant
Term
These controls have no deterrent effect…
 Definition
Hidden Controls
Term
These controls only have a dterrent effect when the employee believes the control is in place to detect fraud…
 Definition
Internal Control
Term
These directly correspond to the generation of current revenue and provide benefits for only the current period.
 Definition
Revenues, Expenditures, or Expenses
Term
These include the donation of property and services…
 Definition
Contributions
Term
These occur when a company does business with another entity whose management or operating policies can be controlled or significantly influenced by the company or by some other party in common.
 Definition
Related-party Transactions
Term
These were made to make punishments more uniform and severe. Also, if organization prevents or discloses certain conduct, sentence will be reduced.
 Definition
Corporate Sentencing Guidelines
Term
They are often used to review internal documentary evidence, evaluate tips or complaints, schedule losses, and provide assistance in technical areas of the company’s operations.
 Definition
Internal Auditors
Term
They can help identify what data is available and where it is located.
 Definition
IT Personnel
Term
They should be consulted to ensure that the laws governing the rights of employees in the workplace are not violated.
 Definition
Human Resources Personnel
Term
They should be kept informed of the progress of the investigation and should be available to lend the necessary assistance.
 Definition
Management Representatives
Term
This increases pre-tax income by the full amount of the expense or liability not recorded, therefore having a significant impact on reported earnings.
 Definition
Concealed Liabilities and Expenses
Term
This is obtained from a judge when there is probable cause to believe certain records are being used or have been used in the commission of a crime.
 Definition
Search Warrant
Term
To inflate current assets at the expense of long-term assets to improve current ratio, for example a loan covenant.
 Definition
Window-dressing
Term
To match revenues and expenses in the proper accounting period.
 Definition
Expense Recognition Principle
Term
Trained to conduct a complex fraud examination from inception to conclusion.
 Definition
Certified Fraud Examiner (CFE)
Term
Transaction that is conducted as though the parties were unrelated.
 Definition
Arms-length Basis
Term
Understatements can be done directly or through improper depreciation.
 Definition
Understating Assets
Term
Voided sales must be proved valid. What 3 ways can this occur?
 Definition
1. Manager Nonchalance
2. Forgery
3. Conspiracy (colusion)
Term
What 2 categories do long-term contracts fall into?
 Definition
1) Completed contract method
2) Percentage complete method
Term
What 2 schemes occur during the pre-solicitation phase?
 Definition
1 Need recognition schemes
2. Specification schemes
Term
What 2 schemes occur during the pre-solicitation phase?
 Definition
1 Need recognition schemes
2. Specification schemes
Term
What 2 things does skimming target?
 Definition
-Sales
-Receivables
Term
What 3 categories can false refunds be broken into?
 Definition
1. Fictitious Refunds
2. Overstated Refunds
3. Credit Card Refunds
Term
What 3 classes of occupational fraud are defined by the "Fraud Tree"?
 Definition
1. Asset misappropriations
2. Corruption
3. Fraudulent statements
Term
What 3 groups where rationalizers broken up into?
 Definition
1. Independent businessmen
2. Longterm violators
3. Absconders
Term
What 3 methods can be used to conceal Incoming Receivables cash larceny?
 Definition
1. Force Balancing
2. Reversing Entries
3. Destruction of Records
Term
What 3 things can be done to decrease occupational fraud?
 Definition
a) Hire the right people
b) Treat them well
c) Don't subject them to unreasonable expectations.
Term
What 3 things do employees need to forge a check?
 Definition
1. access to blank checks
2. the ability to conceal the crime
3. to be able to produce a convincing forgery of an authorized signature
Term
What 3 types of bid rigging schemes occur during the solicitation phase?
 Definition
1. Bid pooling schemes
2. Fictitious suppliers
3. Other
Term
What 4 distinct things must happen to make a ghost employee scheme successful?
 Definition
1. Ghost added to payroll
2. Timekeeping and wage rate info must be collected
3. A paycheck must be issued to the ghost
4. The perp must obtain and cash the ghost's paycheck
Term
What 4 methods do employees use to abuse the expense reimbursement process?
 Definition
1. Mischaracterized Expense Reimbursements
2. Overstated Expense Reimbursements
3. Fictitous Expense Reimbursements
4. Multiple Reimbursements
Term
What 5 methods are used to conceal cash larceny @ the Point-of-Sale?
 Definition
1. Theft from other registers
2. Death by a thousand cuts
3. Reversing transactions
4. Altering cash counts or register tapes
5. Destroying register tapes
Term
What 5 methods can be use to conceal check tampering?
 Definition
1. Reconciling the bank statement
2. Re-altering checks
3. Falsifying the disbursements journal
4. Reissuing intercepted checks
5. Preparing bogus supporting documents
Term
What are 2 common methods used for Fictitious Expense Reimbursements schemes
 Definition
1. Creating bogus support documents (i.e. false receipts)
2. Claiming the expenses of others
Term
What are 2 major categories of Bribery?
 Definition
1. Kickback Schemes
2. Bid rigging schemes
Term
What are 2 major categories of Bribery?
 Definition
1. Kickback Schemes
2. Bid rigging schemes
Term
What are 2 ways fraudsters can commit personal purchase schemes through false invoicing?
 Definition
-If he has authorized privilege he can create and authorize invoices
-If he doesnt have authorizing authority, he must falsify documents to obtain authorization
Term
What are 4 types of Kickbacks?
 Definition
1. Diverting Business to Vendors
2. Overbilling
3. Slush funds
4. Other
Term
What are 4 types of Kickbacks?
 Definition
1. Diverting Business to Vendors
2. Overbilling
3. Slush funds
4. Other
Term
What are closed questions used to deal with?
 Definition
specifics such as amounts, dates, or times
Term
What are leading Qs used for?
 Definition
To confirm facts that are already known
Term
What are some forms of F/S fraud?
 Definition
1) Overstated assets or revenue
2) Understated liabilities or expenses
3) Asset valuations
4) Improper disclosures
5) Timing differences
Term
What are some rules for collecting and handling documents?
 Definition
1) Obtain original documents where feasible.
2) Do not touch originals any more than necessary; they might later have to undergo forensic analysis.
3) Maintain a good filing system for the documents.
Term
What are the 2 most common schemes involving accounts receivable?
 Definition
1) Fictitious receivables
2) Failure to write-off accounts receivable as bad debts
Term
What are the 2 primary qualitative characteristics?
 Definition
Relevance and reliability
Term
What are the 2 principal categories of skimming schemes?
 Definition
-Cash Schemes
-Non-cash Schemes
Term
What are the 2 secondary qualitative characteristics?
 Definition
Comparability and consistency
Term
What are the 2 types of fraudulent disbursement schemes that take place at the cash register?
 Definition
1. False returns
2. False voids
Term
What are the 3 categories of Billing Schemes?
 Definition
1. Shell Company Schemes
2. Non-accomplice Vendor Schemes
3. Personal Purchase Schemes
Term
What are the 3 categories of Payroll Scemes?
 Definition
1. Ghost Employee Schemes
2. Falsified Hours & Salaries Schemes
3. Commission Schemes
Term
What are the 3 components of Albrecht's "Fraud Scale"?
 Definition
-Situational pressures
-Perceived opportunities
-Personal Integrity
Term
What are the 3 general types of questions that can be asked?
 Definition
1. Open
2. Closed
3. Leading
Term
What are the 3 main purposes of assessment Qs?
 Definition
1. Distinguish the innocent from the culpable
2. Obtain a valid confession
3. Obtain a written statement
Term
What are the 3 objectives of the code of business ethics?
 Definition
1) Set out specific conduct that violates the organization's policies.
2) State that dishonest acts will have consequences.
3) Provide information on the mechanisms for reporting unethical conduct.
Term
What are the 3 phases of bid rigging schemes?
 Definition
1. Pre-solicitation
2. Solicitiation
3. Submission
Term
What are the 3 phases of bid rigging schemes?
 Definition
1. Pre-solicitation
2. Solicitiation
3. Submission
Term
What are the 3 steps involved in a concealed check scheme?
 Definition
1. Perp prepares check
2. Brings checks to an authorized maker
3. Perp banks on the inattentiveness of the signer
Term
What are the 3 types of cash schemes?
 Definition
1. Skimming
2. Cash larceny
3. Fraudulent disbursement
Term
What are the 4 methods of concealing inventory shrinkage?
 Definition
1. Altered inventory records
2. Fictitious sales and accounts receivable
3. Write off inventory and other assets
4. Physical padding
Term
What are the 4 steps in the Fraud Theory Approach?
 Definition
1. Ananlyze available data
2. Create hypothesis
3. Test hypothesis
4. Refine/amend hypothesis
Term
What are the 4 types of corruption schemes?
 Definition
1. Bribery
2. Economic extortion
3. Illegal Gratuities
4. Conflicts of Interest
Term
What are the 4 types of corruption schemes?
 Definition
1. Bribery
2. Economic extortion
3. Illegal Gratuities
4. Conflicts of Interest
Term
What are the 5 categories of Non-Cash Misappropriations?
 Definition
1. Misuse
2. Unconcealed Cash Larceny Schemes
3. Asset Requisitions and transfers
4. Purchasing & Receiving Schemes
5. Fraudulent Shipments
Term
What are the 5 interview questions/phases?
 Definition
1. Introductory
2. Informational
3. Assessment
4. Closing
5. Admission Seeking
Term
What are the 6 steps that should be taken to increase the perception of detection?
 Definition
1) Employee Education
2) Proactive Fraud Policies
3) A Higher Stance
4) Increased Use of Analytical Review
5) Surprise Audits Where Feasible
6) Adequate Reporting Programs
Term
What are the 9 steps of the admission-seeking interview process?
 Definition
1. Direct accusation
2. Observe reactions
3. Repeat accusation
4. Interrupt denials
5. Establish rationalization
6. Diffuse alibis
7. Benchmark admission
8. Verbal confession
9. Taking a signed statement
Term
What are the major differences between fraud examination and auditing in regard to METHODOLOGY
 Definition
Fraud Examination--examine documents, outside data, interviews

Auditing--examine financial data
Term
What are the major differences between fraud examination and auditing in regard to OBJECTIVE
 Definition
Fraud Examination--point blame

Auditing--give opinion
Term
What are the major differences between fraud examination and auditing in regard to PRESUMPTION
 Definition
Fraud Examination--final proof

Auditing--professional skepticism
Term
What are the major differences between fraud examination and auditing in regard to RELATIONSHIP
 Definition
Fraud Examination--adversarial

Auditing--non-adversarial
Term
What are the major differences between fraud examination and auditing in regard to SCOPE
 Definition
Fraud Examination--Specific

Auditing--General
Term
What are the major differences between fraud examination and auditing in regard to TIMING?
 Definition
Fraud Examination--When sufficient reason

Auditing--regular basis
Term
What are the six methods/types of receivables skimming?
 Definition
1. Lapping
2. Force balancing
3. Stolen statements
4. Fraudulent write-offs or discounts
5. Debiting the wrong account
6. Documentation destruction
Term
What are the three legs of the fraud triangle?
 Definition
1. Preceived non-sharable financial need

2. Preceived opportunity

3. Rationalization
Term
What are the two groups of cash schemes?
 Definition
1. Fraudulent Disbursement Schemes
2. Cash Receipt Schemes
Term
What are the two most common methods used to avoid detection of fraudulent register disbursements?
 Definition
1. Making only small disbursements
2. Destroying records
Term
What are the two ways that Commission Schemes may be committed?
 Definition
1. By falsifying the amount of sales made
2. By increasing the commission rate received on sales
Term
What do schemes/frauds in the submission phase involve?
 Definition
Abuse of the sealed-bid process
Term
What does a high number of days in inventory indicate?
 Definition
A lack of demand for the product being sold.
Term
What does fraud examination involve?
 Definition
-Obtaining Evidence
-Financial Analysis
-Interviewing Witnesses
Term
What four elements must be present in a crime for fraud to exist?
 Definition
1. Material false statement
2. Knowledge that the statement was false when uttered
3. Reliance on false statement by victim
4. Reliance leads to damages
Term
What function do kickbacks almost always attack?
 Definition
the purchasing function
Term
What is Edwin Sutherland's Theory of Differential Association say?
 Definition
Crime is a learned behavior; it is not genetically based
Term
What is covert operations?
 Definition
1. Investigator assumes a fictitious identity in order to gather evidence.
2. The courts have deemed undercover operations as acceptable method of developing information, provided there is sufficient probable cause that a crime has been committed.
Term
What is evidence?
 Definition
1) Anything perceivable by the five senses
2) Any proof such as testimony of witnesses, records, documents, facts, data, or tangible objects that is legally presented at trial to prove a contention and induce a belief in the minds of a jury.
Term
What is surveillance?
 Definition
1. The secretive and continuous observance of a suspect’s activities.
2. May be done to obtain probable cause for search warrants, develop other investigative leads, identify co-conspirators, gather intelligence, and locate persons and things relevant to the investigation.
Term
What is the best control for preventing concealed check schemes?
 Definition
review checks before signing them
Term
What is the difference between bribery and illegal gratuities?
 Definition
Illegal gratuities do not intend to influence a decision (which is usually already made)
Term
What is the difference between fraud and abuse?
 Definition
Fraud involves intentional deceit

Abuses are actions that may not be consitent with an organizations standards
Term
What is the goal of fraud examination?
 Definition
To determine whether fraud occurred and if so, who is responsible
Term
What is the maximum fine (criminal and civil) and probation time a corporation can receive for criminal employee behavior?
 Definition
1) $290 million in fines can be imposed.
2) Probation for up to 5 years.
Term
What is the most important factor in preventing cash larceny?
 Definition
Separation of Duties

Calculationg daily receipts, preparing the deposit, delivering the deposit to the bank, and verifying the receipted deposit slip are duties that should be performed independently
Term
What is the purpose of the follow-up/recommendations?
 Definition
Identifies any investigation procedures that remain outstanding, usually because they are outside the mandate of the investigator.
Term
What is the purpose of the report?
 Definition
1) Conveys evidence
2) Adds credibility
3) Accomplishes objectives of case
Term
What is the purpose of the summary?
 Definition
It is intended to give basic information.
Term
What must be talked about in the open?
 Definition
Fraud and Abuse
Term
What ratio is also called the "acid-test" ratio and is also a great measure of liquidity?
 Definition
Quick Ratio
Term
What ratio is one of the best measures of financial strength?
 Definition
Current Ratio
Term
What two issues arise as a result of fraudulent disbursements?
 Definition
1. Shinkage
2. Imbalanced books
Term
What two ways should inventory be written down?
 Definition
1) To its current value
2) Written off altogether
Term
What type of scheme is most common in the solicitation phase?
 Definition
Bid pooling schemes
Term
What was Donald Cressey's final hypothesis?
 Definition
(Fraud Triangle) Trusted personnel become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply their own conduct which enables them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of entrusted funds or property
Term
What was the goal of Albrecht's "Fraud Scale"?
 Definition
To assemble a list of 'red flags' that could indicate fraud and abuse in order to prevent fraud
Term
What was the main reason the Hollinger-Clark Study identified as why employees steal?
 Definition
The study found that employees steal mainly because of workplace conditions and that employee deviance is mainly caused by job dissatisfaction
Term
What were the 3 major findings of the 2006 National Fraud Survey?
 Definition
1. Lower-level employees and managers committed the most frauds (but fraud committed by owners and execs was most costly)
2. The older the employee, the more costly the fraud
3. Smallere business are more likely to be victims of fraud than large ones
Term
When a company applies the same accounting treatment to similar events. From period to period
 Definition
Consistency
Term
When are leading Qs particularly effective?
 Definition
In obtaining confessions or getting subjects to make unpleasent confessions
Term
When in doubt, choose the solution that will be least likely to overstate assets and income.
 Definition
Conservatism
Term
When is an Investigation Necessary?
 Definition
1) Determining source of losses caused by occupational fraud.
2) Enables a company to reduce losses, identify the perpetrator, gather evidence for a criminal prosecution or civil trial, and recapture some or all amount stolen.
3) Sheds light on weaknesses in the company’s control structure.
4) An internal investigation can mitigate the company’s liability by stopping the illegal conduct before grows and showing that the company has an effective program to detect and prevent criminal misconduct.
Term
When is revenue recognized?
 Definition
1) Realized or realizable
2) Earned
Term
When should admission seeking Qs be asked?
 Definition
They are reserved specifically for individuals whose culpability is reasonably certain
Term
When should assessment Qs be asked?
 Definition
when you consider previous statements by the respondent to be inconsistent because of possible deception
Term
Where do a greater percentage of larceny schemes take place?
 Definition
At the point of sale/cash register
Term
Who commits F/S fraud?
 Definition
1) Senior Management
2) Mid/Lower level employees
Term
Who is most likely to commit cash larceny from the victim org's bank deposits?
 Definition
the employee in charge of delivering the cash/checks to the bank
Term
Who is most likely to skim?
 Definition
Employees who deal with customers or who handle customer payments
Term
Who is the most common perpetrator of concealed check schemes?
 Definition
person responsible for preparing checks
Term
Who is the potential user of F/S?
 Definition
Victims of fraudulent F/S
Term
Who usually commits forged maker schemes?
 Definition
Employees who do not have signature authority
Term
Why do people expense costs that should be capitalized?
 Definition
1) To minimize net income due to tax implications
2) To increase earnings in future periods
Term
Why is skimming difficult to detect?
 Definition
it is an "off-book" fraud; it leaves no direct audit trail
Term
Why type of cash scheme is the most common and has the highes median loss?
 Definition
Fraudulent disbursement schemes
Term
____ is theft of cash from a victim entity prior to its entry in an accounting system
 Definition
Skimming
Term
_____ are distinct subcategories of Non-accomplice venor schems in which an employee intentionally mishandles payments that are owed to legitimate companies and then steals the excess payments when they are returned
 Definition
Pay and return schemes
Term
_____ - petty crimes committed against orgnizations
 Definition
abuse
Term
_____ Qs are poised in a percise order designed to clear an innocent person and encourage the culpable person to confess
 Definition
Admission-seeking
Term
_____ are financial difficulties that would be hard for a potential occupational offender to disclose to outsiders, such as excessive debt, gambling, drug use, etc.
 Definition
Non-sharable financial problems
Term
_____ are situations where an employee, manager, or exec has an UNDISCLOSED economic or personal interest in a transaction that adversely affects the company as a result.
 Definition
Conflicts of interest
Term
_____ is a method of concealing receivables skimming whereby the fraudster falsifies account totals to conceal the theft of funds.
 Definition
force balancing
Term
_____ is a method of concealing receivables skimming whereby the fraudster falsifies account totals to conceal the theft of funds.
 Definition
force balancing
Term
_____ is the offering, giving, receiving, or soliciting of something of value for, or because of an official act
 Definition
illegal gratuities
Term
______ Qs are asked for the purposes of:
reconfirming Facts, Obtaining Previously Undiscovered Information, Seeking New Evidence, & Maintaining Goodwill
 Definition
Closing
Term
______ Qs are the fact gathering portion("the heart") of the interview
 Definition
Informational
Term
______ Qs are used to establish the credibility of the respondent (if necessary)
 Definition
Assessment
Term
______ Qs set the tone of the interview and provide the interviewer a way of introducing the subject matter to be discussed
 Definition
Introductory
Term
______ are entities that are created only to commit fraud and are themselves fictitious.
 Definition
shell companies
Term
______ are schemes in which an employee accounts for stolen cash by voiding a previously recorded sale
 Definition
False Voids
Term
______ are undisclosed payments made by vendors to employees of purchasing companies
 Definition
Kickbacks
Term
______ are undisclosed payments made by vendors to employees of purchasing companies
 Definition
Kickbacks
Term
______ is resolving allegations of fraud.
 Definition
Fraud Examination
Term
______ is the process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work
 Definition
Bid pooling
Term
______ is the process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work
 Definition
Bid pooling
Term
______ occurs when an employee demands payment from the vendor in order to make a decision in the vendor's favor
 Definition
economic extortion
Term
______ occurs when an employee wrongfully uses his influence in a transaction to procure some benefit for himself or another person contrary to the employee's duty to the org for which he works
 Definition
Corruption
Term
______ or ______ is the process of observing behavior before critical Qs are asked
 Definition
Norming or Calibrating
Term
_______ are check tampering schemes where an employee INTERCEPTS a company check intended for a 3rd party and converts it by signing the 3rd party's name on the endorsement line
 Definition
Forged Endorsement Schemes
Term
_______ are check tampering schemes where an employee intercepts a company check intended for a 3rd party and alters the payee designation so the check can be converted
 Definition
Altered Payee Schemes
Term
_______ are check tampering schemes where an employee misappropriates a check and fraudulently attaches the signature of an authorized maker onto the check
 Definition
Forged Maker Schemes
Term
_______ are check tampering schemes where an employee prepares a fraudulent check and submits it along with legitimate checks to an authorized maker who signs it without proper review
 Definition
Concealed Check Schemes
Term
_______ are check tampering schemes where an employee with signature authority writes fraudulent checks for his own benefit and signs his own name as the maker
 Definition
Authorized Maker Schemes
Term
_______ are worded in a way that makes it difficult to respond yes or no
 Definition
open questions
Term
_______ is a category of billing scheme in which an employee simply buys personal items with company funds/credit cards
 Definition
Personal Purchase Schemes
Term
_______ is a method of concealing fraud that attempts to make it look like the company has more inventory on hand then it actually does
 Definition
Physical Padding
Term
_______ is any crime for gain using deception as its main method
 Definition
fraud
Term
_______ is the crediting of one account through the abstraction of money from another account
 Definition
lapping
Term
_______ is the offering, giving, receiving, or soliciting of any thing of value to influence an official act
 Definition
bribery
Term
_______ limit the possible responses to a precise answer
 Definition
closed questions
Term
_______ occur when a perp processes a false refund on a credit card sale
 Definition
Credit Card Refunds
Term
_______ refer to someone who is on the payroll who does not actually work for the victim company
 Definition
Ghost Employee Schemes
Term
________ are a form of fraudulent disbursement in which an org makes a payment to an individual who either works for the org or claims to
 Definition
Payroll Schemes
Term
________ contain the answer as part of the question
 Definition
Leading questions
Term
________ involve an employee who submits a single expense for multiple reimbursements
 Definition
Multiple Reimbursement Schemes
Term
________ is the theft of an org's cash after it has been recorded in the accounting system
 Definition
cash larceny
Term
________ occur when a perp processes fake refund transactions as if a customer were actually returning merchandise
 Definition
Fictitious Refunds
Term
________ occur when a perpetrator causes his employer to issue payment for some fraudulent purpose through the use of false documents
 Definition
billing schemes
Term
________ occur when an employee is paid to convince his company that a particular project is necessary, resulting in the purchase of unnecessary goods or services
 Definition
Need Recognition Schemes
Term
________ occur when an employee is paid to convince his company that a particular project is necessary, resulting in the purchase of unnecessary goods or services
 Definition
Need Recognition Schemes
Term
_________ are schemes involving the filing of documents to allow assets to be moved from one location to another and are then stolen by the perp
 Definition
Asset Requisitions & Transfers
Term
_________ involve employee fraudulently modifying their hourly wage, number of hours worked, or salary amount
 Definition
Falsified Hours & Salary Schemes
Term
_________ is a method of concealing deposit theft that occurs when an employee stills part or all of the deposit from one day and then replaces it with receipts from subsequent days.
 Definition
Deposit lapping
Term
_________ is an employee using his/her occupation for personal enrichment through the deliberate misuse of the organization's resources or assets
 Definition
occupational fraud
Term
_________ is when an employee converts an org's funds by: 1) fraudulently preparing a company check for his benefit, or 2) by intercepting a company check intended for a 3rd party and converting that check for his benefit
 Definition
Check Tampering
Term
_________ occur when a perp overstates the amount of a legitimate customer refund and pockets the excess
 Definition
Overstated Refunds
Term
_________ questions ask the subject to agree with matters that go against principles of most honest people
 Definition
assessment
Term
_________ schemes are, schemes in which an employee illegally or improperly causes the distribution of funds in a way that appears to be legitimate.
 Definition
Fraudulent disbursement schemes
Term
__________ are schemes in which a fraudulent refund is processed at the cash register to account for stolen cash
 Definition
false refunds
Term
__________ occur when an employee fraudulently assists a vendor in winning a contract through the competitive bidding process
 Definition
Bid rigging schemes
Term
__________ occur when an employee fraudulently assists a vendor in winning a contract through the competitive bidding process
 Definition
Bid rigging schemes
Term
__________ schemes are frauds that target incoming sales or receivables
 Definition
Cash Receipt Schemes
Term
__________ schemes occur when fraudsters create fake documents that support the sale and shipment of goods
 Definition
Fraudulent Shipment
Term
___________ occur when an employee tailors the specifications of a contract to meet the strengths of a particular supplier
 Definition
Specification Schemes
Term
___________ occur when an employee tailors the specifications of a contract to meet the strengths of a particular supplier
 Definition
Specification Schemes
Term
___________ schemes occur when a company legitimately orders needed assets and those assets are missappropriated by the fraudster
 Definition
Purchasing & Receiving Schemes
Term
______________ occur when an employee makes false claims for reimbursement of fictitious or inflated business expenses
 Definition
Expense Reimbursement Schemes