73 terms

ACFE Fraud Examination - 1st Exam

Chapters 1-6

Terms in this set (...)

What is a Ponzi Scheme?
A type of fraud that lures investments funds from victims and then pays those victims a premium from money that is paid by subsequent investors.
What are the four basic sources of fraud statistics?
Governments agencies, researchers, insurance companies and victims of fraud.
What are companies and individuals who have been defrauded more concerned about?
The embarrassment of making fraud public and the costs of investigating fraud than they are about seeking and punishing fraud perpetrators.
What is the ACFE?
The Association of Certified Fraud Examiners. It regularly conducts one of the most comprehensive fraud studies in the United States.
How do losses incurred from fraud reduce a firm's income on a dollar-for-dollar basis?
For every $1 of fraud, net income is reduced by $1. It takes significantly more revenue to recover the effect of the fraud on net income.
What is the best way to minimize fraud?
To prevent it from occurring.
What are the two principal methods of getting something from others illegally?
By physically forcing someone to give you what you want or by tricking them out of their assets. The former is robbery and the latter is fraud.
What are the 7 elements of fraud?
A (1) representation about a (2) material point, which is (3) false, and (4) intentionally or recklessly so, which is (5) believed and (6) acted upon by the victim to the victim's (7) damage.
What is the difference between unintentional errors and fraud?
A mistake is not fraud because it is not done with intent or for the purpose of gaining advantage over another through false pretense.
What does a Ponzi scheme involve?
It involves deception. It also involves greed from the perpetrator and the investors. It also involves confidence from investors.
What is the most important element in a Ponzi scheme?
Confidence is the most important element in a Ponzi scheme.
What is the most common way to divide frauds?
To divide frauds into those that are committed against the organizations and those that are committed on behalf of organizations.
What is occupational fraud?
The ACFE defines it as the use of one's occupation for personal enrichment through the deliberate misuse of misapplication of the employing organization's resources or assets.
What is the key to occupational fraud?
(1) It is clandestine, (2) violates the employee's fiduciary duties to the organization, (3) is committed for the purpose of direct or indirect financial benefit to the employee, and (4) costs the employing organization assets, revenues, or reserves.
What are the three major categories of occupational fraud?
Asset misappropriation, corruption, and fraudulent statements.
What are the purposes of criminal and civil cases respectively?
to right a wrong and to seek a remedy.
What are the skills to prepare to be a fraud-fighting professional?
Analytical skills, communication skills and technological skills.
What are the requirements for an individual to become a certified fraud examiner?
Be an associate member of the ACFE in good standing, meet minimum academic and professional requirements, be of high moral character, and agree to abide by the Bylaws of the Code of Professional Ethics of the ACFE.
What is the profile of most fraud perpetrators?
Those that look like honest people.
What were the results of a fraud study that compared fraud perpetrators to prisoners incarcerated for property offenses and a sample of noncriminal, college students?
When compared to other criminals, fraud perpetrators were less likely to be caught, turned in, arrested, convicted, and incarcerated. They were also less likely to serve long sentences and were considerably older.
Fraud perpetrators were better educated, more religious, less likely to have criminal records, less likely to have abused alcohol, and considerably less likely to have used drugs. They were also in better psychological health, they enjoyed more optimism, self-esteem, self-sufficiency, achievement, motivation, and family harmony than other property offenders. Fraud perpetrators also seemed to express more social conformity, self-control, kindness, and empathy than other property offenders.
What is the composition of the fraud triangle?
A perceived pressure, a perceived opportunity, and some way to rationalize the fraud as acceptable.
Which of the elements of the fraud triangle can be controlled?
Only opportunities can be controlled. To a certain degree rationalization can be controlled through training and having appropriate controls that report inappropriate behavior. Pressures cannot be controlled.
What are the four main groups of pressures?
financial pressures, vices, work-related pressures, and other pressures.
What are the common financial pressures associated with fraud?
Greed, living beyond one's means, high bills or personal debt, poor credit, personal financial losses, and unexpected financial needs.
What have recent studies found about employee frauds?
30% of employee frauds are perpetrated by employees during their first three years of employment, 70% are committed by employees with four to 35 years of experience, and the age group with the highest evidence of fraud involves individuals between the ages of 35 and 44 years old.
Who said "Every man has his price, and he was getting close to mine?"
Abraham Lincoln.
What is the purpose, consequences, burden of proof methodology, jury, initiation, verdict and claims like for a criminal case?
Its purpose is to right a wrong, the consequences are jail and/or fines, the burden of proof methodology is beyond a reasonable doubt, the jury consists of 12 people, the initiation is determined by a grand jury that sufficient evidence must exist to indict, the verdict is reached unanimously and only one claim at a time is permitted.
What is the purpose, consequences, burden of proof methodology, jury, initiation, verdict and claims like for a civil case?
Its purpose is to obtain a remedy, the consequences are restitution and damage payments, the burden of proof methodology is preponderance of evidence, the jury may consist of fewer than 12 persons, the initiation is determined by filing a claim by a plaintiff, the verdict may be stipulated to be less than unanimous and various claims at a time are permitted.
What are the elements of a perceived opportunity?
1. Lack of controls that prevent and/or detect fraudulent behavior.
2. Inability to judge quality of performance.
3. Failure to discipline fraud perpetrators.
4. Lack of access to information.
5. Ignorance, apathy, and incapacity.
6. Lack of an audit trail.
What does COSO stand for and what does it do?
Committee of Sponsoring Organizations. It is the organization that established the common internal control framework that most businesses subscribe to.
What is the control environment?
The work atmosphere that an organization establishes for its employees. The control environment includes management's role and example, management communication, appropriate hiring, clear organized structure, and an effective internal audit department.
What are the three components of the control structure that prevent and/or detect fraudulent behavior?
The control environment, the accounting system, and control procedures.
What are the three elements of every fraud? Also, elements of the Fraud Element Triangle.
The theft act, concealment and conversion.
A good accounting system should ensure that recorded transactions are?
1. Valid
2. Properly authorized
3. Complete
4. Properly Classified
5. Reported in the proper period
6. Properly valued
7. Summarized Correctly
What are the five primary control procedures that are necessary?
1. Segregation of duties.
2. System of authorizations.
3. Independent Checks.
4. Physical safeguards.
5. Documents and records.
What are the three critical functions that even small business owners should set up as segregated duties or always do themselves?
Writing checks, making bank deposits, and reconciling bank statements.
Why are frauds still committed when controls are in place?
Because these controls are not being followed. The controls are being overwritten which allows most frauds to be perpetrated.
What four activities can mitigate the occurrence of fraud?
1. Fraud prevention.
2. Early fraud detection.
3. Fraud investigation.
4. Follow-up legal action.
What are the least effective and most expensive fraud-fighting efforts?
Fraud investigation and follow-up legal action.
What is the most cost-effective way to reduce losses from fraud?
Preventing fraud.
Who are the winners once fraud has been committed?
No one is. Perpetrators lose because of humiliation and embarrassment as well as legal consequences. Victims lose because not only are assets stolen but they also incur legal fees, lost time, negative publicity, etc. If organizations don't deal harshly with the perpetrators, a message is sent to others in the organization that nothing serious happens to fraud perpetrators.
What two fundamental activities does effective fraud prevention involves?
(1) Taking steps to create and maintain a culture of honesty and high ethics and (2) assessing the risks for fraud and developing concrete responses to mitigate the risks and eliminate the opportunities for fraud.
What are the five of the most critical and common elements to create a culture of honesty and high ethics?
(1) Making sure the that top management models appropriate behavior, (2) hiring the right kind of employees, (3) communicating expectations throughout the organization and requiring periodic written confirmation of acceptance of those expectations, (4) creating a positive work environment, and (5) developing and maintaining an effective policy for handling fraud when it does occur.
What can companies do to mitigate fraud opportunities?
(1) Accurately identify sources and measuring risks, (2) implementing appropriate preventative and detective controls to mitigate those risks, (3) creating widespread monitoring by employees, and (4) having internal auditors who provide independent checks on performance.
What are the three primary ways to detect fraud?
(1) By chance, (2) by providing ways for people to report suspicions of fraud, and (3) by examining transaction records and documents to determine if there are anomalies that could represent fraud.
Symptoms of fraud can be separated into six main groups:
1. Accounting anomalies
2. Internal control weaknesses
3. Analytical anomalies
4. Extravagant Lifestyle
5. Unusual behavior
6. Tips and complaints
Three main areas of accounting anomalies include:
1. Irregularities in source documentation
2. Faulty Journal Entries
3. Inaccuracies in the ledger
Schemes used by miniscribe:
Packaging bricks shipping them and recording as sales
Dramatically increasing shipments to warehouses and booking as sales
Shipping defective merchandise and booking as sales
Shipping excess merchandise that was not returned until after the financial statements had been released
Understating bad debt expense and allowance for doubtful accounts
Changing shipping dates on shipments to oversea customers so that revenues were recognized before sales were made
Changing auditor workpapers
What is the first and most common proactive fraud detection approach?
Install reporting hotlines (whistle-blowing systems) as described earlier whereby employees, coworkers, and others can call in using a telephone or submit an anonymous tip of a suspicion of fraud.
What is the second proactive fraud detection approach?
Analyze data and transactions to look for suspicious trends, numbers, and other anomalies.
What is predication and why is it important?
Refers to the circumstances, taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will occur.
Predication must be present because allegations of fraud against another party can lead to the reputations of innocent individuals being irreparably injured and guilty parties can go undetected.
What are the four types of evidence that can be accumulated in a fraud investigation
1. Testimonial evidence.
2. Documentary evidence.
3. Physical evidence.
4. Personal observation.
What is a second approach to fraud investigation?
Focus on the two different fraud triangles: (1) the fraud motivation triangle and (2) the fraud element triangle.
What are the two essential factors involved in low-fraud environments?
Creating a culture of honesty, openness, and assistance. The second is it involves eliminating opportunities to commit fraud and creating expectations that fraud will be punished.
What three factors in fraud prevention relate to creating a culture of honesty, openness, and assistance?
(1) Hiring honest people and providing fraud awareness training. (2) Creating a positive work environment, which means having a well-defined code of conduct, having an open-door policy, not operating on a crisis basis, and having a low-fraud atmosphere. (3) Providing an employee assistance program that helps employees deal with personal pressures.
What are the five methods of diminishing fraud opportunities?
1. Having good internal controls.
2. Discouraging collusion between employees and customers or vendors and clearly informing vendors and other outside contacts of the company's policies against fraud.
3. Monitoring employees and providing a hotline for anonymous tips.
4. Creating an expectation of punishment.
5. Conducting proactive auditing.
What should the internal control framework of an organization include?
1. A good control environment.
2. A good accounting system.
3. Good control activities.
4. Monitoring.
5. Good communication and information.
What are the four reason why some whistle-blowing systems fail?
1. Lack of anonymity.
2. Culture.
3. Policies.
4. Lack of awareness.
What elements must a whistle-blowing system must have in place in order for it to work effectively?
1. Anonymity.
2. Independence.
3. Accessibility.
4. Follow up.
What two trends in business have increased the number of collusive frauds?
The first is the increasingly complex nature of business. the second is the increasing frequency of supplier alliances, where oral agreements replace paper trails and closer relationships exist between buyers and suppliers.
What are the three steps of the proactive method of fraud detection?
(1) Analytical steps, (2) Technological steps, (3) Investigative steps.
What are the steps within the analytical step of the proactive method of fraud detection?
1. Understand the business.
2. Identify possible frauds that could exist.
3. Catalog possible fraud symptoms.
What are the steps within the technological step of the proactive method of fraud detection?
4. Use technology to gather data about symptoms.
5. Analyze results.
What are the steps within the investigative step of the proactive method of fraud detection?
6. Investigate symptoms.
What are the red flags of kickbacks?
Analytical symptoms like increased prices, larger order quantities, increasing orders from favored vendor, etc.
Behavioral symptoms like buyer not relating well to other buyers and vendors and the buyer's work habits change unexpectedly.
Lifestyle symptoms like buyer living beyond known salary, buyer purchases expensive automobiles, and buyer builds more expensive home.
Control symptoms like all transactions with one buyer and one vendor and use of unapproved vendors.
Document symptoms like 1099s from vendor to buyer's relative.
Tips and complaints like anonymous complaints about buyer or vendor, unsuccessful vendor complaints, and quality complaints about purchased products.
What is the Benford's Law?
This law states that the first digit of random data will begin with a 1 more often than a with a 2, a 2 more often than with a 3, and so on. Human-generated numbers which are usually randomly distributed will not match Benford's Law.
What is a pivot table?
Also called a cross table are two-dimensional views with cases in one dimension and the calculations on the other.
What is real-time analysis?
Works at transaction time and analyzes each transaction for fraud. This analysis needs continual improvement and updating of indicators.
What is the formula for the current ratio?
Current Assets/Current liabilities
What is the formula for the quick ratio?
(Cash and Accounts Receivable)/Current Liabilities
What is the formula for accounts receivable turnover ratio?
Sales/Average Accounts Receivable
What is the formula for days in receivable turnover ratio?
365/Receivable Turnover
What is the formula for the receivable percentage ratio?
Accounts Receivable/Total Assets