chapter 5

Accounting Information Systems, 12e (Romney/Steinbart) Chapter 5 Computer Fraud 1) Perhaps the most striking fact about natural disasters in relation to AIS controls is that A) many companies in one location can be seriously affected at one time by a disaster. B) losses are absolutely unpreventable. C) there are a large number of major disasters every year. D) disaster planning has largely been ignored in the literature. Answer: A Page Ref: 121 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 2) 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 cash receipts. B) Inflating bank balances by transferring money among different bank accounts. C) Increasing expenses to conceal that an asset was stolen. D) Stealing small amounts of cash, many times over a period of time. Answer: A Page Ref: 128 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 3) Which of the following is the greatest risk to information systems and causes the greatest dollar losses? A) human errors and omissions B) physical threats such as natural disasters C) dishonest employees D) fraud and embezzlement Answer: A Page Ref: 122 Objective: Learning Objective 1 Difficulty : Easy AACSB: Analytic 4) All of the following could lead to computer fraud except A) allowing computer operators full access to the computer room. B) releasing data to unauthorized users. C) allowing computer users to test software upgrades. D) storing backup tapes in a location where they can be quickly accessed. Answer: A Page Ref: 131-134 Objective: Learning Objective 4 Difficulty : Easy AACSB: Analytic 1 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

5) Which of the following is not an example of the fraud triangle characteristic concerned with easing a fraudster's conscience? A) Revenge against the company B) Sense of entitlement as compensation for receiving a lower than average raise C) Intent to repay "borrowed" funds in the future D) Belief that the company won't suffer because an insurance company will reimburse losses Answer: A Page Ref: 130 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 6) Most fraud perpetrators are insiders because A) insiders are more dishonest than outsiders. B) insiders know more about the system and its weaknesses than outsiders. C) outsiders are more likely to get caught than insiders. D) insiders have more need for money than outsiders. Answer: B Page Ref: 126 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 7) Most frauds are detected by A) external auditors. B) internal auditors. C) accident. D) hotline tip. Answer: D Page Ref: 135 Objective: Learning Objective 5 Difficulty : Easy AACSB: Analytic

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8) Amy wants to open a floral shop in a downtown business district. She doesn't have funds enough to purchase inventory and pay six months rent up front. Amy approaches a good friend, Coleen, to discuss the possibility of Coleen investing funds and becoming a 25% partner in the business. After a lengthy discussion Coleen agrees to invest. Eight months later, Coleen and Amy have a falling out. In order for Coleen to sue Amy for fraud, all the following must be true except A) Amy told Coleen she had worked at a floral shop for several years, when in fact she did not have any prior experience in floral retail. B) Coleen's decision to invest was primarily based on Amy's assertion that she had prior floral retail experience. C) Coleen's 25% share of the business is worth substantially less than her initial investment. D) Before Coleen invested, Amy prepared a detailed business plan and sales forecasts, and provided Coleen with copies. Answer: D Page Ref: 123 Objective: Learning Objective 2 Difficulty : Moderate AACSB: Reflective Thinking 9) Perpetrators of theft of company assets typically exhibit all the following characteristics except that they A) attempt to return or pay back stolen amounts soon after the initial theft, but find they are unable to make full restitution. B) use trickery or lies to gain the confidence and trust of others at the organization they defraud. C) become bolder and more greedy the longer the theft remains undetected. D) begin to rely on stolen amounts as part of their income. Answer: A Page Ref: 124-125 Objective: Learning Objective 2 Difficulty : Easy AACSB: Analytic 10) "Cooking the books" is typically accomplished by all the following except A) inflating accounts payable. B) accelerating recognition of revenue. C) delaying recording of expenses. D) overstating inventory. Answer: A Page Ref: 125 Objective: Learning Objective 2 Difficulty : Moderate AACSB: Analytic

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11) SAS No. 99 requires that auditors A) plan audits based on an analysis of fraud risk. B) detect all material fraud. C) alert the Securities and Exchange Commission of any fraud detected. D) take all of the above actions. Answer: A Page Ref: 125 Objective: Learning Objective 2 Difficulty : Difficult AACSB: Analytic 12) Which of the following is not a management characteristic that increases pressure to commit fraudulent financial reporting? A) Close relationship with the current audit engagement partner and manager B) Pay for performance incentives based on short-term performance measures C) High management and employee turnover D) Highly optimistic earnings projections Answer: A Page Ref: 128 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 13) Intentional or reckless conduct that results in materially misleading financial statements is called A) financial fraud. B) misstatement fraud. C) fraudulent financial reporting. D) audit failure fraud. Answer: C Page Ref: 125 Objective: Learning Objective 2 Difficulty : Easy AACSB: Analytic 14) Researchers have compared the psychological and demographic characteristics of white-collar criminals, violent criminals, and the general public. They found that A) few differences exist between white-collar criminals and the general public. B) white-collar criminals eventually become violent criminals. C) most white-collar criminals invest their illegal income rather than spend it. D) most white-collar criminals are older and not technologically proficient. Answer: A Page Ref: 126 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic

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15) Which of the following is an opportunity that could contribute to employee fraud? A) an employee's spouse loses their job B) an employee suddenly acquires lots of credit cards C) an employee is upset that he was passed over for a promotion D) close association with suppliers or customers Answer: D Page Ref: 129 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 16) Which of the following is a financial pressure that could cause an employee to commit fraud? A) a feeling of not being appreciated B) failing to receive a deserved promotion C) believing that their pay is too low relative to others around them D) having a spouse injured in a car accident and in the hospital for several weeks Answer: D Page Ref: 127 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 17) Opportunity to commit fraud is comprised of three stages. The stage that often takes most time and effort would include A) stealing inventory from the warehouse. B) selling stolen inventory to get cash. C) lapping accounts receivable. D) creating false journal entries to overstate revenue. Answer: C Page Ref: 128 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 18) In many cases of fraud, the ________ takes more time and effort than the ________. A) concealment; theft B) theft; concealment C) conversion; theft D) conversion; concealment Answer: A Page Ref: 128 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic

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19) Which of the following is the best way to hide theft of assets? A) Creating "cash" through the transfer of money between banks B) Conversion of stolen assets into cash C) Stealing cash from customer A and then using customer B's balance to pay customer A's accounts receivable D) Charging the stolen asset to an expense account Answer: D Page Ref: 128 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 20) In a ________ scheme, customer receipts are stolen and then subsequent payments by other customers are misapplied to cover the theft of the original receipts. A) kiting B) laundering C) bogus expense D) lapping Answer: D Page Ref: 128 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 21) One fraudulent scheme covers up a theft by creating cash through the transfer of money between banks. This is known as A) lapping. B) misappropriation of assets. C) kiting. D) concealment. Answer: C Page Ref: 128 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 22) Which characteristic of the fraud triangle often stems from a lack of internal controls within an organization? A) pressure B) opportunity C) rationalization D) concealment Answer: B Page Ref: 129 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic

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23) Which situation below makes it easy for someone to commit a fraud? A) placing excessive trust in key employees B) inadequate staffing within the organization C) unclear company policies D) All of the above situations make it easy for someone to commit a fraud. Answer: D Page Ref: 129 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 24) What is the most prevalent opportunity within most companies to commit fraud? A) lack of any internal controls B) failure to enforce the internal controls C) loopholes in the design of internal controls D) management's failure to believe employees would commit fraud Answer: B Page Ref: 129 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic 25) Which characteristic of the fraud triangle relates to excuses that perpetrators use to justify their illegal behavior? A) pressure B) opportunity C) rationalization D) concealment Answer: C Page Ref: 130 Objective: Learning Objective 3 Difficulty : Easy AACSB: Analytic 26) The US Justice Department defines computer fraud as A) any crime in which a computer is used. B) an illegal act in which knowledge of computer technology is essential. C) any act in which cash is stolen using a computer. D) an illegal act in which a computer is an integral part of the crime. Answer: B Page Ref: 130 Objective: Learning Objective 4 Difficulty : Moderate AACSB: Analytic

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27) The most efficient way to conceal asset misappropriation is to A) write-off a customer receivable as bad debt. B) alter monthly bank statements before reconciliation. C) alter monthly physical inventory counts to reconcile to perpetual inventory records. D) record phony payments to vendors. Answer: A Page Ref: 128 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Reflective Thinking 28) Computer fraud is often much more difficult to detect than other types of fraud because A) perpetrators usually only steal very small amounts of money at a time, thus requiring a long period of time to have elapsed before they're discovered. B) massive fraud can be committed in only seconds, leaving little or no evidence. C) most perpetrators invest their illegal income rather than spend it, thus concealing key evidence. D) most computer criminals are older and are considered to be more cunning when committing such a fraud. Answer: B Page Ref: 130 Objective: Learning Objective 4 Difficulty : Moderate AACSB: Analytic 29) Why is computer fraud often more difficult to detect than other types of fraud? A) Rarely is cash stolen in computer fraud. B) The fraud may leave little or no evidence it ever happened. C) Computers provide more opportunities for fraud. D) Computer fraud perpetrators are just more clever than other types of criminals. Answer: B Page Ref: 130 Objective: Learning Objective 4 Difficulty : Easy AACSB: Analytic 30) Why do many fraud cases go unreported and unprosecuted? A) Major fraud is a public relations nightmare. B) Fraud is difficult, costly, and time-consuming to investigate and prosecute. C) Law enforcement and the courts are often so busy with violent crimes that little time is left for fraud cases. D) all of the above Answer: D Page Ref: 131 Objective: Learning Objective 4 Difficulty : Easy AACSB: Analytic

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31) The fraud that requires the least computer knowledge or skill involves A) altering or falsifying source data. B) unauthorized use of computers. C) tampering with or copying software. D) forging documents like paychecks. Answer: A Page Ref: 131 Objective: Learning Objective 4 Difficulty : Moderate AACSB: Reflective Thinking 32) The simplest and most common way to commit a computer fraud is to A) alter computer input. B) alter computer output. C) modify the processing. D) corrupt the database. Answer: A Page Ref: 131 Objective: Learning Objective 4 Difficulty : Easy AACSB: Analytic 33) Downloading a master list of customers and selling it to a competitor is an example of A) data fraud. B) output theft. C) download fraud. D) fraudulent financial reporting. Answer: A Page Ref: 133 Objective: Learning Objective 4 Difficulty : Easy AACSB: Analytic 34) Which of the following will not reduce the likelihood of an occurrence of fraud? A) encryption of data and programs B) use of forensic accountants C) adequate insurance coverage D) required vacations and rotation of duties Answer: C Page Ref: 134-135 Objective: Learning Objective 5 Difficulty : Easy AACSB: Analytic

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35) Which of the following is not an example of one of the basic types of fraud? A) While straightening the store at the end of the day, a shoe store employee finds and keeps an expensive pair of sunglasses left by a customer. B) An executive devised and implemented a plan to accelerate revenue recognition on a long-term contract, which will allow the company to forestall filing for bankruptcy. The executive does not own any stock, stock options or grants, and will not receive a bonus or perk because of the overstated revenue. C) A purchasing agent places a large order at higher-than-normal unit prices with a vendor that gave the agent tickets to several football games. D) A salesperson approves a large sales discount on an order from a company owned partially by the salesperson's sister. Answer: A Page Ref: 124-125 Objective: Learning Objective 2 Difficulty : Moderate AACSB: Reflective Thinking 36) On Monday morning, Janet Pillsner, Chief Information Officer at International Securities Corporation (ISC), got some bad news. A tape used to store system data backups was lost while it was being transported to an offsite storage location. She called a meeting of her technical staff to discuss the implications of the loss. Which of the following is most likely to relieve her concerns over the potential cost of the loss? A) The shipper has insurance that will reimburse ISC for the cost of the tape. B) ISC has a copy of the tape onsite, so a new copy for storage offsite can easily be prepared. C) The tape was encrypted and password protected. D) ISC has a comprehensive disaster recovery plan. Answer: C Page Ref: 135 Objective: Learning Objective 5 Difficulty : Easy AACSB: Reflective Thinking 37) A simple method for catching or preventing many types of employee fraud is to A) monitor all employee behavior using video cameras. B) require all employees to take annual vacations. C) explain to employees that fraud is illegal and that it will be severely punished. D) monitor employee bank accounts and net worth. Answer: B Page Ref: 134 Objective: Learning Objective 5 Difficulty : Easy AACSB: Analytic

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38) Describe two kinds of fraud. Answer: Misappropriation of assets, or theft, by a person or group for personal financial gain is usually committed by employees. Fraudulent financial reporting is intentional or reckless conduct that results in materially misleading financial statements. Page Ref: 124-125 Objective: Learning Objective 2 Difficulty : Easy AACSB: Analytic 39) What are the actions recommended by the Treadway Commission to reduce the possibility of fraudulent financial reporting? Answer: Establish an organizational environment that contributes to the integrity of the financial reporting process. Identify and understand the factors that lead to fraudulent financial reporting. Assess the risk of fraudulent financial reporting within the company. Design and implement internal controls to provide reasonable assurance that the fraudulent financial reporting is prevented. Page Ref: 125 Objective: Learning Objective 5 Difficulty : Moderate AACSB: Analytic 40) Explain the impact of SAS No. 99 on auditors' responsibilities. Answer: SAS No. 99, effective December 2002, requires that auditors explicitly consider fraud risks when planning and performing an audit. Auditors must understand types and characteristics of fraud. Audit teams must review clients' financial statements for areas susceptible to fraud and communicate with each other during planning of the audit. Auditors must ask management and audit committee members about any past or current instances of fraud. Since many frauds involve revenue recognition, auditors must exercise special care and testing in examining revenue accounts. Audit procedures and testing must be tailored in response to fraud risk assessment. Auditors must evaluate the risk of management override of controls and any other indications of fraud occurrences. All audit procedures, testing and findings must be documented and communicated to management and the audit committee. Auditors must evaluate and recognize the impact of technology on fraud risks, as well as opportunities technology may provide to design fraud-auditing procedures. Page Ref: 125-126 Objective: Learning Objective 2 Difficulty : Moderate AACSB: Analytic 41) Why is computer fraud on the rise? Answer: Not everyone agrees on what constitutes computer fraud and some people may commit computer fraud unwittingly and not be aware of it. Many computer frauds go undetected. The belief that "it just can't happen to us." Most networks have a low level of security. Many Internet sites provide guidance on how to commit computer crimes. Law enforcement is unable to keep up with the number of computer frauds. Most frauds are not reported. The total dollar value of losses is difficult to calculate. Page Ref: 131 Objective: Learning Objective 4 Difficulty : Moderate AACSB: Reflective Thinking

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42) Describe at least four ways a company can make fraud less likely to occur. Answer: A company can decrease fraud by: good hiring and firing practices; good management of unhappy employees; training in fraud awareness; manage and track computer licenses; implement signed confidentiality agreements; maintain visible security; educate the workforce in ethics and the penalties for illegal acts. Page Ref: 134-135 Objective: Learning Objective 5 Difficulty : Moderate AACSB: Analytic 43) Describe four ways companies can reduce losses from fraud. Answer: Maintain adequate insurance. Keep a current backup copy of all program and data files in a secure off-site location. Develop a contingency plan for fraud occurrences and other disasters that might occur. Use special software designed to monitor system activity and help companies recover from frauds and malicious actions. Page Ref: 135 Objective: Learning Objective 5 Difficulty : Easy AACSB: Analytic 44) What are some of the distinguishing characteristics of fraud perpetrators? Answer: Some distinguishing characteristics of fraud perpetrators are: they tend to spend their illegal income to support their lifestyle; once they begin it becomes harder to stop and they become bolder as each incident happens; once they start to rely on the ill-gotten gains, they become more greedy and sometimes careless and overconfident. In the case of computer criminals, they are often young and have substantial computer knowledge. About two-thirds are men and likely to be an employee of the firm from which they steal. Many are unhappy or disgruntled with their employer because they feel unappreciated and underpaid. Most have no previous criminal record. Page Ref: 126 Objective: Learning Objective 3 Difficulty : Moderate AACSB: Analytic

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45) Why do fraudulent acts often go unreported and are therefore not prosecuted? Answer: Most fraud cases go unreported and are not prosecuted for several reasons. Many cases of computer fraud are as yet still undetected. As new technology and methods become available to organizations, prior undetected fraud may be revealed in the future. A second reason is that companies are reluctant to report computer fraud and illegal acts simply because of bad publicitya highly visible case can undermine consumer confidence in an organization such as a financial institution. Also, the fact that a fraud has occurred may indeed encourage others to attempt to commit further acts against the organization. It would seem that unreported fraud creates a false sense of security, as people think systems are more secure than they are in reality. Another reason for not reporting fraudulent acts is the fact that the court system and law enforcement is busy with violent crimes and criminals in its system. There is little time left to go after a crime where no physical harm is present. Also, the court system tends to treat teen hacking and cracking as "acts of childhood" rather than as serious crimesthis leads to many plea bargains when a computer fraud is brought to trial. Another reason is that a computer fraud case is difficult, costly, and time-consuming to investigate and prosecute. Before 1986 no federal law existed governing computer fraud. Law enforcement officials, lawyers, and judges generally lack the computer skills necessary to properly evaluate, investigate, and prosecute computer crimes. Sadly, when all is said and done a successful prosecution and conviction of computer fraud results in a very light sentence. All of these factors contribute to the underreporting and lack of prosecution of computer fraud crimes. Not everyone agrees on what constitutes computer fraud: · Many networks have a low level of security · Many Internet pages give instruction on how to carry out computer crimes · Law enforcement has difficulty keep up with the growing number of computer frauds · The total dollar value of losses from computer fraud is difficult to estimate. Page Ref: 131 Objective: Learning Objective 4 Difficulty : Moderate AACSB: Analytic

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46) A teller at a savings and loan drive-through accepted a cash payment from customer #1 for an auto loan. The teller appeared to process the payment, but told the customer the printer was jammed and she can't print a receipt. The customer accepted the excuse and drove away. The teller pocketed the cash and wrote down customer #1's loan number and payment amount for future reconciling. A couple of days before customer #1's monthly statement was printed, the teller recorded a cash payment from customer #2 as if it were made by customer #1. The teller pocketed the difference between the two payments. The teller continued to steal and misapply customer payments for the next two years without detection. Identify the type of fraud scheme described. Describe five controls you would implement to address the fraud risk, and label each control as preventive or detective. Answer: The fraud appears to be misappropriation of assets that is being concealed with a lapping scheme. Controls would include: 1. rotation of duties (primarily detective) 2. mandatory vacations (primarily detective) 3. surveillance with cameras (primarily detective) 4. staggered statement printing schedules, unknown to tellers (detective) 5. sequentially prenumbered, duplicate receipts (detective) 6. segregation of duties between cash handling and recording (preventive) 7. encourage customers to utilize on-line banking for loan payments and to frequently check balances (detective) Page Ref: 134-135 Objective: Learning Objective 5 Difficulty : Moderate AACSB: Reflective Thinking

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