Test Bank For Forensic Accounting Robert Rufus Laura Miller William Hahn

Test Bank for Forensic Accounting, Robert Rufus, Laura Miller William Hahn
Test Bank for Forensic Accounting, Robert Rufus,

Laura Miller William Hahn
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Forensic Accounting (Rufus)
Chapter 6 Fraud and White-Collar Crime
6.1 True/False Questions
1) A criminal offense is a violation of local, state, or federal law that prohibits certain conduct.
Answer: TRUE
Explanation: Fraud is a criminal offense. A criminal offense is a violation of local, state, or
federal law that prohibits certain conduct.
Diff: 1
LO: 6-1
AACSB: Analytical Thinking
2) White-collar crimes have a potential for violence.

Answer: TRUE
Explanation: White-collar crime is more complex than it might first appear, with a very real
potential for violence.
Diff: 1
LO: 6-1
3) The most common type of financial statement fraud is overvaluation of assets.

Answer: FALSE
Explanation: The most common type of financial statement fraud is overstatement of revenues.
Diff: 1
LO: 6-2
4) The fraud scale study proposes replacing the incentive component of the fraud triangle with
integrity.
Answer: FALSE
Explanation: The fraud scale study proposes replacing the rationalization component of the
fraud triangle with integrity.
Diff: 1
LO: 6-2
5) General theory of crime explains crime as a natural consequence of constantly restraining

human desire to seek pleasure and avoid pain.
Answer: FALSE
Explanation: General theory of crime explains crime as a natural consequence of uncontrolled
human desire to seek pleasure and avoid pain.
Diff: 1
LO: 6-3
1
Copyright © 2015 Pearson Education, Inc.
6) Neutralization is a principal theory of rationalization.
Answer: TRUE
Explanation: A principal theory of rationalization is neutralization, which proposes denial,
condemnation, and higher loyalty as means by which offenders neutralize their role in a crime.
Diff: 1
LO: 6-3
7) External locus of control is a characteristic of a typical white-collar fraudster.

Answer: TRUE
Explanation: Feeling a lack of control over circumstances (external locus of control) is a
characteristic of a typical white-collar fraudster.
Diff: 1
LO: 6-4
8) White-collar crime offenders commonly receive light or no detention and rarely make full
restitution.
Answer: TRUE
Explanation: Even when tried and convicted, white-collar crime offenders commonly receive
light or no detention and rarely make full restitution.
Diff: 1
LO: 6-5
9) Which financial crimes are prosecuted is determined by the local prosecuting attorney.
Answer: TRUE
Explanation: Which financial crimes are prosecuted is determined by the local prosecuting
attorney (federal or state) and generally selected based on probability of conviction, operating
plan, budget, notoriety, and public impact.
Diff: 1
LO: 6-6
10) An indictment is a statement of fact.

Answer: FALSE
Explanation: An indictment is not a statement of fact-it is simply an accusation.
Diff: 1
LO: 6-6
2
6.2 Multiple-Choice Questions
1) Which of the following is a white-collar crime as identified by FBI?

A) foreign lottery fraud
B) social security fraud
C) robbery
D) food and stamp fraud
Answer: A
Explanation: A) The FBI has identified and categorized eight major types of financial crime.
Mass marketing fraud such as advance fee fraud, overpayment fraud, and foreign lottery fraud is
a white-collar crime.
Diff: 2
LO: 6-1
2) Which of the following best describes the term fraud?

A) use of force to persuade someone to surrender property
B) use of one's wealth to gain power and influence decisions
C) use of deception to persuade someone to surrender property
D) unintentional misrepresentation of financial statements
Answer: C
Explanation: C) The term fraud refers to use of deception to persuade someone to surrender
property.
Diff: 1
LO: 6-1
3) Which of the following is one of the six attributes of white-collar crimes?

A) lack of integrity
B) concealment
C) pretense
D) loss of standing
Answer: B
Explanation: B) The six attributes of white-collar crime are deceit, intent, breach of trust, losses,
concealment, and outward respectability.
Diff: 2
LO: 6-1
3
4) Why should financial crimes meet the "beyond a reasonable doubt" burden of proof standard?
A) because these are victimless
B) because these do not involve violent acts
C) because it is a criminal offense
D) because it is the lowest standard of proof
Answer: C
Diff: 2
LO: 6-1
5) Which of the following describes fraud?

A) a crime of intent
B) a crime of innocence
C) a crime of revenge
D) a crime of honor
Answer: A
Explanation: A) Fraud is a crime of intent. Black's Law Dictionary defines intent as a "state of
mind accompanying an act."
Diff: 1
LO: 6-1
6) Which of the following types of financial crime is in the primary jurisdiction of the FBI?
A) tax fraud
B) Social Security fraud
C) immigration fraud
D) insurance fraud
Answer: D
Explanation: D) The FBI has identified and categorized eight major types of financial crime, one
of which is insurance frauds. Other major categories of white-collar crime that are outside the
primary jurisdiction of the FBI include tax fraud, mail fraud, Social Security fraud, food stamp
fraud, immigration fraud, and bank fraud.
Diff: 1
LO: 6-1
4
7) Which of the following is required to establish fraudulent intent in the absence of a direct
confession?
A) documentary evidence
B) character evidence
C) demonstrative evidence
D) circumstantial evidence
Answer: D
Explanation: D) In the absence of direct evidence, circumstantial evidence is used to establish
fraudulent intent.
Diff: 1
LO: 6-1
8) Which of the following factors is true of circumstantial evidence?

A) It provides "proof certain" of the actual intent of the subject.
B) It is a collection of fragmented evidence that supports one inference over another.
C) It is deemed highly reliable if alternative explanations do exist.
D) Its reliability is not affected by the degree of impact.
Answer: B
Explanation: B) Circumstantial evidence is a collection of fragmented evidence that supports
one inference over another. The reliability of circumstantial evidence for the purpose of
establishing intent depends on two key factors: (1) alternative explanations, and (2) degree of
impact.
Diff: 2
LO: 6-1
9) Which of the following is the most common type of financial statement fraud?
A) understatement of losses
B) overvaluation of reserves
C) overstatement of revenues
D) undervaluation of liabilities
Answer: C
Explanation: C) The most common type of financial statement fraud is overstatement of
revenues.
Diff: 1
LO: 6-2
5
10) Who conducted the seminal research on which the fraud theory was founded?
A) Edwin Sunderland
B) Donald Cressey
C) Skousen and Wright
D) Wolfe and Hermanson
Answer: B
Explanation: B) Fraud theory is founded in the seminal research of Donald Cressey. Cressey
presented his research findings in the 1953 book Other People's Money, in which he theorized
that fraud results from the convergence of three factors: pressure, opportunity, and
rationalization.
Diff: 1
LO: 6-2
11) As per Cressey, which of the following is a need or nonshareable problem that precedes the
criminal violation of financial trust?
A) opportunity
B) rationalization
C) pressure
D) capability
Answer: C
Explanation: C) Cressey described pressure (which was identified in every inmate interview) as
a need or nonshareable problem that precedes the criminal violation of financial trust.
Diff: 1
LO: 6-2
12) Which of the following is a factor in the fraud triangle?

A) incentive
B) pressure
C) capability
D) expectation
Answer: B
Explanation: B) Cressey's research suggests that violations of trust (fraud occur when the
position of trust (opportunity) is viewed by the trusted person as a rational means (solution) to
solve a nonshareable problem (pressure). This research is the foundation for the fraud triangle,
which proposes that three factors-pressure (or need), opportunity, and rationalization- constitute
the conditions under which fraud occurs.
Diff: 1
LO: 6-2
6
13) Which of the following are the three factors of the fraud triangle?
A) pressure, opportunity, and capability
B) opportunity, capability, and rationalization
C) pressure, opportunity, and rationalization
D) pressure, capability, and rationalization
Answer: C
Explanation: C) In sum, Cressey's research suggests that violations of trust (fraud occur when
the position of trust (opportunity) is viewed by the trusted person as a rational means (solution)
to solve a nonshareable problem (pressure). This research is the foundation for the fraud triangle,
which proposes that three factors-pressure (or need), opportunity, and rationalization- constitute
the conditions under which fraud occurs.
Diff: 1
LO: 6-2
14) Which of the following is a process by which a person attempts to make his or her actual or
intended behavior more logical or justified?
A) rationalization
B) justification
C) validation
D) corroboration
Answer: A
Explanation: A) Rationalization is a process by which a person attempts to make his or her
actual or intended behavior more logical or justified. This justification allows individuals to
perceive violations of trust as a legitimate means for solving their nonshareable problems.
Diff: 1
LO: 6-2
15) Which of the following is a red flag of personal fraud characteristics?

A) difficulty in controlling anger
B) excessive gambling habits
C) impulsive behavior
D) depression
Answer: B
Explanation: B) Excessive gambling habits are a red flag of personal fraud characteristics.
Diff: 1
LO: 6-2
7
16) Which of the following elements is present in a fraud diamond but not in a fraud triangle?
A) integrity
B) capability
C) pressure
D) rationalization
Answer: B
Explanation: B) The underlying proposition of the fraud diamond is that, in addition to pressure,
opportunity, and rationalization (the fraud triangle), offenders also need the "capability" to
commit the act. Wolfe and Hermanson assert that opportunity opens the door, incentive and
rationalization draw offenders toward the door, and capability pushes them through.
Diff: 2
LO: 6-2
17) Which of the following explains is the underlying proposition of fraud diamond?
A) Integrity, reflected in one's decisions, influences deviant behavior.
B) If incentive is present in an act, the suspect's capacity does not matter.
C) A suspect's capacity, not incentive, should be considered by the forensic accountant.
D) In addition to pressure, opportunity, and rationalization, offenders also need the capability to
commit the act.
Answer: D
Explanation: D) The "fraud diamond," was proposed in 2004 by Wolfe and Hermanson. The
underlying proposition is that, in addition to pressure, opportunity, and rationalization (the fraud
triangle), offenders also need the "capability" to commit the act.
Diff: 2
LO: 6-2
18) Which of the following components of the fraud triangle was replaced with integrity in the
fraud scale?
A) capability
B) pressure
C) rationalization
D) opportunity
Answer: C
Explanation: C) The fraud scale study proposes replacing the rationalization component of the
fraud triangle with integrity.
Diff: 1
LO: 6-2
8
19) Which of the following is true of the fraud scale?
A) Fraud is more likely to occur when there is high pressure, greater opportunity, and low
personal integrity.
B) Fraud is more likely to occur when there is low pressure, lesser opportunity, and low personal
integrity.
C) Fraud is more likely to occur when there is high pressure, lesser opportunity, and low
personal integrity.
D) Fraud is more likely to occur when there is low pressure, greater opportunity, and low
personal integrity.
Answer: A
Explanation: A) Fraud is more likely to occur when there is high (low) pressure, greater (less)
opportunity, and low (high) personal integrity.
Diff: 2
LO: 6-2
20) According to the traditional economic theory, which of the following motivates smart,
talented, well-educated, and seemingly respectable individuals to commit fraud?
A) self-interest
B) incentive
C) pressure
D) desire
Answer: A
Explanation: A) Traditional economic theory suggests that smart, talented, well-educated, and
seemingly respectable individuals are motivated by self-interest to commit fraud.
Diff: 1
LO: 6-3
21) Which of the following propositions is reflected by the calculus of fraud?

A) Individuals will commit fraud when the reward is lower than the product of the probability of
getting caught and the perceived gravity of the loss.
B) Individuals will commit fraud when the product of the probability of getting caught and the
perceived gravity of the loss is greater than the reward.
C) Individuals will commit fraud when the product of the probability of getting caught and the
perceived gravity of the loss is lesser than the reward.
D) Individuals will commit fraud when the perceived gravity of the loss is greater than the
product of the probability of getting caught and the reward.
Answer: C
Explanation: C) The calculus of fraud reflects the simple proposition that individuals will
commit fraud when the reward (R) is greater than the product of the probability of getting caught
(P) and the perceived gravity of the loss (L). This relationship is formalized as follows: R > PL.
This can also be stated as individuals will commit fraud when the product of the probability of
getting caught and the perceived gravity of the loss is lesser than the reward.
Diff: 2
LO: 6-3
9
22) Which of the following is true of neutralization?
A) It proposes rationale as a technique of rationalization.
B) Its techniques can only be used in combination, not singly.
C) It proposes condemnation as a technique of rationalization.
D) It opposes the rational choice theory.
Answer: C
Explanation: C) Neutralization proposes denial, condemnation, and higher loyalty as means by
which offenders neutralize their role in a crime.
Diff: 1
LO: 6-3
23) Under the knucklehead defense, an attorney argues that

A) even though the client has the ability to commit the crime, he or she did not have the intent to
do it.
B) even if the client was motivated to commit the crime and had the ability to carry it out, he or
she did not have the opportunity for it.
C) even if the client had the opportunity to commit the crime, he or she did not have an incentive
to do it.
D) even if the client was motivated to commit the crime and had the opportunity, he or she did
not have the ability to carry it out.
Answer: D
Explanation: D) A suspect's incapacity is often used as an argument by defense attorneys
because of its proximity to the question of intent. Under the "knucklehead defense," an attorney
argues that, even if the client was motivated to commit the crime and had the opportunity, he or
she did not have the ability to carry it out.
Diff: 2
LO: 6-3
24) Which of the following is a term used to describe an effort to neutralize one's actions by
shifting blame to those who condemn the behavior?
A) defamation
B) accusation
C) denunciation
D) condemnation
Answer: D
Explanation: D) Condemnation is an effort to neutralize one's actions by shifting blame to those
who condemn the behavior (such as co-workers, employers, prosecutors, and law enforcement).
Diff: 1
LO: 6-3
10
25) Which of the following is suggested by the rational choice theory with regard to the criminal
decision-making process?
A) Offenders choose courses of action such as fraud that produce optimal rewards regardless of
the effort.
B) Specific crime is chosen through an analysis of opportunities and the cost-benefit trade-off.
C) Cost-benefit assessments are objective and rigid.
D) Objectivity of the decision process allows criminal behavior to be considered rational.
Answer: B
Explanation: B) Rational choice suggests that offenders are "rational calculators" who choose
courses of action such as fraud that produce optimal rewards with limited effort. The decision to
commit crime is generally based on a number of factors, such as temperament, upbringing, self-
perception, and previous experience with crime. Once a person has decided to commit a crime,
the specific crime (for example, embezzlement) is chosen through an analysis of opportunities
and the cost-benefit trade-off.
Diff: 2
LO: 6-3
26) Which of the following is a technique of neutralization used by offenders?

A) acceptance of authority
B) organizational misconduct
C) higher loyalty
D) criticism
Answer: C
Explanation: C) Fraudsters can rationalize their behavior to themselves, and to the world, in a
variety
of ways. A principal theory of rationalization is neutralization, which proposes denial,
Higher loyalty attempts to legitimize an action by reference to a stronger bond that exists with a
group than with society in general.
Diff: 2
LO: 6-3
11
27) Which of the following is true of the general theory of crime?
A) It states that individuals with low self-control consider the long-term consequences of their
behavior.
B) It suggests that criminal motivation in and of itself results in a crime.
C) It is applicable to all types of crime, except white-collar crime.
D) It explains crime as a natural consequence of uncontrolled human desire to seek pleasure and
avoid pain.
Answer: D
Explanation: D) The general theory of crime explains crime as a natural consequence of
uncontrolled human desire to seek pleasure and avoid pain. Crime is an attractive means of
pursuing self-interest because it provides "immediate, easy, and short-term pleasure."
Diff: 2
LO: 6-3
28) According to the general theory of crime, which of the following is also necessary in
addition to criminal motivation to produce a crime?
A) high rewards
B) opportunity
C) justifiable reason
D) capability
Answer: B
Explanation: B) Criminal motivation in and of itself does not produce a crime. Even the most
motivated criminals must have opportunity.
Diff: 2
LO: 6-3
29) Which of the following is true of organizational misconduct?

A) It is defined as the misconduct performed by individuals on behalf of an organization.
B) It is generally not influenced by an organization's "tone at the top."
C) It is perpetrated by an organization's rivals or competitors to hinder the growth or success of
its business.
D) It is perpetrated by the lower-level management out of loyalty to the organization.
Answer: A
Explanation: A) Organizational misconduct is defined as misconduct performed by individuals
on behalf of an organization. Research on organizational misconduct has historically focused on
the why (why fraud occurs). The dominant working theory proposes that misconduct occurs
when an individual in an organization encounters the right combination of pressure and
opportunity, without the fear of detection.
Diff: 2
LO: 6-3
12
30) Which of the following is a characteristic of a typical white-collar fraudster?
A) uneducated
B) lacks feelings of anxiety and empathy
C) below-average intelligence
D) risk averse
Answer: B
Explanation: B) A typical white-collar fraudster has several characteristics including:
• Above-average intelligence
• Relatively well-educated
• Inclined to take risk
• Lacks feelings of anxiety and empathy
Diff: 1
LO: 6-4
31) Which of the following is true of typical white-collar fraudsters?

A) They have an internal locus of control.
B) They hold a lower management position.
C) They have below-average intelligence.
D) They are relatively well-educated.
Answer: D
Explanation: D) Typical white-collar fraudsters have an external locus of control, hold a higher
management position, have above-average intelligence, and are relatively well-educated.
Diff: 1
LO: 6-5
32) Which of the following is the goal of post-conviction strategies used by white-collar
offenders?
A) to make oneself judgment-proof
B) to ensure that no further legal actions are faced
C) to protect oneself from being financially sued in the future
D) to avoid payment of restitution
Answer: A
Explanation: A) Common post-conviction strategies include bankruptcy, living via cash (no
bank accounts), and no accumulation of assets. The goal of such strategies is to make oneself
judgment-proof.
Diff: 2
LO: 6-5
13
33) Which of the following scenarios indicate post-conviction strategies used by white-collar
offenders?
A) Laviler, Inc. filed for bankruptcy after the banks refused to reschedule the repayment of loan
dues.
B) Shay does not own any bank account or assets and keeps all his cash in his cupboard.
C) Kuriten, Inc. pays all her expenditures and debts in cash but insists on bank checks for all
receipts.
D) Gisselle does not believe in accumulating assets and invests all her cash in mutual funds.
Answer: B
Explanation: B) Common post-conviction strategies include bankruptcy, living via cash (no
bank accounts), and no accumulation of assets.
Diff: 2
LO: 6-5
34) Which of the following statements is true of white-collar crime?

A) There are often easy and inexpensive to prove.
B) These are mostly victimless acts.
C) These are not committed by organizational agents.
D) These are often a low priority for law enforcement.
Answer: D
Explanation: D) White-collar crimes are often a low priority for law enforcement. Even when
law enforcement does pursue a case, financial crimes are often difficult and expensive to prove.
Diff: 1
LO: 6-6
35) Which of the following is an example of prosecutorial misconduct?

A) insider fraud
B) exaggerating medical disability
C) altering financial statements
D) tampering with evidence
Answer: D
Explanation: D) Examples of prosecutorial misconduct include hiding, destroying, or tampering
with evidence; failing to disclose evidence that might exonerate the defendant (exculpatory
evidence); and threatening witnesses.
Diff: 2
LO: 6-6
14
6.3 Short-Answer Questions
1) List the six attributes of white-collar crime.

Answer: The six attributes of white-collar crime are as follows:
• Deceit - Offenders misrepresent and conceal the truth.
• Intent - Fraud does not happen by accident.
• Breach of trust - Offenders are generally in a position of trust that is manipulated or breached to
facilitate the fraudulent action.
• Losses - White-collar crime is the unlawful taking of another's property.
• Concealment - White-collar crime can continue for years or might never be discovered.
• Outward respectability - White-collar crime is commonly perpetrated by individuals (for
example, professionals and executives) who are seemingly beyond reproach.
Diff: 2
LO: 6-1
2) Explain rationalization with respect to Cressey's fraud theory.

Answer: Cressey theorized that rationalization enables the violator to "adjust" or reconcile two
sets of conflicting values and behavior patterns. Thus, rationalization is a process by which a
person attempts to make his or her actual or intended behavior more logical or justified. This
justification allows individuals to perceive violations of trust as a legitimate means for solving
their nonshareable problems. Violators generally engage in rationalization before (or at the same
time) the act takes place. Cressey explained that violations of trust are often rationalized as
essentially noncriminal, part of some general irresponsibility for which the individual is not
completely accountable. Examples of common rationalizations include the following:
• "It was a loan."
• "Everyone does it."
• "I'm underappreciated and underpaid."
• "I did it to help other people."
• "It's covered by insurance."
Diff: 2
LO: 6-2
15
3) Write a short note on techniques of rationalization (neutralization).
Answer: Fraudsters can rationalize their behavior to themselves, and to the world, in a variety of
ways. A principal theory of rationalization is neutralization, which proposes denial,
There are three common denial techniques:
• Denial of responsibility. When offenders deny responsibility, they view their behavior as a
result of circumstances beyond their control.
• Denial of injury. When offenders deny injury, they feel as though their behavior did not hurt
anyone, even though it is against the law.
• Denial of the victim. When offenders deny the victim, they conclude that the victim was
deserving of the injuries.
Condemnation is an effort to neutralize one's actions by shifting blame to those who condemn
the behavior (such as co-workers, employers, prosecutors, and law enforcement).
For example, condemnation is commonly used by student cheaters, who claim that instructors
are unfair, unethical, or uncaring. A final technique of neutralization is loyalty to a group with
which the offender associates. Offenders may feel their crime is legitimized because a bond
dictates greater relevance to this group than to conventional society.
Diff: 3
LO: 6-3
4) List any six characteristics of a typical white-collar fraudster.

Answer: A typical white-collar fraudster has the following characteristics:
• Above-average intelligence
• Relatively well-educated
• 36-45 years old
• Male
• White
• Inclined to take risk
• Commits fraud against own employer
• Works in collusion with another offender
• Employed by the company for more than ten years
• Holds a senior management position
• Works in finance or accounting
• Lacks feelings of anxiety and empathy
• Feels a lack of control over circumstances (external locus of control)
Diff: 2
LO: 6-4
16
Test Bank for Forensic Accounting, Robert Rufus, Laura Miller William Hahn
5) Define the term prosecutorial misconduct.

Answer: Prosecutorial misconduct is an "act, especially involving an attempt to avoid required
disclosure or to persuade the jury to wrongly convict a defendant or assess an unjustified
punishment." Examples of prosecutorial misconduct include hiding, destroying, or tampering
with evidence; failing to disclose evidence that might exonerate the defendant; and threatening
witnesses.
Diff: 2
LO: 6-6
17
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6.1 True/False Questions

2) White-collar crimes have a potential for violence.

3) The most common type of financial statement fraud is overvaluation of assets.

5) General theory of crime explains crime as a natural consequence of constantly restraining

7) External locus of control is a characteristic of a typical white-collar fraudster.

10) An indictment is a statement of fact.

1) Which of the following is a white-collar crime as identified by FBI?

2) Which of the following best describes the term fraud?

3) Which of the following is one of the six attributes of white-collar crimes?

5) Which of the following describes fraud?

8) Which of the following factors is true of circumstantial evidence?

12) Which of the following is a factor in the fraud triangle?

15) Which of the following is a red flag of personal fraud characteristics?

21) Which of the following propositions is reflected by the calculus of fraud?

23) Under the knucklehead defense, an attorney argues that

26) Which of the following is a technique of neutralization used by offenders?

29) Which of the following is true of organizational misconduct?

31) Which of the following is true of typical white-collar fraudsters?

34) Which of the following statements is true of white-collar crime?

35) Which of the following is an example of prosecutorial misconduct?

1) List the six attributes of white-collar crime.

2) Explain rationalization with respect to Cressey's fraud theory.

4) List any six characteristics of a typical white-collar fraudster.

5) Define the term prosecutorial misconduct.

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