Fraud Examination 5th Edition Albrecht

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Chapter 06

1. Which of the following statements is NOT true?

a. In recent years there have been many cases of financial statement fraud.
b. Proactive fraud detection methods are in their infancy.
c. Accounting anomalies indicate fraud has or is occurring.
d. Fraud investigation involves determining who committed the fraud, the schemes used and how much money or
assets were taken.

ANSWER: c
FEEDBACK: a. Incorrect. This statement is true.
b. Incorrect. This statement is true.
c. Correct. Accounting anomalies are primarily caused by control weaknesses, they are not intentional.
d. Incorrect. This statement is true.
POINTS: 1

2. A ______ is a financial statement that reflects account balances at a specific point in time like a snapshot.
a. periodic statement
b. position statement
c. change statement
d. static statement

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

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Chapter 06

3. The proactive method of fraud detection is a six-step process. Which of the following is the correct process
sequence?
a. Identify possible frauds that could exist; catalog possible fraud symptoms; understand the business; use
technology to gather data about symptoms; automotive detection procedures; analyze results; and investigate
symptoms
b. Catalog possible fraud symptoms; understand the business; identify possible frauds that could exist; analyze
results; use technology to gather data about symptoms; and investigate symptoms
c. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; investigate
symptoms; use technology to gather data about symptoms; and analyze results
d. Understand the business; identify possible frauds that could exist; catalog possible fraud symptoms; use
technology to gather data about symptoms; analyze results; and investigate symptoms

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct.
POINTS: 1

4. ACL stands for:

a. Account Coverage Level.
b. Audit Command Language.
c. Actuarial Confidence Level.
d. Auditors’ Common Language.

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct. ACL is data-mining software that is often used by auditors to audit and detect fraud.
c. Incorrect.
d. Incorrect.
POINTS: 1

5. Which of the following is true for accounting anomalies?

a. They are primarily caused by lack of training.
b. They represent intentional sabotage of controls.
c. They are problems caused by failures in systems, procedures, and policies.
d. They represent fraud.

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

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Chapter 06

6. Which of the following is the most direct method of focusing on changes in the company's balance sheet and income
statement?
a. Calculating key ratios and comparing them from period to period
b. Comparing account balances in the statements from one period to the next
c. Performing a vertical analysis
d. Performing a horizontal analysis

ANSWER: d
FEEDBACK: a. Incorrect. By examining ratios, it is possible to see whether resulting changes in liquidity, efficiency, solvency, and
profitability are as expected, but it is not the most direct method of focusing on changes.

b. Incorrect. This method compares numbers in the statement from one period to the next, but it is probably the least
effective way to analyze changes.

c. Incorrect. Vertical analysis converts balance sheets and income statements to change statements for industry and other
comparison by converting financial statement numbers to percentages.

d. Correct. With horizontal analysis, the changes in amounts from period to period are converted to percentages.
POINTS: 1

7. While using n-grams, a match percentage of ________ or ________ generally indicates very similar values.
a. 10 percent, smaller
b. 20 percent, greater
c. 5 percent, smaller
d. 40 percent, greater

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

8. Which of the following is a commercial data-mining software?

a. ACL
b. QuickBooks
c. Peachtree
d. Excel

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect. QuickBooks is an accounting software.
c. Incorrect. Peachtree is an accounting software.
d. Incorrect. Applications like VisiCalc, Lotus 1-2-3, Excel, dBASE, and Access, provide auditors with user-oriented and
accessible tools to analyze large and small data sets.

POINTS: 1

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Chapter 06

9. Which of the following proactive fraud detection methods use Benford's Law to detect fraud?
a. Vertical analysis
b. Digital analysis
c. Real-time analysis
d. Time trend analysis.

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct. Digital analysis is the art of analyzing the digits that make up numbers like invoice amounts, costs, etc. The
distribution of digits actually follows Benford’s law, which is the primary method of digital analysis in fraud
investigations.

c. Incorrect.
d. Incorrect.
POINTS: 1

10. Which of the following is an analytical symptom of a kickback?

a. Decreasing purchases from other vendors
b. Charging normal price for goods supplied
c. Providing better quality goods
d. Smaller purchase quantities and more frequent orders

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect.
c. Incorrect.
d. Incorrect.
POINTS: 1

11. What is the primary drawback of the data-driven approach?

a. More expensive and time intensive than the traditional approach.
b. The time necessary to verify the large number of indicators identified.
c. Cannot highlight frauds while they are still small.
d. The investigator loses control of the fraud investigation process.

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect.
c. Incorrect
d. Incorrect.
POINTS: 1

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Chapter 06

12. Kickbacks from vendors to buyers might generate one of the following symptoms.
a. Buyer doesn’t relate well to other buyers and vendors
b. Decreasing purchases from favored vendor
c. Increasing purchases from other vendors
d. Decreasing prices and increasing quality

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect.
c. Incorrect.
d. Incorrect.
POINTS: 1

13. According to Benford’s law, the first digit of random data sets will most often begin with which number?
a. 7
b. 1
c. 3
d. 4

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct. 1 is the most likely first digit of a random data set.
c. Incorrect.
d. Incorrect.
POINTS: 1

14. From the information given below, calculate the quick ratio.
Particulars Amount (in $) Particulars Amount (in $)
Cash 20,000 Accounts payable 11,000
Notes receivable 15,000 Wages payable 5,000
Stock 5,000 Retained earnings 20,000
Inventory 6,000 Notes Payable 8,000
a. .83 times
b. 1.25 times
c. 1.63 times
d. 1.08 times

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

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Chapter 06

15. Which of the following is similar to ACL and its primary competitor?
a. Picalo
b. IDEA
c. Microsoft Office + ActiveData
d. Z-score

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

16. Digital analysis is:

a. the art of analyzing the digits that make up numbers like invoice amounts, reported hours, and costs.
b. a technique which calculates the average probability for each grouping of data.
c. the searching for expected relationships between numbers.
d. the use of numeric values for decision making.

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect.
c. Incorrect. Benford's Law helps auditors search for unexpected relationships not expected relationships.
d. Incorrect.
POINTS: 1

17. One of the disadvantages of Benford's law in detecting fraud is:

a. potential suspects are more likely to know you are trying to detect fraud than if you use such detection
techniques.
b. users must be thoroughly trained in its complexities to implement and use.
c. that those cases with the lowest probabilities do not match Benford’s law and may need further investigation.
d. it only broadly identifies the possible existence of fraud; it fails to narrow possibilities to a manageable field of
promising leads.

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct.
POINTS: 1

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Chapter 06

18. An appropriate red flag search to detect kickbacks or other fraud being committed by vendors would include:
a. invoices without valid purchase order.
b. employee and vendor telephone numbers are the same.
c. purchase orders with zero dollar amounts by buyer.
d. price increases greater than 20% for several consecutive years.

ANSWER: d
FEEDBACK: a. Incorrect. This is a red flag search designed to detect employees committing purchasing fraud.
b. Incorrect. This is a red flag search designed to detect employees committing purchasing fraud.
c. Incorrect. This is a red flag search designed to detect employees committing purchasing fraud.
d. Correct.
POINTS: 1

19. W
​ hat defines an extension of stratification?
a. Matosas matrix
b. A pivot table
c. Summarization
d. Soundex

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect. .
c. Correct.
d. Incorrect.
POINTS: 1

20. The red-flag that is generally identified when vendors with invoices for the same amount on the same day are found
is:
a. dummy vendors.
b. employees purchasing goods for personal use.
c. billing more than once for the same purchase.
d. providing poor-quality goods.

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

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Chapter 06

21. ____ include statistical summaries of each column that include control totals, mean, maximum, minimum, standard
deviation, number of zero values, number of empty records, etc
a. Captions
b. Histograms
c. Headings
d. Descriptives

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct.
POINTS: 1

22. Which of the following is least effective while searching for anomalies?
a. Comparing account balances in the statements from one period to the next.
b. Calculating key ratios and comparing them from one period to the next.
c. Performing horizontal analysis.
d. Performing vertical analysis.

ANSWER: a
FEEDBACK: a. Correct. Assessing levels of change by comparing account balances is least effective in identifying anomalies because
financial statement numbers are often large and difficult to compare.

b. Incorrect.
c. Incorrect.
d. Incorrect.
POINTS: 1

23. According to Benford's law, 5 will be the first digit of a random number set:
a. more often than 1.
b. less often than 4.
c. about the same as 6.
d. more often than 3.

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct. According to Benford's law, 5 should occur less often than 4.
c. Incorrect.
d. Incorrect.
POINTS: 1

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Chapter 06

24. ____ is the splitting of complex data sets into case-specific tables.
a. Deviation
b. Stratification
c. Data mining
d. Soundex

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

25. Identify the true statement about detecting fraud using financial statement reports.
a. Performing horizontal analysis requires converting the Income statement balances to percentages of gross
sales.
b. Vertical analysis is the most direct method of focusing on changes from period to period.
c. Before performing any data-driven analysis that targets fraud and corruption in financial statements, the
numbers in all three types of financial statements need to be converted to percentages.
d. Small frauds may not affect the summarized financial statements significantly to be detected.

ANSWER: d
FEEDBACK: a. Incorrect. Horizontal analysis compares the numbers from period to period, and does not compare the changes within a
given period.

b. Incorrect. Horizontal analysis, not vertical analysis, is the most direct method of focusing on changes.
c. Incorrect. The cash flow statement is already a change statement. Only balance sheets and income statements need to
be converted.

d. Correct. Small frauds are detected through source documents or other symptoms because they are usually not large
enough to significantly affect the financial statements.

POINTS: 1

26. A mathematical algorithm that predicts the percentage of the time each digit will appear in a sequence of numbers is:
a. inductive fraud detection.
b. deductive fraud detection.
c. Benford's law.
d. horizontal analysis.

ANSWER: c
FEEDBACK: a. Incorrect. This is proactively searching for fraud by identifying anomalies or unusual or unexpected patterns and
relationships.

b. Incorrect. This is determining the types of frauds that can occur and then using query techniques and other methods to
determine if those frauds may actually exist.

c. Correct.
d. Incorrect. This is a tool that determines the percentage change in balance sheet and income statement numbers from
one period to the next.

POINTS: 1

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Chapter 06

27. Which of the following statements is true about ODBC?

a. It allows use of the powerful SQL language for searching and filtering of the data.
b. It is generally slower and less robust than text files.
c. IT departments are very comfortable in giving out ODBC connections.
d. It is an application-level setting rather than a systemwide setting.

ANSWER: a
FEEDBACK: a. Correct.
b. Incorrect.
c. Incorrect.
d. Incorrect.
POINTS: 1

28. Which of the following statements is true about the characteristics of real-time analysis?
a. With real-time analysis in place, there is no need for continual improvement and updating of indicators.
b. It is a distinct technique because it specifically analyzes each transaction for correctness rather than for fraud.
c. It does not allow real-time modification and deletion of less-effective indicators.
d. Indicators are hard-coded into the system.

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct. Effective real-time analysis systems do have indicators hard-coded into the system.
POINTS: 1

29. Which approach converts financial statement numbers as percentage of total assets or total sales?
a. Horizontal Analysis
b. Vertical Analysis
c. Ratio Analysis
d. Variance Analysis

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

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Chapter 06

30. Identify the formula used to calculate z-score.

a. (Mean - Value)/Standard Deviation
b. (Mean - Value)/(Mean + Value)
c. (Value - Mean)/Standard Deviation
d. (Value - Mean)/Median

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

31. Benford's law can help detect fraud by:

a. establishing weaknesses in the accounting control system.
b. identifying accounting anomalies.
c. focusing on unexplained changes.
d. identifying possible attempts by fraudsters to make stolen amounts look random.

ANSWER: d
FEEDBACK: a. Incorrect. Benford's law does not show weaknesses in the control system..
b. Incorrect. Benford's law does not identify accounting anomalies.
c. Incorrect.
d. Correct.
POINTS: 1

32. Horizontal analysis is performed when:

a. total assets are set at 100% and all other balances are a percentage of total assets.
b. the percentage change in the balance sheet and income statement numbers is computed for one period to the
next.
c. there is a need to calculate and compare key ratios from period to period.
d. income statement amounts are shown as a percentage of total sales.

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect
POINTS: 1

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Chapter 06

33. One way to view the results of multiple indicators is to use a chart called a ____________ .
a. Soundex algorithm
b. summarization chart
c. pareto chart
d. Matosas matrix

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct.
POINTS: 1

34. Benford's law:

a. applies to numbers that have built-in limits.
b. is most effectively used with assigned numbers.
c. applies best to numbers that occur naturally.
d. uses ratios to detect fraud.

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

35. While using financial statement analysis, which ratio will be most useful in assessing the company's operational
efficiency?
a. Current Ratio
b. Quick ratio
c. Cost of goods sold percentage
d. Inventory turnover

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct. Inventory turnover is a measure of operational efficiency.
POINTS: 1

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Chapter 06

36. Which of the following ratios can be used to assess a company’s solvency?
a. Current Ratio
b. Return on assets
c. Times-interest-earned
d. Inventory turnover

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

37. What is the primary advantage of the data-driven approach?

a. The investigator makes hypotheses and tests to see if each one holds true.
b. It is less expensive and time intensive than the traditional approach.
c. The investigator takes charge of the fraud investigation process.
d. Data-driven fraud detection is proactive in nature.

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct. The data-driven approach can highlight frauds while they are still small.
d. Incorrect.
POINTS: 1

38. While methods like high-low slope, average slope, handshaking, and Box-Jenkins exist, one of the most popular
techniques for summarizing the slope of a graph is _______ .
a. summarization
b. stratification
c. statistical regression.
d. arithmetic progression

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

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Chapter 06

39. Which statistical approach is one of the most powerful and yet simple methods for identifying outliers?
a. N-grams
b. Z-score
c. Time-trend analysis
d. Soundex algorithm

ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct.
c. Incorrect.
d. Incorrect.
POINTS: 1

40. ______ are a two dimensional view with cases in one dimension and the calculations in the other.
a. N-grams
b. Z-scores
c. Pivot Tables
d. Soundex algorithms

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

41. One of the most common errors investigators make when analyzing time trends is:
a. incorrect data preparation.
b. focusing only on one variable, time (the x-axis if graphed).
c. not monitoring the time taken.
d. not standardizing for time.

ANSWER: d
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Incorrect.
d. Correct.
POINTS: 1

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Chapter 06

42. Specific implementations of delimited text are called TSV. What does TSV stands for?
a. toxicity screening value
b. time segmented volume
c. tab separated values
d. tactical secure voice

ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct.
d. Incorrect.
POINTS: 1

43. Which of the following is a true statement regarding the United States Social Security Administration (U.S. SSA)?
a. T
​ he U.S. SSA publishes a monthly list of newly issued Social Security numbers.
b. T​ he U.S. SSA publishes a monthly list of Social Security numbers that are no longer in use.
c. T ​ he U.S. SSA database of valid numbers can be accessed by interested parties.
d. T ​ he U.S. SSA database can be used to create mailing lists.

ANSWER: b
FEEDBACK: a. Incorrect
b. Correct
c. Incorrect, this would allow illegal activity.
d. Incorrect, the list is not accessible by the public and does not include addresses.
POINTS: 1

44. W
​ hat is a unique feature of Picalo, the data analysis toolkit that differentiates it from other packages?
a. P
​ icalo includes sampling techniques.
b. T​ he primary focus of Picalo is auditing.
c. T ​ he Picalo program mames automation of procedures possible.
d. T ​ he Picalo program is free.

ANSWER: d
FEEDBACK: a. Incorrect
b. Incorrect
c. Incorrect
d. Correct
POINTS: 1

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Chapter 06

45. ​What are detectlets?

a. D
​ etectlets are small program plug­ins that discover specific indicators.
b. D​ etectlets are infrequent accounting anomalies discovered during an audit.
c. D ​ etectlets are fraud indicators highlighted by the data process program during an audit.
d. D ​ etectlets are items discovered by the program that indicate the percentage possibility that fraud is present.

ANSWER: a
FEEDBACK: a. Correct
b. Incorrect
c. Incorrect
d. Incorrect
POINTS: 1

46. W
​ hich of the following is the most important step in data analysis?
a. g​ athering the right data in the right format in the right time period
b. u​ nderstanding the available data
c. l​ earning the basics of table structure and field types
d. l​ earning the basics of key relationships and query syntax

ANSWER: a
FEEDBACK: a. Correct
b. Incorrect
c. Incorrect
d. Incorrect
POINTS: 1

47. Which of the following in the most complete definition of a Matosas Matrix?​
a. T
​ he Matosas Matrix is a table of data useful during audits.
b. T​ he Matosas Matrix is a compromise between prior and real­time data.
c. T ​ he Matosas Matrix is a high­level chart that lists a specific group of items (i.e., contracts) with their
demographics over a specific period of time..
d. T ​ he Matosas Matrix is a high­level chart listing possible fraud indicators related to a group of items (i.e.,
contracts) for a specific period of time.

ANSWER: d
FEEDBACK: a. Incorrect
b. Incorrect
c. Incorrect
d. Correct
POINTS: 1

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Chapter 06

48. W
​ hich of the following may result from a careful review of a Matosas Matrix?
a. T
​ his action identifies indicators that have been circumvented.
b. T​ his action identifies indicator information that has been incorrectly input.
c. T ​ his helps investigators improve the set of indicators utilized.
d. T ​ his helps investigators identify fraud perpetrators.

ANSWER: c
FEEDBACK: a. Incorrect
b. Incorrect
c. Correct
d. Incorrect
POINTS: 1

49. Which of the following is true?​

a. S
​ tratification is the splitting of data into case­specific tables.
b. S​ tratification is an extension of summarization.
c. S ​ ummarization provides detail for each grouping into tables.
d. S ​ tratification is utilized to create a z­score across data sets.

ANSWER: a
FEEDBACK: a. Correct
b. Incorrect: Summarization is an extension of stratification.
c. Incorrect: Stratification separated the data into tables for study.
d. Incorrect: A z-score across data sets (tables) is basically useless.
POINTS: 1

50. W
​ hich of the following records data for each case in a graph and analyzes the slope?
a. s​ ummarization analysis
b. t​ ime­trend analysis
c. f​ uzzy­matching method
d. c​ ross tables method

ANSWER: b
FEEDBACK: a. Incorrect
b. Correct
c. Incorrect
d. Incorrect
POINTS: 1

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