1) One of the most important responsibilities of an employer is the hiring and retention of employees. Which of the following situations reflects the current market scenario?

a. High turnover, low loyalty.

b. Low turnover, low loyalty.

c. High turnover, high loyalty.

d. Low turnover, high loyalty.

2) Which of the following creates opportunities for fraud?

a. Inability to judge quality of performance.

b. Requirement to change passwords on a regular basis.

c. Segregation of duties.

d. Controls that prevent or detect fraud.

3) Jim was a crook. He embezzled $450,000 from his employer. When his employer found out about his misdeeds, before even conducting a thorough investigation, he went and gave all the details to a local newspaper agency. The next day Jim read his own story, with his own name, in the newspaper. Which of the following is correct?

a. Publishing the story in the newspaper was a wrong thing to do because Jim's family will be embarrassed.

b. Jim may have been misrepresented in the story by the newspaper agency and the company might face legal consequences.

c. The company should not have put Jim's name and story in the paper because when other employees will come to know about it, they might leave the organization.

d. The company did the right thing by publishing Jim's identity in the newspaper because it punished him for stealing as well as served a warning to his neighbors who might also be at the risk of being defrauded.

4) Company XYZ had a long-standing relationship with a leading law firm. In fact, the law firm's business with this company was one of its most profitable relationships. If the law firm decides that it no longer wants to conduct business with the company, this is:

a. Indicative that the company might have a lot of customer lawsuits against it.

b. A large cause for concern that financial statement fraud may be occurring.

c. An indication that the client has likely outgrown the law firm.

d. Not any sort of meaningful indicator of fraud activity.

5) Examining a company's relationships with other individuals and entities can reveal important information about financial statement fraud. Identify the piece of information that is correctly linked to its source.

a. Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance.

b. Examining a company's relationships with its lawyers will show whether management is able to unduly influence the selection of accounting principles and the determination of significant estimates.

c. Examining relationships with financial institutions will show whether there has been significant "short selling" of the company's stock.

d. Examining relationships with regulatory bodies will show whether the company has recently changed legal counsel.

6) What is the meaning of short sell?

a. Buy shares from a brokerage firm and enter into a forward transaction to sell the shares at today's price on a future date.

b. Borrow shares from a brokerage and sell the shares at today's price with the intention to repay the borrowed stock they sold at some future time when the stock is trading for a lower price.

c. Sell the shares at today's price to an investor and enter into an option agreement to buy the shares back in the near future.

d. Buy shares from one brokerage firm and sell the shares to another brokerage firm with a view to make quick money.

7) Which of the following environments will be LEAST conducive to fraud?

a. High employee turnover.

b. Unreasonable budget expectations.

c. Perceived inequalities in the organization and inadequate pay.

d. Proactive management.

8) Which of the following is FALSE regarding a comprehensive approach to fighting fraud?

a. Corporate security officers see their role as investigative.

b. Detecting fraud is the responsibility of the independent auditors.

c. Evaluating controls is the function of the internal auditor.

d. Employees are in the best position to prevent and spot fraud.

9) Control activities can be grouped as preventive controls and detective controls. Which of the following is a detective control?

a. Physical safeguards.

b. Independent checks.

c. Segregation of duties.

d. System of authorizations.

10) An employee who has the responsibilities of both writing checks and making bank deposits would have ____ to commit fraud.

a. the rationalization.

b. validation.

c. financial pressure.

d. a perceived opportunity.

11) Which of the following is NOT an example of a control weakness or violation?

a. A manager instructs employees not to share passwords, and then shares her passwords with her immediate assistant.

b. The employees know who has responsibility for each business activity. Procedures to follow are in place.

c. A company has established codes of conduct and conducts training meetings to teach employees to distinguish between acceptable and unacceptable behavior. Attendance is voluntary.

d. The HR department failed to check an applicant's background and hired someone who had committed fraud in the past.

12) Which of the following is true regarding the fraud triangle?

a. The perceived ability to conceal the fraud act concerns the rationalization side of the fraud triangle.

b. Rationalization for the fraud act is thought of after the fraud has been committed.

c. Work-related pressure to commit fraud is the strongest of the pressure triangle element.

d. The three elements of the fraud triangle are interactive.

13) Which of the following is an example of an authorization control procedure?

a. Cash counts or certifications.

b. Periodic job rotation.

c. Supervisor review.

d. Password protection.

14) A fraud perpetrator is able to convince a potential victim that he will receive a large bonus if he supports him in a fraud scheme. Which type of power is the fraud perpetrator using?

a. Legitimate power.

b. Coercive power.

c. Expert power.

d. Reward power.

15) Which of the following is NOT a perceived pressure that can lead to employee fraud?

a. A challenge to beat the system.

b. Experiencing high medical bills because of illness in the family.

c. Anticipated actual financial reports that are below published expectations.

d. Frustration with work.

16) Identify a situation that could usually lead to a conflict of interest.

a. A sales supervisor has to allocate targets to her team members, based on revenue generation probability per region.

b. A purchase manager in the company runs an operation that produces the raw materials required by the company.

c. A market analyst is asked to create a comparative growth forecast for four firms in an industry.

d. A manager has to choose between two of his best employees for the post of assistant manager.

17) Identify an example of a perceived pressure that can motivate financial statement fraud.

a. Failure to meet Wall Street's earnings expectations.

b. A weak board of directors.

c. Rationalizing that all companies use aggressive accounting practices.

d. The ability to obfuscate the fraud behind complex transactions.

18) Company X has a good whistle-blowing program in place. Sara used the whistle-blowing system to alert management about a fraud being committed by a senior employee in the human resources department. The company investigated the allegation and punished the fraudster. However, Sara was shocked to find later that everyone on her team knew that she was the one who blew the whistle. What could be a major issue with the program at the company?

a. Unclear policies regarding whistle-blowing.

b. Lack of awareness about the program.

c. Management inaction regarding anonymity policies.

d. Lack of adherence to anonymity policies.

19) Should nonfinancial indicators be used for assessing fraud risk? Why or why not?

a. No. Nonfinancial measures are indicative of physical assets alone.

b. Yes. Management can more easily manipulate financial numbers but finds it harder to keep all the nonfinancial information consistent with the financial information.

c. No. A company's financial statement data need not always be consistent with its nonfinancial measures.

d. Yes. Management attempts to commit fraud first show up in these indicators. Financial statement fraud is an attempt to cover up those attempts.

20) Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these facts, which one of the following should be most carefully examined?

a. Dividend paid out in the previous year.

b. Loans and other financing transactions between related entities.

c. Large market capitalization.

d. Transactions that result in healthy revenues.

21) Which of the following is least likely to indicate possible financial statement fraud?

a. Purchase of a small competitor that resulted in goodwill.

b. Transactions that generate nonoperating income.

c. Financing transactions between related parties.

d. An unusually large transaction that resulted in income for the organization.

22) Which of the following is NOT a primary control procedure to minimize the occurrence of fraud?

a. Dual custody.

b. Internal audit department.

c. Documents and records.

d. System of authorizations.

23) The correct order of the six elements of the fraud-fighting model is:

a. education and training; tone at the top; integrity risk and controls; reporting and monitoring; proactive detection; investigation and follow-up.

b. tone at the top; education and training; integrity risk and controls; reporting and monitoring; proactive detection; investigation and follow-up.

c. tone at the top; education and training; proactive detection; integrity risk and controls; reporting and monitoring; investigation and follow-up.

d. education and training; integrity risk and controls; reporting and monitoring; proactive detection; investigation and follow-up; tone at the top.

24) Which of the following is an example of a perceived opportunity that can lead to financial statement fraud?

a. Inadequate internal controls.

b. Thinking that fraud is good for the company.

c. Inability to compete with other companies.

d. Independent audit and a strong board of directors.