ACCOUNTING INFORMATION SYSTEMS GLOBAL EDITION 14TH ED BY MARSHALL B – TEST BANK

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Accounting Information Systems, 14e, Global Edition (Romney/Steinbart)

Chapter 5   Computer Fraud

 

1   Explain the threats faced by modern information systems.

 

1) Perhaps the most striking fact about natural disasters in relation to AIS controls is that

  1. A) many companies in one location can be seriously affected at one time by a disaster.
  2. B) losses are absolutely unpreventable.
  3. C) there are a large number of major disasters every year.
  4. D) disaster planning has largely been ignored in the literature.

Answer:  A

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Easy

AACSB:  Analytical Thinking

 

2) Which of the following is the greatest risk to information systems and causes the greatest dollar losses?

  1. A) Human errors and omissions
  2. B) Physical threats such as natural disasters
  3. C) Dishonest employees
  4. D) Computer crime

Answer:  A

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Easy

AACSB:  Analytical Thinking

 

3) Identify the threat below that is not one of the four types of threats faced by accounting information systems.

  1. A) Natural and political disasters
  2. B) Software errors and equipment malfunctions
  3. C) Unintentional acts
  4. D) System design inefficiency

Answer:  D

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Easy

AACSB:  Application of Knowledge

 

 

4) A power outage is an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  B

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

5) Sabotage is an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  D

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

6) Systems that do not meet company need is an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  C

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

7) Terrorists are an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  A

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

8) Undetected data transmission errors are an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  B

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

9) Excessive heat is an example of a(n) ________ threat.

  1. A) natural and political disasters
  2. B) software errors and equipment malfunctions
  3. C) unintentional acts
  4. D) intentional acts (computer crimes)

Answer:  A

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

10) What was the first known cyber-attack intended to harm a real-world physical target?

  1. A) Sasser
  2. B) Stuxnet
  3. C) Michelangelo
  4. D) Doomsday

Answer:  B

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Challenging

AACSB:  Analytical Thinking

 

11) What agency did the United States create to use cyber weapons and to defend against cyber attacks?

  1. A) U.S. Cyber Command
  2. B) Department of Network Security
  3. C) Department of Cyber Defense
  4. D) Department of Technology Strategy

Answer:  A

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Challenging

AACSB:  Analytical Thinking

 

 

12) Which type of threat poses the greatest risk to information systems?

  1. A) Software errors and equipment malfunctions
  2. B) Unintentional acts
  3. C) Intentional acts (computer crimes)
  4. D) Natural and political disasters

Answer:  B

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

13) A disgruntled employee in Australia hacked into a sewage system, causing a quarter of a million gallons of raw sewage to flood a hotel and a park.

Answer:  TRUE

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Easy

AACSB:  Analytical Thinking

14) A 16 year old hacker was able to access the systems of U.S. Missile Command and accidently launched a small nuclear missile, which fortunately, failed to detonate.

Answer:  FALSE

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

15) At Facebook, an automated system for verifying configuration value errors backfired, causing every single client to try to fix accurate data it perceived as invalid. Since the fix involved querying a cluster of databases, that cluster was quickly overwhelmed by hundreds of thousands of queries a second. The resultant crash took the Facebook system offline for two-and-a-half hours.

Answer:  TRUE

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

16) The activist hacker group called Anonymous played Santa Claus one Christmas, indicating they were “granting wishes to people who are less fortunate than most.” They were inundated with requests for iPads, iPhones, pizzas, and hundreds of other things. They hacked into banks and sent over $1 million worth of virtual credit cards to people.

Answer:  TRUE

Concept:  Threats to accounting information systems

Objective:  Learning Objective 1

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

2   Define fraud and describe both the different types of fraud and the auditor’s responsibility to detect fraud.

 

1) Lauren 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. Lauren approaches a good friend, Jamie, to discuss the possibility of Jamie investing funds and becoming a 25% partner in the business. After a lengthy discussion, Jamie agrees to invest. Eight months later, Jamie discovered that Lauren has not be honest with her regarding some aspects of the business financial operation. In order for Jamie to sue Lauren for fraud, all the following must be true except

  1. A) Jamie’s decision to invest was primarily based on Lauren’s assertion that she had prior floral retail experience.
  2. B) Jamie has suffered a substantial loss in her investment because of Lauren’s deception.
  3. C) Jamie trusted and relied on Lauren’s representation of the business financial operation.
  4. D) Jamie found Lauren dishonest because she does not always reconcile the business cash account on a timely basis.

Answer:  D

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Reflective Thinking

2) What characteristics must be presented for an act to be considered fraudulent? Give an example to support your answer.

Answer:  A false statement, representation, or disclosure; a material fact, which is something that induces a person to act; an intent to deceive; a justifiable reliance; that is, the person relies on the misrepresentation to take an action; and an injury or loss suffered by the victim. Students’ response may vary depending on the example that they provide.

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Challenging

AACSB:  Reflective Thinking

 

3) Fraud perpetrators are often referred to as

  1. A) bad actors.
  2. B) blue-collar criminals.
  3. C) white-collar criminals.
  4. D) outlaws.

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Easy

AACSB:  Analytical Thinking

 

 

4) “Cooking the books” is typically accomplished by all the following except

  1. A) overstating inventory.
  2. B) accelerating recognition of revenue.
  3. C) inflating accounts payable.
  4. D) delaying recording of expenses.

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

5) SAS No. 99 requires that auditors

  1. A) plan audits based on an analysis of fraud risk.
  2. B) detect all material fraud.
  3. C) alert the Securities and Exchange Commission of any fraud detected.
  4. D) take all of the above actions.

Answer:  A

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Challenging

AACSB:  Analytical Thinking

6) What is the primary difference between fraud and errors in financial statement reporting?

  1. A) The level of management involved
  2. B) The intent to deceive
  3. C) The materiality of the misstatement
  4. D) The type of transaction effected

Answer:  B

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

7) The two most common types of fraud impacting financial statements are

  1. A) corruption and fraudulent financial reporting.
  2. B) misappropriation of assets and embezzlement.
  3. C) fraudulent financial reporting and e-commerce fraud.
  4. D) fraudulent financial reporting and misappropriation of assets.

Answer:  D

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

8) Intentional or reckless conduct that results in materially misleading financial statements is called

  1. A) financial fraud.
  2. B) misstatement fraud.
  3. C) fraudulent financial reporting.
  4. D) audit failure fraud.

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Easy

AACSB:  Analytical Thinking

 

9) Which of the following is not an example of one of the basic types of fraud?

  1. 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.
  2. 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.
  3. 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.
  4. D) A salesperson approves a large sales discount on an order from a company owned partially by the salesperson’s sister.

Answer:  A

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Reflective Thinking

10) 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.

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Easy

AACSB:  Analytical Thinking

 

 

11) Which of the following is not an example of misappropriation of assets?

  1. A) A warehouse employee takes home two units of electronic entertainment inventory each week without authorization.
  2. B) The chief financial officer of the company falsely adds $20 million to the accounts receivable and revenue accounts.
  3. C) The president of the company utilizes the organization’s cash to add a floor to her 15,000 square foot house.
  4. D) The treasurer of the company makes an unauthorized wire transfer from the organization’s bank to a personal account in Grand Cayman.

Answer:  B

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

12) Describe some of the most frequent fraudulent financial reporting schemes.

Answer:  The most frequent fraudulent financial reporting schemes involve fictitiously inflating revenues,

holding the books open (recognizing revenues before they are earned), closing the books

early (delaying current expenses to a later period), overstating inventories or fixed assets, and

concealing losses and liabilities.

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

13) Describe ways that the Treadway Commission has recommended to reduce fraudulent financial reporting.

Answer:  The Treadway Commission recommended four actions to reduce fraudulent financial

reporting: (1) Establish an organizational environment that contributes to the integrity of the financial reporting process. (2) Identify and understand the factors that lead to fraudulent financial reporting. (3) Assess the risk of fraudulent financial reporting within the company. (4.) Design and implement internal controls to provide reasonable assurance of preventing fraudulent financial reporting.

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

14) Asset misappropriation is ________ likely than fraudulent financial reporting. The amounts involved in asset misappropriation are much ________ than fraudulent financial reporting.

  1. A) less; more
  2. B) less; less
  3. C) more; less
  4. D) more, more

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

15) Misappropriation of assets is a fraudulent act that involves

  1. A) dishonest conduct by those in power.
  2. B) misrepresenting facts to promote an investment.
  3. C) using computer technology to perpetrate a crime.
  4. D) theft of company property.

Answer:  D

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

16) 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.

Concept:  Fraud

Objective:  Learning Objective 2

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

3   Discuss who perpetrates fraud and why it occurs, including the pressures, opportunities, and rationalizations that are present in most frauds.

 

1) Fraud perpetrators do not typically

  1. A) attempt to return or pay back stolen amounts soon after the initial theft, but find they are unable to make full restitution.
  2. B) use trickery or lies to gain the confidence and trust of others at the organization they defraud.
  3. C) become bolder and more greedy the longer the theft remains undetected.
  4. D) begin to rely on stolen amounts as part of their income.

Answer:  A

Concept:  Fraud perpetrators

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

2) Researchers found significant differences between white-collar criminals and the public.

Answer:  FALSE

Concept:  Fraud perpetrators

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

3) Most fraud perpetrators have previous criminal record; they were dishonest and disrespected members of their community.

Answer:  FALSE

Concept:  Fraud perpetrators

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

4) Lapping is best described as the process of

  1. A) applying cash receipts to a different customer’s account in an attempt to conceal previous thefts of cash receipts.
  2. B) inflating bank balances by transferring money among different bank accounts.
  3. C) stealing small amounts of cash, many times over a period of time.
  4. D) increasing expenses to conceal that an asset was stolen.

Answer:  A

Concept:  Fraud

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

5) Which of the following is not an example of the fraud triangle characteristic concerned with rationalization?

  1. A) Revenge against the company
  2. B) Intent to repay “borrowed” funds in the future
  3. C) Sense of entitlement as compensation for receiving a lower than average raise
  4. D) Belief that the company won’t suffer because an insurance company will reimburse losses

Answer:  A

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

6) Insiders are frequently the ones who commit fraud because

  1. A) they are more dishonest than outsiders.
  2. B) they need money more than outsiders.
  3. C) they are less likely to get caught than outsiders.
  4. D) they know more about the system and its weaknesses than outsiders.

Answer:  D

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

7) Which of the following is not a management characteristic that increases pressure to commit fraudulent financial reporting?

  1. A) Close relationship with the current audit engagement partner and manager
  2. B) Pay for performance incentives based on short-term performance measures
  3. C) High management and employee turnover
  4. D) Highly optimistic earnings projections

Answer:  A

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

8) Researchers have compared the psychological and demographic characteristics of white-collar criminals, violent criminals, and the general public. They found that

  1. A) few differences exist between white-collar criminals and the general public.
  2. B) white-collar criminals eventually become violent criminals.
  3. C) most white-collar criminals invest their illegal income rather than spend it.
  4. D) most white-collar criminals are older and not technologically proficient.

Answer:  A

Concept:  Fraud perpetrators

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

9) Identify the opportunity below that could enable an employee to commit fraud.

  1. A) An employee’s spouse loses her job.
  2. B) The company does not have a clear policies and procedures for the employee to follow.
  3. C) The employee is experiencing financial hardship.
  4. D) An employee is upset that he was passed over for a promotion.

Answer:  B

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

10) Which of the following is a financial pressure that could cause an employee to commit fraud?

  1. A) A feeling of not being valued.
  2. B) Having a grumbling and drug addiction.
  3. C) Having a close association with suppliers and customers.
  4. D) Having an anger management issue.

Answer:  B

Concept:  The concept of information

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

11) Which of the following fraudulent acts generally takes most time and effort?

  1. A) Lapping accounts receivable.
  2. B) Selling stolen inventory to get cash.
  3. C) Stealing inventory from the warehouse.
  4. D) Creating false journal entries to overstate revenue.

Answer:  A

Concept:  Fraud

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

12) In many cases of fraud, the ________ takes more time and effort than the ________.

  1. A) concealment; theft
  2. B) theft; concealment
  3. C) conversion; theft
  4. D) conversion; concealment

Answer:  A

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

13) Which of the following is the best way to hide theft of assets?

  1. A) Only steal an immaterial amount of assets.
  2. B) Conversion of stolen assets into cash.
  3. C) Stealing cash from customer A and then using customer B’s balance to pay customer A’s accounts receivable.
  4. D) Charging the stolen asset to an expense account.

Answer:  D

Concept:  Fraud

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

14) Which fraud scheme involves stealing customer receipts and applying subsequent customer cash payments to cover the theft?

  1. A) kiting
  2. B) laundering
  3. C) lapping
  4. D) bogus expense

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

15) One fraudulent scheme covers up a theft by creating cash through the transfer of money between banks. This is known as

  1. A) lapping.
  2. B) misappropriation of assets.
  3. C) kiting.
  4. D) concealment.

Answer:  C

Concept:  Fraud

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

16) Which of the following is not one of the components of the fraud triangle?

  1. A) Incentive
  2. B) Rationalization
  3. C) Susceptibility
  4. D) Opportunity

Answer:  C

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

17) Which characteristic of the fraud triangle often stems from a lack of internal controls within an organization?

  1. A) Pressure
  2. B) Opportunity
  3. C) Rationalization
  4. D) Concealment

Answer:  B

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

18) Which characteristic of the fraud triangle often stems from the belief that “the rules do not apply to me” within an organization?

  1. A) Pressure
  2. B) Opportunity
  3. C) Rationalization
  4. D) Concealment

Answer:  C

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

19) Which situation below makes it easy for someone to commit a fraud?

  1. A) Placing excessive trust in key employees.
  2. B) Inadequate staffing within the organization.
  3. C) Unclear company policies.
  4. D) All of the above situations make it easy for someone to commit a fraud.

Answer:  D

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

20) What is the most prevalent opportunity within most companies to commit fraud?

  1. A) Lack of internal controls designed by management.
  2. B) Failure by management to enforce the internal controls.
  3. C) Weaknesses in the design of internal controls.
  4. D) Management’s belief that most employees would not commit fraud.

Answer:  B

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

21) This component of the fraud triangle explains the incentive or motivation for someone to commit fraud.

  1. A) Pressure
  2. B) Rationalization
  3. C) Concealment
  4. D) Opportunity

Answer:  A

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Easy

AACSB:  Analytical Thinking

 

22) The most efficient way to conceal asset misappropriation is to

  1. A) understate a stolen inventory item an asset account.
  2. B) charge a stolen inventory item to an expense account.
  3. C) not talk about the theft with anyone in the company.
  4. D) record fictitious payments to vendors.

Answer:  B

Concept:  The fraud triangle

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

23) 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.

Concept:  Fraud perpetrators

Objective:  Learning Objective 3

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

4   Define computer fraud and discuss the different computer fraud classifications.

 

1) Which of the following is least likely to result in computer fraud?

  1. A) Releasing data to unauthorized users.
  2. B) Allowing computer users to test software upgrades.
  3. C) Allowing computer operators full access to the computer room.
  4. D) Storing backup tapes in a location where they can be quickly accessed.

Answer:  C

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

2) How does the U.S. Justice Department define computer fraud?

  1. A) As any crime in which a computer is used.
  2. B) As any act in which cash is stolen using a computer.
  3. C) As an illegal act in which a computer is an integral part of the crime.
  4. D) As an illegal act in which knowledge of computer technology is essential.

Answer:  D

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

3) Why is computer fraud often much more difficult to detect than other types of fraud?

  1. A) Because fraud can be committed in only seconds, leaving little-to-no evidence.
  2. B) Because most perpetrators do not spend their illegal income immediately, concealing key evidence.
  3. C) Because most computer criminals are older and more cunning than perpetrators of other types of fraud.
  4. D) Because perpetrators usually only steal immaterial amounts of money at a time, requiring a long period of time to pass before discovery

Answer:  A

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

4) Why is computer fraud often more difficult to detect than other types of fraud?

  1. A) Rarely is cash stolen in computer fraud.
  2. B) The fraud may leave little or no evidence it ever happened.
  3. C) Computers provide more opportunities for fraud.
  4. D) Computer fraud perpetrators are just more clever than other types of criminals.

Answer:  B

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

 

5) Computer systems are particularly vulnerable to computer fraud because

  1. A) perpetrators can steal, destroy, or alter massive amount of data in very little time, often leaving little evidence.
  2. B) computer fraud can be much more difficult to detect than other types of fraud.
  3. C) computer programs need to be modified illegally only once for them to operate improperly for as long as they are in use.
  4. D) all of the above.

Answer:  D

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

6) Why do many computer fraud cases go unreported and unprosecuted?

  1. A) Many companies believe the adverse publicity would result in copycat fraud and a loss of customer confidence, which could cost more than the fraud itself.
  2. B) It is difficult to calculate total losses when information is stolen, websites are defaced, and viruses shut down entire computer systems.
  3. C) Because of lack of funding and skilled staff, law enforcement investigates only 1 in 15 computer crimes.
  4. D) All of the above

Answer:  D

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

 

 

7) The fraud that requires the least computer knowledge or skill involves

  1. A) altering or falsifying source data.
  2. B) unauthorized use of computers.
  3. C) tampering with or copying software.
  4. D) forging documents like paychecks.

Answer:  A

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Reflective Thinking

 

8) The simplest and most common way to commit a computer fraud is to

  1. A) alter computer input.
  2. B) alter computer output.
  3. C) modify the processing.
  4. D) corrupt the database.

Answer:  A

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

 

9) Downloading a master list of customers and selling it to a competitor is an example of

  1. A) data fraud.
  2. B) output theft.
  3. C) download fraud.
  4. D) fraudulent financial reporting.

Answer:  A

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Easy

AACSB:  Analytical Thinking

 

10) Which of the following is an example of processor fraud?

  1. A) A man used desktop publishing to prepare bills for office supplies that were never ordered or delivered and mailed them to local companies. The invoices were for less than $300, an amount that often does not require purchase orders or approvals. A high percentage of the companies paid the bills.
  2. B) Two accountants without the appropriate access rights hacked into Cisco’s stock option system, transferred over $6.3 million of Cisco stock to their brokerage accounts, and sold the stock. They used part of the funds to support an extravagant lifestyle, including a $52,000 Mercedes-Benz, a $44,000 diamond ring, and a $20,000 Rolex watch.
  3. C) The office manager of a Wall Street law firm sold information to friends and relatives about prospective mergers and acquisitions found in Word files. They made several million dollars trading the securities.
  4. D) A fraud perpetrator scanned a company paycheck, used desktop publishing software to erase

the payee and amount, and printed fictitious paychecks.

Answer:  B

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

11) Which of the following is an example of input fraud?

  1. A) A man used desktop publishing to prepare bills for office supplies that were never ordered or delivered and mailed them to local companies. The invoices were for less than $300, an amount that often does not require purchase orders or approvals. A high percentage of the companies paid the bills.
  2. B) Two accountants without the appropriate access rights hacked into Cisco’’s stock option system, transferred over $6.3 million of Cisco stock to their brokerage accounts, and sold the stock. They used part of the funds to support an extravagant lifestyle, including a $52,000 Mercedes-Benz, a $44,000 diamond ring, and a $20,000 Rolex watch.
  3. C) The office manager of a Wall Street law firm sold information to friends and relatives about prospective mergers and acquisitions found in Word files. They made several million dollars trading the securities.
  4. D) A fraud perpetrator scanned a company paycheck, used desktop publishing software to erase

the payee and amount, and printed fictitious paychecks.

Answer:  A

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

12) Which of the following is an example of data fraud?

  1. A) A man used desktop publishing to prepare bills for office supplies that were never ordered or delivered and mailed them to local companies. The invoices were for less than $300, an amount that often does not require purchase orders or approvals. A high percentage of the companies paid the bills.
  2. B) Two accountants without the appropriate access rights hacked into Cisco’’s stock option system, transferred over $6.3 million of Cisco stock to their brokerage accounts, and sold the stock. They used part of the funds to support an extravagant lifestyle, including a $52,000 Mercedes-Benz, a $44,000 diamond ring, and a $20,000 Rolex watch.
  3. C) The office manager of a Wall Street law firm sold information to friends and relatives about prospective mergers and acquisitions found in Word files. They made several million dollars trading the securities.
  4. D) A fraud perpetrator scanned a company paycheck, used desktop publishing software to erase

the payee and amount, and printed fictitious paychecks.

Answer:  C

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

13) Which of the following is an example of output fraud?

  1. A) A man used desktop publishing to prepare bills for office supplies that were never ordered or delivered and mailed them to local companies. The invoices were for less than $300, an amount that often does not require purchase orders or approvals. A high percentage of the companies paid the bills.
  2. B) Two accountants without the appropriate access rights hacked into Cisco’’s stock option system, transferred over $6.3 million of Cisco stock to their brokerage accounts, and sold the stock. They used part of the funds to support an extravagant lifestyle, including a $52,000 Mercedes-Benz, a $44,000 diamond ring, and a $20,000 Rolex watch.
  3. C) The office manager of a Wall Street law firm sold information to friends and relatives about prospective mergers and acquisitions found in Word files. They made several million dollars trading the securities.
  4. D) A fraud perpetrator scanned a company paycheck, used desktop publishing software to erase

the payee and amount, and printed fictitious paychecks.

Answer:  D

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

14) Discuss the reasons for the rapid increase of computer fraud.

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.

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Reflective Thinking

15) 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 under reporting 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.

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

16) Explain the various computer fraud classifications using the data processing model. Provide an example for each computer fraud classification.

Answer:  Computer fraud can be classified into the following categories: data fraud, input fraud, processor fraud, computer instructions fraud, and output fraud. Illegally using, copying, browsing, searching, or harming company data constitutes data fraud. The simplest and most common way to commit a computer fraud is to alter or falsify computer input. Processor fraud includes unauthorized system use, including the theft of computer time and services. Computer instructions fraud includes tampering with company software, copying software illegally, using software in an unauthorized manner, and developing software to carry out an unauthorized activity. Unless properly safeguarded, displayed or printed output can be stolen, copied, or misused. Students answer may vary depending on the examples they used.

Concept:  Computer fraud

Objective:  Learning Objective 4

Difficulty:  Challenging

AACSB:  Reflective Thinking

5   Explain how to prevent and detect computer fraud and abuse.

 

1) Most frauds are detected by

  1. A) external auditors.
  2. B) hotline tip.
  3. C) internal auditors.
  4. D) forensic accountants.

Answer:  B

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Easy

AACSB:  Analytical Thinking

 

2) Which of the following will not reduce the likelihood of an occurrence of fraud?

  1. A) Encryption of data and programs.
  2. B) Use of forensic accountants.
  3. C) Adequate insurance coverage.
  4. D) Required vacations and rotation of duties.

Answer:  C

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Easy

AACSB:  Analytical Thinking

 

 

3) The day after Christmas, Jane Olson, Chief Information Officer at American Trading Corporation (ATC), received some bad news. The hard drive use to store the company’s system data backups was lost while it was being transported to an offsite storage location. Jane 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?

  1. A) ATC has a comprehensive disaster recovery plan.
  2. B) The hard drive was encrypted and password protected.
  3. C) The shipper has insurance that will reimburse ATC for the cost of the hard drive.
  4. D) ATC has a copy of the hard drive onsite, so a new copy for storage offsite can easily be prepared.

Answer:  B

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Easy

AACSB:  Analytical Thinking

 

4) ________ is a simple, yet effective, method for catching or preventing many types of employee fraud.

  1. A) Requiring all employees to take annual vacations
  2. B) Monitoring all employees computer usage activities
  3. C) Requiring all employees to take a fraud prevention awareness course
  4. D) Explaining that fraud is illegal and will be severely punished to employees

Answer:  A

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Easy

AACSB:  Analytical Thinking

5) 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.

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

 

6) 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.

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

7) 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.

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Easy

AACSB:  Analytical Thinking

8) 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)

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Challenging

AACSB:  Reflective Thinking

 

 

9) At the beginning of this chapter, you were presented with a situation regarding Jason Scott. Jason is an internal auditor for Northwest Industries, a forest products company. On March 31, he reviewed his completed tax return and noticed that the federal income tax withholding on his final paycheck was $5 more than the amount indicated on his W-2 form.He used the W-2 amount to complete his tax return and made a note to ask the payroll department what happened to the other $5. The next day, Jason was swamped, and he dismissed the $5 difference as immaterial. On April 16, a coworker grumbled that the company had taken $5 more from his check than he was given credit for on his W-2. When Jason realized he was not the only one with the $5 discrepancy, he investigated and found that all 1,500 employees had the same $5 discrepancy. He also discovered that the W-2 of Don Hawkins, the payroll programmer, had

thousands of dollars more in withholdings reported to the Internal Revenue Service (IRS) than had been withheld from his paycheck.

 

Identify the type of fraud scheme may have happened as described. Describe controls you would implement to address the fraud risk, and label each control as preventive or detective.

Answer:  The fraud appears to be involved computer fraud. Possible controls would include:

  1. rotation of duties (primarily detective)
  2. mandatory vacations (primarily detective)
  3. surveillance (primarily detective)
  4. segregation of duties between cash handling and recording (preventive)

Students’ answer would vary depending on the type of fraud scheme they identify.

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Challenging

AACSB:  Reflective Thinking

10) Which of the following is not a way to make fraud less likely to occur?

  1. A) Adopt an organizational structure that minimizes the likelihood of fraud.
  2. B) Create an organizational culture that stresses integrity and commitment to ethical values.
  3. C) Create an audit trail so individual transactions can be traced.
  4. D) Effectively supervise employees.

Answer:  C

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

11) Which of the following is not a way to reduce fraud losses?

  1. A) Conduct periodic external and internal audits.
  2. B) Maintain adequate insurance.
  3. C) Use software to monitor system activity.
  4. D) Store backup copies of program and data files.

Answer:  A

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Moderate

AACSB:  Analytical Thinking

 

12) Which of the following is not a way to improve fraud detection?

  1. A) Install fraud detection software.
  2. B) Implement a fraud hotline.
  3. C) Employ a computer security officer.
  4. D) Implement computer-based controls over input, processing, storage, and output activities.

Answer:  D

Concept:  Fraud prevention

Objective:  Learning Objective 5

Difficulty:  Moderate

AACSB:  Analytical Thinking

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