Harvard University

AUDIT 111

Chapter 12-Business Ethics, Fraud, and Fraud Detection

TRUE/FALSE

1)The ethical principle of justice asserts that the benefits of the decision should be distributed fairly to those who share the risks.

2. The ethical principle of informed consent suggests that the decision should be implemented so as to minimize all of the risks and to avoid any unnecessary risks.

3. Employees should be made aware of the firm’s commitment to ethics.

4. Business ethics is the analysis of the nature and social impact of computer technology, and the corresponding formulation and justification of policies for the ethical use of such technology.

5. Para computer ethics is the exposure to stories and reports found in the popular media regarding the good or bad ramifications of computer technology.

6. Computer programs are intellectual property.

7. Copyright laws and computer industry standards have been developed jointly and rarely conflict.

8. Business bankruptcy cases always involve fraudulent behavior.

9. Defalcation is another word for financial fraud.

10. The trend toward distributed data processing increases the exposure to fraud from remote locations.

11. Of the three fraud factors (situational pressure, ethics, and opportunity), situational pressure is the factor that actually facilitates the act.

12. Ethical issues and legal issues are essentially the same.

13. Internal control systems are recommended but not required to prevent fraud.

14. Collusion among employees in the commission of a fraud is difficult to prevent but easy to detect.

15. Database management fraud includes altering, updating, and deleting an organization’s data.

16. The fraud triangle represents a geographic area in Southeast Asia where international fraud is prevalent.

17. Situational pressure includes personal or job related stresses that could coerce an individual to act dishonestly.

18. Opportunity involves direct access to assets and/or access to information that controls

assets.

19. Cash larceny involves stealing cash from an organization before it is recorded on the organiza- tion’s books and records.

20. Skimming involves stealing cash from an organization after it is recorded on the organization’s books and records

21. The most common access point for perpetrating computer fraud is at the data collection stage.

22. Changing the Hours Worked field in an otherwise legitimate payroll transaction to increase the amount of the paycheck is an example of data collection fraud.

23. Scavenging is a form of fraud in which the perpetrator uses a computer program to search for key terms in a database and then steal the data.

24. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all phases of the audit process.

MULTIPLE CHOICE

1. Which ethical principle states that the benefit from a decision must outweigh the risks, and that there is no alternative decision that provides the same or greater benefit with less risk?

2. Individuals who acquire some level of skill and knowledge in the field of computer ethics are involved in which level of computer ethics?

3. All of the following are factors in the fraud triangle except

4. Which characteristic is not associated with software as intellectual property?

5. For an action to be called fraudulent, all of the following conditions are required

except

6. One characteristic of employee fraud is that the fraud

7. Forces which may permit fraud to occur do not include

8. Which of the following best describes lapping?

9. Skimming involves

10. Which of the following controls would best prevent the lapping of accounts receivable?

1. Segregate duties so that the clerk responsible for recording in the accounts receivable subsidiary ledger has no access to the general ledger.
2. Request that customers review their monthly statements and report any unrecorded cash                payments.
3. Require customers to send payments directly to the company’s bank.
4. Request that customers make the check payable to the company.

11. In balancing the risks and benefits that are part of every ethical decision, managers receive guidance from each of the following except

12. Cash larceny involves

13. Employee fraud involves three steps. Of the following, which is not involved?

14. What fraud scheme is similar to the “borrowing from Peter to pay Paul” scheme?
    1. expense account fraud
    2. kiting
    3. lapping
    4. transaction fraud

15. A shell company fraud involves

16. When certain customers made cash payments to reduce their accounts receivable, the bookkeeper embezzled the cash and wrote off the accounts as uncollectible. Which control procedure would most likely prevent this irregularity?

17. Business ethics involves

18. All of the following are conditions for fraud except

19. The four principal types of fraud include all of the following except

20. Which of the following is not an issue to be addressed in a business code of ethics required by the SEC?

21. Operations fraud includes

22. Computer fraud can take on many forms, including each of the following except

23. What does the underlying assumption of reasonable assurance regarding implementation of internal control mean?
    1. Auditor’s are reasonably assured that fraud has not occurred in the period.
    2. Auditor’s are reasonably assured that employee carelessness can weaken an internal control structure.
    3. Implementation of the control procedure should not have a significant adverse effect on efficiency                or profitability.
    4. Management assertions about control effectiveness should provide auditors with reasonable assurance.

24. The importance to the accounting profession of the Sarbanes-Oxley Act of 2002 is that
    1. bribery will be eliminated.
    2. management will not be able to override the company’s internal controls.
    3. firms are required to have an effective internal control system.
    4. firms will not be exposed to lawsuits.

SHORT ANSWER

1. 1. 1. What are the main issues to be addressed in a business code of ethics required by the

SEC?

1. 1. 2. What are the five conditions necessary for an act to be considered fraudulent?

1. 1. 3. What is the objective of SAS 99?

1. 1. 4. Distinguish between exposure and risk.

1. 1. 5. Explain the characteristics of management fraud.

1. 1. 6.                                                                 are intentional mistakes while

                                                                are unintentional mistakes.

1. 1. 7. The text discusses many questions about personal traits of executives which might help uncover fraudulent activity. What are three?

1. 1. 8. Give two examples of employee fraud and explain how the theft might occur.

1. 1. 9. What are the six broad classes of physical control activities defined by SAS

78?

1. 1. 10. Explain the pass through fraud.

1. 1. 11. Explain the Pay and Return scheme.

1. 1. 12. What is check tampering?

1. 1. 13. What is program fraud?

1. 1. 14. Explain the shell company fraud.

1. 1. 15. Name three forms of computer fraud.

1. 1. 16. Name three types of program fraud.

1. 1. 17. Define operational fraud.

1. 1. 18. Define database management fraud.

1. 1. 19. What is scavenging?

1. 1. 20. As a form of computer fraud, what is eavesdropping?

ESSAY

1. What fraud detection responsibilities (if any) are imposed on auditors by the Sarbanes- Oxley Act?

2. Contrast management fraud with employee fraud.

3. Why are the computer ethics issues of privacy, security, and property ownership of interest to accountants?

4. According to common law, there are five conditions that must be present for an act to be deemed fraudulent. Name and explain each.

5. Management fraud is regarded as more serious than employee fraud. Three special characteristics have been discussed for management fraud. What are they? Explain.

6. Four principal types of corruption are discussed. Name all four and explain at least

two.