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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.

ANS: T PTS: 1

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.

ANS: F PTS: 1

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

ANS: T PTS: 1

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.

ANS: F PTS: 1

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.

ANS: F PTS: 1

6. Computer programs are intellectual property.

ANS: T PTS: 1

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

ANS: F PTS: 1

8. Business bankruptcy cases always involve fraudulent behavior.

ANS: F PTS: 1

9. Defalcation is another word for financial fraud.

ANS: T PTS: 1

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

ANS: T PTS: 1

11. Of the three fraud factors (situational pressure, ethics, and opportunity),
situational pressure is the factor that actually facilitates the act.
ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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


but easy to detect.

ANS: F PTS: 1

15. Database management fraud includes altering, updating, and


deleting an organization’s data.

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1
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.

ANS: T PTS: 1

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.

ANS: F PTS: 1

24. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of


fraud into all phases of the audit process.

ANS: T PTS: 1

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?
a. minimize risk
b. justice
c. informed consent
d. proportionality
ANS: D PTS: 1

2. Individuals who acquire some level of skill and knowledge in the field of
computer ethics are involved in which level of computer ethics?
a. para computer ethics
b. pop computer ethics
c. theoretical computer ethics
d. practical computer ethics
ANS: A PTS: 1

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


a. Ethical behavior of an individual
b. Pressure exerted on an individual at home and job related
c. Materiality of the assets
d. Opportunity to gain access to assets
ANS: C PTS: 1

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


a. uniqueness of the product
b. possibility of exact replication
c. automated monitoring to detect intruders
d. ease of dissemination
ANS: C PTS: 1

5. For an action to be called fraudulent, all of the following conditions are required
except
a. poor judgment
b. false representation
c. intent to deceive
d. injury or loss
ANS: A PTS: 1

6. One characteristic of employee fraud is that the fraud


a. is perpetrated at a level to which internal controls do not apply
b. involves misstating financial statements
c. involves the direct conversion of cash or other assets to the employee’s personal benefit
d. involves misappropriating assets in a series of complex transactions involving third parties
ANS: C PTS: 1

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


a. a gambling addiction
b. lack of segregation of duties
c. centralized decision making environment
d. questionable integrity of employees
ANS: C PTS: 1

8. Which of the following best describes lapping?


a. applying cash receipts to a different customer’s account in an attempt to conceal previous
thefts of funds
b. inflating bank balances by transferring money among different bank accounts
c. expensing an asset that has been stolen
d. creating a false transaction
ANS: A PTS: 1

9. Skimming involves
a. stealing cash from an organizaon before it is recorded
b. Stealing cash from an organizaon aer it has been recorded
c. manufacturing false purchase orders, receiving reports, and invoices
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: A PTS: 1

10. Which of the following controls would best prevent the lapping of accounts
receivable?
a. Segregate duties so that the clerk responsible for recording in the accounts receivable
subsidiary ledger has no access to the general ledger.
b. Request that customers review their monthly statements and report any unrecorded
cash payments.
c. Require customers to send payments directly to the company’s bank.
d. Request that customers make the check payable to the company.
ANS: C PTS: 1

11. In balancing the risks and benefits that are part of every ethical decision,
managers receive guidance from each of the following except
a. justice
b. self interest
c. risk minimization
d. proportionality
ANS: B PTS: 1

12. Cash larceny involves


a. stealing cash from an organizaon before it is recorded
b. Stealing cash from an organizaon aer it has been recorded
c. manufacturing false purchase orders, receiving reports, and invoices
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: B PTS: 1

13. Employee fraud involves three steps. Of the following, which is not involved?
a. concealing the crime to avoid detection
b. stealing something of value
c. misstating financial statements
d. converting the asset to a usable form
ANS: C PTS: 1

14. What fraud scheme is similar to the “borrowing from Peter to pay Paul” scheme?

a. expense account fraud


b. kiting
c. lapping
d. transaction fraud
ANS: C PTS: 1

15. A shell company fraud involves


a. stealing cash from an organizaon before it is recorded
b. Stealing cash from an organizaon aer it has been recorded
c. manufacturing false purchase orders, receiving reports, and invoices
d. A clerk pays a vendor twice for the same products and cashes the reimbursement check
issued by the vendor.

ANS: C PTS: 1
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?
a. segregation of duties
b. accounting records
c. accounting system
d. access controls
ANS: A PTS: 1

17. Business ethics involves


a. how managers decide on what is right in conducting business
b. how managers achieve what they decide is right for the business
c. both a and b
d. none of the above
ANS: C PTS: 1

18. All of the following are conditions for fraud except


a. false representation
b. injury or loss
c. intent
d. material reliance
ANS: D PTS: 1

19. The four principal types of fraud include all of the following except
a. bribery
b. gratuities
c. conflict of interest
d. economic extortion
ANS: B PTS: 1

20. Which of the following is not an issue to be addressed in a business code of


ethics required by the SEC?
a. Conflicts of interest
b. Full and Fair Disclosures
c. Legal Compliance
d. Internal Reporting of Code Violations
e. All of the above are issues to be addressed
ANS: E PTS: 1

21. Operations fraud includes


a. altering program logic to cause the application to process data incorrectly
b. misusing the firm’s computer resources
c. destroying or corrupting a program’s logic using a computer virus
d. creating illegal programs that can access data files to alter, delete, or insert values
ANS: B PTS: 1
22. Computer fraud can take on many forms, including each of the following except
a. theft or illegal use of computer-readable information
b. theft, misuse, or misappropriation of computer equipment
c. theft, misuse, or misappropriation of assets by altering computer-readable records and files
d. theft, misuse, or misappropriation of printer supplies
ANS: D PTS: 1

23. What does the underlying assumption of reasonable assurance regarding


implementation of internal control mean?
a. Auditor’s are reasonably assured that fraud has not occurred in the period.
b. Auditor’s are reasonably assured that employee carelessness can weaken an
internal control structure.
c. Implementation of the control procedure should not have a significant adverse effect on
efficiency or profitability.
d. Management assertions about control effectiveness should provide auditors with reasonable

assurance.

ANS: C PTS: 1

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