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Accounting Information Systems, 12e (Romney/Steinbart)

Chapter 5 Computer Fraud


1) Perhaps the most striking fact about natural disasters in relation to AIS controls is that
A) many companies in one location can be seriously affected at one time by a disaster.
B) losses are absolutely unpreventable.
C) there are a large number of maor disasters every year.
!) disaster planning has largely been ignored in the literature.
Ans"er# A
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%) )hich of the follo"ing best describes lapping*
A) Applying cash receipts to a different customer+s account in an attempt to conceal previous thefts of
cash receipts.
B) Inflating bank balances by transferring money among different bank accounts.
C) Increasing e,penses to conceal that an asset "as stolen.
!) Stealing small amounts of cash- many times over a period of time.
Ans"er# A
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/) )hich of the follo"ing is the greatest risk to information systems and causes the greatest dollar
losses*
A) human errors and omissions
B) physical threats such as natural disasters
C) dishonest employees
!) fraud and embe22lement
Ans"er# A
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3) All of the follo"ing could lead to computer fraud except
A) allo"ing computer operators full access to the computer room.
B) releasing data to unauthori2ed users.
C) allo"ing computer users to test soft"are upgrades.
!) storing backup tapes in a location "here they can be 4uickly accessed.
Ans"er# A
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9) )hich of the follo"ing is not an e,ample of the fraud triangle characteristic concerned "ith easing a
fraudster+s conscience*
A) $evenge against the company
B) Sense of entitlement as compensation for receiving a lo"er than average raise
C) Intent to repay :borro"ed: funds in the future
!) Belief that the company "on+t suffer because an insurance company "ill reimburse losses
Ans"er# A
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;) 0ost fraud perpetrators are insiders because
A) insiders are more dishonest than outsiders.
B) insiders kno" more about the system and its "eaknesses than outsiders.
C) outsiders are more likely to get caught than insiders.
!) insiders have more need for money than outsiders.
Ans"er# B
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<) 0ost frauds are detected by
A) e,ternal auditors.
B) internal auditors.
C) accident.
!) hotline tip.
Ans"er# !
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.) Amy "ants to open a floral shop in a do"nto"n business district. She doesn+t have funds enough to
purchase inventory and pay si, months rent up front. Amy approaches a good friend- Coleen- to discuss
the possibility of Coleen investing funds and becoming a %9= partner in the business. After a lengthy
discussion Coleen agrees to invest. (ight months later- Coleen and Amy have a falling out. In order for
Coleen to sue Amy for fraud- all the follo"ing must be true except
A) Amy told Coleen she had "orked at a floral shop for several years- "hen in fact she did not have any
prior e,perience in floral retail.
B) Coleen+s decision to invest "as primarily based on Amy+s assertion that she had prior floral retail
e,perience.
C) Coleen+s %9= share of the business is "orth substantially less than her initial investment.
!) Before Coleen invested- Amy prepared a detailed business plan and sales forecasts- and provided
Coleen "ith copies.
Ans"er# !
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>) Perpetrators of theft of company assets typically e,hibit all the follo"ing characteristics except that
they
A) attempt to return or pay back stolen amounts soon after the initial theft- but find they are unable to
make full restitution.
B) use trickery or lies to gain the confidence and trust of others at the organi2ation they defraud.
C) become bolder and more greedy the longer the theft remains undetected.
!) begin to rely on stolen amounts as part of their income.
Ans"er# A
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17) :Cooking the books: is typically accomplished by all the follo"ing except
A) inflating accounts payable.
B) accelerating recognition of revenue.
C) delaying recording of e,penses.
!) overstating inventory.
Ans"er# A
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11) SAS ?o. >> re4uires that auditors
A) plan audits based on an analysis of fraud risk.
B) detect all material fraud.
C) alert the Securities and (,change Commission of any fraud detected.
!) take all of the above actions.
Ans"er# A
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1%) )hich of the follo"ing is not a management characteristic that increases pressure to commit
fraudulent financial reporting*
A) Close relationship "ith the current audit engagement partner and manager
B) Pay for performance incentives based on short5term performance measures
C) 8igh management and employee turnover
!) 8ighly optimistic earnings proections
Ans"er# A
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1/) Intentional or reckless conduct that results in materially misleading financial statements is called
A) financial fraud.
B) misstatement fraud.
C) fraudulent financial reporting.
!) audit failure fraud.
Ans"er# C
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13) $esearchers have compared the psychological and demographic characteristics of "hite5collar
criminals- violent criminals- and the general public. 1hey found that
A) fe" differences e,ist bet"een "hite5collar criminals and the general public.
B) "hite5collar criminals eventually become violent criminals.
C) most "hite5collar criminals invest their illegal income rather than spend it.
!) most "hite5collar criminals are older and not technologically proficient.
Ans"er# A
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19) )hich of the follo"ing is an opportunity that could contribute to employee fraud*
A) an employee+s spouse loses their ob
B) an employee suddenly ac4uires lots of credit cards
C) an employee is upset that he "as passed over for a promotion
!) close association "ith suppliers or customers
Ans"er# !
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1;) )hich of the follo"ing is a financial pressure that could cause an employee to commit fraud*
A) a feeling of not being appreciated
B) failing to receive a deserved promotion
C) believing that their pay is too lo" relative to others around them
!) having a spouse inured in a car accident and in the hospital for several "eeks
Ans"er# !
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1<) &pportunity to commit fraud is comprised of three stages. 1he stage that often takes most time and
effort "ould include
A) stealing inventory from the "arehouse.
B) selling stolen inventory to get cash.
C) lapping accounts receivable.
!) creating false ournal entries to overstate revenue.
Ans"er# C
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1.) In many cases of fraud- the @@@@@@@@ takes more time and effort than the @@@@@@@@.
A) concealmentA theft
B) theftA concealment
C) conversionA theft
!) conversionA concealment
Ans"er# A
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1>) )hich of the follo"ing is the best "ay to hide theft of assets*
A) Creating :cash: through the transfer of money bet"een banks
B) Conversion of stolen assets into cash
C) Stealing cash from customer A and then using customer B+s balance to pay customer A+s accounts
receivable
!) Charging the stolen asset to an e,pense account
Ans"er# !
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%7) In a @@@@@@@@ scheme- customer receipts are stolen and then subse4uent payments by other
customers are misapplied to cover the theft of the original receipts.
A) kiting
B) laundering
C) bogus e,pense
!) lapping
Ans"er# !
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%1) &ne fraudulent scheme covers up a theft by creating cash through the transfer of money bet"een
banks. 1his is kno"n as
A) lapping.
B) misappropriation of assets.
C) kiting.
!) concealment.
Ans"er# C
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%%) )hich characteristic of the fraud triangle often stems from a lack of internal controls "ithin an
organi2ation*
A) pressure
B) opportunity
C) rationali2ation
!) concealment
Ans"er# B
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%/) )hich situation belo" makes it easy for someone to commit a fraud*
A) placing e,cessive trust in key employees
B) inade4uate staffing "ithin the organi2ation
C) unclear company policies
!) All of the above situations make it easy for someone to commit a fraud.
Ans"er# !
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%3) )hat is the most prevalent opportunity "ithin most companies to commit fraud*
A) lack of any internal controls
B) failure to enforce the internal controls
C) loopholes in the design of internal controls
!) management+s failure to believe employees "ould commit fraud
Ans"er# B
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%9) )hich characteristic of the fraud triangle relates to e,cuses that perpetrators use to ustify their
illegal behavior*
A) pressure
B) opportunity
C) rationali2ation
!) concealment
Ans"er# C
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%;) 1he BS Custice !epartment defines computer fraud as
A) any crime in "hich a computer is used.
B) an illegal act in "hich kno"ledge of computer technology is essential.
C) any act in "hich cash is stolen using a computer.
!) an illegal act in "hich a computer is an integral part of the crime.
Ans"er# B
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%<) 1he most efficient "ay to conceal asset misappropriation is to
A) "rite5off a customer receivable as bad debt.
B) alter monthly bank statements before reconciliation.
C) alter monthly physical inventory counts to reconcile to perpetual inventory records.
!) record phony payments to vendors.
Ans"er# A
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%.) Computer fraud is often much more difficult to detect than other types of fraud because
A) perpetrators usually only steal very small amounts of money at a time- thus re4uiring a long period of
time to have elapsed before they+re discovered.
B) massive fraud can be committed in only seconds- leaving little or no evidence.
C) most perpetrators invest their illegal income rather than spend it- thus concealing key evidence.
!) most computer criminals are older and are considered to be more cunning "hen committing such a
fraud.
Ans"er# B
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%>) )hy is computer fraud often more difficult to detect than other types of fraud*
A) $arely is cash stolen in computer fraud.
B) 1he fraud may leave little or no evidence it ever happened.
C) Computers provide more opportunities for fraud.
!) Computer fraud perpetrators are ust more clever than other types of criminals.
Ans"er# B
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/7) )hy do many fraud cases go unreported and unprosecuted*
A) 0aor fraud is a public relations nightmare.
B) Draud is difficult- costly- and time5consuming to investigate and prosecute.
C) 'a" enforcement and the courts are often so busy "ith violent crimes that little time is left for fraud
cases.
!) all of the above
Ans"er# !
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/1) 1he fraud that re4uires the least computer kno"ledge or skill involves
A) altering or falsifying source data.
B) unauthori2ed use of computers.
C) tampering "ith or copying soft"are.
!) forging documents like paychecks.
Ans"er# A
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/%) 1he simplest and most common "ay to commit a computer fraud is to
A) alter computer input.
B) alter computer output.
C) modify the processing.
!) corrupt the database.
Ans"er# A
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//) !o"nloading a master list of customers and selling it to a competitor is an e,ample of
A) data fraud.
B) output theft.
C) do"nload fraud.
!) fraudulent financial reporting.
Ans"er# A
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/3) )hich of the follo"ing "ill not reduce the likelihood of an occurrence of fraud*
A) encryption of data and programs
B) use of forensic accountants
C) ade4uate insurance coverage
!) re4uired vacations and rotation of duties
Ans"er# C
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/9) )hich of the follo"ing is not an e,ample of one of the basic types of fraud*
A) )hile straightening the store at the end of the day- a shoe store employee finds and keeps an
e,pensive pair of sunglasses left by a customer.
B) An e,ecutive devised and implemented a plan to accelerate revenue recognition on a long5term
contract- "hich "ill allo" the company to forestall filing for bankruptcy. 1he e,ecutive does not o"n
any stock- stock options or grants- and "ill not receive a bonus or perk because of the overstated
revenue.
C) A purchasing agent places a large order at higher5than5normal unit prices "ith a vendor that gave the
agent tickets to several football games.
!) A salesperson approves a large sales discount on an order from a company o"ned partially by the
salesperson+s sister.
Ans"er# A
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/;) &n 0onday morning- Canet Pillsner- Chief Information &fficer at International Securities
Corporation EISC)- got some bad ne"s. A tape used to store system data backups "as lost "hile it "as
being transported to an offsite storage location. She called a meeting of her technical staff to discuss the
implications of the loss. )hich of the follo"ing is most likely to relieve her concerns over the potential
cost of the loss*
A) 1he shipper has insurance that "ill reimburse ISC for the cost of the tape.
B) ISC has a copy of the tape onsite- so a ne" copy for storage offsite can easily be prepared.
C) 1he tape "as encrypted and pass"ord protected.
!) ISC has a comprehensive disaster recovery plan.
Ans"er# C
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/<) A simple method for catching or preventing many types of employee fraud is to
A) monitor all employee behavior using video cameras.
B) re4uire all employees to take annual vacations.
C) e,plain to employees that fraud is illegal and that it "ill be severely punished.
!) monitor employee bank accounts and net "orth.
Ans"er# B
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/.) !escribe t"o kinds of fraud.
Ans"er# 0isappropriation of assets- or theft- by a person or group for personal financial gain is usually
committed by employees. Draudulent financial reporting is intentional or reckless conduct that results in
materially misleading financial statements.
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/>) )hat are the actions recommended by the 1read"ay Commission to reduce the possibility of
fraudulent financial reporting*
Ans"er# (stablish an organi2ational 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 "ithin the company. !esign and implement internal controls to
provide reasonable assurance that the fraudulent financial reporting is prevented.
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37) (,plain the impact of SAS ?o. >> on auditors+ responsibilities.
Ans"er# SAS ?o. >>- effective !ecember %77%- re4uires that auditors e,plicitly consider fraud risks
"hen planning and performing an audit. Auditors must understand types and characteristics of fraud.
Audit teams must revie" clients+ financial statements for areas susceptible to fraud and communicate
"ith 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 e,ercise special care and testing in e,amining 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 recogni2e the impact of technology on fraud risks- as "ell as opportunities
technology may provide to design fraud5auditing procedures.
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31) )hy is computer fraud on the rise*
Ans"er# ?ot everyone agrees on "hat constitutes computer fraud and some people may commit
computer fraud un"ittingly and not be a"are of it. 0any computer frauds go undetected. 1he belief that
:it ust can+t happen to us.: 0ost net"orks have a lo" level of security. 0any Internet sites provide
guidance on ho" to commit computer crimes. 'a" enforcement is unable to keep up "ith the number of
computer frauds. 0ost frauds are not reported. 1he total dollar value of losses is difficult to calculate.
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3%) !escribe at least four "ays a company can make fraud less likely to occur.
Ans"er# A company can decrease fraud by# good hiring and firing practicesA good management of
unhappy employeesA training in fraud a"arenessA manage and track computer licensesA implement
signed confidentiality agreementsA maintain visible securityA educate the "orkforce in ethics and the
penalties for illegal acts.
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3/) !escribe four "ays companies can reduce losses from fraud.
Ans"er# 0aintain ade4uate insurance. Feep a current backup copy of all program and data files in a
secure off5site location. !evelop a contingency plan for fraud occurrences and other disasters that might
occur. Bse special soft"are designed to monitor system activity and help companies recover from frauds
and malicious actions.
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33) )hat are some of the distinguishing characteristics of fraud perpetrators*
Ans"er# Some distinguishing characteristics of fraud perpetrators are# they tend to spend their illegal
income to support their lifestyleA once they begin it becomes harder to stop and they become bolder as
each incident happensA once they start to rely on the ill5gotten gains- they become more greedy and
sometimes careless and overconfident. In the case of computer criminals- they are often young and have
substantial computer kno"ledge. About t"o5thirds are men and likely to be an employee of the firm
from "hich they steal. 0any are unhappy or disgruntled "ith their employer because they feel
unappreciated and underpaid. 0ost have no previous criminal record.
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39) )hy do fraudulent acts often go unreported and are therefore not prosecuted*
Ans"er# 0ost fraud cases go unreported and are not prosecuted for several reasons. 0any cases of
computer fraud are as yet still undetected. As ne" technology and methods become available to
organi2ations- 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 publicitya highly visible
case can undermine consumer confidence in an organi2ation 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
organi2ation. It "ould 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 la" enforcement is busy "ith violent crimes and criminals in its system.
1here is little time left to go after a crime "here no physical harm is present. Also- the court system
tends to treat teen hacking and cracking as :acts of childhood: rather than as serious crimesthis leads
to many plea bargains "hen a computer fraud is brought to trial. Another reason is that a computer fraud
case is difficult- costly- and time5consuming to investigate and prosecute. Before 1>.; no federal la"
e,isted governing computer fraud. 'a" enforcement officials- la"yers- and udges generally lack the
computer skills necessary to properly evaluate- investigate- and prosecute computer crimes. Sadly- "hen
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 underreporting and lack of prosecution of computer fraud
crimes. ?ot everyone agrees on "hat constitutes computer fraud#
G 0any net"orks have a lo" level of security
G 0any Internet pages give instruction on ho" to carry out computer crimes
G 'a" enforcement has difficulty keep up "ith the gro"ing number of computer frauds
G 1he total dollar value of losses from computer fraud is difficult to estimate.
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3;) A teller at a savings and loan drive5through accepted a cash payment from customer H1 for an auto
loan. 1he teller appeared to process the payment- but told the customer the printer "as ammed and she
can+t print a receipt. 1he customer accepted the e,cuse and drove a"ay. 1he teller pocketed the cash and
"rote do"n customer H1+s loan number and payment amount for future reconciling. A couple of days
before customer H1+s monthly statement "as printed- the teller recorded a cash payment from customer
H% as if it "ere made by customer H1. 1he teller pocketed the difference bet"een the t"o payments. 1he
teller continued to steal and misapply customer payments for the ne,t t"o years "ithout detection.
Identify the type of fraud scheme described. !escribe five controls you "ould implement to address the
fraud risk- and label each control as preventive or detective.
Ans"er# 1he fraud appears to be misappropriation of assets that is being concealed "ith a lapping
scheme. Controls "ould include#
1. rotation of duties Eprimarily detective)
%. mandatory vacations Eprimarily detective)
/. surveillance "ith cameras Eprimarily detective)
3. staggered statement printing schedules- unkno"n to tellers Edetective)
9. se4uentially prenumbered- duplicate receipts Edetective)
;. segregation of duties bet"een cash handling and recording Epreventive)
<. encourage customers to utili2e on5line banking for loan payments and to fre4uently check balances
Edetective)
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