Financial Forensics
Midterm Exam
Course Introduction
Financial Forensics is a specialized course that explores the application of accounting, auditing, and investigative skills to examine financial records for evidence of fraud, embezzlement, and other financial crimes. Students will learn how to detect, analyze, and document financial discrepancies, utilizing techniques such as forensic auditing, data analysis, and litigation support. The course covers key topics including forensic accounting methodologies, legal aspects of financial investigations, ethics in financial forensics, and the role of expert witnesses in legal proceedings. Through case studies and practical exercises, students gain the skills necessary to critically evaluate financial information and support the resolution of disputes involving financial matters.
Recommended Textbook Forensic Accounting and Fraud Examination 2nd Edition by William S. Hopwood
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Page 2
Chapter 1: Introduction to Forensic Accounting and Fraud Examination
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Q1) What types of organizations offer credentials to forensic accountants?
A) Association of Certified Fraud Examiners.
B) American College of Forensic Examiners.
C) Institute of Business Appraisers.
D) All of the above.
Answer: D
Q2) What does credentialing mean?
Answer: Some of the organizations that support forensic accounting will evaluate the forensic accountant's knowledge and experience based upon education, time in the field and written examinations. These organizations will then issue a credential based upon these criteria. This is similar to the CPA credential.
Q3) How is defalcation different from misrepresentation?
Answer: The appropriation of assets for the benefit of those who do not rightfully deserve them, whereas the act of presenting oneself in a manner that does not agree with reality.
Q4) It is possible to hold credentials as a forensic accountant.
A)True
B)False
Answer: True
3
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Chapter 2: The Forensic Accounting Legal Environment
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Q1) The Foreign Corrupt Practices Act is applicable to whom?
A) United States Congressmen.
B) U.S. Corporations who do businesses in other country.
C) Any corporation.
D) All of the above.
Answer: C
Q2) If an employee is determined to have been under pressure to commit the crime, had the opportunity to commit the crime and has complete rationalization for committing the crime, then the employee is caught in a(n):
A) Evidentiary motion.
B) Sworn statement.
C) Fraud triangle.
D) Fruit of the poisonous tree.
Answer: C
Q3) The three elements of the Fraud Triangle are Pressure, Opportunity, and Rationalization.
A)True
B)False
Answer: True
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Chapter 3: Fundamentals I: Accounting Information Systems
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Q1) Ethics and corporate culture, management philosophy and operating style and an effective and independent audit committee are all part of which internal control component?
A) Information and communication.
B) Monitoring.
C) Control activities.
D) Control environment.
Answer: D
Q2) The four transaction cycles Financial Supply Chain Management, Procurement and Inbound/Outbound Logistics, Product Manufacturing and Deployment and Sales and Service are a part of:
A) the principles of internal control.
B) the SAP modules.
C) the Just in Time inventory model.
D) total quality management.
Answer: B
Q3) Audit work is primarily concerned with cash reconciliation.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Fundamentals II: The Auditing Environment
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Q1) What are the seven evidence gathering procedures?
Q2) There are no standard setting boards for auditors as their trade is more of an art than a specific science.
A)True
B)False
Q3) Auditing is the process of:
A) Developing internal controls.
B) Testing internal controls.
C) Gathering and evaluating evidence.
D) Proving standards of SOX 2002 are upheld.
Q4) If auditors work together on areas of a report, they must disclose this in the report.
A)True
B)False
Q5) What is an estimation of misstatement and comparison to tolerable misstatement?
Q6) All auditors are regulated by the SEC as given authority by SOX 2002.
A)True
B)False
Q7) Compare and contrast sampling for risk and sampling for attributes.
Q8) What does the model ADR = AAR/(IR x CR) represent?
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Chapter 5: Fraud Prevention and Risk Management
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Q1) Some Information security assurances involve organizations such as Local, state, national and international governments and organizations, Organizational policy makers (e.g., for policies relating to security, personnel, procurement, and marketing) and End users (including consumer and business users).
A)True
B)False
Q2) The normal approach to penetration testing is to attempt to exploit all possible vulnerabilities.
A)True
B)False
Q3) How can an organization have some type evidence-based assertion that increases one's certainty that a security-related deliverable can withstand specified security threats?
A) Through Risk Analysis Matrix.
B) Through Information security assurance (ISA).
C) Through Internal Controls.
D) Through hiring hackers to test the system.
Q4) Who are some types of individuals posing active and passive threats?
Q5) How is Information Security Assurance achieved?
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Chapter 6: Fraud Detection
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Q1) ERM stands for:
A) Electronic Risk Measurements.
B) Environmentally Resilient Management
C) Enabled Rick Management.
D) Enterprise Risk Management.
Q2) Where are fraud discovery personnel assigned within an organization?
A) Within the customer service department.
B) Within the Human Resources department.
C) As their own department, operating independently.
D) Within any department that typically has the highest risk for fraud
Q3) Fraud discovery departments are typically assigned to the HR Director.
FALSE
A)True
B)False
Q4) Tip and fraud hotlines only help catch fraud.
A)True
B)False
Q5) Explain Benford's Analysis and how you might use it to detect fraud.
Q6) Explain how fraud detection relates to enterprise risk management.
Q7) Explain how a detection of fraud may not necessarily mean that fraud exists.
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Chapter 7: The Fraud Investigation and Engagement
Processes
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Q1) If the investigator is attempting to prove that a given fraud theory is correct but also attempting to prove that it is not correct, he is engaging in:
A) Double Jeopardy
B) Proving beyond a reasonable doubt
C) Double crossing
D) Reverse proof
Q2) The reporting process involves:
A) Video recording and summarizing the results of the fraud investigation.
B) Documenting and summarizing the results of the civil litigation.
C) Documenting and summarizing the results of the fraud investigation.
D) A formal out brief to the Executives of the Corporation outlining the fraud discovered.
Q3) There is a Constitutional Amendment that requires law enforcement to investigate all fraud allegations.
A)True
B)False
Q4) Within the interview process, explain the steps involved and if the interviews should begin or end with those farthest away from the fraud.
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Chapter 8: The Evidence Collection Process
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Q1) The "who" of a fraud scheme are:
A) The possible locations of the fraud.
B) The general functional area or position.
C) The conditions present to commit the fraud.
D) The mechanisms of the fraud.
Q2) The principle of predication dictates that there must be a reasonable justification for each step in the evidence collection process.
A)True
B)False
Q3) The "how" of a fraud investigation are the conditions surrounding the fraud.
A)True
B)False
Q4) Almost all ongoing frauds schemes, no matter how sophisticated, have one weakness in common:
A) The perpetrator is subject to being caught in the act.
B) The fraud can be detected through financial statement analysis.
C) The burden of proof is on the fraudster.
D) Law enforcement can arrest the fraudster at anytime.
Q5) Outline the steps in the evidence collection process
Q6) Explain and give examples of the use of a fraud theory.
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Chapter 9: Fraud Examination Evidence I: Physical,
Documentary, and Observational Evidence
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Q1) If skimming has been in practice for years in a business, why might it be hard to detect using horizontal analysis?
A) Comparing a year in which receipts have been skimmed to other years in which. receipts have been skimmed will usually not reveal differences.
B) Horizontal analysis is typically performed in industries that have high skimming rates.
C) Gross margins for the industry typically won't reveal any fraud when evaluated via Horizontal analysis.
D) Skimming typically is revealed on the income statement and horizontal analysis is only done on balance sheet accounts.
Q2) Two common approaches to using ratio analysis are:
A) Internal and external.
B) Horizontal and vertical.
C) Formal and informal.
D) Industry and general.
Q3) Provide at least three examples of both private and public databases.
Q4) Contrast auditing approaches for cases of financial statement fraud versus other types of fraud.
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Chapter 10: Fraud Examination Evidence II: Interview and Interrogation Methods
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Q1) When seeking an admission to a fraud, the interviewer will often make a direct accusation if the interviewer is almost certain the subject has committed the offense.
A)True
B)False
Q2) Eye movements during an interview or interrogation means:
A) The subject is visually, or light oriented.
B) The subject is touch oriented.
C) The subject is feeling guilt associated with the question asked.
D) They are trying to recall memories that do not exist.
Q3) The signed confession should be a(n) _______________ regarding the guilt of the perpetrator.
A) Concise statement
B) Detailed account of the amount of fraud that has occurred.
C) Full statement recalling every time the fraud incurred.
D) Sleuth's response answering all the questions of who, what, when, where, why and how.
Q4) During an interview, acting angry is the same as being angry.
A)True
B)False
Page 12
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Chapter 11: Fraud Examination Evidence III: Forensic Science and Computer Forensics
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Q1) What type of information should a forensic accountant keep in their log of activities when dealing with computers?
A) names, dates, times, and computer serial numbers.
B) names, programs used and items found.
C) computer serial numbers, network types used and viruses found.
D) all of the above.
Q2) In which of the following types of crimes can computer forensics be used?
A) Terrorism.
B) destruction of data.
C) murder.
D) all of the above.
Q3) Why must criminalists and forensic accountants work together at some crime scenes?
A) FASB has published a statement regarding their working together.
B) Sometimes a criminal may arson a building to cover up a financial crime.
C) Insurance companies require a financial audit if arson is expected.
D) Only criminalists are allowed into a crime scene and must gather evidence for the forensic accountant.
Q4) What does computer forensics involve?
Q5) How does a forensic scientist establish forensic identification?
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Chapter 12: The Fraud Report, Litigation, and the Recovery Process
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Q1) If an employer fires an employee for fraud, what might that employee do?
A) Continue their fraud from outside the company.
B) Sue for wrongful termination of employment, defamation, or discrimination.
C) Start a bad PR campaign in the news against the company.
D) Be hired by a competitor.
Q2) If the fraud involves payroll taxes collected for submission to the IRS, it is referred to as:
A) Trust liability taxes.
B) Pass through taxes.
C) Withholding entity taxes
D) Trust fund taxes.
Q3) Instead of firing an employee, an employer may provide them with excellent references to obtain a new job.
A)True
B)False
Q4) Explain the different uses of fraud investigation reports
Q5) A fraud investigation report can sometimes be more helpful in ruling out fraud than in ruling it in.
A)True
B)False
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Chapter 13: Employee, Vendor, and Other Frauds Against the Organization
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Q1) An employee is authorizing refund checks without any supporting documentation. This is an example of:
A) Accounts receivable fraud.
B) Expenditure cycle fraud.
C) Custodial theft of money.
D) Lapping of accounts receivables.
Q2) How do encrypted files store temporary data in memory?
A) In an encrypted format.
B) In an unencrypted format.
C) Encrypted files do not use temporary memory.
D) Encrypted files use a special encrypted memory chip.
Q3) Describe at least two methods that vendors could use to fraud a company.
Q4) Why is input manipulation such a nightmare to prove?
A) A false audit trail could be created to point toward another employee.
B) The user could be inputting under another person's credentials.
C) The user could erase their audit trail in the accounting system.
D) All of the above.
Q5) In terms of catching employee fraud, what is the most important concept and how can it assist in catching employees actions?
Q6) What are the three elements of the fraud triangle? Describe each. Page 15
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Chapter 14: Financial Statement Fraud
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Q1) Any lack of independence between management, internal auditors, and external auditors undermines the basic structure that prevents financial statement fraud. What type of red flag does this represent?
A) Internal control process.
B) Management style.
C) Personnel practices and environment.
D) The government structure.
Q2) Nearly half of the audit reports indicate some type of anomaly, such as a change of auditors, doubts about the company's ability to continue as a going concern, a change in accounting principles, or a litigation issue.
A)True
B)False
Q3) How do public oversight boards help prevent financial statement fraud?
A) They perform post-audit evaluation of financial statements.
B) They set standards for auditors.
C) They educate CEOs and CFOs on ways to prevent financial statement fraud.
D) They help enforce SOX standards within corporations.
Q4) What are some consequences to companies and their managers for financial statement fraud?
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Chapter 15: Fraud and Sox Compliance
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Q1) What does good enterprise risk management do?
A) Helps management achieve its objectives relating to financial reporting objectives and legal compliance.
B) Helps the SEC identify high fraud potential organizations.
C) Eliminates risk to investors by forcing corporations to maintain a fraud liability sinking fund.
D) Assists industry analysts with a risk management reports.
Q2) What is the major change to restitution under Section 308-Fair funds for investors?
A) Investors are guaranteed full restitution of any losses from the date of their purchase of the corporations securities.
B) The U.S. Treasury cow pay restitution to investors.
C) The corporation will now pay all civil penalties to its investors.
D) The CEO and CFO's personal assets can be liquidated to pay restitution to investors.
Q3) The enterprise risk management report defines 16 overlapping components.
A)True
B)False
Q4) Describe the composition of the Security and Exchange Commission.
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Chapter 16: Tax Fraud
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Q1) What are the penalties under 18 USC § 1001 for any person who willfully falsifies, conceals, or covers up information or who makes any materially false, fictitious, or fraudulent statement, representation, or makes any document that contains any materially false, fictitious, or fraudulent statement or entry?
A) $25,000 for individuals and $50,000 for corporations.
B) $250,000 for individuals and $500,000 for corporations.
C) $25,000 for corporations and $50,000 for individuals.
D) $250,000 for corporations and $500,000 for individuals.
Q2) What can be the first step in violation of IRC § 7205(a)?
A) An unsigned tax return.
B) A false W-4 form.
C) A false 1099 form.
D) Knowingly claiming more hours than worked on a time card.
Q3) Which constitutional amendment laid the foundation for the IRS to be formed?
A) 14th.
B) 16th.
C) 18th.
D) 19th.
Q4) What does the IRS recognize as taxable individual income and how can it be adjusted?
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Chapter 17: Bankruptcy, Divorce, Identity Theft
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Q1) What is identity theft, how big is the problem and who is largely responsible for it?
Q2) How does truncation of identity numbers work?
A) Machines encode account numbers when transmitting them over the internet.
B) Machines can only print the last 5 digits of an account number on anything that is printed for mailing.
C) Clerks and telephone operators are only allowed to verify identity by the last five letters of a persons name.
D) Older machines that do manual imprinting of credit card numbers must be modified to only copy the last five digits of the account numbers.
Q3) Secretly transferring (or selling below market value) assets to others, perhaps to family or friends, in order to keep them out of the bankruptcy estate and maintain control over them is referred to as:
A) Concealment of assets fraud.
B) Multiple filing scheme.
C) Fraudulent conveyances.
D) Bust-outs.
Q4) How are loan applications helpful in the asset discovery process?
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Chapter 18: Organized Crime, Counterterrorism, and Anti-Money Laundering
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Q1) Organized crime is a global problem that sucks over a trillion dollars a year out of the legitimate world economy.
A)True
B)False
Q2) How does the LCN hide its cash assets?
A) Money Market accounts.
B) Investment portfolios.
C) Offshore bank accounts.
D) Large assets in other people's names.
Q3) What was the Window WMF exploit?
Q4) What is one of the criteria to becoming a made man?
A) Donate a large amount of money to a charity.
B) Recruit at least 4 other men to become soldiers in the organizations.
C) Carry out a hit.
D) All of the above.
Q5) Where do some terrorist organizations base their operations?
A) Local government buildings.
B) Banks.
C) Houses of worship such as Mosques.
D) All of the above.
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Chapter 19: Business Valuation
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Q1) Under the Market approach, what are assets valued at?
Q2) If a businesses assets are going to be valuated at a high synergistic possibility, then it is assumed:
A) That they are going to be broken into pieces and sold separately outside the business.
B) They are going to be sold as a group outside the business.
C) They are going to be sold at their salvage value.
D) They are going to be sold as a group inside of the businesses.
Q3) Which of the following is not a step in the process of valuation?
A) Sell a sample of the assets to test market conditions.
B) Collect and analyze information about the business.
C) Research the industry in which the business operates.
D) Study and Analyze the business's financial statements.
Q4) Under the income approach, the value of the asset is the present value of the future economic income associated with the asset.
A)True
B)False
Q5) Describe at least 3 of the 6 levels of the fair value hierarchy as defined by the Financial Accounting Standards Board's Fair Value Project.
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Chapter 20: Dispute Resolution Services
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Q1) Arbitration also involves a neutral third-party, but the neutral third-party is empowered to issue findings that can be binding on the disputants.
A)True
B)False
Q2) A combination of mediation and arbitration is called:
A) arb-med
B) med-arb
C) arbi-medi
D) juxtaposition
Q3) After initial mediation, what might the mediator do?
A) Rule that the parties will never come to agreement and close the proceedings.
B) Bring an expert witness to provide recommendations for resolution.
C) Call a 7 day cooling off period.
D) Separate the two parties and continue mediation via written messages.
Q4) When does mediation work best?
A) When one party has information on the other that makes them succumb to the others demands.
B) When both parties are at the end of their ropes and ready to sue each other.
C) When both sides desire in advance to reach a negotiated solution.
D) When one side desires in advance to reach a negotiated solution.
Page 23
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