Legal Aspects of Accounting
Chapter Exam Questions
Course Introduction
Legal Aspects of Accounting explores the intersection of law and accounting, providing students with an understanding of the legal environment in which accounting operates. The course examines the regulatory framework governing the profession, including statutes, regulations, and case law affecting accountants responsibilities and liabilities. Topics include the legal implications of financial reporting, auditing standards, professional ethics, fraud prevention, contracts, and agency relationships. Students will also analyze the roles and responsibilities of accountants under various laws such as the Sarbanes-Oxley Act, and consider issues related to negligence, malpractice, and client confidentiality. This course equips future accounting professionals with the legal knowledge necessary to navigate complex legal challenges and uphold ethical standards in their practice.
Recommended Textbook
Forensic Accounting and Fraud Examination 1st Edition by Mary Jo Kranacher
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Page 2
Chapter 1: Core Foundation Related to Fraud Examination and Financial
Forensics
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Q1) In fraud cases where no legal action was taken, the most significant reason for the lack of prosecution was cited as:
A) that internal discipline was sufficient.
B) the fear of bad publicity.
C) private settlement was attained.
D) the dollar value of the loss was insufficient.
Answer: B
Q2) Differentiate between fraud and abuse.
Answer: Although both fraud and abuse involve an intentional deception that causes its victim to suffer an economic loss and/or the perpetrator to realize a gain, abuse does not rise to the level of fraud. Abuse is often a way to describe a variety of petty crimes and other counterproductive behavior, such as surfing the web while at work, coming to work late or leaving early, using sick leave when not sick, that have become common and even silently condoned in the workplace.
Q3) Explain fraud examination.
Answer: Fraud examination involves obtaining documentary evidence, interviewing witnesses and potential suspects, writing investigative reports, testifying to findings, and assisting in the general detection and prevention of fraud.
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Chapter 2: Careers in Fraud Examination and Financial Forensics
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Q1) There has been a great deal of concern about the issue of corporate governance and accountability of publicly traded companies because of:
A) internal audit failures such as those associated with Enron, Crazy Eddie, and WorldCom.
B) board of director involvement in the external audit process.
C) financial statement fraud.
D) None of the above are correct answers.
Answer: C
Q2) As a result of events such as the passing of the Sarbanes-Oxley Act of 2002 SOX Act and the Emergency Economic Stabilization Act of 2008 EESA professionals practicing in the traditional areas of tax, audit, management, information systems, government, not-for-profit, external independent, and internal audit are expected to have a greater understanding of fraud and financial forensics.
A)True
B)False
Answer: True
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4
Chapter 3: Who Commits Fraud and Why: Criminology and Ethics
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Q1) Regarding theft, Hollinger and Clark were able to confirm a direct relationship between:
A) computerized inventory control and sick leave policy.
B) an employee's position and the level of theft.
C) lower levels of income and higher levels of theft.
D) None of these were confirmed as a direct relationship.
Answer: B
Q2) The definition of ethics has certain key elements. What are these four key elements? Answer: 1. Ethics involves questions requiring reflective choice and their consequences to the individual and others decision problems.
2. Ethics considers the rules and regulations that are in place to guide behavior as well as the consequences for breaking those rules and regulations.
3. Ethics often relies on moral principles to guide choices of right and wrong. These ethical frameworks are discussed in more detail below.
4. Ethics is concerned with outcomes, the assigned impact associated with making a decision where the impact reflects the underlying values of individuals and organizations. Text page 76
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Chapter 4: Complex Frauds and Financial Crimes
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Q1) "Organizations" refers to unions, the mafia, as well as corporations.
A)True
B)False
Q2) What is the difference between mail and wire fraud:
A) Mail fraud consists of written material;, wire fraud is electronic and written
B) Mail fraud consists of using the US Postal system; wire fraud consists of the use of non US Postal system services
C) Mail fraud applies whenever the US Postal system is involved ,including intrastate mail service; wire fraud consists of transmissions to foreign or interstate locales
D) All of the above
Q3) RICO:
A) Addresses the illegal activities in organizations that mix both legitimate and illegal activities
B) Addresses only organizations formed to sponsor terror groups
C) Addresses civil as well as criminal issues
D) All of the above
Q4) Describe the stages of money laundering and for each stage, provide an example.
Q5) Explain how the Patriot Act enhances RICO.
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Chapter 5: Cybercrime: Computer and Internet Fraud
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Q1) An employee, having authorized access to a work computer, commits fraud while using the computer. This is an example of a computer crime.
A)True
B)False
Q2) Cyber-crime involves the use of cell phones.
A)True
B)False
Q3) Computers offer cyber criminals efficient ways to hide fraudulent activities.
A)True
B)False
Q4) The "computer as a symbol" involves using a computer to intercept data transmission.
A)True
B)False
Q5) Computer crime and computer fraud are synonyms.
A)True
B)False
Q6) Computer crime involves the attempt to access data illegally.
A)True
B)False
Page 7
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Chapter 6: Legal, Regulatory, and Professional Environment
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Q1) In addition to the criminal and civil justice systems, regulatory agencies also play an important role in monitoring illegal activities and pursuing those responsible.
A)True
B)False
Q2) The ______ Amendment provides that a person cannot be compelled to provide incriminating information against himself or herself in a criminal case.
A) Fifth
B) Fourth
C) Sixth
D) Fourteenth
Q3) Generally, evidence is admissible in court if it is relevant, its probative value outweighs any prejudicial effects, and it is trustworthy.
A)True
B)False
Q4) What common law protections do individuals have during interviews?
Q5) The Fourth Amendment prohibits unreasonable searches and seizures.
A)True
B)False
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Chapter 7: Fraud Detection: Red Flags and Targeted Risk Assessment
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Q1) "One-time" transactions of large values should be scrutinized to ensure they have an appropriate underlying business rationale because generally such transactions will be fraudulent.
A)True
B)False
Q2) Some of the analytical anomalies include all of the following except:
A) transactions too small or too large for normal activity.
B) explained cash shortages.
C) excessive purchases.
D) excessive debit and credit memos.
Q3) Red flags are considered trouble signs in almost any environment and yet there seem to be many red flags in normal business operations which can reduce their value in finding fraudulent activities. Explain how this may happen.
Q4) Anomalies are:
A) most often red flags that indicate fraud is present.
B) part of the day-to-day operations for most companies.
C) seldom seen in companies with good internal controls and procedures.
D) Both "A" and "C" are correct.
Q5) How is materiality determined?
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Chapter 8: Detection and Investigations
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Q1) Predication requires hard evidence before it is said to exist.
A)True
B)False
Q2) Which of the following is NOT an attribute of M.I.C.E,:
A) Motive
B) Coercion
C) Ego
D) Ideology
Q3) Authentication, as it relates to evidence, is demonstrated by:
A) Storing the evidence in a secure facility that is accessible to police and prosecuting attorneys
B) Copying the evidence where possible
C) Maintaining a chain of custody of the evidence
D) All of the above
Q4) Searching for changes in behavior patterns prior to and after a crime is a form of invigilation.
A)True
B)False
Q5) Data mining software
Q6) Circumstantial evidence
Page 10
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Chapter 9: Effective Interviewing and Interrogation
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Q1) A murderer is condemned to death. He has to choose between three rooms. The first is full of raging fires, the second is full of assassins with loaded guns, and the third is full of lions that haven't eaten in three years. Which room is safest for him?
Q2) ________ or ________ is the process of observing behavior before critical questions are asked, as opposed to doing so during questioning.
A) Gauging, detecting
B) Norming, calibrating
C) Surveying, discovering
D) Spying, viewing
Q3) In order to begin in information phase of the interview, you must first make a transition out of the introductory phase. Which method is NOT commonly used during this phase?
A) Begin with background questions
B) Observe verbal and nonverbal behavior
C) Ask leading closed questions
D) Approach sensitive questions carefully
Q4) What are the five types of interview and interrogation questions?
Q5) Why are introductory questions so important to an interview's success?
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Chapter 10: Using Information Technology for Fraud
Examination and Financial Forensics
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Q1) Data mining and knowledge discovery software is generally classified into two general categories: public domain and commercial applications.
A)True
B)False
Q2) The source documents that support the electronic data systems do not need to be pre-numbered and used in sequence.
A)True
B)False
Q3) The simple act of turning on a confiscated computer, digital camera, cell phone, PDA, etc. may make all the evidence on that digital device inadmissible in a courtroom.
A)True
B)False
Q4) Which of the following is not considered CAATTs Computer-Aided Audit Tools and Techniques software:
A) Microsoft Dynamics GP
B) IDEA
C) ACL
D) Picalo
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Chapter 11: Cash Receipt Schemes and Other Asset
Misappropriations
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Q1) Writing off inventory and other assets is a relatively common way for fraudsters to remove assets from the books before or after they are stolen.
A)True
B)False
Q2) Perhaps the biggest key to preventing skimming of any kind is to maintain a viable oversight presence at any point where cash enters an organization.
A)True
B)False
Q3) List three proactive audit tests to detect noncash misappropriations.
Q4) How are noncash assets misappropriated?
Q5) Which is the most effective control to prevent receivables skimming?
Q6) What computer audit steps could catch a scheme in which inventory is shipped directly to an employee address?
A) List top ten employees by sales adjustments
B) Join an employee home address file to a shipment address file
C) List tope tem employees in respect to asset transfers
D) Summarize user access to the sales file
Q7) Why is sales skimming called an "off-book" fraud?
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Chapter 12: Cash Disbursement Schemes
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Q1) After an invoice is vouched, a check is generated by the computer: The next step should be:
A) Having accounts payable mail the check to the vendor
B) Having Purchasing mail the check to the vendor
C) Having the cashier mail the check to the vendor
D) Any of the above
Q2) A commission scheme can be detected by:
A) Examining sales return patterns
B) Examining sales over a certain amount
C) Examining sales returns
D) All of the above
Q3) Shell companies require collusion amongst employees in order to be successful.
A)True
B)False
Q4) Register disbursement fraud in the form of falsified returns can be detected by:
A) Inventory counts
B) Cash counts
C) Examination of return receipts
D) All of the above
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Chapter 13: Corruption and the Human Factor
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Q1) Economic extortion schemes are committed when one person demands payment from another.
A)True
B)False
Q2) The threat of surprise audits, especially in businesses that are currency-intensive, is not a powerful deterrent to occupational fraud and abuse.
A)True
B)False
Q3) ________ are similar to bribery schemes, except that something of value is given to an employee to reward a decision rather than influence it.
A) Conflicts of interest
B) Economic extortion
C) Illegal gratuities
D) Expropriation
Q4) Employees who perceive that they will be caught engaging in occupational fraud and abuse are less likely to commit it.
A)True
B)False
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Chapter 14: Financial Statement Fraud
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Q1) In warranty liability fraud, the warranty liability is usually either omitted or substantially understated.
A)True
B)False
Q2) One of the most popular methods of overstating inventory is through:
A) Understating cost of goods sold
B) "Phantom" inventory
C) Overstating sales revenue
D) Overstating inventory obsolescence
Q3) What is the conceptual framework for financial reporting?
Q4) Reporting practices within certain industries may not deviate from generally accepted accounting principles as a matter of fair and clear presentation..
A)True
B)False
Q5) Improper asset valuations usually fall into one of the following EXCEPT:
A) Inventory valuation
B) Accounts receivable
C) Cash
D) Fixed assets
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Chapter 15: Consulting, Litigation Support, and Expert
Witnesses: Damages, Valuations, and Other Engagements
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Q1) The accepted concept for measuring lost revenues or excess expenses over a loss period:
A) Project incremental lost sales or increased expenses
B) Validate opportunity costs
C) Validate sunk costs
D) Validate the fair value of assets
Q2) Risk and return are ________ related.
A) Inversely
B) Positively
C) Not
D) Exponentially
Q3) What types of damages may ensue as a result of personal injury, wrongful death, and survival actions?
Q4) Some of the methods that can be used to develop estimates of lost sales and incremental expenses include:
A) The Before and After Method
B) The Benchmark "Yardstick" Method
C) Either A or B
D) Neither A nor B
Q5) What are the considerations related to forecasting income and cash flows?
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Chapter 16: Remediation and Litigation Advisory Services
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Q1) A deposition is a post-trial process by which the parties to a civil litigation are allowed to examine the other side's fact witnesses and expert witnesses.
A)True
B)False
Q2) What three attributes must the plaintiff demonstrate in a civil framework?
Q3) How does the legal system differentiate between "following" versus "tracing' the money?
Q4) What is the difference between fact witnesses and expert witnesses?
Q5) One of the most disturbing aspects of the audit process and corporate governance responsibility is that a certain cohort can do almost anything they want despite the systems of checks and balances designed to prevent asset misappropriation and financial statement fraud. This is referred to as management:
A) Override
B) Obligation
C) Duty
D) Custom
Q6) When may an expert's opinion be subject to challenge?
Q7) In what types of cases may a forensic accountant serve as an expert witness?
Q8) What are the types of losses available for recovery?
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