Chapter 9

Question 1

1. Borrowing a company asset for personal use without permission, even if it is returned unharmed, is a form of non-cash asset misappropriation.
   a. True
   b. False

Answer 1

a. True

Question 2

2. Which of the following is not a red flag in a fraudulent shipment scheme?
   a. An increase in bad debt expense
   b. An unexplained decrease in the scrap account
   c. Unusually high levels of reorders for inventory items
   d. Shipments with missing sales documents

Answer 2

b. An unexplained decrease in the scrap account

Question 3

3. Manually altering entries in an organization’s books in order to conceal fraud is called:

a. Padding the books
b. Forced reconciliation
c. Shrinkage
d. Fictitious reconstruction

Answer 3

b. Forced reconciliation

Question 4

4. To prevent fraudulent shipments of merchandise, organizations should:

a. Match every receiving slip to an approved purchase order.
b. Match every outgoing shipment to a sales order.
c. Make sure that all increases to perpetual inventory records are supported by proper source documents.
d. All of the above

Answer 4

b. Match every outgoing shipment to a sales order.

Question 5

5. Which of the following methods can be used to conceal inventory shrinkage on a company’s books?
   a. Creating fictitious sales and receivables
   b. Writing off inventory as obsolete
   c. Physical padding
   d. All of the above

Answer 5

a. Creating fictitious sales and receivables
b. Writing off inventory as obsolete
c. Physical padding
d. All of the above
The correct answer is D

Question 6

6. An employee causes his organization to purchase merchandise that it does not need. This is an example of what type of scheme?

a. Purchasing and receiving scheme
b. False billing scheme
c. Unconcealed larceny scheme
d. Asset requisition scheme

Answer 6

b. False billing scheme

Question 7

7. An unexplained increase in uncollectible accounts receivable may be a warning sign of a non-cash asset misappropriation scheme involving false shipments of inventory.

a. True
b. False

Answer 7

a. True

Question 8

8. Of the following, which is the best method for detecting the theft of inventory?

a. Have the warehouse manager personally oversee bi-monthly inventory counts.
b. Have someone from purchasing conduct inventory counts every quarter.
c. Have a designated person in customer service follow-up with customers who have complained about short shipments.
d. Match vendor addresses against employee addresses.

Answer 8

c. Have a designated person in customer service follow-up with customers who have complained about short shipments.

Question 9

9. To deter inventory theft schemes, organizations should install security cameras in the warehouses without the employees’ knowledge.

a. True
b. False

Answer 9

b. False

Question 10

10. Which of the following procedures would be least helpful in preventing larceny of non-cash assets?

a. Segregating the duties of sales and accounts payable
b. Installing surveillance cameras in the warehouse and on sales floors
c. Creating access logs to track employees that enter restricted areas
d. Employing security guards at the entrance of the warehouse

Answer 10

a. Segregating the duties of sales and accounts payable

Question 11

11. The unaccounted-for reduction in the company’s inventory that results from theft is called:
    a. Physical defalcation
    b. Spoilage
    c. Shrinkage
    d. Misappropriation of intangible assets

Answer 11

c. Shrinkage

Question 12

12. Unexplained increases in inventory shrinkage can be a red flag that signals which type of fraud scheme?

a. Fictitious refunds
b. Inventory larceny
c. Sales skimming
d. All of the above

Answer 12

a. Fictitious refunds
b. Inventory larceny
c. Sales skimming
d. All of the above
D is the correct one

Question 13

13. Which of the following computer audit tests can be used to detect purchasing and receiving schemes?

a. Identifying dormant customer accounts for the past six months that show a sale in the last two months of the year
b. Calculating the ratio of the largest sale to the next largest sale by customer
c. Extracting all inventory coded as obsolete and possessing reorder points within the inventory system
d. All of the above

Answer 13

c. Extracting all inventory coded as obsolete and possessing reorder points within the inventory system

Question 14

14. Which of the following computer audit tests can be used to detect an inventory misappropriation scheme?

a. Identifying inventory receipts in the receiving system that do not agree to the receipts per the accounts payable system
b. Identifying inventory shipments delivered to an address that is not designated as a business address
c. Identifying inventory with a negative quantity balance
d. All of the above

Answer 14

a. Identifying inventory receipts in the receiving system that do not agree to the receipts per the accounts payable system
b. Identifying inventory shipments delivered to an address that is not designated as a business address
c. Identifying inventory with a negative quantity balance
d. All of the above
The correct answer is D

Question 15

15. Running a computer program that identifies shipping documents with no associated sales order can detect which of the following non-asset cash misappropriation schemes?

a. False shipments
b. Purchasing and receiving schemes
c. Unconcealed inventory larceny
d. Asset requisition schemes

Answer 15

a. False shipments

Question 16

16. Which of the following is not a method used to conceal false shipments of inventory?

a. Creating false sales orders
b. Falsely increasing the perpetual inventory
c. Writing off the inventory as scrap
d. Physical padding

Answer 16

Falsely increasing the perpetual inventory

Question 17

17. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, non-cash schemes occur more frequently than cash schemes.
    a. True
    b. False

Answer 17

b. False

Question 18

18. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, cash schemes have a higher median loss than non-cash schemes.

a. True
b. False

Answer 18

a. True

Question 19

19. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the theft of which type of non-cash asset was the least common but caused the highest median loss?

a. Equipment
b. Proprietary information
c. Securities
d. Inventory

Answer 19

c. Securities

Question 20

20. Andy Kaplan is a foreman for JCP Enterprises, a regional construction company. He recently ordered some plumbing supplies from the company warehouse for an office building project he is overseeing. When the supplies arrived at the job site, however, he loaded them in his truck and took them home to use in remodeling his master bathroom. What kind of inventory theft scheme did Andy commit?

a. False shipments
b. Unconcealed larceny
c. Asset requisition
d. Misappropriation of intangible assets

Answer 20

c. Asset requisition

Question 21

21. Nicolette Garrison works part-time at an independent record store. Whenever her friend, Jacob Barker, comes into the store during one of her shifts, he picks up a CD and brings it to the register where Nicolette is stationed. After ringing a “no sale” transaction on the cash register, Nicolette pretends to swipe Jacob’s credit card for payment. She puts the CD in a bag and gives it to Jacob, who walks out without actually paying for the merchandise. What kind of scheme is being committed?

a. Fake sale
b. False refund
c. Sales skimming
d. Cash larceny

Answer 21

a. Fake sale

Question 22

22. Ben Rogers works as a cashier for Tillis Sporting Goods. One afternoon, he asked his sister Dawn to come into the store. When she arrived, Ben put three watches, two fishing reels, and four pairs of sunglasses in a sack and gave it to her. Dawn walked out of the store, sold two of the watches, and returned to the store later to return the other items for a refund. What type of asset misappropriation has been committed?

a. Sales skimming
b. Pay-and-return scheme
c. False refund scheme
d. Inventory larceny scheme

Answer 22

d. Inventory larceny scheme

Question 23

23. Ace Electronics is a company that sells computers, televisions, home entertainment centers, DVD players, and other electronic equipment. A downturn in the market has caused severe financial problems in the company. In order to fool the auditors as they begin their inventory count, several of Ace’s managers have begun stacking empty boxes in the warehouse to create the illusion of extra inventory. This scheme is known as:
    a. Forced reconciliation
    b. Physical padding
    c. Inventory shuffling
    d. Misappropriation of intangible assets

Answer 23

b. Physical padding

Question 24

24. To supplement her income, Jeanne Lester decided to start her own bookkeeping business while still working as an office assistant at Howe & Lyon, a small CPA firm. Not having much start-up capital for her new business, she used her phone at work to contact clients and her work computer to print invoices and client letters. However, she ordered and paid for her own office supplies and used her own postage stamps to mail the invoices and letters. From the information given, has Jeanne misappropriated any of the firm’s assets?

a. Yes
b. No

Answer 24

a. Yes

Question 25

25. In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend’s father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was the theft discovered? a. A security guard found the chips in a routine check of his work cart. b. An inventory manager filling an order noticed that many of the chips were missing. c. The auditors found the shortage when they conducted the annual inventory count. d. His co-worker notified the loss prevention department in exchange for a cash award.

Answer 25

b. An inventory manager filling an order noticed that many of the chips were missing.

Question 26

26. In one of the cases in the textbook, Larry Gunter was a shipping clerk for a computer company that manufactured microprocessor chips. After learning that the chips were valuable, he stole three boxes and sold them to his girlfriend’s father. Since the scheme worked so well the first time, he continued stealing and selling the chips, even letting a co-worker in on the scheme. How was Gunter punished? a. He was arrested, charged with grand theft and embezzlement, and sentenced to prison. b. He was indicted for receiving stolen property, placed on probation, and ordered to repay the company for the value of the stolen chips. c. The company fired him but agreed not to prosecute him if he repaid the money and did not go to the media. d. He wasn’t, because he found out about the investigation and skipped town on the day he was to be arrested.

Answer 26

a. He was arrested, charged with grand theft and embezzlement, and sentenced to prison.

Question 27

27. In one of the cases in the textbook, Swainler’s Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its theft insurance policy, the company had to show that the theft was an outside job. Before the insurance company paid Swainler’s claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler’s marketing manager, Frederic Boucher. How did the investigator identify Boucher’s involvement? a. Boucher’s ex-wife found out and contacted Swainler’s board of directors. b. A former employee of Swainler’s went to work for a competitor and told his manager about Boucher’s involvement. c. The investigator found telephone calls made by Boucher to a warehouse where some of the stolen drives had been traced. d. Investigators found a large cash deposit in Boucher’s bank account around the time that the drives went missing.

Answer 27

c. The investigator found telephone calls made by Boucher to a warehouse where some of the stolen drives had been traced.

Question 28

28. In one of the cases in the textbook, Swainler’s Technology discovered that someone had stolen 1,400 hard drives from its computer warehouse. In order to collect on its theft insurance policy, the company had to show that the theft was an outside job. Before the insurance company paid Swainler’s claim, it hired an independent investigator, who ultimately found that the hard drives were stolen and sold by Swainler’s marketing manager, Frederic Boucher. Which of the following control weaknesses were present in the company? a. Because the company was run primarily on trust, many transactions were conducted without any documentation or controls. b. The surveillance cameras on the loading dock didn’t work. c. Background checks were required only on senior executives and accounting personnel. d. All of the above

Answer 28

a. Because the company was run primarily on trust, many transactions were conducted without any documentation or controls.