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Increasing the perception of detection might well be the most effective fraud prevention method. Controls, for example, do little good in forestalling theft and fraud if those at risk do not know of the presence of possible detection. This means letting employees, managers, and executives know that auditors are actively seeking out information concerning internal theft.
Correct Answer: (C)
The Sarbanes-Oxley Act has several provisions that set out specific requirements for the audit committees of public companies. Specifically, the audit committee has the sole responsibility for hiring, overseeing, and paying the external auditors and for resolving any disputes that arise between the auditors and management regarding financial reporting issues. The audit committee is also required to establish procedures (e.g., a hotline) for receiving, retaining, and dealing with complaints, including confidential or anonymous employee tips, regarding irregularities in the company’s accounting methods, internal controls, or auditing matters. Additionally, the committee is required to pre-approve all services to be performed by the external auditors. While the audit committee may consult with outside advisors, it is not required to approve those advisors hired by management
Correct Answer: (B)
The Corporate Sentencing Guidelines require that, whenever possible, the organization must pay full restitution to the victims of the crime. Restitution is not, however, viewed as a form of punishment in the Guidelines, but rather as a means of remedying the harm caused by the offense.
Correct Answer: (B)
According to Managing the Business Risk of Fraud: A Practical Guide, “personnel at all levels of the organization—including every level of management, staff, and internal auditors, as well as the organization’s external auditors—have responsibility for dealing with fraud risk.”
Correct Answer: (A)
Regulatory and legal misconduct includes a wide range of risks, such as conflicts of interest, insider trading, theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export. Depending on the particular organization and the nature of its business, some or all of these risks might be applicable and should be considered in the fraud risk assessment process.
Correct Answer: (D)
What works in one organization most likely will not easily work in another. Recognizing the nuances and differences of each business and tailoring the approach and execution to the specific organization can help make the fraud risk assessment successful. While a generic framework or tool set can be a valuable starting point for the development of the fraud risk assessment, it must be adapted to fit the business model, culture, and language of the organization.
The Office of the Comptroller of the Currency (OCC) requires national banks to submit a Suspicious Activity Report (SAR) under certain circumstances (12 C.F.R. §21.11, as amended). Reports are required if there is a known or suspected criminal violation committed against the bank or involving a transaction conducted through the bank and (1) the bank has a substantial basis for identifying responsible bank personnel; or (2) the amount involved is $5,000 or more and the bank has a substantial basis for identifying a possible suspect; or (3) the amount involved is $25,000 or more (if the amount involved is $25,000 or more, the bank is required to report even if the bank does not have a substantial basis for identifying a suspect); or (4) the amount involved is $5,000 or more and the potential for money laundering exists; or (5) the amount involved is $5,000 or more and the violation of the Bank Secrecy Act exists; or (6) the amount involved is $5,000 or more and the transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.
Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is the loan participation, where the purchaser participates in the loan but does not purchase the entire loan. The fraud schemes associated with brokered or participated loans generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Generally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are generally not sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence.
Correct Answer: (A)
Understating liabilities and expenses is one of the ways financial statements can be manipulated to make a company appear more profitable. Because pre-tax income will increase by the full amount of the expense or liability not recorded, this financial statement fraud method can significantly affect reported earnings with relatively little effort by the fraudster. There are three common methods for concealing liabilities and expenses:
Omitting liabilities and/or expenses
Improperly capitalizing costs rather than expensing them
Failing to disclose warranty costs and liabilities
The term corporate governance, in its essence, refers to a corporation’s government; the term is broadly used to describe the oversight responsibilities of different parties for an organization’s direction, operations, and performance. More specifically, the Organization for Economic Co-operation and Development (OECD) defines corporate governance as: “[The] procedures and processes according to which an organization is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization—such as the board, managers, shareholders and other stakeholders—and lays down the rules and procedures for decision-making.”
Though there is no consensus within the scholarly community, one current definition of white-collar crime is that proposed by Albert J. Reiss, Jr., and Albert Biderman: "White-collar crime violations are those violations of law to which penalties are attached that involve the use of a violator’s position of economic power, influence, or trust in the legitimate economic or political institutional order for the purpose of illegal gain, or to commit an illegal act for personal or organizational gain."
Correct Answer: (C)
Monitoring is the process that assesses the effectiveness of a control system over time. This component of COSO’s Internal Control—Integrated Framework should include both ongoing evaluations and periodic, separate evaluations, the findings of which should be evaluated against pre-defined criteria. The following are the Framework principles supporting this component:
The organization selects, develops, and performs ongoing and separate evaluations to ascertain whether the components of internal control are present and functioning.
The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.
Regulatory and legal misconduct includes a wide range of risks, such as conflicts of interest, insider trading, theft of competitor trade secrets, anti-competitive practices, environmental violations, and trade and customs regulations in areas of import and export. Depending on the particular organization and the nature of its business, some or all of these risks may be applicable and should be considered in the fraud risk assessment process.
COSO envisions that upper management will be responsible for the control environment of organizations. Employees look to management for guidance in most business affairs, and organizational ethics are no different. It is important for upper management to operate in an ethical manner, and it is equally important for employees to view management in a positive light.
Considering all white-collar crime offenders, the higher an individual’s status, the more likely the person was to be imprisoned. According to Crimes of the Middle Classes, "all else being equal, doctors will have about a 30 percent greater likelihood of being imprisoned for a white-collar crime than truck drivers and almost a 13 percent greater likelihood than managers." Judges seem to find persons of higher prestige more at fault or, in other words, more blameworthy in the commission of their crimes.
Computer forensic examiners generally agree that investigations typically involve four phases: the seizure phase, the image-acquisition phase, the analysis phase, and the reporting and testifying phase.
Correct Answer: (D)
User-created files are files created under the user’s direction, and include text-based documents, spreadsheets, databases, email, address books, presentation slides, audio/video files, image files, Internet bookmarks, and so on.
An issue faced in most examinations is that multiple copies of various files will be collected as part of the investigative process. Because reviewing such duplicative materials is expensive and time consuming, the fraud examiner should identify and eliminate duplicates in the collected data. This process is referred to as deduplication filtering, and it is critical in helping to reduce the vast amounts of information collected during a fraud examination. That is, deduplication filtering is a data-processing technique that fraud examiners can use to identify and eliminate identical materials in digital data.
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