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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 major disasters every year.
D) disaster planning has largely been ignored in the literature.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
2) Which of the following 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
D) fraud and embezzlement
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
3) Identify the threat below that is not one of the four types of threats faced by accounting
information systems.
A) natural and political disasters
B) software errors and equipment malfunctions
C) unintentional acts
D) system inefficiency
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
1
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5) Excessive heat is an example of a(n) ________ threat.
A) natural and political disasters
B) software errors and equipment malfunctions
C) unintentional acts
D) system inefficiency
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
6) What was the first known cyber-attack intended to harm a real-world physical target?
A) Sasser
B) Stuxnet
C) Michelangelo
D) Doomsday
Answer: B
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic
7) What agency did the United States create to use cyber weapons and to defend against cyber
attacks?
A) U.S. Cyber Command
B) Department of Network Security
C) Department of Cyber Defense
D) Department of Technology Strategy
Answer: A
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic
2
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9) True or False: A disgruntled employee in Australia hacked into a sewage system, causing a
quarter of a million gallons of raw sewage to flood a hotel and a park.
Answer: TRUE
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
10) True or False: A 16 year old hacker was able to access the systems of U.S. Missile
Command and accidently launched a small nuclear missile, which fortunately, failed to detonate.
Answer: FALSE
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
5.2 Define fraud and describe both the different types of fraud and the process one follows to
perpetuate a fraud.
1) Seble wants to open a floral shop in a downtown business district. She doesn't have funds
enough to purchase inventory and pay six months'' rent up front. Seble approaches a good friend,
Zhou, to discuss the possibility of Zhou investing funds and becoming a 25% partner in the
business. After a lengthy discussion Zhou agrees to invest. Eight months later, Zhou and Seble
have a major argument. In order for Zhou to sue Seble for fraud, all the following must be true
except
A) Zhou's decision to invest was primarily based on Seble's assertion that she had prior floral
retail experience.
B) Seble told Zhou she had worked at a floral shop for several years, when in fact she did not
have any prior experience in floral retail.
C) before Zhou invested, Seble prepared a detailed business plan and sales forecasts, and
provided Zhou with copies.
D) Zhou's 25% share of the business is worth substantially less than her initial investment.
Answer: C
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
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2) Perpetrators do not typically
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 organization they defraud.
C) become bolder and more greedy the longer the theft remains undetected.
D) begin to rely on stolen amounts as part of their income.
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
4
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6) Which of the following is not an example of one of the basic types of fraud?
A) While straightening the store at the end of the day, a shoe store employee finds and keeps an
expensive pair of sunglasses left by a customer.
B) An executive devised and implemented a plan to accelerate revenue recognition on a long-
term contract, which will allow the company to forestall filing for bankruptcy. The executive
does not own any stock, stock options or grants, and will not receive a bonus or perk because of
the overstated revenue.
C) A purchasing agent places a large order at higher-than-normal unit prices with a vendor that
gave the agent tickets to several football games.
D) A salesperson approves a large sales discount on an order from a company owned partially by
the salesperson's sister.
Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking
5
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9) All of the following are required for an act to be legally classified as fraudulent except
A) a falsehood is made.
B) about a material fact.
C) to inflict pain.
D) resulting in a financial loss.
Answer: C
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
5.3 Discuss who perpetrates fraud and why it occurs, including the pressures, opportunities, and
rationalizations that are present in most frauds.
2) Which of the following is not an example of the fraud triangle characteristic concerned with
rationalization?
A) revenge against the company
B) intent to repay "borrowed" funds in the future
C) sense of entitlement as compensation for receiving a lower than average raise
D) belief that the company won't suffer because an insurance company will reimburse losses
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking
6
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3) Insiders are frequently the ones who commit fraud because
A) they are more dishonest than outsiders.
B) they need money more than outsiders.
C) they are less likely to get caught than outsiders.
D) they know more about the system and its weaknesses than outsiders.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
4) Which of the following is not a management characteristic that increases pressure to commit
fraudulent financial reporting?
A) close relationship with the current audit engagement partner and manager
B) pay for performance incentives based on short-term performance measures
C) high management and employee turnover
D) highly optimistic earnings projections
Answer: A
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
6) Identify the opportunity below that could enable an employee to commit fraud.
A) An employee's spouse loses her job.
B) An employee has a close association with suppliers or customers.
C) An employee suddenly acquires lots of credit cards.
D) An employee is upset that he was passed over for a promotion.
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic
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7) Which of the following 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 low relative to others around them
D) having a spouse injured in a car accident and in the hospital for several weeks
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic
8) Which of the following fraudulent acts generally takes most time and effort?
A) lapping accounts receivable
B) selling stolen inventory to get cash
C) stealing inventory from the warehouse
D) creating false journal entries to overstate revenue
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking
9) In many cases of fraud, the ________ takes more time and effort than the ________.
A) concealment; theft
B) theft; concealment
C) conversion; theft
D) conversion; concealment
Answer: A
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
10) Which of the following is the best way to hide theft of assets?
A) creating "cash" through the transfer of money between 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
D) charging the stolen asset to an expense account
Answer: D
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Reflective Thinking
8
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11) Which fraud scheme involves stealing customer receipts and applying subsequent customer
cash payments to cover the theft?
A) kiting
B) laundering
C) lapping
D) bogus expense
Answer: C
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
12) One fraudulent scheme covers up a theft by creating cash through the transfer of money
between banks. This is known as
A) lapping.
B) misappropriation of assets.
C) kiting.
D) concealment.
Answer: C
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
13) Which characteristic of the fraud triangle often stems from a lack of internal controls within
an organization?
A) pressure
B) opportunity
C) rationalization
D) concealment
Answer: B
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
14) Which situation below makes it easy for someone to commit a fraud?
A) placing excessive trust in key employees
B) inadequate staffing within the organization
C) unclear company policies
D) All of the above situations make it easy for someone to commit a fraud.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
9
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15) What is the most prevalent opportunity within 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
D) management's failure to believe employees would commit fraud
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic
16) This component of the fraud triangle explains how perpetrators justify their (illegal)
behavior.
A) pressure
B) rationalization
C) concealment
D) opportunity
Answer: B
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
10
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5.4 Define computer fraud and discuss the different computer fraud classifications.
3) Why is computer fraud often much more difficult to detect than other types of fraud?
A) because massive fraud can be committed in only seconds, leaving little-to-no evidence
B) because most perpetrators invest their illegal income rather than spend it, concealing key
evidence
C) because most computer criminals are older and more cunning than perpetrators of other types
of fraud
D) because perpetrators usually only steal very small amounts of money at a time, requiring a
long period of time to pass before discovery
Answer: A
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
4) Why is computer fraud often more difficult to detect than other types of fraud?
A) Rarely is cash stolen in computer fraud.
B) The fraud may leave little or no evidence it ever happened.
C) Computers provide more opportunities for fraud.
D) Computer fraud perpetrators are just more clever than other types of criminals.
Answer: B
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
11
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5) Why do many fraud cases go unreported and unprosecuted?
A) Major fraud is a public relations nightmare.
B) Fraud is difficult, costly, and time-consuming to investigate and prosecute.
C) Law enforcement and the courts are often so busy with violent crimes that little time is left for
fraud cases.
D) all of the above
Answer: D
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
6) The fraud that requires the least computer knowledge or skill involves
A) altering or falsifying source data.
B) unauthorized use of computers.
C) tampering with or copying software.
D) forging documents like paychecks.
Answer: A
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Reflective Thinking
12
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9) Why is computer fraud on the rise?
Answer: Not everyone agrees on what constitutes computer fraud and some people may commit
computer fraud unwittingly and not be aware of it. Many computer frauds go undetected. The
belief that "it just can't happen to us." Most networks have a low level of security. Many Internet
sites provide guidance on how to commit computer crimes. Law enforcement is unable to keep
up with the number of computer frauds. Most frauds are not reported. The total dollar value of
losses is difficult to calculate.
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Reflective Thinking
10) Why do fraudulent acts often go unreported and are therefore not prosecuted?
Answer: Most fraud cases go unreported and are not prosecuted for several reasons. Many cases
of computer fraud are as yet still undetected. As new technology and methods become available
to organizations, 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 publicity
—a highly visible case can undermine consumer confidence in an organization 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 organization. It would 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 law
enforcement is busy with violent crimes and criminals in its system. There is little time left to go
after a crime where no physical harm is present. Also, the court system tends to treat teen
hacking and cracking as "acts of childhood" rather than as serious crimes—this leads to many
plea bargains when a computer fraud is brought to trial. Another reason is that a computer fraud
case is difficult, costly, and time-consuming to investigate and prosecute. Before 1986 no federal
law existed governing computer fraud. Law enforcement officials, lawyers, and judges generally
lack the computer skills necessary to properly evaluate, investigate, and prosecute computer
crimes. Sadly, when 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 under reporting and
lack of prosecution of computer fraud crimes. Not everyone agrees on what constitutes computer
fraud:
• Many networks have a low level of security
• Many Internet pages give instruction on how to carry out computer crimes
• Law enforcement has difficulty keep up with the growing number of computer frauds
• The total dollar value of losses from computer fraud is difficult to estimate.
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
13
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5.5 Explain how to prevent and detect computer fraud and abuse.
2) Which of the following will not reduce the likelihood of an occurrence of fraud?
A) encryption of data and programs
B) use of forensic accountants
C) adequate insurance coverage
D) required vacations and rotation of duties
Answer: C
Objective: Learning Objective 5
Difficulty: Easy
AACSB: Analytic
3) On Tuesday morning, Chen Lee, Chief Information Officer at American Trading Corporation
(ATC), got some bad news. The hard drive use to store system data backups was lost while it
was being transported to an offsite storage location. Chen called a meeting of her technical staff
to discuss the implications of the loss. Which of the following is most likely to relieve her
concerns over the potential cost of the loss?
A) ATC has a comprehensive disaster recovery plan.
B) The hard drive was encrypted and password protected.
C) The shipper has insurance that will reimburse ATC for the cost of the hard drive.
D) ATC has a copy of the hard drive onsite, so a new copy for storage offsite can easily be
prepared.
Answer: B
Objective: Learning Objective 5
Difficulty: Easy
AACSB: Reflective Thinking
14
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4) ________ is a simple, yet effective, method for catching or preventing many types of
employee fraud.
A) Requiring all employees to take annual vacations
B) Monitoring employee bank accounts and net worth
C) Monitoring employee behavior using video cameras
D) Explaining that fraud is illegal and will be severely punished to employees
Answer: A
Objective: Learning Objective 5
Difficulty: Easy
AACSB: Analytic
5) What are the actions recommended by the Treadway Commission to reduce the possibility of
fraudulent financial reporting?
Answer: Establish an organizational 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 within the company. Design and implement
internal controls to provide reasonable assurance that the fraudulent financial reporting is
prevented.
Objective: Learning Objective 5
Difficulty: Moderate
AACSB: Analytic
6) Describe at least four ways a company can make fraud less likely to occur.
Answer: A company can decrease fraud by: good hiring and firing practices; good management
of unhappy employees; training in fraud awareness; manage and track computer licenses;
implement signed confidentiality agreements; maintain visible security; educate the workforce in
ethics and the penalties for illegal acts.
Objective: Learning Objective 5
Difficulty: Moderate
AACSB: Analytic
15
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8) A teller at a savings and loan drive-through accepted a cash payment from customer #1 for an
auto loan. The teller appeared to process the payment, but told the customer the printer was
jammed and she can't print a receipt. The customer accepted the excuse and drove away. The
teller pocketed the cash and wrote down customer #1's loan number and payment amount for
future reconciling. A couple of days before customer #1's monthly statement was printed, the
teller recorded a cash payment from customer #2 as if it were made by customer #1. The teller
pocketed the difference between the two payments. The teller continued to steal and misapply
customer payments for the next two years without detection.
Identify the type of fraud scheme described. Describe five controls you would implement to
address the fraud risk, and label each control as preventive or detective.
Answer: The fraud appears to be misappropriation of assets that is being concealed with a
lapping scheme. Controls would include:
1. rotation of duties (primarily detective)
2. mandatory vacations (primarily detective)
3. surveillance with cameras (primarily detective)
4. staggered statement printing schedules, unknown to tellers (detective)
5. sequentially prenumbered, duplicate receipts (detective)
6. segregation of duties between cash handling and recording (preventive)
7. encourage customers to utilize on-line banking for loan payments and to frequently check
balances (detective)
Objective: Learning Objective 5
Difficulty: Moderate
AACSB: Reflective Thinking
9) Which of the following is not a way to make fraud less likely to occur?
A) Adopt an organizational structure that minimizes the likelihood of fraud.
B) Create an organizational culture that stresses integrity and commitment to ethical values.
C) Create an audit trail so individual transactions can be traced.
D) Effectively supervise employees.
Answer: C
Objective: Learning Objective 5
Difficulty: Moderate
AACSB: Analytic
16
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11) Which of the following is not a way to improve fraud detection?
A) Install fraud detection software.
B) Implement a fraud hotline.
C) Employ a computer security officer.
D) Implement computer-based controls over input, processing, storage, and output activities.
Answer: D
Objective: Learning Objective 5
Difficulty: Moderate
AACSB: Analytic
17
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