Corporate Fraud and Internal Control Workbook: A Framework for Prevention

By Richard E. Cascarino

The essential companion to Corporate Fraud and Internal Control, complete with review exercises for key concepts

Used together with Corporate Fraud and Internal Control: A Framework for Prevention, this Workbook tests readers' knowledge of the subject with a focus on the appropriateness of the design of the system of internal controls in fraud risk mitigation, as well as the mechanisms to ensure effective implementation and monitoring on an ongoing basis. This Workbook includes step-by-step exercises and tests to help the reader master the techniques in fraud prevention and detection.

• Companion to Corporate Fraud and Internal Control: A Framework for Prevention
• Includes step-by-step exercise and tests
• Provides discussion-based case studies
• Features the necessary tools that companies need to combat fraud

Written by a fraud prevention leader, Corporate Fraud and Internal Control Workbook features a fill in the blanks structure, followed by a short answer section, and ending with a discussion based series of case studies covering the following topics.

• Language: English
• Publisher: Wiley
• Release date: Dec 12, 2012
• ISBN: 9781118478509

Book preview

Part One

Questions and Problems

Chapter One

Nature of Fraud

THROUGHOUT HISTORY, THE DEVELOPMENT OF NEGOTIABLE instruments, from cowrie shells to plastic cards, has led to the creation of a set of rules and conventions for trade and the promotion of smooth and orderly commercial interactions among individuals and countries. The breaking of these rules and conventions helps white-collar criminals make a living—in some cases a fortune—while evading discovery. In many countries, the courts and judicial system do not afford economic crimes the priority of crimes involving violence.

QUESTIONS: FILL IN THE BLANKS

Refer to Chapter 1 in Corporate Fraud and Internal Control: A Framework for Prevention.

1. Fraud itself is a ___________ concept existing within the criminal laws of virtually every civilized country.

2. In most countries, fraud may be deemed to occur when these individual elements exist: An ___________ representation about a ___________ fact or event is ___________ made by an individual or organization.

3. For fraud to exist, such representation ___________ be believed by the person or organization whom the representation was made.

4. For fraud to exist, the victim ___________ suffer the possibility of ___________ or ___________ as a result of the misrepresentation.

5. Under South African law, ___________ proprietary prejudice is not necessarily required for fraud.

6. Under Arkansas law, occupational fraud and abuses include misappropriation of ___________ in the form of , fraudulent disbursements, theft. or personal use of inventory or other .

7. A crime that is commonly confused with fraud is .

8. The misrepresentation leading to fraud can also be committed by means of an admission whereby the perpetrator fails to disclose a ___________ .

9. There is no definitive ___________ control that can stop all fraud in its tracks.

10. Fraudulent activity could be looked on as: any ___________ in which deceitful practices are resorted to by an organization or representative of an organization with the intent to cause ___________ would deprive another of property or other entitlements.

11. The ultimate bearer of the cost of fraud in most cases is .

12. In order to adopt a comprehensive policy toward the minimization of fraud within the organization, a full ___________ is required.

13. Much of the corporate fraud that takes place results from poor bookkeeping practices combined with ___________ and ___________ staff.

14. In general, the motivating factor leading individuals to commit fraud can be defined as a form of . This can take the form of significant financial need (or perceived need) and may include anything from ___________ to a simple case of an employee having .

15. For this to translate into a fraud-enabling pressure, generally some ___________ is involved.

16. ___________ is the process by which fraudsters can reconcile their behavior in committing the fraud with their own ___________ regarding honesty and trust.

17. Opportunity involves the ___________ of people to commit fraud in what they believe will be an ___________ manner.

18. Most fraud opportunities are created by or weak with an absence of detective controls increasing the probability.

19. Detection involves not only being alert for ___________ in business records and areas where internal controls may be ineffectual, but also for red flags in employee ___________ and changes in behavior patterns.

20. Red flags are ___________ indicators that the risk of fraud in a particular area either is higher than is normally tolerable or has increased over a period. Once again, these can be categorized as , changes in behavior, and general personality traits.

21. Typically, the primary objective of fraudsters is to ___________ with the secondary, although essential, objective to ___________ in order to avoid detection.

22. Frauds can be split into two broad categories: frauds against the ___________ and frauds against the ___________ .

23. In the past, such undetected fraud was subject to guesstimates with no real indication of the reliability for the figures produced. Recently, ___________ has given greater reliability to the estimated values for such fraud.

24. According to the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse, a typical organization will, in all probability, lose some ___________ percent of its annual revenue to fraud.

25. Occupational frauds are much more likely to be detected by ___________ than by any other means.

26. It is accepted that certain costs are a necessary part of doing business. Fraud, however, is frequently a ___________ cost.

27. In addition to the initial losses, cost of fraud includes the cost of insuring against ___________ due to employee dishonesty as well as loss of reputation.

28. Some insurance policies cover ___________ costs, but others do not, or cover them only for proven fraud that is covered by the particular policy.

29. One of the main deterrents to insider fraud is the degree of certainty that any attempt will be ___________ and that the perpetrator will be caught.

30. It is critical that organizations encourage the reporting of fraudulent activities or suspected wrongdoings by maintaining a strong ___________ and ___________ , while at the same time giving employees a mechanism and the confidence to carry out such reporting without fear of retribution.

31. Corruption includes the purchasing of intangibles, such as ___________ , direct influence, or political appointment, and can be seen in virtually every country in the world.

32. The U.S. Improper Payments Information Act (2002) required public agencies to publish a ___________ of the extent of fraud and error in their programs and activities.

QUESTIONS: SHORT ANSWER

1. The three elements of the fraud triangle are:

a.

b.

c.

2. A bookkeeper employed by a company for 15 years was passed over for promotion because of a disagreement with his supervisor. Despite appealing through the human resources department, nothing was done. Six months later, the bookkeeper resigned and left the company. A new appointment was made and, shortly after this appointment, a shortage was discovered in the petty cash system. Although nothing could be proven, the previous bookkeeper fell under suspicion despite his previous good record.

What grounds would management have for suspecting the previous bookkeeper?

3. As an auditor for the national defense force, you have been sent to audit the payroll section at army headquarters that handles the processing of the military payrolls for the army, air force, and navy. All types of weekly and monthly paid staff are processed in this office.

There have been suggestions that payroll data have been tampered with prior to being sent for data capture, and you have been asked to conduct an investigation.

What red flags would indicate the possibility of insider participation in such a fraud?

Chapter Two

Elements of the Crimes of Theft and Fraud

OVER THE YEARS, many different legal definitions of fraud have been promulgated, including fraud as a criminal act, fraud as a tort for civil action, and fraud as defined by professional organizations in an attempt to give their members evaluation criteria to judge the sufficiency of evidence gathered. All of these definitions agree in general that in order to be defined as fraud, certain criteria must be met.

QUESTIONS: FILL IN THE BLANKS

Refer to Chapter 2 in Corporate Fraud and Internal Control: A Framework for Prevention.

1. Common law, also known as ___________ law, originated in the United Kingdom during the reign of Henry II (1133–1189) and is based on the concept that the decision previously made sets a precedent and should be followed in subsequent cases.

2. The common law offense of ___________ is one of the most prevalent offenses committed in today's society.

3. Some estimates indicate that the average dishonest manager will be in a position to steal ___________ times that of an average hourly worker.

4. In order to be classified as theft, normally there would have been a contrectatio, whereby the perpetrator must have actually ___________ the object stolen, normally to remove it from the lawful possession of the owner.

5. The act of appropriation itself has two elements wherein the thief ___________ the lawful owner or possessor of his or her property and then the thief him- or herself ___________ of an owner in respect of the property.

6. Intangible assets, such as ___________ that can be stolen via electronic means, and online banking, either at the corporate level or via home Internet banking, have created considerably more opportunities for the ___________ of funds.

7. A ___________ document is anything that can be exchanged for monetary value.

8. In days gone by, document fraud was carried out using the basic techniques of ___________ and .

9. Use of high-quality security paper with ___________ and void pantographs made it more difficult to alter a document without changing its , thus making the alteration easy to detect.

10. Artificial watermarks can be simulated via computer; ___________ cannot.

11. In the procurement process, a variety of fraud techniques are found, including , bid rigging, supply of , product substitution, defective pricing, and cost/labor mischarging.

12. An alternate form of procurement fraud involves collaboration between an employee working with an ___________ in order to defraud the employer through the authorization of bogus or inflated invoices, payment for services or products not delivered, or work that is ___________ .

13. Technically, price fixing is an agreement among competitors to fix, ___________ , or simply maintain a price at which the goods and services are sold.

14. Price fixing is most commonly found in markets that are ___________ and ___________ with a declining demand and a distinct absence of product differentiation.

15. ___________ is also an anticompetitive activity that involves competitors agreeing in advance which organization will submit the winning bid during a competitive bidding process.

16. Variations on this type of fraud include ___________ in which certain competitors agree to submit bids that they know will be unacceptable to the buyer either because of the price or because of the terms of the contract.

17. In the case of competitive bidding for large contracts, ___________ agreements may be used as part of a bid rigging scheme.

18. Defective pricing involves contractors inflating their costs in order to ___________ or limit their losses. This is normally seen in cost plus contracts in which the price quoted is the supplier's cost plus a certain percentage.

19. A bribe is generally defined as something of value given to a person in a position of authority with the intention of ___________ or ___________ .

20. Use of ___________ to mask bribery with cash amounts being siphoned off as dividends to corrupt officials is particularly tricky to identify.

21. When an individual or corporation is in a position to exploit his or her/their own professional or official capacity in