Chapter 5

Accounting Information Systems, 12e (Romney/Steinbart)
Chapter 5 Computer Fraud

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
Page Ref: 121
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
2) Which of the following best describes lapping?
A) Applying cash receipts to a different customer's account in an attempt to conceal previous thefts of
cash receipts.
B) Inflating bank balances by transferring money among different bank accounts.
C) Increasing expenses to conceal that an asset was stolen.
D) Stealing small amounts of cash, many times over a period of time.
Answer: A
Page Ref: 128
Difficulty : Moderate
AACSB: Reflective Thinking
3) 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
Page Ref: 122
Difficulty : Easy
AACSB: Analytic
4) All of the following could lead to computer fraud except
A) allowing computer operators full access to the computer room.
B) releasing data to unauthorized users.
C) allowing computer users to test software upgrades.
D) storing backup tapes in a location where they can be quickly accessed.
Answer: A
Page Ref: 131-134
Difficulty : Easy
AACSB: Analytic
1
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
5) Which of the following is not an example of the fraud triangle characteristic concerned with easing a
fraudster's conscience?
A) Revenge against the company
B) Sense of entitlement as compensation for receiving a lower than average raise
C) Intent to repay "borrowed" funds in the future
D) Belief that the company won't suffer because an insurance company will reimburse losses
Answer: A
Page Ref: 130
6) Most fraud perpetrators are insiders because
A) insiders are more dishonest than outsiders.
B) insiders know more about the system and its weaknesses than outsiders.
C) outsiders are more likely to get caught than insiders.
D) insiders have more need for money than outsiders.
Answer: B
Page Ref: 126
Difficulty : Easy
AACSB: Analytic
7) Most frauds are detected by
A) external auditors.
B) internal auditors.
C) accident.
D) hotline tip.
Answer: D
Page Ref: 135
Difficulty : Easy
AACSB: Analytic
2
8) Amy 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. Amy approaches a good friend, Coleen, to discuss
the possibility of Coleen investing funds and becoming a 25% partner in the business. After a lengthy
discussion Coleen agrees to invest. Eight months later, Coleen and Amy have a falling out. In order for
Coleen to sue Amy for fraud, all the following must be true except
A) Amy told Coleen she had worked at a floral shop for several years, when in fact she did not have any
prior experience in floral retail.
B) Coleen's decision to invest was primarily based on Amy's assertion that she had prior floral retail
experience.
C) Coleen's 25% share of the business is worth substantially less than her initial investment.
D) Before Coleen invested, Amy prepared a detailed business plan and sales forecasts, and provided
Coleen with copies.
Answer: D
Page Ref: 123
9) Perpetrators of theft of company assets typically exhibit all the following characteristics except that
they
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
Page Ref: 124-125
Difficulty : Easy
AACSB: Analytic
10) "Cooking the books" is typically accomplished by all the following except
A) inflating accounts payable.
B) accelerating recognition of revenue.
C) delaying recording of expenses.
D) overstating inventory.
Answer: A
Page Ref: 125
AACSB: Analytic
3
11) SAS No. 99 requires that auditors

A) plan audits based on an analysis of fraud risk.
B) detect all material fraud.
C) alert the Securities and Exchange Commission of any fraud detected.
D) take all of the above actions.
Answer: A
Page Ref: 125
Difficulty : Difficult
AACSB: Analytic
12) 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
Page Ref: 128
Difficulty : Easy
AACSB: Analytic
13) Intentional or reckless conduct that results in materially misleading financial statements is called
A) financial fraud.
B) misstatement fraud.
C) fraudulent financial reporting.
D) audit failure fraud.
Answer: C
Page Ref: 125
Difficulty : Easy
AACSB: Analytic
14) Researchers have compared the psychological and demographic characteristics of white-collar
criminals, violent criminals, and the general public. They found that
A) few differences exist between white-collar criminals and the general public.
B) white-collar criminals eventually become violent criminals.
C) most white-collar criminals invest their illegal income rather than spend it.
D) most white-collar criminals are older and not technologically proficient.
Answer: A
Page Ref: 126
Difficulty : Easy
AACSB: Analytic
4
15) Which of the following is an opportunity that could contribute to employee fraud?
A) an employee's spouse loses their job
B) an employee suddenly acquires lots of credit cards
C) an employee is upset that he was passed over for a promotion
D) close association with suppliers or customers
Answer: D
Page Ref: 129
AACSB: Analytic
16) 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
Page Ref: 127
AACSB: Analytic
17) Opportunity to commit fraud is comprised of three stages. The stage that often takes most time and
effort would include
A) stealing inventory from the warehouse.
B) selling stolen inventory to get cash.
C) lapping accounts receivable.
D) creating false journal entries to overstate revenue.
Answer: C
Page Ref: 128
18) 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
Page Ref: 128
Difficulty : Easy
AACSB: Analytic
5
19) 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
Page Ref: 128
20) In a ________ scheme, customer receipts are stolen and then subsequent payments by other
customers are misapplied to cover the theft of the original receipts.
A) kiting
B) laundering
C) bogus expense
D) lapping
Answer: D
Page Ref: 128
Difficulty : Easy
AACSB: Analytic
21) 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
Page Ref: 128
Difficulty : Easy
AACSB: Analytic
22) 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
Page Ref: 129
Difficulty : Easy
AACSB: Analytic
6
23) 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
Page Ref: 129
Difficulty : Easy
AACSB: Analytic
24) 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
Page Ref: 129
AACSB: Analytic
25) Which characteristic of the fraud triangle relates to excuses that perpetrators use to justify their
illegal behavior?
A) pressure
B) opportunity
C) rationalization
D) concealment
Answer: C
Page Ref: 130
Difficulty : Easy
AACSB: Analytic
26) The US Justice Department defines computer fraud as
A) any crime in which a computer is used.
B) an illegal act in which knowledge of computer technology is essential.
C) any act in which cash is stolen using a computer.
D) an illegal act in which a computer is an integral part of the crime.
Answer: B
Page Ref: 130
AACSB: Analytic
7
27) The most efficient way to conceal asset misappropriation is to

A) write-off a customer receivable as bad debt.
B) alter monthly bank statements before reconciliation.
C) alter monthly physical inventory counts to reconcile to perpetual inventory records.
D) record phony payments to vendors.
Answer: A
Page Ref: 128
28) Computer fraud is often much more difficult to detect than other types of fraud because
A) perpetrators usually only steal very small amounts of money at a time, thus requiring a long period of
time to have elapsed before they're discovered.
B) massive fraud can be committed in only seconds, leaving little or no evidence.
C) most perpetrators invest their illegal income rather than spend it, thus concealing key evidence.
D) most computer criminals are older and are considered to be more cunning when committing such a
fraud.
Answer: B
Page Ref: 130
AACSB: Analytic
29) 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
Page Ref: 130
Difficulty : Easy
AACSB: Analytic
30) 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
Page Ref: 131
Difficulty : Easy
AACSB: Analytic
8
31) 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
Page Ref: 131
32) The simplest and most common way to commit a computer fraud is to
A) alter computer input.
B) alter computer output.
C) modify the processing.
D) corrupt the database.
Answer: A
Page Ref: 131
Difficulty : Easy
AACSB: Analytic
33) Downloading a master list of customers and selling it to a competitor is an example of
A) data fraud.
B) output theft.
C) download fraud.
D) fraudulent financial reporting.
Answer: A
Page Ref: 133
Difficulty : Easy
AACSB: Analytic
34) 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
Page Ref: 134-135
Difficulty : Easy
AACSB: Analytic
9
35) 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
Page Ref: 124-125
36) On Monday morning, Janet Pillsner, Chief Information Officer at International Securities
Corporation (ISC), got some bad news. A tape used to store system data backups was lost while it was
being transported to an offsite storage location. She 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) The shipper has insurance that will reimburse ISC for the cost of the tape.
B) ISC has a copy of the tape onsite, so a new copy for storage offsite can easily be prepared.
C) The tape was encrypted and password protected.
D) ISC has a comprehensive disaster recovery plan.
Answer: C
Page Ref: 135
Difficulty : Easy
37) A simple method for catching or preventing many types of employee fraud is to
A) monitor all employee behavior using video cameras.
B) require all employees to take annual vacations.
C) explain to employees that fraud is illegal and that it will be severely punished.
D) monitor employee bank accounts and net worth.
Answer: B
Page Ref: 134
Difficulty : Easy
AACSB: Analytic
10
38) Describe two kinds of fraud.

Answer: Misappropriation of assets, or theft, by a person or group for personal financial gain is usually
committed by employees. Fraudulent financial reporting is intentional or reckless conduct that results in
materially misleading financial statements.
Page Ref: 124-125
Difficulty : Easy
AACSB: Analytic
39) 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.
Page Ref: 125
AACSB: Analytic
40) Explain the impact of SAS No. 99 on auditors' responsibilities.
Answer: SAS No. 99, effective December 2002, requires that auditors explicitly consider fraud risks
when planning and performing an audit. Auditors must understand types and characteristics of fraud.
Audit teams must review clients' financial statements for areas susceptible to fraud and communicate
with each other during planning of the audit. Auditors must ask management and audit committee
members about any past or current instances of fraud. Since many frauds involve revenue recognition,
auditors must exercise special care and testing in examining revenue accounts. Audit procedures and
testing must be tailored in response to fraud risk assessment. Auditors must evaluate the risk of
management override of controls and any other indications of fraud occurrences. All audit procedures,
testing and findings must be documented and communicated to management and the audit committee.
Auditors must evaluate and recognize the impact of technology on fraud risks, as well as opportunities
technology may provide to design fraud-auditing procedures.
Page Ref: 125-126
AACSB: Analytic
41) 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.
Page Ref: 131
11
42) 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.
Page Ref: 134-135
AACSB: Analytic
43) Describe four ways companies can reduce losses from fraud.
Answer: Maintain adequate insurance. Keep a current backup copy of all program and data files in a
secure off-site location. Develop a contingency plan for fraud occurrences and other disasters that might
occur. Use special software designed to monitor system activity and help companies recover from frauds
and malicious actions.
Page Ref: 135
Difficulty : Easy
AACSB: Analytic
44) What are some of the distinguishing characteristics of fraud perpetrators?
Answer: Some distinguishing characteristics of fraud perpetrators are: they tend to spend their illegal
income to support their lifestyle; once they begin it becomes harder to stop and they become bolder as
each incident happens; once they start to rely on the ill-gotten gains, they become more greedy and
sometimes careless and overconfident. In the case of computer criminals, they are often young and have
substantial computer knowledge. About two-thirds are men and likely to be an employee of the firm
from which they steal. Many are unhappy or disgruntled with their employer because they feel
unappreciated and underpaid. Most have no previous criminal record.
Page Ref: 126
AACSB: Analytic
12
45) 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 publicitya 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 crimesthis 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 underreporting 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.
Page Ref: 131
AACSB: Analytic
13
46) 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)
Page Ref: 134-135
14

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Accounting Information Systems, 12e (Romney/Steinbart)

Chapter 5 Computer Fraud

11) SAS No. 99 requires that auditors

27) The most efficient way to conceal asset misappropriation is to

38) Describe two kinds of fraud.

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