Deck 6: Data-Driven Fraud Detection

Question 1

Which of the following is NOT a red flag for fraud committed by purchasing employees to purchase goods for personal use?

A) Invoices without valid purchase order
B) Employee and vendor telephone numbers are the same
C) Invoices exceeding purchase order dollar amount ranked by dollar difference
D) Purchase orders with zero dollar amounts by buyer

Answer 1

B
A: It is a red flag that the purchasing employee purchases something for herself or himself without authorization
B: This is usually a symptom of setting up a dummy company
C: The employee may over purchase for himself or herself.
D: It is a red flag

Question 2

What is the major disadvantage of using the data-driven approach?

A) More expensive than the traditional reactive approach
B) Limited when databases are large
C) Leads to excessive leads of possible frauds
D) None of the above

Answer 2

A
A: Correct
B: Incorrect
C: Incorrect

Question 3

Benford's Law states that the most likely first digit of any randomly selected number will be which of the following?

A) 1
B) 7
C) 3
D) 4

Answer 3

A
A: Correct; 1 is the most likely first digit of a number

Question 4

All of the following are symptoms of vendor fraud except:

A) Short shipping
B) Billing for goods not ordered or shipped
C) Providing poor quality goods
D) All of the above are symptoms of vendor fraud

Question 5

The quick ratio is calculated as:

A) Current assets/Current Liabilities
B) Current Assets (minus Inventory)/Current Liabilities
C) Net Income/ Net Sales
D) Inventory/Total Assets

Question 6

ACL stands for:

A) Account coverage level.
B) Audit command language.
C) Actuarial confidence level.
D) Auditors can't learn

Question 7

All of following are methods of gathering information about a business except:

A) Become familiar with competitor processes
B) Interview key personnel
C) Observe employees performing their duties
D) Analyze financial statements and other accounting information
E) All of the above are acceptable methods of gathering information about a business

Question 8

All of the following are red flags of the existence of kickbacks except:

A) The purchaser gains greater control over the vendor
B) Prices increase
C) Volume with the kickback vendor increases
D) Quality from the kickback vendor decreases
E) All of the above are red flags of the existence of kickbacks

Question 9

Which of the following is not a step in the deductive fraud detection approach?

A) Understanding the business or operations to be studied
B) Understanding what kinds of frauds could occur
C) Determining the most likely symptoms
D) Performing digital analysis of company databases
E) Gathering data about symptoms

Question 10

ACL is to a database as:

A) Google is to the Internet
B) Monitor is to a computer
C) Phone number is to a Phone Company
D) None of the above

Question 11

Each of the following is true about Benford's Law except:

A) Benford's law broadly identifies the possible existence of fraud, but does not identify promising leads.
B) Benford's law states that each digit (from 1 to 9) will be the first digit in a number approximately the same amount of times as every other digit.
C) A major advantage of using Benford's law to detect fraud is that it is the least expensive method to implement and use.
D) Fraud perpetrators are less likely to learn that you are analyzing data according to Benford's law because it does not involve extensive data mining queries.

Question 12

Which statement is false?

A) In recent years there have been many cases of financial statement fraud.
B) Proactive fraud detection methods are in their infancy.
C) Fraud investigation involves identifying symptoms that often indicate fraud is being or has been committed.
D) Fraud investigation involves determining who committed the fraud, the schemes used and how much money or assets were taken.

Question 13

Which of the following illustrates the proactive approach to fraud detection?

A) Using data-mining software to identify fraud
B) Using Benford's law to identify fraud
C) Locating accounting anomalies and investigating for possible fraud
D) Learning about the business or operations to be studied prior to investigating for fraud

Question 14

Which of the following types of software is commercial data-mining software?

A) Audit command language (ACL)
B) QuickBooks
C) Peachtree
D) Excel

Question 15

Sampling is an effective analysis procedure for finding _________:

A) Routine accounting anomalies
B) Fraud
C) All of the above
D) None of the above

Question 16

When identifying possible frauds that may exist, the auditor should ask all of the following questions except?

A) Who are the key players in the business?
B) Does management demonstrate principles of integrity?
C) How could customers or vendors acting alone commit fraud?
D) What types of fraud have occurred or been suspected in the past?
E) All of the above are questions an auditor should ask.

Question 17

The data-driven method of fraud detection does not include which of the following characteristics:

A) Determining symptoms that the most likely frauds would generate
B) Understanding the business
C) Understanding and using Benford's law to analyze company databases
D) Understanding what kinds of frauds could occur

Question 18

Which of the following is the most direct method of focusing on changes in a company's balance sheet and income statement?

A) Comparing key ratios from one period to the next
B) Comparing account balances from one period to the next
C) Vertical analysis
D) Horizontal analysis

Question 19

True or false: Spreadsheets are not very useful in analyzing large amounts of data.

A) True
B) False

Question 20

Which of the following proactive fraud detection methods uses Benford's Law to detect fraud?

A) Commercial data-mining software
B) Digital analysis of company databases
C) Deductive fraud detection
D) None of the above

Question 21

Benford's law states that five will be the first digit of a random number set.

A) More often than four.
B) Less often than four.
C) About the same as six.

Question 22

Which of the following is the least effective way to compare financial statements from one period to the next when searching for anomalies?

A) Comparing account balances in the statements from one period to the next
B) Calculating key ratios and comparing them from one period to the next
C) Performing horizontal analysis
D) Performing vertical analysis

Question 23

Which of the following methods of data analysis is most direct in focusing on changes?

A) Vertical
B) Horizontal
C) Ratios
D) It can be easily adapted to any company
E) It can query any size companies database

Question 24

__________ is the splitting of complex data sets into case-specific tables.

A) Summarization
B) Stratification
C) Data Mining
D) None of the above

Question 25

____________ is a fuzzy logic technique that works best with large sequences of characters.

A) n-gram
B) Soundex
C) SRD
D) Audiograph

Question 26

In a data-driven investigation, putting yourself in the shoes of a criminal would be an example of what step?

A) Identify possible frauds that could exist
B) Investigate symptoms
C) Use technology to gather data
D) Understanding the business

Question 27

Identify the true statement about detecting fraud through financial statements reports:

A) To perform horizontal analysis, convert the financial statement balances to percentages of total assets or gross sales.
B) Vertical analysis is the most direct method of focusing on changes from period to period.
C) Before performing fraud analysis, all three types of financial statements need to be converted to change statements.
D) Small frauds usually do not significantly affect the financial statement balance.

Question 28

Which of the following addresses is not a cross-correlation?

A) 853 South 900 E, Plymouth, Massachusetts, 05683-4583
B) 853 S 900 E Plymouth, MA 05683
C) 853 So. 900 Ea. Plymouth, M.A. 05683
D) 853 South 900 E Plymouth, MA 05683

Question 29

Which of the following frauds would require a contractor and the company committing fraud to be in collusion?

A) Billing at wrong rates
B) Charging for fake employees
C) Kickbacks for favors
D) Over billing for equipment used

Question 30

__________ include statistical summaries of each column that include control totals, mean, maximum, standard deviation, number of zero values, number of empty records, etc.

A) Descriptives
B) Descriptions
C) Headings
D) Captions

Question 31

Benford's Law is:

A) An algorithm that predicts the probability of fraud within the company.
B) A tool that converts financial statements to percentages
C) An algorithm that accurately predicts the probability of selected digits of groups of numbers in a random sample.
D) The number of dollars of borrowed funds for every dollar invested.

Question 32

The most effective real-time analysis systems have all of the following characteristics except:

A) Indicators are hard-coded into the system
B) They allow deletion of less-effective indicators
C) They allow real-time modifications to indicators
D) All of the above are used in the most effective systems.

Question 33

Open database connectivity is usually the best way to retrieve data for analysis for all of the following reasons except:

A) It can retrieve data in real time
B) It allows use of SQL
C) It allows repetitive pulls for iterative analysis
D) It directly retrieves metadata like column types and relationships
E) All of the above are valid reasons

Question 34

One of the major disadvantages of Benford's law in detecting fraud is:

A) You know exactly what you are looking for.
B) It is a fairly expensive method to use.
C) You have enormous amounts of information to sift through.
D) It only broadly identifies the possible existence of fraud and can include non-fraud factors.

Question 35

All of the following are data analysis software except?

A) ACL
B) MySQL
C) Picalo
D) IDEA
E) All of the above are examples of Data Analysis software

Question 36

An appropriate red flag search to detect kickbacks or other favors would include

A) Invoices without valid purchase order
B) Employee and vendor telephone numbers are the same
C) Purchase orders with zero dollar amounts by buyer
D) Price increases greater than 30% for four consecutive years

Question 37

When a vendor takes control of a purchasing relationship, prices increase usually result from which kind of fraud?

A) Asset fraud
B) Kiting
C) Management fraud
D) Kickback fraud

Question 38

A mathematical algorithm that predicts the percentage of the time each digit will appear in a sequence of numbers:

A) Inductive fraud detection
B) Deductive Fraud detection
C) Benford's law
D) Horizontal Analysis
E) Vertical Analysis

Question 39

The following are all techniques for time trend analysis except:

A) Graphing each case
B) Regression analysis
C) All of the above
D) None of the above

Question 40

Digital analysis refers to:

A) A predicted distribution pattern usually found in a random set of numbers
B) Benton's Law
C) Searching for expected relationships between numbers
D) All of the above

Question 41

All of the following must be converted to a change statement before it can be used effectively as a fraud detection tool except:

A) Balance Sheet
B) Income Statement
C) Statement of Cash flows
D) Two of the above

Question 42

What is the most direct approach to focusing on changes in the balance sheet?

A) Vertical Analysis
B) Horizontal Analysis
C) Ratio Analysis
D) None of the Above

Question 43

SRD does all of the following except:

A) Detect potential collusion between employees and vendors
B) Identify suspect relationships between employees and customers
C) Locate repeat risk management claims across a corporation
D) Identify suspect relationships between upper management and other employees
E) Find employees or clients who are "in cahoots" with lists of known criminals

Question 44

Benford's law can help detect fraud by

A) Establishing weaknesses in the accounting controls system
B) Identifying accounting anomalies
C) Identifying employees that are a high risk for fraud
D) Showing attempts by fraudsters to make stolen amounts look random

Question 45

Individuals use financial statements to best detect fraud by focusing on:

A) Unexplained changes in financial statement balances
B) Earnings expectations
C) Management discussion and analysis
D) Consistencies

Question 46

Using these to detect fraud is much easier than assessing changes in the financial statement numbers themselves:

A) Financial statement ratios
B) Vertical analyses
C) Horizontal analyses
D) Data mining

Question 47

Which is not one of the steps in the Proactive Fraud Detection process?

A) Determine if actual fraud or other factors are causing the symptoms
B) Understanding the business or operations to be studied
C) Use databases and information systems to identify the fraud
D) Understanding what kinds of frauds could occur (fraud exposures) in the operation

Question 48

When using financial statement analysis, which ratio will be most useful in assessing a company's operational efficiency?

A) Inventory turnover
B) Quick ratio
C) Cost of goods sold percentage
D) Current Ratio

Question 49

Horizontal analysis is performed when:

A) Total assets are set at 100% and all other balances are a percentage of total assets
B) The percentage change in the balance sheet and income statement numbers is computed for one period to the next
C) Calculating and comparing key ratios from period to period
D) Comparing account balances in the statements from one period to the next

Question 50

Benford's Law is best exemplified by what type of distribution curve?

A) First digit numbers are evenly distributed
B) First digit numbers do not follow a defined pattern
C) Number sets will begin with a 1, more often than a 2, a 2 more often than a 3, and so on
D) None of the above

Question 51

In doing vertical analysis of an income statement, you notice that cost of goods sold increased from 50% of sales in year 1 to 60% of sales in year 2. All of the following are possible explanations except:

A) Inventory costs rose faster than sales prices.
B) Inventory is being stolen.
C) The accounting records are not accurate.
D) All of the above are possible explanations.

Question 52

Detecting fraud through financial statement ratios is much easier than assessing changes in the financial statement numbers themselves because:

A) They are sensitive to changes in key variables
B) Benchmarks are known
C) All of the above
D) None of the above

Question 53

Benford's Law:

A) Applies to numbers that have built-in limits
B) Is most effectively used with assigned numbers
C) Applies best to numbers that occur naturally
D) Uses ratios to detect frauds

Question 54

Which of the following is the most direct approach to focusing on changes in the balance sheet from one period to the next?

A) Vertical Analysis
B) Horizontal Analysis
C) Ratio Analysis
D) None of the above

Question 55

A Matasos matrix allows a user to combine different indicators to different schemes.