3: Ethics, Fraud, and Internal Control

True

The ethical principle of justice asserts that the benefits of the decision should be distributed fairly to those who share the risks.

False

The ethical principle of informed consent suggests that the decision should be implemented so as to minimize all of the risks and to avoid any unnecessary risks.

True

Employees should be made aware of the firm’s commitment to ethics.

False

Business ethics is the analysis of the nature and social impact of computer technology, and the corresponding formulation and justification of policies for the ethical use of such technology.

False

Para computer ethics is the exposure to stories and reports found in the popular media regarding the good or bad ramifications of computer technology.

True

Source code is an example of intellectual property.

False

Copyright laws and computer industry standards have been developed jointly and rarely conflict.

False

Business bankruptcy cases always involve fraudulent behavior.

True

Defalcation is another word for financial fraud.

True

The trend toward distributed data processing increases the exposure to fraud from remote locations.

False

The external auditor is responsible for establishing and maintaining the internal control system.

True

Segregation of duties is an example of an internal control procedure.

False

Controls in a computer-based information system are identical to controls in a manual system.

True

Preventive controls are passive techniques designed to reduce fraud.

False

Ethical issues and legal issues are essentially the same.

False

Internal control systems are recommended but not required of firms subject to the Foreign Corrupt Practices Act.

True

Operations fraud is the misuse or theft of the firm’s computer resources.

False

The Foreign Corrupt Practices Act requires only that a firm keep good records.

True

A key modifying assumption in internal control is that the internal control system is the responsibility of management.

False

Database management fraud includes altering, updating, and deleting an organization’s data.

True

While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to their audit clients, they are not prohibited from performing such services for non-audit clients or privately held companies.

True

The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external auditors.

False

Section 404 requires that corporate management (including the CEO) certify their organization’s internal controls on a quarterly and annual basis.

False

Section 302 requires the management of public companies to assess and formally report on the effectiveness of their organization’s internal controls.

True

The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all phases of the audit process.

D

Which ethical principle states that the benefit from a decision must outweigh the risks, and that there is no alternative decision that provides the same or greater benefit with less risk?

a. minimize risk

b. justice

c. informed consent

d. proportionality

A

Individuals who acquire some level of skill and knowledge in the field of computer ethics are involved in which level of computer ethics?

a. para computer ethics

b. pop computer ethics

c. theoretical computer ethics

d. practical computer ethics

B

All of the following are issues of computer security except

a. releasing incorrect data to authorized individuals

b. permitting computer operators unlimited access to the computer room

c. permitting access to data by unauthorized individuals

d. providing correct data to unauthorized individuals

C

Which characteristic is not associated with software as intellectual property?

a. uniqueness of the product

b. possibility of exact replication

c. automated monitoring to detect intruders

d. ease of dissemination

A

For an action to be called fraudulent, all of the following conditions are required except

a. poor judgment

b. false representation

c. intent to deceive

d. injury or loss

C

One characteristic of employee fraud is that the fraud
a. is perpetrated at a level to which internal controls do not apply

b. involves misstating financial statements

c. involves the direct conversion of cash or other assets to the employee’s personal benefit

d. involves misappropriating assets in a series of complex transactions involving third parties

C

Forces which may permit fraud to occur do not include

a. a gambling addiction

b. lack of segregation of duties

c. centralized decision making environment

d. questionable integrity of employees

A

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 funds

b. inflating bank balances by transferring money among different bank accounts

c. expensing an asset that has been stolen

d. creating a false transaction

B

Operations fraud includes

a. altering program logic to cause the application to process data incorrectly

b. misusing the firm’s computer resources

c. destroying or corrupting a program’s logic using a computer virus

d. creating illegal programs that can access data files to alter, delete, or insert values

C

Who is responsible for establishing and maintaining the internal control system?

a. the internal auditor

b. the accountant

c. management

d. the external auditor

A

The concept of reasonable assurance suggests that

a. the cost of an internal control should be less than the benefit it provides

b. a well-designed system of internal controls will detect all fraudulent activity

c. the objectives achieved by an internal control system vary depending on the data processing method

d. the effectiveness of internal controls is a function of the industry environment

A

The most cost-effective type of internal control is

a. preventive control

b. accounting control

c. detective control

d. corrective control

A

Which of the following is a preventive control?

a. credit check before approving a sale on account

b. bank reconciliation

c. physical inventory count

d. comparing the accounts receivable subsidiary ledger to the control account

A

A well-designed purchase order is an example of a

a. preventive control

b. detective control

c. corrective control

d. none of the above

B

A physical inventory count is an example of a

a. preventive control

b. detective control

c. corrective control

d. feedforward control

B

The bank reconciliation uncovered a transposition error in the books. This is an example of a

a. preventive control

b. detective control

c. corrective control

d. none of the above

B

In balancing the risks and benefits that are part of every ethical decision, managers receive guidance from each of the following except

a. justice

b. self interest

c. risk minimization

d. proportionality

C

Which of the following is not an element of the internal control environment?

a. management philosophy and operating style

b. organizational structure of the firm

c. well-designed documents and records

d. the functioning of the board of directors and the audit committee

C

Which of the following suggests a weakness in the internal control environment?

a. the firm has an up-to-date organizational chart

b. monthly reports comparing actual performance to budget are distributed to managers

c. performance evaluations are prepared every three years

d. the audit committee meets quarterly with the external auditors

A

Which of the following indicates a strong internal control environment?

a. the internal audit group reports to the audit committee of the board of directors

b. there is no segregation of duties between organization functions

c. there are questions about the integrity of management

d. adverse business conditions exist in the industry

C

According to SAS 78, an effective accounting system performs all of the following except

a. identifies and records all valid financial transactions

b. records financial transactions in the appropriate accounting period

c. separates the duties of data entry and report generation

d. records all financial transactions promptly

C

Which of the following is the best reason to separate duties in a manual system?

a. to avoid collusion between the programmer and the computer operator

b. to ensure that supervision is not required

c. to prevent the record keeper from authorizing transactions

d. to enable the firm to function more efficiently

A

Segregation of duties in the computer-based information system includes

a. separating the programmer from the computer operator

b. preventing management override

c. separating the inventory process from the billing process

d. performing independent verifications by the computer operator

B

Which of the following is not an internal control procedure?

a. authorization

b. management’s operating style

c. independent verification

d. accounting records

B

The decision to extend credit beyond the normal credit limit is an example of

a. independent verification

b. authorization

c. segregation of functions

d. supervision

A

When duties cannot be segregated, the most important internal control procedure is

a. supervision

b. independent verification

c. access controls

d. accounting records

D

An accounting system that maintains an adequate audit trail is implementing which internal control procedure?

a. access controls

b. segregation of functions

c. independent verification

d. accounting records

C

Employee fraud involves three steps. Of the following, which is not involved?

a. concealing the crime to avoid detection

b. stealing something of value

c. misstating financial statements

d. converting the asset to a usable form

D

Which of the following is not an example of independent verification?

a. comparing fixed assets on hand to the accounting records

b. performing a bank reconciliation

c. comparing the accounts payable subsidiary ledger to the control account

d. permitting authorized users only to access the accounting system

C

The importance to the accounting profession of the Foreign Corrupt Practices Act of 1977 is that

a. bribery will be eliminated

b. management will not override the company’s internal controls

c. firms are required to have an effective internal control system

d. firms will not be exposed to lawsuits

B

The board of directors consists entirely of personal friends of the chief executive officer. This indicates a weakness in

a. the accounting system

b. the control environment

c. control procedures

d. this is not a weakness

D

Computer fraud can take on many forms, including each of the following except

a. theft or illegal use of computer-readable information

b. theft, misuse, or misappropriation of computer equipment

c. theft, misuse, or misappropriation of assets by altering computer-readable records and files
d. theft, misuse, or misappropriation of printer supplies

A

When certain customers made cash payments to reduce their accounts receivable, the bookkeeper embezzled the cash and wrote off the accounts as uncollectible. Which control procedure would most likely prevent this irregularity?

a. segregation of duties

b. accounting records

c. accounting system

d. access controls

B

The office manager forgot to record in the accounting records the daily bank deposit. Which control procedure would most likely prevent or detect this error?

a. segregation of duties

b. independent verification

c. accounting records

d. supervision

C

Business ethics involves

a. how managers decide on what is right in conducting business

b. how managers achieve what they decide is right for the business

c. both a and b

d. none of the above

D

All of the following are conditions for fraud except

a. false representation

b. injury or loss

c. intent

d. material reliance

B

The four principal types of fraud include all of the following except

a. bribery

b. gratuities

c. conflict of interest

d. economic extortion

A

The characteristics of useful information include

a. summarization, relevance, timeliness, accuracy, and completeness

b. relevance, summarization, accuracy, timelessness, and completeness

c. timeliness, relevance, summarization, accuracy, and conciseness

d. disaggregation, relevance, timeliness, accuracy, and completeness

D

Internal control system have limitations. These include
a. possibility of honest error

b. circumvention

c. management override

d. stability of systems

B

Management can expect various benefits to follow from implementing a system of strong internal control. Which of the following benefits is least likely to occur?

a. reduced cost of an external audit.

b. prevents employee collusion to commit fraud.

c. availability of reliable data for decision-making purposes.

d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977.

e. some assurance that important documents and records are protected.

B

Which of the following situations is not a segregation of duties violation?

a. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine.

b. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse, selects the vendor and authorizes purchases when inventories are low.

c. The sales manager has the responsibility to approve credit and the authority to write off accounts.

d. The department time clerk is given the undistributed payroll checks to mail to absent employees.

e. The accounting clerk who shares the record keeping responsibility for the accounts receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control account.

E

Which of the following is not an issue to be addressed in a business code of ethics required by the SEC?

a. Conflicts of interest

b. Full and Fair Disclosures

c. Legal Compliance

d. Internal Reporting of Code Violations

e. All of the above are issues to be addressed