CHAPTER 3

True/False

1. Once fraud has been committed, there are no winners. True

2. Fraud prevention involves two fundamental activities: (1) a hotline for tips and (2)
assessing the risk of fraud and developing concrete responses to mitigate the
risks and eliminate opportunities for fraud. False
3. Developing a positive work environment is of little importance when creating
culture of honesty. False
4. No matter how well an organization has developed a culture of honesty and high
ethics, most organizations will still have some fraud. True
5. Research has shown that it is employees and manager not auditors who detect
most frauds. True
6. Organizations that want to prevent fraud must make it easy for employees and
others to report suspicious activities. True
7. If a perpetrator is not caught, his confidence in the scheme will decrease and we
will become less and less greedy. False
8. Once predication is present, and investigation is usually undertaking to determine
whether or not fraud is actually occurring. True
9. Most investigators rely heavily on interviews to obtain the truth. True
10. Physical evidence includes evidence gathered from paper, computers, and other
written documents. False
11. Legal action taken by an organization can affect the probability of whether fraud
will occur. True
12. Investigating fraud is the most cost effective way to reduce losses from fraud.
False
13. Fraud prevention includes taking steps to create and maintain a culture of
honesty and high ethics. True
14. Effective hiring policies that discriminate between marginal and highly ethical
people contribute to an organization's success in preventing fraud. True
15. Expectations about punishment must be communicated randomly among work
groups if fraud is to be prevented. False
16. Frauds typically start large and get smaller as the perpetrator tries to conceal his
dishonest acts.False
17. Fraud is difficult to detect because some fraud symptoms often cannot be
differentiated from non fraud factors that appear to be symptoms. True
18. The three elements of the fraud triangle by which the investigative techniques are
often classified are 1. theft acts 2. concealment efforts 3. conversion methods.
True
19. Organizations often want to avoid embarrassment and expense so they
terminate fraudulent employees without having them prosecuted further. True
20. Criminal conviction is much more difficult to achieve than a civil judgement
because there must be proof beyond a reasonable doubt that the perpetrator
intentionally stole assets. True
21. In order to create a culture of honesty and confidentiality, persons aware of
fraudulent activity should be encouraged to tell only the CEO. False
 22. Since complete fraud prevention is impossible because it requires changing
actual human behavior, successful companies should forgo fraud prevention and
instead focus on strong detection programs. False
23. Since fraud prevention programs are so costly, despite being ethically superior,
they almost always result in higher costs and thus lower net income. False
24. Most fraud perpetrators have a long history of dishonesty and deceit. False

MULTIPLE CHOICE

1. The most effective way to reduce losses from fraud is: c. preventing fraud from
occurring.
2. To successfully prevent fraud, and organization must: d all of the above (identify
and remedy internal control weakness, explicitly consider fraud risks, take
proactive steps to create the right kind of environment)
3. The best way for management to model appropriate behavior is to: b. set an
example of appropriate behavior
4. Which of the following is NOT a proactive way for a company to eliminate fraud
opportunities? A. severely punishing fraud perpetrators.
5. Most frauds state small and: a. if undetected, continue to grow larger
6. Because of the ability to override internal controls, it is usually most difficult to
prevent which type of fraud? b. Fraud committed by a company president.
7. Which of the following refers to the circumstances, taken as a whole, that would
lead a reasonable prudent professional to believe fraud has occurred, is
occurring or will occur? D. Predication.
8. A method of classifying investigative approaches into testimonial evidence,
documentary evidence, physical evidence, and personal observations is referred
to as the: c. evidence square
9. Usually, for everyone involved, especially victims, the investigation of fraud is
very: d. traumatic and difficult.
10. To prevent fraud from reoccurring, most organizations and other fraud victims
should d. pursue either civil or criminal action, depending on the circumstances,
or both.
11. All of the following are ways to create a culture of honesty and high ethics
EXCEPT: d. eliminating opportunities for fraud.
12. The tone at the top when related to fraud usually refers to managements attitude
about: d. how management models appropriate behavior.
13. Research shows that fraud occurs less frequently when employees feel: d.
ownership in the organization
14. Opportunities to commit fraud can be eliminated by identifying sources of fraud,
by implementing controls and through independent checks One other effective
way of eliminating opportunities is: a. teaching employees to monitor and report
fraud.
15. Drawback to establishing a hotline for employees to report fraud include all of the
following except: d. This method of fraud is outdated.
16. Predication of fraud is defined as: a. reasonable belief that fraud has occurred or
is occurring.
17. Which of the four types of evidence includes interrogation and honesty testing?
a. Testimonial
18. The three elements present in most cases of fraud are: C. theft act, concealment,
conversion
19. Most often, victims of fraud do not take legal action against perpetrators. This is
because legal action can be: d. all of the above (unproductive, expensive,
embarrassing)
20. The best argument for taking legal action against fraud perpetrators is d.
prosecution of perpetrators discourages future occurrences of fraud.
21. Factors that are usually associated with high levels of employee fraud include all
of the following except: C. Long and difficult hours shared by everyone in the
organization.
22. Which of the following is true regarding the Sarbanes Oxley act of 2002? B.
Public companies must have a whistle blower system in place.