Fraud Prevention & Detection Flashcards

Which red flag is most commonly associated with billing fraud by an accounts payable clerk?

Answer: Invoices lacking purchase order numbers

Fraudulent invoices often bypass the normal purchase order process, making the absence of a PO number a key red flag.

A forensic accountant uses 'digital analysis' of a transaction population. Which law underpins this technique?

Answer: Benford's Law

Benford's Law predicts the frequency distribution of leading digits in naturally occurring data sets, and deviations can signal manipulation.

Which type of control is an organization's code of ethics?

Answer: Preventive control

A code of ethics sets behavioral expectations before misconduct occurs, classifying it as a preventive anti-fraud control.

When auditors select transactions that do NOT appear in the system to test whether they were recorded, this is called:

Answer: Completeness testing

Completeness testing ensures all transactions that should be recorded have been captured, detecting schemes that involve omitting entries.

Which fraud risk is heightened when a company has a dominant CEO who overrides controls without challenge?

Answer: Management override

A culture where leadership overrides established controls creates an environment where financial statement fraud is easier to perpetrate.

A company conducts physical inventory counts without advance notice to the warehouse team. This is an example of:

Answer: A detective surprise procedure

Unannounced inventory counts detect inventory theft or misrepresentation that employees cannot conceal without prior warning.

Which of the following best describes a 'conflict of interest' in the context of fraud prevention?

Answer: A personal relationship or financial interest that compromises professional judgment

A conflict of interest exists when an employee's personal interests could improperly influence their professional decisions, creating fraud risk.