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58 Cards in this Set
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In order for a ghost employee scheme involving an hourly employee to be successful, all of the following must happen EXCEPT:
a. A paycheck must be issued to the ghost employee b. The ghost employee must be added to the payroll c. The ghost employee must be a fictitious person d. Timekeeping information must be collected for the ghost employee |
(c) In order for a ghost-employee scheme to work, four things must happen: (1) the ghost must be added to the payroll, (2) timekeeping (for an hourly employee) and wage rate information must be collected, (3) a paycheck must be issued to the ghost, and (4) the check must be delivered to the perpetrator or an accomplice. The ghost employee may be a fictitious person or a real individual who simply does not work for the victim employer. When the ghost is a real person, it is often a friend or relative of the perpetrator. In some cases, the ghost employee is an accomplice of the fraudster who cashes the fraudulent paychecks and splits the money with the perpetrator.
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Which of the following does NOT happen in a fictitious refund scheme?
a. The company's inventory is overstated b. a fraudster processes a transaction as if a customer were returning merchandise c. merchandise is to the stock room d. The register tape balances with the amount of money in the register |
(c) In a fictitious refund scheme, a fraudster processes a transaction as if a customer were returning merchandise, even though no actual return takes place. Two things result from this fraudulent transaction. First, the fraudster takes cash from the register in the amount of the false return. Since the register tape shows that a merchandise return has been made, the disbursement appears legitimate. The register tape balances with the amount of money in the register because the money that was taken by the fraudster is supposed to have been removed and given to a customer as a refund.
The second thing that happens in a fictitious refund scheme is that a debit is made to the inventory system showing that the merchandise has been returned to the inventory. Because the transaction is fictitious, no merchandise actually is returned. As a result, the company's inventory is overstated. |
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Which of the following is one of the four major categories of check tampering schemes?
a. Forged maker schemes b. Forged endorsement schemes c. Altered payee schemes d. All of the above |
(d) The four major categories of check tampering schemes include:
• Forged maker schemes • Forged endorsements • Altered payees • Authorized maker schemes |
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Fraudulent disbursement schemes include which of the following?
a. Register disbursement schemes b. Check tampering schemes c. payroll schemes d. All of the above |
(d) All of the following are types of fraudulent disbursement schemes:
• Register disbursement schemes • Check tampering schemes • Payroll schemes • Billing schemes • Expense reimbursement schemes |
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Most shell company schemes involve the purchase of fictitious:
a. Services b. Supplies c. Goods d. Inventory |
(a) Most shell company schemes involve the purchase of services rather than goods. The primary reason for this is that services are not tangible. If an employee sets up a shell company to make fictitious sales of goods to his employer, these goods will obviously never arrive. By comparing its purchases to its inventory levels, the victim organization might detect the fraud. It is much more difficult, on the other hand, for the victim organization to verify that the services were never rendered. For this reason, many employees involved in shell company schemes bill their employers for things like “consulting services.”
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Which of the following is recommended to prevent fraud in electronic payments?
a. Implementing ACH blocks and filers b. Positive pay for ACH transactions c. Having separate bank accounts for paper checks and electronic payments d. All of the above |
(d) Banks offer services that help business account holders mitigate the risk of fraudulent electronic payments. ACH blocks allow account holders to notify their banks that ACH debits should not be allowed on specific accounts. ACH filters enable account holders to provide their banks a list of criteria against which banks can filter ACH debits and reject unauthorized transactions. Positive pay for ACH is another security feature offered by banks. With positive pay, banks match details of ACH payments with those on a list of legitimate and expected payments provided by the account holder. Only authorized electronic transactions are allowed withdrawn from the account; exceptions are reported to the customer for review.
Companies should consider segregating their bank accounts to maintain better control over them—separate accounts can be used for paper and electronic transactions. Having separate bank accounts will facilitate the audit process and help identity suspicious payment |
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As a means to prevent check fraud, companies should establish maximum dollar amounts above which the company’s bank will not accept checks drawn against the account.
True or False |
(True) Companies should work in a cooperative effort with banks to prevent check fraud. One way to do this is to establish maximum dollar amounts above which the company’s bank will not accept checks drawn against the account.
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Which of the following methods would be useful in detecting a ghost employee scheme?
a. Analyzing payroll withholdings b. Examining payroll checks for dual endorsements c. Comparing personnel records to payroll data d. All of the above |
(d) Comparing personnel records maintained by the human resources department to payroll data can be useful in detecting ghost employee schemes. An analysis of payroll withholdings might also reveal either ghost employees or trust account abuses. Ghost employees often will have no withholding taxes, insurance, or other normal deductions. Therefore, a listing of any employee without these items might reveal a ghost employee. Another way to detect a ghost employee scheme is to examine paychecks for dual endorsements. This might indicate that the fraudster has forged an endorsement in order to deposit the ghost’s paycheck into his own account.
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A detailed expense report should require which of the following components?
a. Original receipts (when possible) b. Time period when the expense occurred c. Explanation of the business purpose of each expense d. All of the above |
(d) Detailed expense reports should require the following information:
• Receipts or other support documentation • Explanation of the expense, including specific business purpose • Time period when the expense occurred • Place of expenditure • Amount When possible, require that employees submit original, paper receipts. Given the amount of electronic and Internet commerce that happens in today’s world, this is not always possible. Keep in mind that electronic copies of receipts are often much easier to forge and doctor than paper receipts. Special attention should be paid to any receipts that come via email or email attachment. Consider corroborating prices on Internet receipts with those found on the vendor’s website. It is not enough to have the detailed reports submitted if they are not reviewed. A policy requiring the periodic review of expense reports, coupled with examining the appropriate detail, will help deter employees from submitting personal expenses for reimbursement. |
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Jill is a CPA who needs to satisfy continuing professional education (CPE) requirements throughout the year to maintain her license. Her supervisor usually signs off on these requests without paying them much attention or scrutiny. Wanting to use this to her advantage, Jill figures out that it would be easy to copy the image of the logo from a popular CPE provider and generate a receipt using basic computer software. She creates a fraudulent receipt and submits it to her supervisor for reimbursement. What type of scheme is Jill committing?
a. A multiple reimbursement scheme b. A fictitious expense scheme c. A mischaracterized expense scheme d. Collusion with a supervisor |
(b) Expense reimbursements are sometimes sought by employees for wholly fictitious items. Instead of overstating a real business expense or seeking reimbursement for a personal expense, an employee just invents a purchase that needs to be reimbursed. One way to generate a reimbursement for a fictitious expense is to create bogus support documents, such as false receipts. Using simple computer software, it is easy for employees to create realistic-looking counterfeit receipts at home. These counterfeits are often very sophisticated, even including the logos of the stores in which goods or services were allegedly purchased.
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Which of the following best describes a mischaracterized reimbursement expense scheme?
a. An employee submits a receipt for an item in one expense report and an email confirmation for the same item in the next period's expense report b. An employee alters a receipt to reflect a higher cost than what he actually paid and submits it for reimbursement c. An employee produces a fictitious receipt and includes it with his expense report d. An employee who travels frequently on business submits receipts from his hotel stay during a family vacation as a business expense |
(d) One of the most basic expense schemes is perpetrated by requesting reimbursement for personal expense, claiming its business related. Examples include claiming personal travel as business trip, listing dinner with friend as “business development” or “client entertainment, etc” . Fraudsters submit receipts from their personal expenses along with their reports and provide business reasons for incurred costs.
Instead of reimbursement for personal expenses, some overstate cost of actual business expenses. This is considered an overstated expense reimbursement scheme. In a fictitious expense reimbursement scheme, employee seeks reimbursement for wholly fictitious expenses. Instead of overstating real business expense or seeking reimbursement for personal expense, employee invents expense by producing fictitious receipt and requests to be reimbursed. In a multiple reimbursement scheme, employee submits several types of support for same expense so he can get reimbursed multiple times. |
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Skimmed checks and false voids are types of check tampering schemes.
True or False |
(False) Neither skimmed checks nor false voids are types of check tampering schemes. Skimmed checks are a form of theft of incoming cash. False voids are a type of register disbursement scheme. The four categories of check tampering schemes include:
• Forged maker schemes • Forged endorsements • Altered payees • Authorized maker schemes |
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How does positive pay help prevent check fraud?
a. The bank verifies checks presented for payment against a list of approved checks written provided by the company b. Positive pay controls with vendors the company's bank can deposit checks from c. The bank scans all checks presented for payment to determine whether the signatures are forged d. Positive pay establishes a maximum dollar amount above with the company's bank will not accept checks drawn against the account |
(a) Positive pay allows a company and its bank to work together to detect fraudulent items presented for payment. The company provides the bank with a list of checks and amounts that are written each day. The bank verifies items presented for payment against the company’s list. The bank rejects items that are not on the list. Investigations are conducted as to the origin of “nonlist” items.
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Pass-through schemes are usually undertaken by employees who receive inventory on behalf of the victim company.
True or False |
(False) Pass-through schemes are usually undertaken by employees in charge of purchasing on behalf of the victim company. Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious entity. He then resells the merchandise to his employer from the shell company at an inflated price, thereby making an unauthorized profit on the transaction.
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Which of the following control procedures will NOT help prevent payroll fraud?
a. Having the employee who prepares the payroll also review and sign all payroll checks b. Maintaining personnel records separately from payroll and timekeeping functions c. Keeping the payroll accounting function independent of the general ledger function d. Prenumbering payroll check and issuing them in numeral sequence |
(a) There are two basic preventive measures for payroll-related fraud: segregation of duties and periodic payroll review and analysis. The following activities should be segregated:
• Payroll preparation • Payroll disbursement (into payroll and withholding tax accounts) • Payroll distribution • Payroll bank reconciliations • Human resource departmental functions Therefore, the employee who prepares the payroll should NOT review or sign any payroll checks. |
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An excessive number of missing checks without stop payments issued to them is often a red flag of check tampering.
True or False |
(True) An excessive number of missing checks can be a red flag of a check tampering scheme, especially if stop payments haven’t been issued.
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A recommended practice to detect expense reimbursement schemes is to compare current period expenses to both historical expenditure amounts and budgeted expense amounts.
True or False |
(True) Generally, expense account review uses one of two methods: historical comparisons or comparisons with budgeted amounts. A historical comparison compares the balance expended this period in relation to the balance spent in prior, similar periods.
Budgets are estimates of the money and/or time necessary to complete a task. They are based on past experience with consideration for current and future business conditions. Therefore, when comparing actual and budgeted expenses, determining inordinate expenses or inaccurate budget estimates is important. |
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All of the following are classifications of billing schemes EXCEPT:
a. Invoicing via non-accomplice vendors b. Shell company schemes c. Personal purchases with company funds d. Bid rigging |
(d) There are three principal types of billing schemes:
• Invoicing via shell companies • Invoicing via nonaccomplice vendors • Personal purchases with company funds |
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All of the following measures are recommended to help mitigate the risk of billing schemes EXCEPT:
a. Separate the purchasing function from the payment function b. Implement a hotline function c. Prohibit competitive bidding d. Provide objective compensation for purchasing staff |
(c) The prevention of purchasing fraud is difficult. Most effective purchasing fraud prevention measure is education and training of purchasing and payable personnel. The second most effective measure is an objective compensation arrangement with people responsible for purchasing decisions.
For best results and accountability, each company sufficient in size should separate purchasing department. Regardless company size, purchasing function is separate from the payment function. Companies's hotline should provide a forum for complaints and fraud tips by employees and outsiders. Companies should enforce competitive bidding. Competitive bidding is transparent procurement method in which bids from competing contractors are invited by openly publicizing the scope, specifications, and terms and conditions of proposed contract and criteria by which bids will be evaluated. It aims at obtaining goods and services at lowest prices by stimulating competition and by preventing bias and fraud. |
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Zach was booking travel arrangements for a business trip. He purchased an airline ticket online using his own funds and obtained a receipt for the ticket via email. Using photo-editing software, Zach changed the ticket price from $530 to $680 on the electronic receipt and submitted it to his employer for reimbursement. This is an example of what type of fraud scheme?
a. Multiple reimbursement scheme b. Mischaracterized expense scheme c. Personal purchases with company funds d. Overstated expense scheme |
(d) Instead of seeking reimbursement for personal expenses, some employees overstate the cost of actual business expenses. The most fundamental example of an overstated expense reimbursement scheme occurs when an employee doctors a receipt or other supporting documentation to reflect a higher cost than what he actually paid.
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Jacob was on a business trip in Las Vegas. One night, he met up with some friends (unrelated to his work) at an expensive restaurant and paid for the group's entire tab on his credit card, announcing that “it would be on the company.” He submitted the receipt for the dinner along with the rest of his legitimate business receipts from the trip and described the dinner as “client entertainment.” What type of scheme did Jacob commit?
a. A mischaracterized expense scheme b. A fictitious expense scheme c. An overstated expense scheme d. A multiple reimbursement scheme |
(a) One of the most basic expense reimbursement schemes is perpetrated by simply requesting reimbursement for a personal expense, claiming that it is business related. Examples of mischaracterized expenses include claiming personal travel as a business trip, listing dinner with a friend as “business development” or “client entertainment,” and so on. Fraudsters might submit the receipts from their personal expenses along with their reports and provide business reasons for the incurred costs.
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Sheila, an accounts payable supervisor for ABC Company, bought supplies for a company she owned on the side. Sheila entered vouchers in ABC Company's accounts payable system for the cost of the supplies. Checks were cut to pay for these unauthorized expenses during normal daily check runs. The goods were drop-shipped to a location where Sheila could collect them. What type of occupational fraud is this?
a. An invoice kickback scheme b. An expense reimbursement scheme c. A personal purchase with company fund scheme d. A pay-and-return scheme |
(c) Instead of undertaking billing schemes to generate cash, many fraudsters simply purchase personal items with their company’s money. Company accounts are used to buy items for employees, their businesses, their families, and so on. This type of scheme is classified as a fraudulent billing scheme rather than theft of inventory. The heart of the scheme is not the theft of the items but rather the purchase of them. The perpetrator causes the victim company to purchase something it did not actually need, so the damage to the company is the money lost in purchasing the item.
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Baker used his company credit card to pay for a business dinner at which he was entertaining a client, knowing the credit card bill would be paid by Baker's employer. Baker saved the receipt and later filed an expense report seeking reimbursement for the cost of the meal, attaching the receipt as support. This is an example of what kind of fraud?
a. Personal purchase with company funds b. False billing scheme c. Multiple reimbursement scheme d. Muscharacterized expense scheme |
(c) A multiple expense reimbursement scheme involves the submission of a single expense several times to receive multiple reimbursements. The most frequent example of such a scheme is the submission of several types of support for the same expense. However, rather than file two expense reports, employees might also charge an item to the company credit card, save the receipt, and attach it to an expense report as if they paid for the item themselves. The victim company therefore ends up paying twice for the same expense.
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Baker, the managing partner in a small law firm, is the authorized signer on all company checks. When his personal phone bill arrived last month, Baker prepared and signed a company check to pay the bill. He did not disclose this payment to his partners. Baker committed:
a. A false billing scheme b. An authorized maker scheme c. A mischaracterized expense scheme d. A forged maker scheme |
(b) An authorized maker scheme is a type of check tampering fraud in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker. The most common example occurs when a majority owner or sole shareholder uses his company as a sort of alter ego, paying personal expenses directly out of company accounts. Baker's scheme is not a billing scheme because he wrote the check himself and there is no indication that he submitted the phone bill to the firm's regular payment cycle.
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Which of the following is considered a red flag of check tampering?
a. Payee addresses that match employee addresses b. Non-payroll checks payable to employees c. Large gaps in the check register d. All of the above |
(d) The following are red flags of check tampering:
• Missing checks or gaps in the check register indicate lax control of physical checks. Stop payments is issued. • Checks payable to employees, with exception of regular payroll checks, is scrutinized. Examination may indicate other schemes, as conflicts of interest, fictitious vendors, or duplicate expense reimbursements. • Altered endorsements or dual endorsements of returned checks indicate possible tampering. • Duplicate or counterfeit checks indicate fraud. Checks might be traceable to depositor through bank check coding. • Questionable deposit dates is matched to the corresponding customer accounts. • An examination of cash advances might reveal advances not properly documented and inappropriate payments made to employees. • Customer complaints regarding payments not being applied to their accounts is investigated. • A questionable payee/payee address on a check should trigger review |
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What happens when an employee records a fictitious refund of goods at his cash register?
a. The victim company's inventory is overstated b. Inventory is returned to the store c. The register total is out of balance with the register log d. None of the above |
(a) A refund shows a disbursement of money from the register as the customer gets his money back. In a fictitious refund scheme, a fraudster processes a transaction as if a customer were returning merchandise, even though no actual return takes place. Two things result from this fraudulent transaction. First, the employee takes cash from the register in the amount of the false return. Since the register log shows that a merchandise return has been made, it appears that the disbursement is legitimate. The second thing that happens in a fictitious refund scheme is that a debit is made to the inventory system showing that the merchandise has been returned. Since the transaction is fictitious, no merchandise is actually returned. The result is that the company’s inventory is overstated.
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Which of the following is a red flag of fraudulent register disbursements?
a. There are multiple refunds or voids under the review limit b. Voided transactions are not properly documented or approved by a supervisor c. Personal checks from cashiers are found in the register d. All of the above |
(d) Red flags of register disbursements include:
• Inappropriate segregation of duties exists. • Cashiers, rather than supervisors, have access to the control keys which are necessary for refunds and voids. • Register employees have the authority to void their own transactions. • Register refunds are not methodically reviewed. • Multiple cashiers operate from a single cash drawer without separate access codes. • Personal checks from cashiers are found in the register. • Voided transactions are not properly documented or approved by a supervisor. • Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file. • There are missing or obviously altered register tapes. • Gaps exist in sequence of transactions on the register tape. • There an inordinate number of refunds, voids, or no-sales on register tape. • Inventory totals appear forced. • There are multiple refunds or voids under review limit |
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A register disbursement scheme is easier to conceal when register employees have the authority to void their own transactions.
True or False |
(True) Register disbursements include:
• Inappropriate segregation of duties exists. • Cashiers, rather than supervisors, have access to the control keys which are necessary for refunds and voids. • Register employees have the authority to void their own transactions. • Register refunds are not methodically reviewed. • Multiple cashiers operate from a single cash drawer without separate access codes. • Personal checks from cashiers are found in the register. • Voided transactions are not properly documented or approved by a supervisor. • Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file. • There are missing or obviously altered register tapes. • Gaps exist in sequence of transactions on the register tape. • There an inordinate number of refunds, voids, or no-sales on register tape. • Inventory totals appear forced. • There are multiple refunds or voids under review limit |
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Duplicate check numbers in the listing of canceled checks are a potential sign of fraud.
True or False |
(True) Duplicate check numbers indicate potential fraud. These checks might be traceable to the depositor through bank check coding.
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Bank reconciliations should be performed by an authorized signatory on the account.
True or False |
(False) To prevent check fraud, bank reconciliations should NOT be performed by an authorized check signatory. Bank statements should be reviewed and reconciled by more than one person each month.
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Julia, a fraud examiner, is performing tests to look for potential asset misappropriation schemes at her company. One of her routine tests is to compare the payroll records to the human resources files. What type of fraud scheme is she most likely looking for when performing this test?
a. A check tampering scheme b. A ghost employee scheme c. A fraudulent commissions scheme d. A falsified hours and wages scheme |
(b) Comparing personnel records maintained by the human resources department to payroll data can be useful in detecting ghost employee schemes. The term "ghost employee" refers to someone on the payroll who does not actually work for the victim company. Through the falsification of personnel or payroll records, a fraudster causes paychecks to be generated to a ghost.
For example, comparing employee names, addresses, and Social Security numbers, as well as direct-deposit bank account numbers, can determine if there are any unexpected duplicates or discrepancies that would indicate a ghost on the payroll. |
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Gaps in the sequence of transactions on register tape might indicate that a fraudulent register disbursement scheme is taking place.
True or False |
(True) Register disbursements include:
• Inappropriate segregation of duties exists. • Cashiers, rather than supervisors, have access to the control keys which are necessary for refunds and voids. • Register employees have the authority to void their own transactions. • Register refunds are not methodically reviewed. • Multiple cashiers operate from a single cash drawer without separate access codes. • Personal checks from cashiers are found in the register. • Voided transactions are not properly documented or approved by a supervisor. • Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file. • There are missing or obviously altered register tapes. • Gaps exist in sequence of transactions on the register tape. • There an inordinate number of refunds, voids, or no-sales on register tape. • Inventory totals appear forced. • There are multiple refunds or voids under review limit |
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In order for an hourly employee to commit a falsified hours and salary scheme, he may overstate either the number of hours worked or his rate of pay.
True or False |
(True) For hourly employees, the size of a paycheck is based on two essential factors: the number of hours worked and the rate of pay. Therefore, for an hourly employee to fraudulently increase the size of his paycheck, he must either falsify the number of hours he has worked or change his wage rate.
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Sean is responsible for delivering timesheets to the payroll department on behalf of his supervisor. One day he decides to withhold his timesheet from those being sent to his supervisor for approval. He falsely increases the number of hours he has worked and then forges his supervisor’s signature on his timesheet. He adds the timesheet to the stack of authorized sheets and delivers them to payroll. This is an example of:
a. A check tampering scheme b. A ghost employee scheme c. A falsified hours and salary scheme d. A fictitious reimbursement scheme |
(c) For hourly employees, the size of a paycheck is based on two essential factors: number of hours worked and rate of pay. For an hourly employee to fraudulently increase size of his paycheck, he either falsify number of hours worked or change wage rate. One form of control breakdown common in falsified hours and salary schemes is failure to maintain proper control over timecards. In properly run system, once timecards are authorized by management, they should be sent directly to payroll. Those who prepare timecards shouldn't have access to them after they have been approved. When this procedure is not observed, person who prepared a timecard can alter it after his supervisor has approved it but before it is delivered to payroll.
Common hours and salary scheme include: • Inflating the number of hours worked • Inflating the rate of pay • Forging a supervisor’s signature • Collusion with a supervisor • Implementing poor custody procedures • Altering a timesheet after it approve |
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Which of the following is a method of committing a falsified hours and salary scheme?
a. A colluding with a supervisor b. Altering a timesheet after it has been approved c. Forging a supervisor's signature d. All of the above |
(d) The most common method of misappropriating funds from the payroll is the overpayment of wages. For hourly employees, the size of a paycheck is based on two factors: the number of hours worked and the rate of pay. It is therefore obvious that for an hourly employee to fraudulently increase the size of his paycheck, he must either falsify the number of hours he has worked or change his wage rate.
Common ways to commit a falsified hours and salary scheme include: • Inflating the number of hours worked • Inflating the rate of pay • Forging a supervisor’s signature • Collusion with a supervisor • Implementing poor custody procedures • Altering a timesheet after it has been approved |
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Electronic payment tampering is generally easier to detect than traditional check tampering because it leaves a clear audit trail.
True or False |
(False) Electronic payment tampering is generally more difficult to detect than traditional check tampering schemes. As with other schemes, once the fraudulent payment has been made, the employee must cover his tracks. However, the lack of physical evidence and forged signatures can make concealment of fraudulent electronic payments less challenging than other check tampering schemes. Some fraudsters attempt to conceal their schemes by altering the bank statement, miscoding transactions in the accounting records, or sending fraudulent payments to a shell company with a name similar to that of an existing vendor. Others merely rely on the company’s failure to monitor or reconcile its accounts.
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_______________ is a system by which the bank verifies checks presented for payment against the list provided by the company of approved checks written on the account.
a. Positive pay b. Check matching c. Verification control d. Payment patrol |
(a) Positive pay allows a company and its bank to work together to detect fraudulent items presented for payment. The company provides the bank with a list of checks and amounts that are written each day. The bank verifies items presented for payment against the company’s list. The bank rejects items that are not on the list. Investigations are conducted as to the origin of “nonlist” items.
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Which of the following measures should be in place help prevent check tampering schemes?
a. Bank reconciliations should be performed by someone who is NOT an authorized signatory on the account b. Checks should be mailed immediately after they are signed c. Companies should set up a positive pay system with their bank d. All of the above |
(d) Companies should work in a cooperative effort with banks to prevent check fraud. Consider the following control measures that might be taken in regard to a firm’s checking accounts.
• Establish maximum dollar amounts above which the company’s bank will not accept checks drawn against the account. • Use positive pay banking controls. Positive pay allows a company and its bank to work together to detect fraudulent items presented for payment. The company provides the bank with a list of checks and amounts that are written each day. The bank verifies items presented for payment against the company’s list. The bank rejects items that are not on the list. Investigations are conducted as to the origin of “nonlist” items. In addition, the following activities will help tighten controls and possibly deter employees from giving in to the temptation to commit check fraud. • Checks should be mailed immediately after signing. • Bank reconciliations not made by signatories on the account |
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A forged maker scheme is a check tampering scheme in which an employee intercepts a company check intended for a third party and converts the check by signing the third party's name on the endorsement line of the check.
True or False |
(False) Forged endorsement frauds are those check tampering schemes in which an employee intercepts a company check intended for a third party and converts the check by signing the third party’s name on the endorsement line of the check.
The person who signs a check is known as the “maker” of the check. A forged maker scheme is defined as a check tampering scheme in which an employee misappropriates a check and fraudulently affixes the signature of an authorized maker thereon. |
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White, an employee of ABC Corporation, intentionally issued two payments for the same invoice. After the checks had been mailed, White called the vendor and explained that a double payment had been made by mistake. She asked the vendor to return one of the checks to her attention. When the vendor returned the check, White took it and cashed it. This is an example of:
a. A pay-and-return scheme b. A pass-through scheme c. A shell company scheme d. A receivables skimming scheme |
(a) Instead of using shell companies in their overbilling schemes, some employees generate fraudulent disbursements by using the invoices of legitimate third-party vendors who are not a part of the fraud scheme. In a pay-and-return scheme, an employee intentionally mishandles payments that are owed to legitimate vendors. One way to do this is to purposely double-pay an invoice. For instance, a clerk might intentionally pay an invoice twice and then call the vendor and request that one of the checks be returned. The clerk then intercepts the returned check.
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Which of the following statements is TRUE regarding a fictitious refund scheme?
a. Inventory is returned to the store b. The amount of cash in the register balances with the register log c. The victim company's inventory is understated d. All of the above |
(b) In a fictitious refund scheme, an employee processes a transaction as if a customer were returning merchandise, even though no actual return takes place. The register log balances with the amount of cash in the register because the money that was taken by the fraudster is supposed to have been removed and given to the customer as a refund. Instead, however, the employee pockets this cash for himself.
The second thing that happens in a fictitious refund scheme is that a debit is made to the inventory system showing that the merchandise has been returned. Since the transaction is fictitious, no merchandise is actually returned. The result is that the company’s inventory is overstated. |
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The most effective way to prevent and detect electronic payment fraud is through proper separation of duties.
True or False |
(True) The most important practice for preventing and detecting electronic payment fraud is separation of duties. In the case of online bill payments, as those made through a bank’s website or a third-party business-to-business payment service, separate individuals should be responsible for maintaining payment templates, entering payments, and approving payments. For wire transfers, duties for creating, approving, and releasing wires should be segregated. And to prevent attempts to conceal fraudulent electronic payment activity, no individual involved in payment process should reconcile the bank statement or even have access to it. Any individual authorized to make payments should NOT be permitted to set up ACH blocks or filters, or to submit positive pay information.
In addition to separating duties, companies should consider segregating their bank accounts to maintain better control over them—for example, separate accounts is used for paper and electronic transactions |
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All of the following are types of expense reimbursement schemes EXCEPT:
a. Multiple reimbursements b. Mischaracterized expenses c. Fictitious expenses d. Ghost expense reports |
(d) The four main types of expense reimbursement schemes are:
• Mischaracterized expenses • Overstated expenses • Fictitious expenses • Multiple reimbursements There is no such scheme as "ghost expense reports." Ghost employees, however, are a common payroll fraud scheme. |
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Which of the following describes the primary purpose of an ACH filter?
a. It enables account holders to provide their banks with a list of criteria to ensure only designated individuals get paid b. It is a tool used by auditors to examine electronic payment activity on the bank records c. It requires the bank to contact the account holder before any payments are made d. It matches the details of incoming payments with those on a list of expected payments provided by the account holder |
(a) Most banks offer a number of security services that can help business account holders mitigate the risk of fraudulent electronic payments. For example, ACH blocks allow account holders to notify their banks that ACH debits should not be allowed on specific accounts. ACH filters enable account holders to provide their banks with a list of defined criteria (such as the sending company ID, account number, and transaction code) against which banks can filter ACH debits and reject any unauthorized transactions. Positive pay for ACH is another security feature offered by banks to their account holders. With positive pay, banks match the details of ACH payments with those on a list of legitimate and expected payments provided by the account holder. Only authorized electronic transactions are allowed to be withdrawn from the account; exceptions are reported to the customer for review.
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Baker, a cash register attendant at a department store, regularly inflates the amount of customer refunds. For instance, if a customer returns an item for $100, Baker records a $150 refund. Then Baker gives the customer $100 and keeps $50 for himself. This scheme is known as:
a. A fictitious refund scheme b. Skimming c. An overstated refund scheme d. Cash larceny |
(c) One type of register disbursement scheme is the overstated refund. Rather than creating an entirely fictitious refund, a fraudster might overstate the value of a real customer's refund, pay the customer the actual amount owed for the returned merchandise, and then keep the excess portion of the return for himself.
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Examples of expense reimbursement schemes include which of the following?
a. Listing dinner with a friend as a business development expense b. Listing personal travel as business travel c. Requesting reimbursement for an expense that was never incurred d. All of the above |
(d) Employees can manipulate an organization’s expense reimbursement procedures to generate fraudulent disbursements. The four most common types of expense reimbursement schemes are mischaracterized expenses, overstated expenses, fictitious expenses, and multiple reimbursements.
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For employee expense reimbursement requests, electronic receipts are preferred to paper receipts because they are more difficult to alter or forge.
True or False |
(False) Requiring receipts to be submitted electronically is NOT a recommended form of expense reimbursement fraud prevention. In fact, electronic receipts are often much easier to forge or alter than paper receipts.
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Rachel's boss was an authorized maker on the company checks. Rachel stole one of the checks and forged her boss's signature. This check tampering scheme is known as a forged endorsement scheme.
True or False |
(False) Rachel committed a forged maker scheme, not a forged endorsement scheme. The person who signs a check is known as the “maker” of the check. A forged maker scheme is defined as a check tampering scheme in which an employee misappropriates a check and fraudulently affixes the signature of an authorized maker thereon.
In a forged endorsement scheme, an employee intercepts a company check intended for a third party and converts the check by endorsing it with the third party’s name. |
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Annika, a bookkeeper for a small company, created checks to a local vendor and had her boss sign them. She then used correctional fluid to cover up the vendor's name and insert her own. She also changed the amounts of the checks in the same manner. Then she cashed the checks. What kind of scheme did Annika commit?
a. An altered payee scheme b. A cash larceny scheme c. A forged maker scheme d. A forged endorsement scheme |
(a) The altered payee scheme is a type of check tampering fraud in which an employee intercepts a company check intended for a third party and alters the payee designation so that the check can be converted by the employee or an accomplice. The fraudster inserts his own name, the name of a fictitious entity, or some other name on the payee line of the check.
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Which of the following is an example of a fictitious expense reimbursement scheme?
a. An employee alters an electronic receipt using photo editing software to reflect a higher cost than what he actually paid b. An employee generates a fake receipt using basic computer software and includes it with his expense report c. An employee who travels frequently on business submits receipts from his hotel stay during a family vacation as a business expense d. An employee submits a receipt for a hotel reservation in one expense report and a copy of his credit card statement reflecting the same reservation in the next period's expense report |
(b) Expense reimbursements are sought by employees for fictitious items. Instead of overstating a real business expense or seeking reimbursement for a personal expense, an employee just invents a purchase to be reimbursed. One way to generate a fictitious expense is to create bogus support documents, as false receipts. Using simple computer software, it is easy for employees to create realistic-looking counterfeit receipts. These counterfeits are sophisticated, even including logos of stores in which goods or services were allegedly purchased.
Instead of seeking reimbursement for personal expenses, some employees overstate cost of actual business expenses. This is considered an overstated expense reimbursement scheme. In a multiple reimbursement scheme, an employee submits several types of support for same expense to get reimbursed multiple times. In a mischaracterized expense scheme, an employee requests reimbursement for a personal expense, claiming that it is business related. |
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Which of the following is TRUE regarding an overstated refund scheme?
a. It is based on entirely fictitious refund transaction b. IT requires collusion between the customer and the employee c. An employee overstates the amount of a legitimate refund and pockets the excess cash d. The company's inventory balance on the books will be understated |
(c) Rather than create an entirely fictitious refund, some employees merely overstate the amount of a legitimate refund and steal the excess money. For example, if a customer returns $100 worth of merchandise, the employee might ring up a $200 return. The employee gives the customer $100 in return for the merchandise and then pockets the remaining $100. The customer may or may not be aware of the scheme taking place. This will result in shrinkage of $100 worth of inventory. In other words, the inventory balance on the books will be overstated by the amount of the excess refund.
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Joe formed a company called Glenn Corp. He opened a bank account in Glenn Corp.’s name and used his home computer to create fraudulent invoices from Glenn Corp. for "consulting services." However, Glenn Corp. is a fictitious entity that was created solely to commit fraud, and no services have been rendered. Joe mailed these invoices to his employer, Paisley Company. Paisley Company promptly submitted payment to Glenn Corp., not realizing that the company was fake, and Joe deposited the money. What type of billing scheme did Joe commit?
a. A shell company scheme b. A pass-through scheme c. A cash larceny scheme d. A pay-and-return scheme c. A cash larenc7 |
(a) Shell companies, though sometimes created for legitimate purposes, are often fictitious entities created for the sole purpose of committing fraud. They might be nothing more than a fabricated name and a post office box that an employee uses to collect disbursements from false billings. However, since the checks received will be made out in the name of the shell company, the perpetrator will normally also set up a bank account in the shell company’s name. Once a shell company has been formed and a bank account has been opened, the corrupt employee is in a position to begin billing his employer by mailing forged invoices for fictitious goods and/or services.
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All of the following are payroll scheme types EXCEPT:
a. Ghost employees b. Commission schemes c. Stolen Paychecks d. Falsified hours and salary |
(c) In general, payroll schemes fall into one of the following categories:
• Ghost employees • Falsified hours and salary • Commission schemes If an employee stole paychecks, this would fall under check tampering, not payroll fraud. The reason is that the heart of the scheme is stealing the check, not generating false payroll disbursements. |
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Pam is the purchasing manager at a retail store. She decides to form her own shell company and purchase merchandise through this entity. She then sells the merchandise to her employer at an inflated price as if she were a legitimate vendor. What type of scheme is Pam committing?
a. A pay-and-return scheme b. A need recognition scheme c. A pass-through-scheme d. A cash larceny scheme |
(c) Pass-through schemes are usually undertaken by employees in charge of purchasing on behalf of the victim company. Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious entity. He then resells the merchandise to his employer from the shell company at an inflated price, thereby making an unauthorized profit on the transaction.
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In order to prevent fraudulent register disbursements, an employee other than the register worker should be responsible for preparing register count sheets and agreeing them to register totals.
True or False |
(True) In order to prevent fraudulent register disbursements, an employee other than the register worker should be responsible for preparing register count sheets and agreeing them to register totals.
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Which of the following schemes refers to the falsification of personnel or payroll records, causing paychecks to be generated to someone who does not actually work for the victim company?
a. Inflated commission scheme b. Record alteration scheme c. Falsified salary scheme d. Ghost employee scheme |
(d) The term "ghost employee" refers to someone on the payroll who does not actually work for the victim company. Through the falsification of personnel or payroll records, a fraudster causes paychecks to be generated to a ghost. The fraudster or an accomplice then converts these paychecks. The ghost employee may be a fictitious person or a real individual who simply does not work for the victim employer.
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If an employee intercepts a company check intended for a third party and converts that check for his own benefit, he has committed:
a. Check tampering b. Skimming c. Billing fraud d. Economic extortion |
(a) Check tampering is a type of fraudulent disbursement scheme in which an employee either (1) prepares a fraudulent check for his own benefit or (2) intercepts a check intended for a third party and converts the check to his own benefit.
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Which of the following would be considered a forged maker scheme?
a. Stewart intercepts a check written from his employer, Alamo Corp., to Richard Johnson, one of Alamo's contractors. He then forges Johnson's name on the endorsement line of the check and cashes it for himself b. Jeff is an employee at Carlisle Company. He obtains a check intended for Lewis, one of Carlisle's vendors. Jeff covers up Lewis's name with correction fluid, inserts his own name, and cashes the check for himself c. Erica steals a check from her employer, makes it payable to herself, and then forges the CFO's signature on the check. The CFO is an authorized check signer at the company d. Lindsay's employer writes her a check to reimburse her for travel expenses. The check is for $350. She carefully changes the 3 to an 8 so that the check amount now appears to be $850. |
(c) The person who signs check is “maker” of the check. A forged maker scheme is defined as a check tampering scheme that employee misappropriates a check and fraudulently affixes the signature of an authorized maker thereon. Erica committed a forged maker scheme because she forged signature of an authorized maker, on her employer’s check.
In a forged endorsement scheme, an employee intercepts check intended for third party and converts check by endorsing with third party’s name. Stewart committed a forged endorsement scheme because he signed Johnson’s name on back of check and cashed it himself. In an altered payee scheme, employee intercepts company check for third party and alters payee designation so employee or accomplice can convert the check. The employee inserts his name, accomplice’s name, or a fictitious entity’s name on check’s payee line. In additional, altering the payee designation, amount of the check can be altered by tacking on extra numbers. |
