Forensic Accounting Robert Rufus Laura Miller William Hahn Test Bank

Type:

Test Bank

Resource:

Forensic Accounting

Edition:

1st Edition

Author(s):

Robert Rufus Laura Miller William Hahn

Forensic Accounting (Rufus) Chapter 1 Introduction to the World of Forensic Accounting 1.1 True/False Questions 1) Forensic accounting can be defined as the application of financial facts to legal situations.

Answer: TRUE Explanation: Forensic accounting can be defined as the application of financial facts to legal situations.

Diff: 1 LO: 1-1 AACSB: Analytical Thinking 2) "Trust, but verify" is the general rule while exercising professional skepticism.

Answer: TRUE Explanation: Forensic accountants must exercise a healthy dose of professional skepticism. This reflects a proactive, questioning mindset, where nothing is as it seems and "trust, but verify" is the general rule.

Diff: 1 LO: 1-1 AACSB: Analytical Thinking 3) Fraud detection and fraud examination describes reactive strategies while fraud deterrence describes proactive strategies.

Answer: TRUE Explanation: Fraud deterrence differs from fraud detection and fraud examination in that it describes proactive (rather than reactive) strategies.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 4) The need or motive of the fraud is not the immediate challenge of a fraud examination.

Answer: TRUE Explanation: The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committed it, when it was committed, how much was taken, and who else was involved. The why (need or motive), although important to the overall understanding of fraud, is not the immediate challenge.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 5) Fraud deterrence strategies include statistical analysis.

Answer: FALSE Explanation: Statistical analysis is a fraud detection strategy.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 1 .

6) Fact witnesses can express opinions but expert witnesses cannot.

Answer: FALSE Explanation: Expert witnesses differ from fact witnesses in that they can express opinions.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 7) The accounting process has three basic steps: recording, classifying, and summarizing.

Answer: TRUE Explanation: The accounting process has three basic steps: recording, classifying, and summarizing.

Diff: 1 LO: 1-3 AACSB: Analytical Thinking 8) The first line of defense against accounting failures within an organization is the external auditor.

Answer: FALSE Explanation: The first line of defense against accounting failures within an organization is the internal auditor.

Diff: 1 LO: 1-3 AACSB: Analytical Thinking 9) Deductive reasoning draws conclusions from patterns.

Answer: FALSE Explanation: Inductive reasoning draws conclusions from patterns.

Diff: 1 LO: 1-4 AACSB: Analytical Thinking 10) Expert reports prepared in the course of litigation are exempt from professional report writing standards.

Answer: TRUE Explanation: Expert reports prepared in the course of litigation are exempt from professional report writing standards.

Diff: 1 LO: 1-4 AACSB: Analytical Thinking

2 .

1.2 Multiple-Choice Questions 1) Which of the following best describes the term forensic accounting?

A) It is a discipline that deals with the preparation and analysis of financial statements of companies.

B) It is the use of accounting principles to consolidate financial statements of foreign corporations.

C) It is a discipline that primarily deals with methods of preparation of financial budgets of a company.

D) It is the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony.

Answer: D Explanation: D) Forensic accounting can be defined as the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony. In other words, it is the application of financial facts to legal situations.

Diff: 2 LO: 1-1 AACSB: Analytical Thinking 2) Which of the following is recognized as the first forensic accountant?

A) Frank J. Wilson B) Maurice Peloubet C) Alphonse Capone D) Leslie A. Shuway Answer: A Explanation: A) The term forensic accountant was first used by Maurice Peloubet in 1946 in the Journal of Accountancy to recognize and celebrate IRS Special Agent Frank J. Wilson as the man who brought down Capone.

Diff: 1 LO: 1-1 AACSB: Analytical Thinking 3) Which of the following statement is true of forensic accountants?

A) They should have a reactive mindset.

B) They should focus their investigations on numbers rather than looking beyond them.

C) They should embrace systematic thinking.

D) They must trust their preexisting judgments.

Answer: C Explanation: C) Forensic accountants need to be intellectually curious. In addition to this, they must embrace systematic thinking and exercise a healthy dose of professional skepticism.

Diff: 1 LO: 1-1 AACSB: Analytical Thinking

3 .

4) Which of the following shows Paul, a forensic accountant, indicating an intellectually curious mindset?

A) He relies on the reports given by the management to form an opinion on the financial viability of the business.

B) He bases his judgments on the existing industry standards and not on the environment in which the organization operates.

C) He gives room for the possibility that mistakes maybe attributable to negligence.

D) He questions his understanding of an issue, in spite of being an expert in the field.

Answer: D Explanation: D) An intellectually curious individual possesses a restless mind-one that is never satisfied with his or her understanding of an issue, regardless of experience and expertise.

Moreover, forensic accountants must have the instinct to explore problems that challenge conventional wisdom.

Diff: 2 LO: 1-1 AACSB: Reflective Thinking 5) Which of the following situations shows Kelcie, a forensic accountant, exercising professional skepticism?

A) Kelcie argues that the immediate previous year's records serve as a better basis for the investigation than the earlier years.

B) Kelcie believes that the reputation of the external auditor is an indicator of the reliability of the audit report.

C) Kelcie believes in the phrase "guilty, until proved otherwise" and does not presume innocence until she has reasonable doubt.

D) Kelcie verifies the reports given by the internal auditor against available evidence before using it in her reports.

Answer: D Explanation: D) Forensic accountants must exercise a healthy dose of professional skepticism.

This reflects a proactive, questioning mindset, where nothing is as it seems and "trust, but verify" is the general rule. Kelcie follows this general rule, which indicates professional skepticism.

Diff: 2 LO: 1-1 AACSB: Reflective Thinking

4 .

6) Which of the following statements is true of forensic accounting investigative services?

A) These are provided in connection with actual, pending, or potential legal or regulatory proceedings-criminal or civil.

B) These are only performed after a crime has occurred.

C) These include fraud detection, fraud examination, and fraud deterrence.

D) These generally involve actual or threatened litigation.

Answer: C Explanation: C) Investigative services provided by forensic accountants are generally related to corporate investigations, which are initiated for the purpose of protecting the organization and its assets from internal or external threats.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking 7) Which of the following is a technique of fraud detection?

A) perception of detection B) analysis of financial statement C) preemployment screening D) evaluation of hiring practices Answer: B Explanation: B) Fraud detection includes a variety of strategies, such as internal control procedures, statistical analysis, financial statements analysis, and anonymous reporting channels (such as hotlines).

Diff: 2 LO: 1-2 AACSB: Analytical Thinking 8) Which of the following is NOT the primary focus of a fraud examination by a forensic accountant?

A) Who committed the fraud?

B) How was the fraud committed?

C) When was the fraud committed?

D) Why was the fraud committed?

Answer: D Explanation: D) The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committed it (the fraud scheme), when it was committed (time frame and duration), how much was taken, and who else was involved. The why (need or motive), although important to our overall understanding of fraud, is not the immediate challenge.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking

5 .

9) Which of the following is a difference between fraud examination and fraud detection?

A) Fraud examination is done before a fraud has been committed, whereas fraud detection is done after a fraud has been committed.

B) Fraud examination is the investigation specific allegations or suspicions of fraud, whereas fraud detection is the identification of an error or irregularity after it has occurred.

C) Fraud examination focuses on the time and duration of the fraud, whereas fraud detection focuses on the need or motive of the fraud.

D) Fraud examination adapts proactive strategies, whereas fraud detection adapts reactive strategies.

Answer: B Explanation: B) Fraud detection is simply the discovery of fraud. Detective procedures are designed to identify an error or irregularity after it has occurred. A fraud examination's purpose is to investigate specific allegations or suspicions of fraud.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking 10) Which of the following is most likely a short-term strategy for fraud deterrence?

A) financial statement analysis B) employee invigilation C) time series analysis D) evaluation of hiring practices Answer: D Explanation: D) Examples of short-term (or procedural) strategies include evaluation of hiring practices, internal controls, and performance monitoring.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 11) Which of the following is a proactive employee strategy of fraud deterrence?

A) perception of detection B) analysis of financial statement C) analysis of statistical data D) employee contracts Answer: A Explanation: A) Proactive employee strategies include preemployment screening, employee training, employee monitoring, perception of detection (through internal controls and external audits), and organizational culture.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking

6 .

12) Which of the following forensic accounting services primarily focuses on determining who committed the fraud, the scheme of the fraud, the time frame and duration, how much was taken, and who else was involved?

A) fraud detection B) fraud deterrence C) fraud examination D) fraud anticipation Answer: C Explanation: C) The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committed it (the fraud scheme), when it was committed (time frame and duration), how much was taken, and who else was involved.

Diff: 2 LO: 1-2 AACSB: Reflective Thinking 13) Which of the following forensic accounting investigation services includes proactive employee strategies such as preemployment screening, employee training, and employee monitoring strategies?

A) fraud detection B) fraud deterrence C) fraud examination D) fraud anticipation Answer: B Explanation: B) Because fraud requires individual actors (the offenders), a reasonable starting point for fraud deterrence is employee relations. Proactive employee strategies include preemployment screening, employee training, employee monitoring, perception of detection (through internal controls and external audits), and organizational culture.

Diff: 2 LO: 1-2 AACSB: Reflective Thinking 14) Which of the following best describes a whistle blower complaint?

A) It is an informal disclosure of personal issues of an employee with other employees within an organization.

B) It is a disclosure by a person of wrong doing or misconduct within an organization.

C) It is an annual complaint forum designed to discuss issues of an organization.

D) It is a complaint raised by the SEC toward an organization.

Answer: B Explanation: B) A whistleblower complaint is a disclosure by a person (usually an employee) of wrongdoing or misconduct within the organization.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking

7 .

15) Which of the following is the most significant practice component of forensic accounting As indicated by the results of a 2011 AICPA survey?

A) bankruptcy B) business valuations C) insolvency and reorganization D) computer forensic analysis Answer: B Explanation: B) The results of a 2011 American Institute of Certified Public Accountants survey indicate that business valuations are by far the most significant practice component.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 16) Which of the following are the two major components of forensic accounting services?

A) fraud detection services and fraud deterrence services B) expert services and consulting services C) investigative services and litigation services D) fraud examination services and business valuations services Answer: C Explanation: C) Forensic accounting services are commonly divided into two major components: investigative services and litigation services.

Diff: 1 LO: 1-2 AACSB: Analytical Thinking 17) Which of the following is a difference between an external auditor and a forensic accountant?

A) An external auditor captures and records all economic transactions of the organization, whereas a forensic accountant ensures compliance with policy and procedures.

B) An external auditor manages the organization's accounting and internal control system, whereas a forensic accountant validates effectiveness of controls in various processes or areas of the organization.

C) An external auditor adds credibility to reported financial information, whereas a forensic accountant provides assurance that management is adequately identifying and mitigating risks.

D) An external auditor forms an opinion on the overall financial statements taken as a whole, whereas a forensic accountant addresses a specific question/issue.

Answer: D Explanation: D) An external auditor forms an opinion on the overall financial statements taken as a whole, whereas a forensic accountant addresses a specific question/issue.

Diff: 2 LO: 1-3 AACSB: Analytical Thinking

8 .

18) Which of the following is a difference between an internal auditor and an external auditor?

A) An internal auditor conducts the audit because a deficiency has been identified, whereas an external auditor conducts audits on a recurring basis.

B) An internal auditor manages accounting and internal control of an organization, whereas an external auditor examines the financial data of an organization.

C) An internal auditor's reports are used by the users of the financial statements, whereas the external auditor's reports are used by the management and internal auditor.

D) An internal auditor reports on the level of compliance with a company's internal policies, whereas the external auditor reports on the level of compliance with external laws and regulations.

Answer: A Explanation: A) The internal auditor conducts an audit according to a plan or because a deficiency has been identified. An external auditor conducts an audit on a recurring basis.

Diff: 1 LO: 1-3 AACSB: Analytical Thinking 19) Which of the following is true of transactional accountants?

A) They evaluate the internal control systems of an organization and test the accounts to ensure that all economic events are recorded and reported properly.

B) They form and express an opinion as to whether an organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period.

C) They report on the adequacy of internal controls, the accuracy and propriety of transactions.

D) They employ generally accepted accounting principles (GAAP) to process information useful in decision making.

Answer: D Explanation: D) Accountants working for an organization employ generally accepted accounting principles (GAAP) to process information useful in decision making.

Diff: 1 LO: 1-3 AACSB: Analytical Thinking

9 .

20) The internal auditor's functions exist to support the other three representatives of an organization: A) the board of directors, executive management, and the external auditor.

B) the board of directors, executive management, and the transactional accountant.

C) the transactional accountant, board of directors, and the external auditor.

D) the transactional accountant, executive management, and the external auditor.

Answer: A Explanation: A) The internal auditor's function is to report on the adequacy of internal controls, the accuracy and propriety of transactions, the extent to which assets are accounted for and safeguarded, and the level of compliance with a company's internal policies as well as external laws and regulations. This function exists to support the other three representatives of an organization: the board of directors (BOD), executive management, and the external auditor.

Diff: 2 LO: 1-3 AACSB: Analytical Thinking 21) Which of the following is true of an internal auditor?

A) The responsibilities of an internal auditor extend beyond the processing functions of a transactional accountant.

B) A qualified opinion from the internal auditor adds credibility to the organization and its financial statements.

C) The internal auditor issues reports that are used by the stakeholders and other users to understand the financial statements of an organization.

D) The budgets, cash flow statements, income statement, and balance sheet of an organization is prepared by the internal auditor.

Answer: A Explanation: A) Aside from management, the first line of defense against accounting failures within an organization is the internal auditor, whose responsibilities extend beyond the processing functions of a transactional accountant.

Diff: 1 LO: 1-3 AACSB: Analytical Thinking 22) The purpose of the ________ is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period.

A) forensic accountant B) external auditor C) transactional accountant D) internal auditor Answer: B Explanation: B) The purpose of the external auditor is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period.

Diff: 2 LO: 1-3 AACSB: Analytical Thinking 10 .

23) A ________ records, classifies and summarizes the financial transactions a company.

A) transactional accountant B) internal auditor C) external auditor D) management accountant Answer: A Explanation: A) Accountants working for an organization employ generally accepted accounting principles (GAAP) to process information useful in decision making. The accounting process has three basic steps: recording, classifying, and summarizing. To facilitate this process, transactional accountants require core accounting skills.

Diff: 1 LO: 1-3 AACSB: Reflective Thinking 24) Which of the following exemplifies the role of an internal auditor?

A) Chloe classifies the transactions of Pole Star, Inc. and records it in the books of accounts.

B) Chloe reports on the sufficiency of the insurance policies taken out on the assets of Pole Star, Inc. C) Chloe reports on the financial position of Pole Star, Inc. at the end of the accounting period.

D) Chloe assists the management of Pole Star, Inc. to determine the taxes and tax benefits..

Answer: B Explanation: B) The internal auditor's function is to report on the adequacy of internal controls, the accuracy and propriety of transactions, the extent to which assets are accounted for and safeguarded, and the level of compliance with a company's internal policies as well as external laws and regulations.

Diff: 2 LO: 1-3 AACSB: Reflective Thinking 25) Which of the following exemplifies the role of an external auditor?

A) Victor recorded the transactions entered in to by Trident, Inc. in the proper accounting period.

B) Victor prepared the annual budget of Trident, Inc., and he also helped the department heads prepare budgets for each department.

C) Victor evaluated the internal controls of Trident, Inc. and reported on the financial position as at the year end.

D) Victor conducted an investigation into the affairs of Trident, Inc. to allay suspicions of mismanagement of funds.

Answer: C Explanation: C) External auditors, who work for CPA firms, are hired by organizations to evaluate their internal control systems and test their transactions and accounts to ensure that all economic events are recorded and reported in the proper accounting period.

Diff: 2 LO: 1-3 AACSB: Reflective Thinking

11 .

26) Which of the following is the objective of an external auditor?

A) form an opinion on the overall financial statements taken as a whole B) capture and record all economic transactions of the organization C) ensure compliance with policy and procedures; offer recommendations for improvement of internal controls D) address a specific question/issue Answer: A Explanation: A) The purpose of the external auditor is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period.

Diff: 2 LO: 1-3 AACSB: Analytical Thinking 27) Which of the following defines the term deductive reasoning?

A) It is defined as reasoning from the general to the specific.

B) It is defined as reasoning from a logically valid conclusion to the premises.

C) It is defined as generalizing results to arrive at a valid conclusion.

D) It is defined as reasoning from particular facts to general conclusions.

Answer: A Explanation: A) Deductive reasoning is defined as "reasoning from the general to the specific, or from the premises to a logically valid conclusion."

Diff: 1 LO: 1-4 AACSB: Analytical Thinking 28) Which of the following is a process flowing from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion?

A) intuitive reasoning B) inductive reasoning C) deductive reasoning D) critical reasoning Answer: B Explanation: B) In contrast to deductive reasoning, inductive reasoning draws conclusions from patterns. The inductive reasoning process flows from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion (that is, bottom up).

Diff: 1 LO: 1-4 AACSB: Analytical Thinking

12 .

29) All kids like Jelly Bean. Sam is a kid. Therefore, we can conclude that Sam likes Jelly Bean.

Which type of reasoning does this indicate?

A) intuitive reasoning B) inductive reasoning C) deductive reasoning D) critical reasoning Answer: C Explanation: C) Deductive reasoning is defined as "reasoning from the general to the specific, or from the premises to a logically valid conclusion." In other words, identify two or more general premises (either known or assumed to be true) and then apply these accepted truths to a specific situation. The major premise is "All kids like Jelly bean." The minor premise is "Sam is a kid."

The conclusion is "Sam likes Jelly bean."

Diff: 2 LO: 1-4 AACSB: Reflective Thinking 30) All clouds are white. Some clouds are round. Which of the following can be concluded using deductive reasoning?

A) Some clouds are white.

B) No conclusion can be obtained.

C) White clouds are round.

D) Round clouds are white.

Answer: D Explanation: D) In deductive reasoning, identify two or more general premises and then apply these accepted truths to a specific situation. The major premise is "All clouds are white." The minor premise is "Some clouds are round." Since all clouds are white, it can be concluded that round clouds are also white.

Diff: 2 LO: 1-4 AACSB: Reflective Thinking 31) All birds have wings. Kiwis have wings. Which of the following can be concluded using deductive reasoning?

A) Kiwis are birds.

B) No conclusion can be obtained.

C) All birds are Kiwis.

D) Kiwis can fly.

Answer: B Explanation: B) In deductive reasoning, identify two or more general premises (either known or assumed to be true) and then apply these accepted truths to a specific situation. In this case, the major premise is "All birds have wings." However, this does not mean that all winged creatures are birds. Hence, the minor premise "Kiwis have wings" cannot lead to the conclusion that kiwis are birds.

Diff: 2 LO: 1-4 AACSB: Reflective Thinking 13 .

32) Which of the following is a primary responsibility of a testifying expert?

A) to render an opinion that will assist the judge in understanding the evidence B) to render an opinion that will assist the attorney in advocating for the client C) to render an opinion that will assist the attorney in understanding the evidence D) to render an opinion that will assist the trier of fact in reaching a judgment Answer: A Explanation: A) One of the primary responsibilities of a testifying expert is to render an opinion that will assist the trier of fact (judge or jury) in understanding the evidence. To that end, an expert's opinion must be stated in a legally sufficient manner and must be based on reliable facts, data, and methodology.

Diff: 2 LO: 1-4 AACSB: Analytical Thinking 33) In 2008, the sales of the Trident Inc. went up by 10% and its stock prices increased by 20%.

In 2010, the sales of the Trident Inc. went up by 15% and its stock prices increased by 30%. You conclude that in 2013, since the sales increased by 5%, the stock price will increase by 10%.

Which type of reasoning are you using?

A) deductive reasoning B) intuitive reasoning C) suggestive reasoning D) inductive reasoning Answer: D Explanation: D) Inductive reasoning draws conclusions from patterns. The inductive reasoning process flows from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion (that is, bottom up). Here, the pattern in increase in sale along with corresponding increase in stock prices is forming the base for conclusion.

Diff: 3 LO: 1-4 AACSB: Analytical Thinking 34) Which of the following represents the relative importance of the three components of oral communication?

A) body language - 55%, voice tone - 35%, and words - 10% B) body language - 30%, voice tone - 50%, and words - 20% C) body language - 45%, voice tone - 25%, and words - 30% D) body language - 20%, voice tone - 10%, and words - 70% Answer: A Explanation: A) The relative importance of the three components of oral communication is: (1) body language, which accounts for roughly 55% of the message; (2) voice tone, which accounts for roughly 35% of the message; and (3) words, which account for only 10% of the message.

Diff: 2 LO: 1-4 AACSB: Analytical Thinking

14 .

35) Which of the following organizations provide forensic accounting certifications?

A) Institute of Certified Cost & Management Accountants B) Institute of Management Accountants C) American Institute of Certified Public Accountants D) Chartered Financial Analyst Institute Answer: C Explanation: C) American Institute of Certified Public Accountants provides Accredited in Business Valuation and Certified in Financial Forensics certifications.

Diff: 1 LO: 1-5 AACSB: Analytical Thinking 1.3 Short-Answer Questions 1) Define forensic accounting.

Answer: Forensic accounting is a discipline that is focused on: (1) the prevention, detection, and investigation of both occupational fraud and financial statement fraud; and (2) the rendering of other litigation-support services.

Diff: 1 LO: 1-1 AACSB: Analytical Thinking 2) Apart from fraud-related investigations, what other investigations are forensic accountants commonly engaged in?

Answer: In addition to the fraud-related investigations previously discussed, forensic accountants are commonly engaged to conduct investigations unrelated to fraud. Examples of such investigations include whistleblower complaints and financial viability concerns. A whistleblower complaint is a disclosure by a person of wrongdoing or misconduct within the organization. Usually, a forensic accountant is utilized when the allegation is considered serious or when the appearance of independence is important. Financial viability investigations include short- or long-term assessments of financial and managerial sustainability or the reasonableness of insurance claims.

Diff: 2 LO: 1-2 AACSB: Analytical Thinking

15 .

3) Write a short note on career opportunities for forensic accountants in both the private and public sectors.

Answer: The forensic accounting profession offers great variety of opportunities, including roles for individuals with different skills and talents. The private sector offers many such roles.

Various companies and organizations require forensic accountants for the post of internal auditors and compliance officers. CPA firms and consulting firms need highly skilled professionals to play the role of external auditors, valuation analysts, expert witnesses, consulting experts, and fraud investigators. In insurance companies, forensic accountants can use their knowledge to work as claims examiners or fraud investigators. The public sector also offers a wide spectrum of careers to choose from. Forensic accountants can pursue a career in law enforcement (state and federal) as documents examiners, digital analysts, forensic analysts (FBI), or special agents (FBI). Regulatory agencies (for example, Federal Reserve or SEC) require talented professionals to act as financial analysts and examiners. Internal revenue services give scope for careers as tax examiners, tax specialists, tax compliance officers, internal revenue agents, and criminal investigators. Government accountability offices are in need of financial analysts, financial auditors, and criminal investigators.

Diff: 3 LO: 1-6 AACSB: Analytical Thinking 4) Write a short note on value of critical thinking for forensic accountants.

Answer: Critical thinking is a necessary skill for any type of investigation, research, or scientific inquiry. The analytical processes employed by forensic accountants are based on a scientific approach. This involves (1) identifying a question, (2) gathering sufficient relevant data, (3) analyzing the data, (4) drawing conclusions, and (5) communicating results. In this context, critical thinking serves as a guiding frame to preserve the integrity of the scientific process.

Various threats to the integrity of this process are manifested in the concept of "blind spots."

Blind spots are caused by mistakes in reasoning, human irrationality, biases, distortions, and selfinterest. Exercising critical thinking can help in the detection of blind spots.

Diff: 2 LO: 1-4 AACSB: Analytical Thinking

16 .

5) List the major areas of the body of knowledge covered in the Certified in Financial Forensics (CFF) Exam and Accredited in Business Valuation (ABV) Exam.

Answer: Areas covered in CFF Exam: 1 - Professional responsibilities and practice management 2 - Fundamental forensic knowledge 3 - Specialized forensic knowledge, such as fraud, business valuations, computer forensics, and economic damages calculations Areas covered in ABV Exam: 1 - Qualitative and quantitative analysis 2 - Valuation analysis 3 - Related topics, such as defining the engagement and professional standards Diff: 1 LO: 1-5 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 2 The Legal Environment of Forensic Accounting 2.1 True/False Questions 1) In criminal cases, sanctions generally involve compensation for loss or wrongs suffered.

Answer: FALSE Explanation: In civil cases, sanctions generally involve compensation for loss or wrongs suffered (for example, economic damages).

Diff: 1 LO: 2-1 AACSB: Analytical Thinking 2) Personal justice is justice concerned with the private affairs of citizens and their respective rights.

Answer: FALSE Explanation: Justice concerned with the private affairs of citizens and their respective rights is known as civil justice.

Diff: 1 LO: 2-1 AACSB: Analytical Thinking 3) Tax evasion, health care frauds, and bank frauds are covered under civil laws.

Answer: FALSE Explanation: Tax evasion, health care frauds, and bank frauds are covered under criminal laws.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking 4) In the case of a jury trial, the trial stage begins with the selection of a jury.

Answer: TRUE Explanation: The trial stage begins with the selection of a jury.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking 5) The burden of proof is the obligation of the defendant to prove his or her innocence.

Answer: FALSE Explanation: The burden of proof is the obligation of the plaintiff or prosecution to prove liability (in a civil case) or guilt (in a criminal case). The defendant is not required to prove his or her innocence-it is presumed.

Diff: 1 LO: 2-3 AACSB: Analytical Thinking

1 .

6) Mediation is a "mini trial" wherein each party presents its case to one or more mediators, who render a binding decision that generally cannot be appealed.

Answer: FALSE Explanation: Mediation is a non-binding informal process wherein a mediator (mutually selected by the parties) evaluates the arguments of both sides and helps the parties reach common ground.

Diff: 1 LO: 2-3 AACSB: Analytical Thinking 7) An expert's testimony is more credible than that of other witnesses.

Answer: TRUE Explanation: A higher level of credibility is generally attached to an expert's testimony.

Diff: 1 LO: 2-4 AACSB: Analytical Thinking 8) The trial judge is challenged to carefully qualify the expert but not the testimony of the expert.

Answer: FALSE Explanation: The trial judge is challenged to carefully qualify both the expert and his or her testimony.

Diff: 1 LO: 2-4 AACSB: Analytical Thinking 9) A Daubert hearing decides whether the expert is correct.

Answer: FALSE Explanation: As provided in Daubert, the "court must focus on the methodology, not on the conclusions generated by the methodology." In other words, a Daubert hearing is not to decide whether the expert is correct.

Diff: 1 LO: 2-6 AACSB: Analytical Thinking 10) Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data.

Answer: TRUE Explanation: Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data.

Diff: 1 LO: 2-5 AACSB: Analytical Thinking

2 .

2.2 Multiple-Choice Questions 1) Which of the following is an example of sanctions in civil cases?

A) capital punishment B) home confinement C) probation D) compensation for economic damages Answer: D Explanation: D) In civil cases, sanctions generally involve compensation for loss or wrongs suffered (for example, economic damages).

Diff: 1 LO: 2-1 AACSB: Analytical Thinking 2) Which of the following best describes civil justice?

A) justice between parties to a dispute, regardless of any larger principles that might be involved B) justice concerned with the private affairs of citizens and their respective rights C) justice fairly administered according to the rules of substantive law (such as a fair trial) D) justice that conforms to a moral principle Answer: B Explanation: B) Justice concerned with the private affairs of citizens and their respective rights, including certain freedoms of speech and action and equal treatment, protection, and opportunities regardless of race, sex, or religion is known as civil justice.

Diff: 1 LO: 2-1 AACSB: Analytical Thinking 3) Which of the following forms of justice is fairly administered according to the rules of statutory law?

A) social justice B) civil justice C) substantial justice D) criminal justice Answer: C Explanation: C) Substantial justice is justice fairly administered according to the rules of substantive law (such as a fair trial).

Diff: 2 LO: 2-1 AACSB: Analytical Thinking

3 .

4) Which of the following scenarios, if identified, can result in a mistrial?

A) Ginny, one of the jury, avidly followed the polls conducted by the media to know the people's opinion on the trial.

B) Derek, the defense attorney, concealed his client's drinking habit as he felt it would be prejudicial to the client in the ongoing case of banking fraud.

C) Silvia, the attorney for the prosecution, raised an objection for every evidence presented by the defense attorney.

D) Rico, an expert witness, stated an opinion on the evidence without first testifying to the underlying facts.

Answer: A Explanation: A) Verdicts are (or are expected to be) decided based on the evidence presented during the trial. Consideration of outside information, which has not been subjected to challenge, violates the rules of evidence. If identified, such violations can result in removal of the juror/s, mistrials, or appeals.

Diff: 2 LO: 2-1 AACSB: Analytical Thinking 5) Igor, a wealthy entrepreneur, was involved in embezzlement of cash from the office and tax evasion. If discovered, which of the following will he be charged under?

A) criminal law B) constitutional law C) administrative law D) civil law Answer: A Explanation: A) Embezzlement cases are covered under criminal law.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking 6) Which of the following is true of our justice system?

A) The law is fast; litigation lasts for one or two hours.

B) Trials (aside from the verdict) provide a lot of drama.

C) Closing arguments and cross examination are the most important parts of a trial.

D) The role of the jury is not passive.

Answer: D Explanation: D) Jury selection and opening statements are the most important parts of a trial.

The role of the jury is not passive. Because jurors serve as the trier of fact, they must actively evaluate the evidence and decide who and what to believe.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking

4 .

7) Which of the following rules of Federal Rules of Civil Procedure limits discovery of an expert's communications with engaging counsel and any report drafts that may be prepared?

A) Rule 26(b)(1) B) Rule 26(b)(4) C) Rule 26(a)(2) D) Rule 26(e)(2) Answer: B Explanation: B) Rule 26(b)(4) of Federal Rules of Civil Procedure limits discovery of an expert's communications with engaging counsel and any report drafts that may be prepared. It also limits discovery of facts and opinions held by an expert who is engaged to assist counsel in trial preparation (a consulting expert) but not expected to be called as a witness.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking 8) Which of the following stages applies to a criminal case but not to a civil case?

A) pleading stage B) discovery stage C) trial stage D) sentencing stage Answer: D Explanation: D) The basic structure of a criminal case is similar to that of a civil case, with the addition of a fourth stage-sentencing.

Diff: 1 LO: 2-2 AACSB: Analytical Thinking 9) Which of the following is a difference between criminal cases and civil cases?

A) A complaint should be accompanied by an investigator's affidavit to initiate a civil case, whereas filing a complaint is sufficient to initiate a criminal case.

B) A defendant has an amount of time (20 days) to respond to the complaint in a civil case, whereas he or she enters a plea to the charge during the first appearance in a criminal case.

C) A defendant can only enter a plea of guilty or not guilty to charges in a civil case, whereas he or she can also claim lack of sufficient knowledge to respond or assert affirmative defenses in a criminal case.

D) Failing to file a timely response can result in a default judgment in a civil case, whereas failing to file a timely response can result in a declaratory judgment in a criminal case.

Answer: B Explanation: B) In a civil case, once a defendant has been served with the complaint, the individual or entity has a limited amount of time (20 days) to respond by filing an answer. In a criminal case, during the first appearance, the defendant also enters a plea to the charge or charges-guilty or not guilty.

Diff: 3 LO: 2-2 AACSB: Analytical Thinking

5 .

10) Which of the following is a difference between civil law and criminal law?

A) The purpose of civil law is to resolve disputes between individuals or entities, whereas the purpose of criminal law is to convict and punish offenders.

B) Under civil law, the burden of proof is on the government, whereas under criminal law, the burden of proof is on the plaintiff.

C) Under civil law, the responding party is the government, whereas under criminal law, the responding party is the defendant.

D) Civil law sanctions may include imprisonments, whereas criminal law sanctions include compensations but not imprisonments.

Answer: A Explanation: A) The purpose of civil law is to resolve disputes between individuals or entities, whereas the purpose of criminal law is to convict and punish offenders.

Diff: 2 LO: 2-2 AACSB: Analytical Thinking 11) Which of the following is true of a civil proceeding?

A) The pleading stage is followed by the trial stage.

B) The evidence is evaluated by the judge in order to reach a verdict.

C) Failure on the part of the defendant to file a timely response can result in a declaratory judgment.

D) The discovery process is governed by the Federal Rules of Civil Procedure in federal courts.

Answer: D Explanation: D) In federal courts, the discovery process is governed by the Federal Rules of Civil Procedure (FRCP). Although states may determine their own rules, most have adopted rules that are modelled after the FRCP. Diff: 1 LO: 2-2 AACSB: Analytical Thinking 12) Andre LeFevre, a testifying expert, failed to include changes to the case. These were not been previously presented in his report. He is expecting that this information will be offered at the trial. Which of the following rules of the Federal Rules of Civil Procedure has been violated

by Andre?

A) Rule 26(b)(1) B) Rule 26(b)(4) C) Rule 26(e)(2) D) Rule 26(a)(2) Answer: C Explanation: C) Rule 26(e)(1) requires a testifying expert to supplement his or her report to include any changes or additional information that has not been previously presented but is expected to be offered at trial.

Diff: 3 LO: 2-2 AACSB: Reflective Thinking

6 .

13) The trial stage of a legal proceeding involves the voir dire process. What does this process involve?

A) It is a process wherein residents from the local county are randomly selected and summoned to the court to serve as prospective jurors.

B) It is a process wherein the jurors collectively evaluate the evidence to render a verdict.

C) It is a process wherein all evidence is presented to the jury through witnesses (such as a forensic accountant).

D) It is a process wherein the judge and the attorneys question prospective jurors about their backgrounds and beliefs.

Answer: D Explanation: D) The jury is selected through a process known as voir dire, wherein the judge and the attorneys question prospective jurors about their backgrounds and beliefs.

Diff: 2 LO: 2-2 AACSB: Analytical Thinking 14) Which of the following best describes the meaning of burden of proof in a trial?

A) It is the obligation of the plaintiff or prosecution to prove liability or guilt.

B) It is the obligation of the jury to prove guilty and reach a verdict after a trial.

C) It is the obligation of the defendant to prove his or her innocence.

D) It is the obligation of the expert witness to prove his or her reliability in the court.

Answer: A Explanation: A) The burden of proof is the obligation of the plaintiff or prosecution to prove liability (in a civil case) or guilt (in a criminal case). The defendant is not required to prove his or her innocence-it is presumed.

Diff: 2 LO: 2-3 AACSB: Analytical Thinking 15) Which of the following statements is true of standards of proof?

A) Preponderance of evidence is a higher standard of proof than clear and convincing evidence.

B) In a civil case, the requisite standard is a preponderance of the evidence.

C) Clear and convincing evidence is evidence that is probably true.

D) Preponderance of evidence is evidence that can be proved beyond a reasonable doubt.

Answer: B Explanation: B) In a civil case, the requisite standard is a preponderance of the evidence-more likely than not (>50% probability).

Diff: 2 LO: 2-3 AACSB: Analytical Thinking

7 .

16) Which of the following statements is true of the two means of settling disputes between parties?

A) Alternative dispute resolution is less expensive than litigation.

B) Litigation is faster than alternative dispute resolution.

C) Litigation allows for greater privacy than alternative dispute resolution.

D) Alternative dispute resolution allows for more transparency than litigation.

Answer: A Explanation: A) Alternative dispute resolution may be preferred over litigation because it is less expensive, is generally faster, and allows for greater privacy.

Diff: 1 LO: 2-3 AACSB: Analytical Thinking 17) Which of the following statements is true of rules of evidence?

A) The rules of evidence allow expert witnesses greater latitude than other witnesses to testify based on evidence that would not otherwise be admissible.

B) The rules of evidence allow other witnesses greater latitude than expert witnesses to testify based on evidence that would not otherwise be admissible.

C) The rules of evidence do not allow both expert witnesses and other witnesses to testify based on evidence that is not admissible.

D) The rules of evidence allow expert witnesses and other witnesses great latitude to testify based on evidence that would not otherwise be admissible.

Answer: A Explanation: A) The rules of evidence allow expert witnesses greater latitude than other witnesses to testify based on evidence (such as hearsay evidence) that would not otherwise be admissible.

Diff: 1 LO: 2-4 AACSB: Analytical Thinking 18) Which of the following is the purpose of the Federal Rules of Evidence?

A) to set standards for evidence to be admissible in court B) to dictate the manner in which evidence is to be presented to the jury C) to seek justice and truth in a fair and reasonable manner D) to reduce the delay in trial due to unavailability of evidence Answer: C Explanation: C) The purpose of the Federal Rules of Evidence is to seek justice and truth in a fair and reasonable manner.

Diff: 1 LO: 2-5 AACSB: Analytical Thinking

8 .

19) Which of the following is a criterion under Rule 702 of the Federal Rules of Evidence for an expert testimony to be admissible?

A) The testimony can be accepted within the professional community.

B) The testimony is based on reliable assumptions.

C) The testimony is given in relation to scientific, technical, or other specialized knowledge.

D) The testimony is the product of reliable principles and methods.

Answer: D Explanation: D) Under Rule 702, expert testimony is admissible only if it meets three specific criteria: 1. The testimony is based on sufficient facts or data.

2. The testimony is the product of reliable principles and methods.

3. The principles and methods have been applied reliably to the facts of the case.

Diff: 1 LO: 2-5 AACSB: Analytical Thinking 20) Which of the following scenarios indicates the application of Rule 702 of the Federal Rules of Evidence?

A) The plaintiff engages Ali, an attorney, to represent them in court.

B) The attorney calls upon Riya, a construction engineer, to provide evidence on the structural sufficiency of a building.

C) Pete, a store-owner, appears as a witness to give testimony on a robbery committed outside his store.

D) The court calls on Fiona, a forensic accountant, to give a statement on the accident that caused damage to her car.

Answer: B Explanation: B) Rule 702 allows the testimony of an expert witness if it will assist the trier of fact (judge or jury) through the maze of "scientific, technical, or other specialized knowledge." In this scenario, Riya, a construction engineer, can give the trier of fact a technical perspective on the structure of a building, thus enabling better understanding of the case.

Diff: 2 LO: 2-5 AACSB: Analytical Thinking

9 .

21) Which of the following is a difference between Rule 704 and Rule 705 of the Federal Rules of Evidence?

A) Rule 704 allows an expert to state an opinion without first testifying to the underlying facts or data, whereas Rule 705 allows an expert to testify to the underlying facts or data.

B) Rule 704 allows an expert to testify on areas that embrace an ultimate issue to be decided by the fact finder, whereas Rule 705 allows an expert witness a considerable degree of latitude regarding the facts or data upon which his or her opinions are based.

C) Rule 704 allows an expert to testify on areas that embrace an ultimate issue to be decided by the fact finder, whereas Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data.

D) Rule 704 allows an expert witness a considerable degree of latitude regarding the facts or data upon which his or her opinions are based, whereas Rule 705 allows an expert to testify on areas that embrace an ultimate issue to be decided by the fact finder.

Answer: C Explanation: C) Rule 704 allows an expert to testify on areas that embrace an ultimate issue to be decided by the fact finder. Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data, with the understanding that the opinion is subject to cross-examination.

Diff: 3 LO: 2-5 AACSB: Analytical Thinking 22) Which of the following does Rule 705 of the Federal Rules of Evidence allow?

A) It allows an expert to state an opinion without first testifying to the underlying facts or data, with the understanding that the opinion is subject to cross-examination.

B) It allows an expert to testify on areas that embrace an ultimate issue to be decided by the fact finder.

C) It allows an expert witness a considerable degree of latitude regarding the facts or data upon which his or her opinions are based.

D) It allows the testimony of an expert witness if it will assist the trier of fact (judge or jury) through the maze of "scientific, technical, or other specialized knowledge."

Answer: A Explanation: A) Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data, with the understanding that the opinion is subject to cross-examination.

This cross-examination is important because an expert's opinion is only as good as the facts, assumptions, data, and methodology upon which it is based.

Diff: 2 LO: 2-5 AACSB: Analytical Thinking

10 .

23) Fingerprints and DNA samples are examples of A) direct evidence.

B) documentary evidence.

C) character evidence.

D) circumstantial evidence.

Answer: D Explanation: D) Circumstantial evidence is evidence based on inference and not on personal knowledge or observation; also known as indirect evidence. Examples include fingerprints and DNA samples or, in a financial crime, evidence of the defendant's lifestyle.

Diff: 1 LO: 2-5 AACSB: Analytical Thinking 24) Which of the following is an example of hearsay evidence?

A) The attorney called on Anna to present her version of the events that took place during her class.

B) The police recorded a statement from Tina, which claims that she often heard the neighbors complain about the suspect's behavior.

C) The detective testified that the fingerprints lifted from the scene of crime had been identified as those of the suspect.

D) The prosecution presented a copy of the legal will of the deceased that had been altered by the defendant.

Answer: B Explanation: B) Hearsay evidence is testimony given by a witness who relates not what he/she knows personally, but rather what others have said. It depends on the credibility of someone other than the witness.

Diff: 2 LO: 2-5 AACSB: Analytical Thinking 25) Which of the following best describes a Daubert challenge?

A) It is a challenge faced by the judge when the jury is equally divided over a verdict.

B) It is a method used by the jury to evaluate the testimony given during a trial.

C) It is a special hearing conducted before the trial judge to determine the relevance and reliability of an expert's opinion.

D) It is a process by which the defendant challenges the prosecution's evidence.

Answer: C Explanation: C) A Daubert challenge is a special hearing conducted before the trial judge to determine the relevance and reliability of an expert's opinion-that is, to rule on its admissibility.

Diff: 2 LO: 2-6 AACSB: Analytical Thinking

11 .

26) Which of the following is a factor to be considered when evaluating expert testimony under the Daubert challenge?

A) how well accepted the methodology is within the professional community B) what the known or potential success rate of the method is C) whether the theory can be backed by evidence D) whether the theory can be comprehended by the community Answer: A Explanation: A) Daubert set forth several factors that should be considered when evaluating expert testimony. One of these factors is how well accepted the methodology is within the professional community.

Diff: 2 LO: 2-6 AACSB: Analytical Thinking 27) Which of the following are the three cases that make up the Daubert trilogy?

A) Daubert v. Merrell Dow Pharmaceuticals, G.E. v. Joiner, and Upjohn Co. v. United States.

B) Daubert v. Merrell Dow Pharmaceuticals, Kumho Tire v. Carmichael, and Hickman v.

Taylor.

C) Daubert v. Merrell Dow Pharmaceuticals, G.E. v. Joiner, and Kumho Tire v. Carmichael.

D) Daubert v. Merrell Dow Pharmaceuticals, Hickman v. Taylor, and Upjohn Co. v. United States.

Answer: C Explanation: C) Daubert v. Merrell Dow Pharmaceuticals, G.E. v. Joiner, and Kumho Tire v.

Carmichael are the three cases that make up the Daubert trilogy.

Diff: 2 LO: 2-6 AACSB: Analytical Thinking 28) Which rule does the Daubert trilogy serve to interpret?

A) Rule 705 B) Rule 704 C) Rule 703 D) Rule 702 Answer: D Explanation: D) Together, the three cases, known as the "Daubert trilogy," serve to interpret Rule 702.

Diff: 1 LO: 2-6 AACSB: Analytical Thinking

12 .

29) Which of the following is a drawback of the Frye test?

A) It is not flexible enough to address new scientific issues where general acceptance has not yet been established.

B) It does not allow room for additional evidence to be considered when the initial evidence is insufficient.

C) It does not admit evidence given by an expert if the evidence is not based on a well-known method.

D) It is not extensive enough to address the latest developments in civil and criminal law.

Answer: A Explanation: A) Critics of the Frye test argue that it is not flexible enough to address new scientific issues where general acceptance has not yet been established.

Diff: 2 LO: 2-6 AACSB: Analytical Thinking 30) Which of the following is a legal principle that protects communications taking place within a protected relationship?

A) protected communication B) privileged communication C) guarded communication D) secured communication Answer: B Explanation: B) Privileged communication is a legal principle that protects communications taking place within a protected relationship.

Diff: 1 LO: 2-7 AACSB: Analytical Thinking 31) What is the underlying theory of privileged communication?

A) The parties in a protected relationship are liable to disclose details of the communication taking place between them.

B) The society has a right to be aware of the communication within a protected relationship.

C) The privacy and confidentiality of a communication within a protected relationship has to be maintained.

D) In certain instances, society is best served by the suppression (protection from disclosure) of information.

Answer: D Explanation: D) The underlying theory of privileged communication, articulated by the U.S. Supreme Court in Upjohn Co. v. United States (1981), is that in certain instances, society is best served by the suppression (protection from disclosure) of information.

Diff: 1 LO: 2-7 AACSB: Analytical Thinking

13 .

32) A requisite element for establishing privilege in an attorney-client privilege includes a communication that A) is made to a person the client reasonably believed was an attorney.

B) relates to rendering personal services.

C) is irrelevant for the jury to reach a verdict.

D) contains detail that can harm the client.

Answer: A Explanation: A) The requisite elements for establishing privilege include a communication that relates to the rendering of legal services, is made in confidence, and is made to a person the client reasonably believed was an attorney.

Diff: 2 LO: 2-7 AACSB: Analytical Thinking 33) Which of the following best defines the term attorney-client privilege?

A) It is the client's right to refuse to disclose and to prevent any other person from disclosing confidential communications between the client and the attorney.

B) It is the attorney's right to refuse to disclose and to prevent the testifying expert from disclosing confidential communications between the client and the attorney.

C) It is the client's obligation to disclose confidential communications between the client and the attorney.

D) It is the attorney's right to refuse to disclose and to prevent any other person from disclosing confidential communications between the attorney and the testifying expert.

Answer: A Explanation: A) Attorney-client privilege is defined as the "client's right to refuse to disclose and to prevent any other person from disclosing confidential communications between the client and the attorney."

Diff: 2 LO: 2-7 AACSB: Analytical Thinking

14 .

34) Which of the following is a similarity between attorney-client privilege and work product doctrine?

A) Both allow lawyers to prepare for litigation but with the risk that their work will be revealed to court adversaries.

B) Both are intended to encourage individuals involved in legal disputes to be candid with their attorneys, thus enabling the attorneys to give sound legal advice.

C) Both can be extended to non-attorneys who assist attorneys in rendering legal advice or services.

D) Both provide protection from discovery of documents and other items prepared by an attorney in anticipation of a trial.

Answer: C Explanation: C) Consistent with the rules governing attorney-client privilege, the work product doctrine can be extended to items prepared by non-attorneys who assist in rendering legal services.

Diff: 2 LO: 2-7 AACSB: Analytical Thinking 35) What was the result of amending FRCP 26(b)(4) to allow the extension of work product protection to most attorney-expert communications and to all draft expert reports?

A) It reduced the cost of litigation, but made the process more complex.

B) It increased the cost of litigation and made the process more complex.

C) It reduced the cost of litigation and made the process more efficient.

D) It increased the cost of litigation and simplified the process.

Answer: C Explanation: C) FRCP 26(b)(4) was amended to allow the extension of work product protection to most attorney-expert communications and to all draft expert reports. This was a highly practical change, which served to reduce the cost of litigation and make the process more efficient.

Diff: 2 LO: 2-7 AACSB: Analytical Thinking

15 .

2.3 Short-Answer Questions 1) Rule 26(a)(2) of the Federal Rules of Civil Procedure requires the disclosure of all experts (such as forensic accountants) expected to testify at trial. The disclosure is generally accompanied by the expert's written report. List the elements that should be contained in the expert's written report.

Answer: The expert's written report must contain the following elements: 1. A complete statement of all opinions the witness will express, along with the basis and reasons for them.

2. The facts or data considered by the witness in forming the opinions.

3. Any exhibits that will be used to summarize or support the opinions.

4. The witness's qualifications, including a list of all publications authored in the preceding ten years.

5. A list of all other cases in which the witness has testified as an expert (either at trial or by deposition) during the preceding four years.

6. A statement of the compensation to be paid for the study and testimony in the case.

Diff: 2 LO: 2-2 AACSB: Analytical Thinking 2) Explain the structure of a criminal case.

Answer: The basic structure of a criminal case is similar to that of a civil case, with the addition of a fourth stage-sentencing. However, the pleading stage of a criminal case is very different.

Criminal cases are initiated with a criminal complaint accompanied by an investigator's affidavit that summarizes the evidence against the defendant. During the first appearance (arraignment), the defendant is informed of the charges and advised of his or her rights. At this time, the defendant also enters a plea to the charge or charges-guilty or not guilty. This is followed by the discovery stage and the trial stage, as discussed previously. If the defendant is found not guilty, the case is over; if found guilty, the case then moves to the sentencing stage. The verdict in a criminal case (guilty or not guilty) differs from the verdict in a civil case, wherein the defendant is found either liable or not liable (for damages). Prior to sentencing by the court, the case is evaluated by the probation department, which prepares a pre-sentence report (PSR). The PSR summarizes the case (including the crime, the case facts, and the offender's profile) and offers a recommendation for sentencing.

Diff: 2 LO: 2-2 AACSB: Analytical Thinking

16 .

3) Write a brief note on standard of proof.

Answer: The presumption of innocence must be overcome by a certain standard of proof, which describes the amount of evidence the plaintiff must present to prove its case. In a civil case, the requisite standard is a preponderance of the evidence-more likely than not (>50% probability).

Some civil cases (such as civil fraud) must be proven by clear and convincing evidence. Clear and convincing is greater than preponderance, but no specific percentage can be assigned. In a criminal case, the prosecution has a legal obligation to prove all elements of an alleged offense (such as fraud, tax evasion, or murder) beyond a reasonable doubt. Again, no percentage can be assigned. The applicable burden and standard of proof are explained to the jury by the judge and included in the jury instructions. The forensic accountant must understand the requisite standard of proof for any litigation engagement and articulate his or her opinion accordingly.

Diff: 2 LO: 2-3 AACSB: Analytical Thinking 4) What are the two most common forms of alternate dispute resolution?

Answer: The most common forms of alternative dispute resolution are mediation and arbitration.

Mediation is a non-binding informal process wherein a mediator evaluates the arguments of both sides and helps the parties reach common ground. If mediation fails, the parties may proceed with litigation. Arbitration, on the other hand, is a "mini trial" wherein each party presents its case to one or more arbitrators, who render a binding decision that generally cannot be appealed.

Arbitration is often voluntary but can also be mandatory.

Diff: 2 LO: 2-3 AACSB: Analytical Thinking 5) What is relevant evidence as defined by FRE 401?

Answer: According to FRE 401, relevant evidence must have the "tendency to make a fact more or less probable than it would be without the evidence," and the fact must be "of consequence in determining the action." As a general principle, all relevant evidence is admissible unless it is inadmissible due to another rule of evidence or law. FRE 403 allows relevant evidence to be excluded if its probative value is substantially outweighed by danger of unfair prejudice, of confusing or misleading the jury, or of wasting the court's time. The presentation of evidence is subject to objection by the opposing party. The basis of an objection must be stated (for example, prejudice or hearsay) and will be ruled on by the court-overruled or sustained. In addition to probative value exclusions, many social policies operate to exclude relevant evidence.

Diff: 2 LO: 2-5 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 3 Screening and Staging Engagements 3.1 True/False Questions 1) The determination of the risk-reward ratio of an engagement is similar among practitioners.

Answer: FALSE Explanation: The determination of this ratio differs widely among practitioners, due primarily to their subjective perceptions of the definition and importance of each of the two components (risks and rewards).

Diff: 1 LO: 3-1 AACSB: Analytical Thinking 2) Under no circumstances can an expert witness provide services under a contingent fee.

Answer: TRUE Explanation: Under no circumstances can an expert witness provide services under a contingent fee, successful efforts, or outcome-based arrangement. Independence and objectivity would certainly be undermined in such a situation.

Diff: 1 LO: 3-1 AACSB: Analytical Thinking 3) A Kovel letter should confirm that the expert is being retained to assist the attorney in providing legal services.

Answer: TRUE Explanation: An engagement letter that establishes an agency relationship between the attorney and the expert is commonly referred to as a "Kovel letter." Specifically, a Kovel letter should confirm that the expert is being retained to assist the attorney in providing legal services.

Diff: 1 LO: 3-2 AACSB: Analytical Thinking 4) When engaged as a testifying expert rather than consulting expert, the expert is not considered an agent of the attorney.

Answer: FALSE Explanation: Even when engaged as a testifying (rather than consulting) expert, which implies very limited protection, the expert is still considered an agent of the attorney.

Diff: 1 LO: 3-3 AACSB: Analytical Thinking

1 .

5) An engagement letter for providing litigation services is required under the AICPA's professional standards.

Answer: FALSE Explanation: Engagement letters for providing litigation services are currently not required under the AICPA's professional standards. (They are encouraged, but not required.)

Diff: 1 LO: 3-3 AACSB: Analytical Thinking 6) The requisite standard of proof is determined by the type of case.

Answer: TRUE Explanation: The type of case (criminal or civil) determines the requisite standard of proof (preponderance of the evidence vs. beyond a reasonable doubt).

Diff: 1 LO: 3-4 AACSB: Analytical Thinking 7) Different jurisdictions often have different laws and use different rules of procedure.

Answer: TRUE Explanation: Different jurisdictions often have different laws and use different rules of procedure and evidence.

Diff: 1 LO: 3-4 AACSB: Analytical Thinking 8) A hypothesis is a statement of fact.

Answer: FALSE Explanation: A hypothesis is not a statement of fact; it is simply a tentative explanation based on preliminary observations that must be tested.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking 9) Drawing conclusions requires a mix of both deductive and inductive reasoning.

Answer: TRUE Explanation: After gathering sufficient facts and data and employing reliable methodology, the forensic accountant draws his or her final conclusions (opinions). This last step requires a mix of both deductive and inductive reasoning.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking

2 .

10) Media is an example of primary sources of information considered by forensic accountants.

Answer: FALSE Explanation: Media is an example of secondary sources of information considered by forensic accountants.

Diff: 1 LO: 3-6 AACSB: Analytical Thinking 3.2 Multiple-Choice Questions 1) Which of the following statements is true of the engaging attorney?

A) The basic purpose of attorneys is to advocate for their clients.

B) Attorneys are generally unwilling to sacrifice the expert's reputation even at the cost of client.

C) It is not possible to distinguish a bad attorney from a good one.

D) Keeping the expert in the loop is a sign of a red flag that the attorney might be bad.

Answer: A Explanation: A) Any potential conflicts of interest must be identified before accepting an engagement.

Diff: 1 LO: 3-1 AACSB: Analytical Thinking 2) Which of the following is true of a joint expert?

A) A joint expert's opinion is considered more subjective.

B) Hiring a joint expert increases fees and the time.

C) Hiring a joint expert is most common in domestic litigation.

D) The chances of conflict of interest increases when a joint expert is hired.

Answer: C Explanation: C) A forensic accountant may be engaged as a "joint expert," or an expert for both parties, which most commonly occurs in domestic (divorce) litigation. The rationale is that hiring one expert reduces fees and saves time.

Diff: 2 LO: 3-1 AACSB: Analytical Thinking

3 .

3) Which of the following is true of the deadlines of a forensic accounting engagement?

A) The deadlines for an engagement are decided by the engaging client, after consulting with the forensic accountant.

B) The deadlines for an engagement are flexible and can be altered to meet the requirements of the expert.

C) Missing a report deadline can result in serious consequences, including court sanctions and damage to one's reputation.

D) Missed deadlines can be easily extended by filing a request for an extension with the court.

Answer: C Explanation: C) All forensic accounting engagements are conducted within a set of time constraints, established by deadlines. These deadlines are often set by the court and are outside the control of the attorney or the expert. Missing a report deadline can result in serious consequences, including court sanctions, legal claims from the client, and damage to one's reputation. Thus, before accepting an engagement, a forensic accountant must confirm the case timeline and balance these demands with competing obligations.

Diff: 2 LO: 3-1 AACSB: Analytical Thinking 4) Which of the following is considered to be a safe compensation arrangement for a forensic accountant?

A) a lump sum amount B) a commission based on the success of the engagement C) an advance payment for the full amount D) an hourly fee with a retainer Answer: D Explanation: D) A safe compensation arrangement is charging an hourly fee with a retainer. The advantages of an hourly fee include its self-explanatory nature, ease of measurement, and ease of communication-work is billed as it is performed. A retainer is an advance payment for services, against which hourly fees are charged.

Diff: 2 LO: 3-1 AACSB: Analytical Thinking

4 .

5) Dimitriv, a forensic accountant, is hired by the court to provide additional insight into the ongoing trial against Blue Rock, Inc. Dimitriv holds a large share of Blue Rock's stock. Which of the following can be inferred of this case?

A) an engagement letter is not necessary B) lack of professional competence C) conflict of interest exists D) nature of engagement is unclear Answer: C Explanation: C) A conflict of interest is defined as a real or perceived incompatibility between the interests of two clients or between the interests of the client and the forensic accountant (or firm). In this case, Dimitriv has a vested interest in Blue Rock. Therefore, conflict of interest exists in this case.

Diff: 2 LO: 3-2 AACSB: Analytical Thinking 6) Which of the following is a reason for rejecting an engagement in which conflicts of interest has been identified?

A) It leads to disagreements between an attorney and an expert.

B) It impairs independence and objectivity of the forensic accountant.

C) It results in disclosure of confidential or sensitive information.

D) It undermines the attorney-client privilege.

Answer: B Explanation: B) In addition to specialized knowledge and skills, a forensic accountant's calling cards are independence, integrity, and objectivity. An allegation of a conflict, whether real or perceived, may serve to undermine an expert's credibility. Thus, regardless of consents, the rejection of all engagements in which a potential conflict has been identified is recommended.

Diff: 1 LO: 3-2 AACSB: Analytical Thinking 7) Which of the following is true in when a conflict of interest exists in an engagement?

A) A potential conflict of interest need not be disclosed if it does not affect the independence of the forensic accountant.

B) A verbal consent is sufficient to acknowledge the potential conflict and waive any objections related thereto in the presence of a judge.

C) An engagement in which a potential conflict has been identified can be accepted if the conflict does not impair the objectivity of the forensic accountant to a large extent.

D) If a potential conflict of interest is identified, it must be fully disclosed to the client before the engagement is accepted.

Answer: D Explanation: D) If a potential conflict of interest is identified, it must be fully disclosed to the client before the engagement is accepted. Moreover, written consents must be obtained, by which the affected parties explicitly acknowledge the conflict and waive any objections related thereto.

Diff: 2 LO: 3-2 AACSB: Analytical Thinking 5 .

8) Which of the following does a conflict of interest generally indicate?

A) The objectivity of the forensic accountant is likely to be impaired.

B) The testimony of the expert will have an adverse impact on the case presented by the attorney.

C) The outcome of the trial will be adverse to the interest of the client.

D) The attorney-client privilege will cease to be in force for the remaining period of the trial.

Answer: A Explanation: A) When there is a conflict of interest, the objectivity and independence of the forensic accountant is likely to be impaired.

Diff: 2 LO: 3-2 AACSB: Analytical Thinking 9) Which of the following can help in identifying a potential conflict of interest?

A) reviewing the subject complaint B) engaging the services of a detective C) assessment of the jury D) statements made by the attorney and expert Answer: A Explanation: A) Conflicts of interest can be identified by reviewing the subject complaint, which specifies the parties (plaintiffs and defendants), the case facts, and the respective attorneys. The expert should consider whether a past or present relationship with any of the named parties could be perceived as a conflict.

Diff: 1 LO: 3-2 AACSB: Analytical Thinking 10) Which of the following is true of engagement letters?

A) Engagement letters can be modified with the approval by both parties.

B) Engagement letters are generally addressed to the expert to establish the expert's relationship as the attorney's agent.

C) Engagement letters are treated as privileged communication and need not be disclosed to the court.

D) Engagement letters for providing litigation services are required under the AICPA's professional standards.

Answer: A Explanation: A) As an engagement evolves, it is common to amend or supplement the engagement letter. Since the engagement letter is a contract, any such modifications must be approved by both parties.

Diff: 1 LO: 3-3 AACSB: Analytical Thinking

6 .

11) Which of the following is generally covered in an engagement letter?

A) research plan B) deadlines given by the court C) evidence required to be gathered D) right to terminate Answer: D Explanation: D) An engagement letter should include the right to terminate.

Diff: 1 LO: 3-3 AACSB: Analytical Thinking 12) Which of the following is true of an engagement letter?

A) It is addressed to the expert, to establish an agent relationship.

B) It cannot be amended once signed by both parties.

C) It is a necessary requirement for litigation services as per the AICPA's professional standards.

D) It establishes the nature of an engagement and any protections attached therewith.

Answer: D Explanation: D) A critical function of the engagement letter is to establish the nature of an engagement and any protections attached therewith (attorney-client privilege and work product protection).

Diff: 1 LO: 3-3 AACSB: Analytical Thinking 13) Joseph Smith, a forensic accountant, is considering whether to accept an engagement or not.

From the preliminary information of the case, he is not able to identify a specific conflict of interest. However, he realizes that there is a chance that the engagement might create the perception of a conflict of interest in the professional community. Joseph should A) accept the engagement as there is not real conflict of interest.

B) not accept the engagement because law does not allow acceptance of such engagements.

C) accept the engagement because perception of conflict is not likely to affect him.

D) not accept the engagement as perception of a conflict could erode his credibility.

Answer: D Explanation: D) Accepting an engagement where there is a possibility of perceived conflict of interest is not a good practice. The reason is that perception of a conflict could erode Joseph's credibility, which could impact reputation and access to future engagements.

Diff: 3 LO: 3-3 AACSB: Analytical Thinking

7 .

14) Framing a case refers to A) the identification of all critical aspects of a case.

B) an economic assessment of an engagement's risks and rewards.

C) the development of the engagement letter.

D) the identification of responsible parties.

Answer: A Explanation: A) Framing a case is the identification of all critical aspects of a case. This provides a way for a forensic accountant to view the case in its proper context.

Diff: 1 LO: 3-4 AACSB: Analytical Thinking 15) Which of the following is true of jurisdiction in terms of a forensic accounting engagement?

A) It does not impact the manner in which evidence is presented.

B) Practitioners need not address any jurisdictional issues with engaging counsel.

C) It is the domain over which a court exercises judicial authority.

D) It is not a factor that is considered by a forensic accountant while framing a case.

Answer: C Explanation: C) A court's jurisdiction is the domain over which it exercises judicial authority.

Different jurisdictions have unique characteristics that significantly impact how a case is developed and how evidence, including an expert's report, is presented.

Diff: 1 LO: 3-4 AACSB: Analytical Thinking 16) When performing an engagement, which of the following professional standards should be adhered to?

A) development standards, which address the development of the expert's opinion B) research standards, which address the process to be followed while conducting a research C) scientific standards, which address the schedule of the scientific approach D) engagement standards, which address the issues to be considered while accepting an engagement Answer: A Explanation: A) Professional standards commonly include: 1. General/ethical standards, including issues such as integrity and objectivity, professional competence, and due professional care 2. Development standards, which address the development of the expert's opinion (including sufficiency and reliability of the data, scope limitations, and methodology) 3. Reporting standards, which address the form and content of the expert's report Diff: 2 LO: 3-4 AACSB: Analytical Thinking

8 .

17) Which of the following is true of the last step of the scientific process?

A) It requires the use of inductive and deductive reasoning to arrive at conclusions.

B) It involves an objective evaluation of all evidence collected in a case followed by an estimation of the probability that the hypothesis is valid.

C) It involves use of techniques such as financial statements analysis.

D) It requires the forensic accountant to form a working hypothesis.

Answer: A Explanation: A) In the last step, the forensic accountant draws his or her final conclusions. This last step requires a mix of both deductive and inductive reasoning.

Diff: 2 LO: 3-4 AACSB: Analytical Thinking 18) Which of the following is a reason why relevant dates should be determined while framing a case?

A) It determines the assumptions to be made.

B) It affects the evidence-gathering process.

C) It defines the time to be taken to complete the engagement.

D) It acts as a scope limitation.

Answer: D Explanation: D) Most forensic accounting engagements involve a pre-determined date or time period, which acts as a scope limitation.

Diff: 2 LO: 3-4 AACSB: Analytical Thinking 19) Which of the following is a step in the scientific process?

A) re-statement of the purpose specified in the engagement letter B) identify the conflict of interest C) form a hypothesis D) testify under oath Answer: C Explanation: C) The scientific process has five steps: define purpose, form a hypothesis, gather evidence, interpret data and refine hypothesis, draw conclusions.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking

9 .

20) Which of the following is generally considered to be the most difficult task in the scientific process?

A) defining the purpose B) forming a hypothesis C) gathering evidence D) drawing conclusions Answer: B Explanation: B) Forming a working hypothesis is generally the most difficult task in the scientific process for both students and practitioners.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking 21) Which of the following best defines a hypothesis in a scientific process?

A) derivation of a conclusion based on observations B) development of a tentative explanation based on preliminary observations C) collection of data for the engagement D) a statement of the exact function an accountant has been engaged to do Answer: B Explanation: B) A hypothesis is a tentative explanation of some observed phenomenon. In forensic accounting, a hypothesis is developed from case facts or suspicions that are provided by the engaging party, or by an expert's independent research.

Diff: 2 LO: 3-5 AACSB: Analytical Thinking 22) Which of the following is the basic purpose of gathering evidence?

A) to determine the objective of the engagement B) to form a working hypothesis C) to draw a conclusion from the scientific process D) to test the validity of the hypothesis Answer: D Explanation: D) The purpose of gathering evidence is to test the validity of the hypothesis.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking

10 .

23) Which of the following is a common evidence-gathering technique used by forensic accountants?

A) benchmarking B) crime scene analysis C) sampling D) inspection Answer: A Explanation: A) Evidence-gathering techniques commonly used by forensic accountants include benchmarking.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking 24) Which of the following should be followed by the forensic accountant while evaluating evidence?

A) The working hypothesis must be constantly re-evaluated and refined based on new evidence.

B) For most engagements, the concept of probability should be considered specifically.

C) Evidence can be accepted at face value if it has been obtained from a known source.

D) The negative facts, inconsistencies, or discrepancies that challenge his or her working hypothesis can be ignored.

Answer: A Explanation: A) The evidence-gathering process should be iterative in nature. This means that the forensic accountant must constantly re-evaluate and refine his or her working hypothesis as new evidence is collected and evaluated.

Diff: 2 LO: 3-5 AACSB: Analytical Thinking 25) When evaluating evidence, the forensic accountant should make an effort to document and date all items considered. Which of the following statements is true of this data log?

A) It should include speculations, in addition to facts and direct observations.

B) It helps keep the process on track and avoid duplication of efforts.

C) It cannot be used by the opposing counsel to challenge the expert witness.

D) It serves as evidence by itself.

Answer: B Explanation: B) When evaluating evidence, the forensic accountant should make an effort to document and date all items considered. Such a record will help keep the process on track and avoid duplication of efforts.

Diff: 2 LO: 3-5 AACSB: Analytical Thinking

11 .

26) Which of the following is a special benefit of the scientific approach?

A) It eliminates the requirement of gathering evidence through primary research.

B) It provides a platform for conducting extensive research.

C) It helps in reducing the number of steps that needs to be performed in an engagement.

D) It decreases liability by reducing the potential for missed steps.

Answer: D Explanation: D) The scientific approach decreases liability by reducing the potential for missed steps.

Diff: 2 LO: 3-5 AACSB: Analytical Thinking 27) Which of the following is the last step of the five step scientific process?

A) interpreting data B) drawing conclusions C) refining the hypothesis D) preparing a report Answer: B Explanation: B) After gathering sufficient facts and data and employing reliable methodology, the forensic accountant draws his or her final conclusions (opinions). This last step requires a mix of both deductive and inductive reasoning.

Diff: 1 LO: 3-5 AACSB: Analytical Thinking 28) Which of the following is a characteristic of a good research?

A) It does not require a working hypothesis as it is tentative in nature.

B) It is mostly using the Internet sources as they are cheaper and easier to access.

C) It is guided by the specific problem and a working hypothesis.

D) It does not accept assumption and is based purely on facts.

Answer: C Explanation: C) Research is guided by the specific problem and a working hypothesis. As previously discussed, a working hypothesis is a tentative explanation based on preliminary observations. Ultimately, hypotheses are never proved or disproved-they are either supported or rejected.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking

12 .

29) Which of the following is a difference between primary research and secondary research?

A) Primary research relates more generally to the subject matter of the research question or problem, whereas secondary research is engagement-specific.

B) Primary research involves the collection, analysis, and interpretation of original data, whereas secondary research involves the collection, analysis, and interpretation of data that has been compiled and published by others.

C) Primary research is done by the engaging attorney or client, whereas secondary research is done by the forensic accountant or the expert engaged.

D) Primary research is commonly used in refining a hypothesis, developing critical assumptions, and selecting methodologies, whereas secondary research is commonly used in forming a hypothesis and gathering evidence.

Answer: B Explanation: B) Forensic accountants perform both primary and secondary research. Primary research is engagement-specific and involves the collection, analysis, and interpretation of primary (original) data. In contrast to primary research, secondary research involves the collection, analysis, and interpretation of data (information) that has been compiled and published by others.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking 30) Which of the following is a key function of a research plan?

A) to specifically identify the data to be collected and analyzed B) to set a schedule for the research process C) to ensure that only data that support the hypothesis is collected and analyzed D) to assist in drawing conclusions from the hypothesis Answer: A Explanation: A) A key function of a research plan is to specifically identify the data to be collected and analyzed.

Diff: 1 LO: 3-6 AACSB: Analytical Thinking 31) Which of the following is an example of primary sources of information?

A) published statistics B) media C) management reports D) asset protection data Answer: D Explanation: D) Asset protection data, such as insurance policies and appraisals, is an example of primary sources of information.

Diff: 1 LO: 3-6 AACSB: Analytical Thinking

13 .

32) Which of the following is true of secondary research?

A) It is engagement-specific and involves the collection, analysis, and interpretation of original data.

B) It is commonly used by forensic accountants in refining a hypothesis, developing critical assumptions, and selecting methodologies.

C) It is comparatively more data-intensive, time-consuming, and expensive as compared to primary research.

D) Sources of secondary information include bank data, communications data, and organizational data.

Answer: B Explanation: B) Secondary research is commonly used by forensic accountants in refining a hypothesis, developing critical assumptions, and selecting methodologies.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking 33) Which of the following is an example of secondary sources of information?

A) Ben collected data from bank statements and loan documents to support her testimony on the banking fraud case.

B) Wendy interviewed the employees of Bourghen, Inc. to know the accounting procedure followed by the company.

C) Olive referred to similar court cases that had been published to understand the take of the jury and the law on certain issues.

D) Liam analyzed the financial statements and tax returns of Grow Healthy, Inc. to obtain data for forming a working hypothesis.

Answer: C Explanation: C) Secondary research involves the collection, analysis, and interpretation of data (information) that has been compiled and published by others. Referring to similar court cases that had been published to understand the take of the jury and the law on certain issues is an example of secondary research.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking

14 .

34) Which of the following is a reason why online research requires exercise of caution and skepticism?

A) The information is available to all and confidentiality of information cannot be maintained.

B) Some states do not accept the conclusions formed on the basis of information collected through online research.

C) The Internet has unpublished content which does not serve any purpose to forensic accountants.

D) The Internet contains misleading information, which is inconsistent with the Daubert standard.

Answer: D Explanation: D) The Internet contains much false and/or misleading information, which is clearly inconsistent with the Daubert standard. Moreover, the sheer volume of available information can be easily overwhelming and difficult to navigate, leading the researcher off track. Thus, it is encouraged that Internet sources are viewed with caution and skepticism.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking 35) Which of the following is a reason why research is considered valuable to forensic accountants?

A) It enhances critical thinking and reasoning skills.

B) It eliminates the requirement of a working hypothesis.

C) It helps in avoiding the evidences against the hypothesis.

D) It increases the mistakes, but results in better decisions.

Answer: A Explanation: A) Research enhances critical thinking and reasoning skills and, by extension, results in fewer mistakes and better decisions-in other words, a more fully developed, reasoned, and defensible opinion.

Diff: 1 LO: 3-6 AACSB: Analytical Thinking

15 .

3.3 Short-Answer Questions 1) Why should any potential conflicts of interest be identified before accepting an engagement?

Answer: A conflict of interest is defined as a real or perceived incompatibility between the interests of two clients or between the interests of the client and the forensic accountant (or firm).

Key considerations in this regard are impaired objectivity and independence. Objectivity requires the forensic accountant to be neutral (unbiased) and intellectually honest, while independence precludes the acceptance of any engagement that impairs the forensic accountant's objectivity.

In addition to specialized knowledge and skills, a forensic accountant's calling cards are independence, integrity, and objectivity. An allegation of a conflict, whether real or perceived, may serve to undermine an expert's credibility.

Diff: 2 LO: 3-2 AACSB: Analytical Thinking 2) What are the general contents of an engagement letter?

Answer: The specific content of an engagement letter depends on the nature of the engagement.

As a general rule, however, an engagement letter should address the following issues: • Identification of responsible parties • Purpose of the engagement (services to be performed) • Nature of the relationship (consulting or testifying expert) • Limitations on the scope of the work • Issues of independence, conflicts of interest, and confidentiality • Ownership, use of materials, and attorney work product • Fees, invoicing procedures, and retainers • Right to terminate • Dispute resolution provisions Diff: 1 LO: 3-3 AACSB: Analytical Thinking 3) Write a short note on scope limitations while framing a case.

Answer: Engagements may be limited with regard to their scope, which defines the extent of the analysis. Scope limitations often take the form of assumptions on which the expert relies. Some assumptions are common to most engagements, such as reliance on the client's representations or other third-party data without independent verification. In a fraud investigation, for example, the scope of analysis may be limited to a particular individual, time frame, location, or activity. For business valuations, the lack of available data may require scope limitations.

Diff: 2 LO: 3-4 AACSB: Analytical Thinking

16 .

4) What are the specific benefits of a scientific approach?

Answer: Specific benefits of the scientific approach include the following: • Ensures a systematic process that can be duplicated to confirm results • Reflects professionalism and due care • Decreases liability by reducing the potential for missed steps • Facilitates communication of the process and results (in both report form and deposition/ trial testimony) • Enhances the credibility of conclusions and opinions (because the process is commonly accepted in the professional community) Diff: 1 LO: 3-5 AACSB: Analytical Thinking 5) Online research is a double-edged sword. Explain why.

Answer: Although online research clearly has a place in the forensic accountant's tool box, it is a double-edged sword. The Internet has a number of research benefits, including breadth and depth of subject matter, quick access, and ease of use. However, it also contains much false and/or misleading information, which is clearly inconsistent with the Daubert standard. Moreover, the sheer volume of available information can be easily overwhelming and difficult to navigate, leading the researcher off track.

Diff: 2 LO: 3-6 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 4 Gathering Evidence — Interviews and Observations 4.1 True/False Questions 1) Communication is not a skill in and of itself.

Answer: TRUE Explanation: Communication is not a skill in and of itself. Rather, it involves several skills, such as active listening, encoding and decoding messages, observing nonverbal communication (body language), and recognizing and managing stress and emotion.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking 2) With regard to noise as a primary component of basic communication, internal noise is attributable to the physical setting.

Answer: FALSE Explanation: Internal noise is attributable to the communicators themselves, while external noise is attributable to the physical setting.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking 3) Crossed arms commonly indicate anger or aggression.

Answer: FALSE Explanation: Crossed arms commonly indicate fear or defensiveness.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 4) Intimate zone is the space that is 18 inches to 4 feet from the individual.

Answer: FALSE Explanation: Intimate zone is the space that is 6 inches to 18 inches from the individual. It is reserved for friends and co-workers.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 5) Structured questions are designed to stimulate conversation.

Answer: FALSE Explanation: Open-ended questions are designed to stimulate conversation.

Diff: 1 LO: 4-3 AACSB: Analytical Thinking

1 .

6) When multiple individuals are identified as potential sources of information, they should be interviewed from the specific to the general.

Answer: FALSE Explanation: The investigative process generally proceeds from the general to the specific.

When multiple individuals are identified as potential sources of information, a similar approach should be used to establish the order in which they are interviewed.

Diff: 2 LO: 4-4 AACSB: Analytical Thinking 7) Employees have the right to be represented by counsel during an interview.

Answer: FALSE Explanation: As a general rule, employees have a duty to cooperate with internal (fraud) investigations as long as the information requested is reasonable. Moreover, they do not have the right to be represented by counsel during an interview.

Diff: 1 LO: 4-4 AACSB: Analytical Thinking 8) Legal observations are made in situations where there is expectation of privacy.

Answer: FALSE Explanation: Legal observations are made in situations where there is no expectation of privacy.

Diff: 1 LO: 4-5 AACSB: Analytical Thinking 9) Compared to visual observations, auditory observations are more limited.

Answer: TRUE Explanation: Compared to visual observations, auditory observations are more limited because they require closer proximity to the subject of interest.

Diff: 1 LO: 4-5 AACSB: Analytical Thinking 10) Legal observations can be considered a type of public record.

Answer: TRUE Explanation: In addition to records in the public domain, legal observations can be considered a type of public record.

Diff: 1 LO: 4-6 AACSB: Analytical Thinking

2 .

4.2 Multiple-Choice Questions 1) Which of the following is a primary reason why an interview is a favored evidence-gathering tool of forensic accountants?

A) It reduces the work to be performed.

B) It saves time as it does not require a lot of planning.

C) It is a cost effective means of collecting data.

D) It is a direct means of obtaining information.

Answer: D Explanation: D) The interview is a favored evidence-gathering tool of forensic accountants for two primary reasons: it is a direct means of obtaining information (straight to the source), and it provides immediate results.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking 2) Discriminative listening requires the forensic accountant to A) listen to an interviewee's rate of speech, volume, tone, pauses, and other vocal and nonverbal cues.

B) listen to an interviewee's body language instead of verbal communication.

C) listen to an interviewee's response based on the discrimination of whether the information is relevant or not.

D) selectively listen to an interviewee's response based on his or her on discretion.

Answer: A Explanation: A) A discriminative listener is sensitive to changes in the interviewee's rate of speech, volume, tone, pauses, and other vocal and nonverbal cues.

Diff: 2 LO: 4-1 AACSB: Analytical Thinking 3) Which of the following demonstrates active listening while interviewing?

A) interrupting the speaker with questions, opinions, and remarks B) repeating the responses of the speaker in own words C) being judgmental of the responses of the speaker and commenting on it D) leaving the room every now and then in the midst of an interview to attend to other clients Answer: B Explanation: B) Interest is demonstrated by letting the speaker finish his or her response without interruption and accepting the response without judgment. Then, the interviewer can confirm an understanding by repeating in his or her own words the interviewee's responses.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking

3 .

4) Which of the following is a primary component of the basic communication process?

A) employing B) deploying C) decoding D) referencing Answer: C Explanation: C) Decoding is the ability to decode the message. It is necessary for understanding to occur. Thus, communication requires that the codes (or languages) of the communicators have some commonality.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking 5) Which of the following is an example of internal noise?

A) time of day B) bad phone connection C) poor listening D) internet problems Answer: C Explanation: C) Examples of internal noise are fatigue, poor listening, attitude, lack of interest, fear, mistrust, lack of common experience, and emotions.

Diff: 1 LO: 4-1 AACSB: Analytical Thinking 6) Bob Mathew, a forensic accountant, interviewed the following individuals for a fraud case.

Based on their body language, which of them is most likely trying to deceive Bob? A) Mia stood with her hands on her hips and rolled her eyes.

B) Devon sat on the chair, jiggling his feet, and kept his head levelled.

C) Cody stood crossing his legs and kept his eyes on the floor.

D) Payton avoided eye contact and kept her hands hidden.

Answer: D Explanation: D) Hidden hands, self-touching, avoiding eye contact, flushed face, excessive blinking, angling away from someone, and exaggerated movements commonly indicate deception.

Diff: 2 LO: 4-2 AACSB: Analytical Thinking

4 .

7) Eyes looking down commonly indicate A) deception.

B) boredom.

C) submission.

D) frustration.

Answer: C Explanation: C) Eyes looking down commonly indicates submission.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 8) Which of the following body languages indicates frustration?

A) rolling eyes B) slouching C) exaggerated movements D) shaking head Answer: A Explanation: A) Rolling eyes commonly indicate disbelief or frustration.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 9) Which of the following body languages indicates fear?

A) excess blinking B) crossed arms C) looking up D) pointing fingers Answer: B Explanation: B) Crossed arms commonly indicate fear.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 10) Social zone A) is the space that is 6 to 18 inches from the individual. It is reserved for intimate relationships.

B) is the space that is 18 inches to 4 feet from the individual. It is reserved for friends and coworkers.

C) is the space that is 4 to 10 feet from the individual. An individual pays little or no attention to people in this zone.

D) is the space that is 10 feet and beyond an individual. An individual pays little or no attention to anything or anyone in this zone.

Answer: C Explanation: C) Social zone is the space that is 4 to 10 feet from the individual. An individual pays little or no attention to people in this zone.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 5 .

11) Which of the following is a difference between an individual's personal zone and his or her social zone?

A) Personal zone is the space that is 6 to 18 inches from the individual, whereas social zone is the space that is 4 to 10 feet from the individual.

B) Personal zone is reserved for intimate relationships, whereas social zone is reserved for friends and co-workers.

C) Personal zone is the space that is 4 to 10 feet from the individual, whereas social zone is the space that is 10 feet and beyond.

D) Personal zone is reserved for friends and co-workers, whereas the individual pays little or no attention to people in the social zone.

Answer: D Explanation: D) Personal zone is the space that is 18 inches to 4 feet from the individual. It is reserved for friends and co-workers. Social zone is the space that is 4 to 10 feet from the individual. The individual pays little or no attention to people in this zone.

Diff: 2 LO: 4-2 AACSB: Analytical Thinking 12) Which of the following is a similarity between an individual's social zone and public zone?

A) The individual pays little or no attention to people in both of these zones.

B) Both zones are reserved for people who the individual meets at social gatherings.

C) The people in both of these zones are acquaintances of the individual.

D) Both zones cover the individual's space that is visible to others.

Answer: A Explanation: A) Social zone is the space that is 4 to 10 feet from the individual. The individual pays little or no attention to people in this zone. Public zone is the space 10 feet and beyond an individual. The individual pays little or no attention to anything or anyone in this zone.

Diff: 2 LO: 4-2 AACSB: Analytical Thinking 13) Which of the following is true of body language?

A) 35% of all communication is done through body language.

B) Body language is standard across cultures.

C) Abnormal behavior can be identified even if normal behavior has not been established.

D) Body language is a two-way form of communication.

Answer: D Explanation: D) Body language is a two-way form of communication. In other words, the interviewee is also reading the interviewer's body language.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking

6 .

14) Keeping palms down while talking is an indication of A) hostility.

B) frustration.

C) anxiety.

D) agreement.

Answer: A Explanation: A) Keeping palms down while talking is an indication of hostility.

Diff: 1 LO: 4-2 AACSB: Analytical Thinking 15) Which of the following is a difference between stress and rapport?

A) Stress negatively impacts the ability to listen, whereas rapport negatively impacts the ability to think clearly.

B) Stress inhibits effective communication, whereas rapport allows the interview to evolve without hostility.

C) Stress increases the quality of witness remembrance, whereas rapport inhibits effective communication.

D) Stress is a positive factor in the communication process, whereas rapport is a negative factor.

Answer: B Explanation: B) Stress inhibits effective communication because it creates internal noise that negatively impacts the ability to listen and think clearly. Rapport allows the interview to evolve without hostility, fostering the perception that "it's safe to talk."

Diff: 2 LO: 4-2 AACSB: Analytical Thinking 16) Which of the following is true of rapport?

A) It serves as a foundation for building trust and confidence.

B) It works only with open-ended questions.

C) It manifests in a number of physical and emotional symptoms.

D) It acts as a stimulus to an unusual or unexpected situation.

Answer: A Explanation: A) Rapport is a connection between the interviewer and interviewee that serves as a foundation for building trust and confidence. Rapport has the opposite effect of stress on the communication process.

Diff: 2 LO: 4-2 AACSB: Analytical Thinking

7 .

17) Which of the following is characteristic of a formal interview?

A) It is unsystematic in nature.

B) It is generally used in the early stages of a forensic accounting engagement, when there is insufficient information to develop an informal interview.

C) It is not controlled by a specific set of detailed questions.

D) It mostly begins with structured questions and progresses to open-ended questions.

Answer: D Explanation: D) Most formal interviews begin with structured (introductory) questions and progress to open-ended (informational) questions.

Diff: 2 LO: 4-3 AACSB: Analytical Thinking 18) Which of the following type of questions are basically designed to stimulate conversation in an interview?

A) objective questions B) close-ended questions C) open-ended questions D) introductory questions Answer: C Explanation: C) Open-ended questions, which do not call for a yes or no response, are designed to stimulate conversation.

Diff: 1 LO: 4-3 AACSB: Analytical Thinking 19) Which of the following is characteristic of an informal interview?

A) It has a blend of open-ended and structured questions.

B) It relies on the spontaneous generation of questions in the natural flow of an interaction.

C) It is systematic in nature.

D) It mostly begins with structured questions and then progresses to open-ended questions.

Answer: B Explanation: B) An informal interview mainly relies on the spontaneous generation of questions in the natural flow of an interaction. To facilitate this natural flow, informal interviews are generally conducted in a friendly, nonthreatening tone.

Diff: 2 LO: 4-3 AACSB: Analytical Thinking

8 .

20) Which of the following is a difference between a formal interview and an informal interview?

A) Most formal interviews progresses from open-ended questions to structured questions, whereas most informal interviews rely on the spontaneous generation of questions in the natural flow of an interaction.

B) Formal interviews are systematic in nature, whereas informal interviews are more structured in nature.

C) Formal interviews are generally conducted in the beginning of an engagement, whereas informal interviews are generally conducted at a much later stage.

D) Formal interviews have a blend of open-ended and structured questions, whereas informal interviews are not controlled by a specific set of detailed questions.

Answer: D Explanation: D) A formal interview is systematic in nature, with a blend of open-ended and structured questions. An informal interview is unsystematic in nature in that it is not controlled by a specific set of detailed questions.

Diff: 2 LO: 4-3 AACSB: Analytical Thinking 21) Which of the following is true of introductory questions?

A) These can be used to norm the interviewee.

B) These are asked in an informal interview but not in a formal interview.

C) These are generally confrontational.

D) These cannot be used to build rapport.

Answer: A Explanation: A) Introductory questions can be used to norm the interviewee (observe body language, tone of voice, and attitude).

Diff: 1 LO: 4-3 AACSB: Analytical Thinking 22) Which of the following type of questions are asked in an interview with the purpose of summarizing and gathering any additional information the interviewee wants to share?

A) introductory questions B) closing questions C) close-ended questions D) cross questions Answer: B Explanation: B) The purpose of closing questions is to summarize and gather any additional information the interviewee wants to share.

Diff: 1 LO: 4-3 AACSB: Analytical Thinking

9 .

23) Which of the following types of questions are used to by the interviewer to make the interviewee comfortable and to create a connection?

A) review questions B) informational questions C) introductory questions D) closing questions Answer: C Explanation: C) Introductory questions are used to establish rapport (create comfort and a connection).

Diff: 1 LO: 4-3 AACSB: Analytical Thinking 24) Which of the following is one of the three fundamental stages of the interview process?

A) memorizing B) memorializing C) evaluating D) analyzing Answer: B Explanation: B) The interview process includes three fundamental stages: planning, doing, and memorializing.

Diff: 1 LO: 4-4 AACSB: Analytical Thinking 25) Which of the following is true of the memorializing stage of the interview process?

A) The interviewer should transcribe the notes in his own words to provide greater understanding.

B) The memorandum should not contain recommendations and opinions of the interviewer.

C) Any content attributable to the interviewer should be clearly identified as such.

D) Hand-written interview notes can serve as a memorandum of interview by itself.

Answer: C Explanation: C) Although facts should always be presented without bias, the memorandum may also include findings, observations, recommendations, and opinions as appropriate. Of course, any content attributable to the interviewer should be clearly identified as such.

Diff: 2 LO: 4-4 AACSB: Analytical Thinking

10 .

26) Which of the following is the order in which the witnesses are to be interviewed in a criminal investigation?

A) First, the neutral third parties, then the corroborative witness, then the suspected coconspirators, and at last, the target.

B) First, the target, then the suspected co-conspirators, then the corroborative witness, and at last, the neutral third parties.

C) First, the target, then the corroborative witness, then the suspected co-conspirators, and at last, the neutral third parties.

D) First, the neutral third parties, then the suspected co-conspirators, then the corroborative witness, and at last, the target.

Answer: A Explanation: A) The interview order should track the proximity of the individual to the subject of interest, beginning with peripheral players, then moving to the insiders. In a criminal investigation, the order of witnesses often proceeds as follows: first, the neutral third parties, then the corroborative witness, then the suspected co-conspirators, and at last, the target.

Diff: 2 LO: 4-4 AACSB: Analytical Thinking 27) Which of the following is true of the order of witness in an investigative process?

A) The order in which witnesses are interviewed is general to specific, it begins with peripheral players, then moves to the insiders.

B) Neutral third-parties are the last witnesses to be interviewed.

C) The forensic accountant gathers maximum information by interviewing the target first.

D) The proximity of the individual to the subject of interest does not affect the order in which witnesses are to be interviewed.

Answer: A Explanation: A) The interview order should track the proximity of the individual to the subject of interest, beginning with peripheral players, then moving to the insiders. In a criminal investigation, the order of witnesses often proceeds as follows: first, the neutral third parties, then the corroborative witness, then the suspected co-conspirators, and at last, the target.

Diff: 1 LO: 4-4 AACSB: Analytical Thinking

11 .

28) Which of the following is a reason to schedule witness interviews in the order of probable culpability?

A) It ensures minimum use of the forensic accountant's time and efforts.

B) It assists in identifying the key witness and in gathering evidence accordingly.

C) It assists in better identification of relevant and important information and thus, the rejection of irrelevant information.

D) It allows the forensic accountant to gather as much information as possible before the target is interviewed.

Answer: D Explanation: D) Scheduling witness interviews in the order of probable culpability allow the forensic accountant to gather as much information as possible before the target is interviewed.

Diff: 1 LO: 4-4 AACSB: Analytical Thinking 29) Which of the following statements is true of the interviewing process in a forensic accounting engagement?

A) Public employees cannot refuse to answer questions from a forensic accountant if they have exposure to criminal liability.

B) Employees have the right to be represented by counsel during an interview.

C) An employee can be fired for refusing to answer questions during an administrative or civil proceeding.

D) Private employers can be sued for Fifth or Sixth Amendment violations.

Answer: C Explanation: C) An employee, whether public or private, can be fired for refusing to answer questions or to be interviewed during an administrative or civil proceeding.

Diff: 2 LO: 4-4 AACSB: Analytical Thinking 30) Which of the following is an example of legal observation?

A) Greg arranged for the communication channels to the suspect's house to be bugged.

B) Nasir slipped into Kaif's room and read through his diary.

C) Zara followed John for a week to find out about his routine.

D) Mellissa hid a recorder in the microphone in the meeting room.

Answer: C Explanation: C) Legal visual observations (obtained through drive-bys or surveillance) involve things that can be seen in plain view, such as: • A car in the driveway • License plate numbers • Location of a residence or business • Times and locations of meetings • A person's routine or schedule • Lifestyle observations Diff: 2 LO: 4-5 AACSB: Analytical Thinking 12 .

31) Which of the following is an example of an illegal observation?

A) Heidi arranged for the communication channels to the suspect's house to be bugged.

B) At the theatre, Cole overheard the conversation between Ken and Dan, both whose movements were being monitored.

C) Levi noted down the license plate number of the suspect.

D) Aaliya kept a track of all meetings and places that Joey was present at.

Answer: A Explanation: A) An example of an illegal observation is the use of a recording device in a location where the observer is not present.

Diff: 2 LO: 4-5 AACSB: Analytical Thinking 32) Which of the following is a primary advantage of searching public records in a forensic accounting engagement?

A) The information remains confidential.

B) Results are tangible and can be replicated.

C) Data accessed through public records are reliable.

D) The multitude of information allows in-depth research.

Answer: B Explanation: B) Searching public records has four primary advantages in a forensic accounting engagement: 1. The information is public, so anyone can access it.

2. Access is fast and cheap, especially when the information is available on the Internet.

3. The search is discreet compared to other methods of investigation.

4. Results are tangible and can be replicated.

Diff: 1 LO: 4-6 AACSB: Analytical Thinking 33) ________ is the use of deception by one party to obtain information from another party who would not otherwise disclose such information is often considered inappropriate and may even be illegal.

A) Pretext B) Guise C) Blind D) Ruse Answer: A Explanation: A) A pretext is the use of deception by one party, such as posing as someone else, or using an individual's personal identifiers to obtain information from another party who would not otherwise disclose such information.

Diff: 1 LO: 4-6 AACSB: Analytical Thinking

13 .

34) Which of the following actions are specifically prohibited by the Fair Credit Reporting Act? A) using credit information obtained from a customer as evidence during a trial without obtaining his prior consent B) asking someone to get another person's customer information using false, fictitious, or fraudulent statements or using forged, counterfeit, lost, or stolen documents C) using a court subpoena to forcibly obtain customer information from a financial institution or directly from a customer of a financial institution D) asking someone personally known to a customer to convince the customer to provide his or her credit information Answer: B Explanation: B) Under the Fair Credit Reporting Act, consent is required to obtain credit information on individuals. Specifically, this law prohibits the following actions: • Using false, fictitious, or fraudulent statements or documents to get customer information from a financial institution or directly from a customer of a financial institution.

• Using forged, counterfeit, lost, or stolen documents to get customer information from a financial institution or directly from a customer of a financial institution.

• Asking someone to get another person's customer information using false, fictitious, or fraudulent statements or using forged, counterfeit, lost, or stolen documents.

Diff: 2 LO: 4-6 AACSB: Analytical Thinking 35) Which of the following best describes a questioned document?

A) It is a document that has been produced in response to a question in a court.

B) It is a document that can be used to question the witness during cross examination.

C) It is a document that contains the questions to be asked during the trial.

D) It is a document that is subject to question regarding its authenticity and/or origin.

Answer: D Explanation: D) A questioned document is a document that, either in its entirety or in part, is subject to question regarding its authenticity and/or origin. Questioned documents are often a component of illegal activities, such as forgery and embezzlement, and become trial evidence.

Diff: 1 LO: 4-6 AACSB: Analytical Thinking

14 .

4.3 Short-Answer Questions 1) List the six basic components of the basic communication process.

Answer: The six primary components of the communication process include: • Communicators - Communication is a coinciding, dynamic, and fluid process in which both the sender and receiver are communicators.

• Message - The message is the information (or understanding) to be shared.

• Channel - The channel is the means of communicating (for example, face-to-face, telephone, or email).

• Decoding - The ability to decode the message is necessary for understanding to occur. Thus, communication requires that the codes (or languages) of the communicators have some commonality.

• Noise - Noise is comprised of secondary signals that obscure or confuse the message. Noise, which might appear at any point in the communication process, can be either internal or external.

Internal noise is attributable to the communicators themselves, while external noise is attributable to the physical setting.

• Environment - Aspects of the communication environment include both physical factors, such as the location, and personal factors, such as the individual experiences and cultural backgrounds of the communicators.

Diff: 2 LO: 4-1 AACSB: Analytical Thinking 2) Write a short note on body language.

Answer: Body language is what a person is saying-without actually saying a word. It involves communicating with the movement or position of the human body, both consciously and unconsciously. Roughly 55% of all communication is done through body language, 35% through voice tone, and only 10% through the content of words.7 Thus, the importance of understanding body language cannot be overemphasized. The following cautions are to be kept in mind: • Because body language varies among cultures (there is no "universal" body language), cultural context is a critical consideration.

• Evaluating body language requires some baseline for comparison: Abnormal behavior cannot be identified until normal behavior is established. Thus, it is necessary for an interviewer to "norm" the body language of the interviewee before making assessments.

• Body language is a two-way form of communication. In other words, the interviewee is also reading the interviewer's body language.

Diff: 2 LO: 4-2 AACSB: Analytical Thinking

15 .

3) Write a short note on the importance of establishing the order of witnesses.

Answer: The investigative process generally proceeds from the general to the specific. When multiple individuals are identified as potential sources of information, a similar approach should be used to establish the order in which they are interviewed. The interview order should track the proximity of the individual to the subject of interest, beginning with peripheral players, then moving to the insiders.

For example, in the context of a criminal investigation, the order of witnesses often proceeds as follows: • Neutral third-parties - Those having some knowledge but no involvement.

• Corroborative witnesses - Those not directly involved but able to corroborate specific facts related to the offense.

• Suspected co-conspirators in the alleged offense-Beginning with least culpable and proceeding to most culpable.

• Target - The suspect.

Scheduling witness interviews in the order of probable culpability allows the forensic accountant to gather as much information as possible before the target is interviewed. In many casesespecially criminal cases-there is only one opportunity to interview key witnesses. Thus, maximum preparation is essential.

Diff: 2 LO: 4-4 AACSB: Analytical Thinking 4) Write a short note on employee interviews.

Answer: As a general rule, employees have a duty to cooperate with internal (fraud) investigations as long as the information requested is reasonable. Moreover, they do not have the right to be represented by counsel during an interview. An employee's constitutional rights under the Fifth and Sixth Amendments are triggered when he or she is confronted with a state action.

Thus, private employers cannot be sued for Fifth or Sixth Amendment violations. Public employees may, without administrative penalty, refuse to answer questions from a forensic accountant if they have exposure to criminal liability. If unsure of any such exposure, the employee is allowed to contact an attorney before being interviewed. However, an employee, whether public or private, can be fired for refusing to answer questions or to be interviewed during an administrative or civil proceeding. Special consideration is required if an interviewee is a union employee. Union employees have the right to union representation during an investigative interview, provided the employee "reasonably believes" he or she has exposure to disciplinary action.

Diff: 2 LO: 4-3 AACSB: Analytical Thinking

16 .

5) Write a short note on observations.

Answer: Observations are visual in nature. Site visits facilitate observations because they allow the opportunity to see the physical setting, such as the condition of the facilities, the layout, locations of individual workstations, and security infrastructure. Perhaps even more valuable are observations about people in these settings, including how they communicate, how specific tasks are performed, what accounting processes are employed, which internal controls are observed, how work flows, and what the overall mood and tone are. Creating a visual context for the various items of information gathered in the investigation allows the forensic accountant to "connect the dots" and further refine the working hypothesis. Thus, observations may produce evidence in and of themselves, or they may shed light on existing evidence or identify additional evidence to be obtained. Finally, observation is important because it is the means through which body language messages are received.

Diff: 2 LO: 4-5 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 5 Financial Statements Analysis — Reading Between the Lines 5.1 True/False Questions 1) Amounts shown on financial statements reflect current values.

Answer: FALSE Explanation: In applying the cost principle, costs are measured objectively on a cash or cashequivalent basis. In other words, amounts shown on financial statements reflect historical costs, not current values.

Diff: 1 LO: 5-1 AACSB: Analytical Thinking 2) Financial statements rarely, if ever, represent economic reality.

Answer: TRUE Explanation: There are certain important elements regarding the context of financial statements.

One such element is that financial statements rarely, if ever, represent economic reality.

Diff: 1 LO: 5-1 AACSB: Analytical Thinking 3) Operational freedom and reporting freedom are held in check by the principle of materiality.

Answer: FALSE Explanation: Operational freedom involves making operational choices at year-end to enhance the appearance of certain accounts, while reporting freedom involves the use of judgment in determining the amounts reported. Under GAAP, these freedoms are, at least theoretically, held in check by the principle of conservatism.

Diff: 1 LO: 5-2 AACSB: Analytical Thinking 4) Internal and external comparisons, made during financial statement analysis, can reveal unexpected relationships or the absence of expected relationships.

Answer: TRUE Explanation: Financial statements analysis requires both internal and external comparisons, which can reveal unexpected relationships or the absence of expected relationships.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking

1 .

5) Methods of financial statements analysis are most effectively applied together in a reiterative (rather than sequential) process.

Answer: TRUE Explanation: Due to their complementary nature, methods of financial statements analysis are most effectively applied together in a reiterative (rather than sequential) process.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 6) Financial ratios represent effects, not causes.

Answer: TRUE Explanation: Financial ratios represent effects, not causes. Looking beyond the mechanical application of a ratio to its root cause is a critical component of financial statements analysis.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 7) The income statement explains all changes in the assets, liabilities, and equity of a company between two consecutive balance sheet dates.

Answer: FALSE Explanation: The income statement explains some, but not all, changes in the assets, liabilities, and equity of a company between two consecutive balance sheet dates.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 8) Content analysis is a quantitative method of determining characteristics of interest.

Answer: FALSE Explanation: Content analysis is a qualitative method of determining characteristics of interest based on grammatical structure, word content, and other fundamental characteristics of communication.

Diff: 1 LO: 5-4 AACSB: Analytical Thinking 9) As per the research conducted by Churyk and Clinton, significantly fewer colons in the management discussion and analysis section of annual reports are an indication of financial statement deception.

Answer: TRUE Explanation: Research conducted by Churyk and Clinton (2008) identified certain "tells" or communication characteristics in the context of the MD&A section of annual reports, related to financial statement deception. One such characteristic is significantly fewer colons.

Diff: 1 LO: 5-4 AACSB: Analytical Thinking

2 .

10) Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Answer: TRUE Explanation: Similar to a company's balance sheet, a personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Diff: 1 LO: 5-5 AACSB: Analytical Thinking 5.2 Multiple-Choice Questions 1) In which of the following aspects does audit differ from compilation or review?

A) An audit gives reasonable level of assurance to the users, whereas a compilation or review does not give any level of assurance to the users.

B) An audit requires an understanding of the entity's internal controls and assessment of fraud risk, whereas a compilation or review does not require such understanding or assessment.

C) An audit requires an auditor or accountant to perform inquiry and analytical procedures, whereas a compilation or review does not require such procedures.

D) An audit is performed to obtain limited assurance that there are no material modifications that should be made to the financial statements, whereas a compilation or review is performed without obtaining any level of assurance.

Answer: B Explanation: B) An audit requires an understanding of the entity's internal controls and assessment of fraud risk, whereas a compilation or review does not require such understanding or assessment.

Diff: 2 LO: 5-1 AACSB: Analytical Thinking 2) Since 2002, the FASB and the International Accounting Standards Board (IASB) have been working to merge U.S. GAAP with international financial reporting standards (IFRS). Which of the following terms is used to describe this process?

A) merger B) integration C) convergence D) unification Answer: C Explanation: C) Since 2002, the FASB and the International Accounting Standards Board (IASB) have been working to merge U.S. GAAP with international financial reporting standards (IFRS), a process known as convergence.

Diff: 1 LO: 5-1 AACSB: Analytical Thinking

3 .

3) Which of the following is true of reviewed financial statements?

A) These represent the most basic level of financial statements.

B) These have a broader scope as compared to audited financial statements.

C) These provide assurance to the user of the financial statements.

D) These have a limited implication of assurance.

Answer: D Explanation: D) Reviewed financial statements have a limited implication of assurance. In other words, based on the accountant's review, he or she is unaware of any material modifications that should be made to the financial statements to be in conformity with GAAP. Diff: 1 LO: 5-1 AACSB: Analytical Thinking 4) Which of the following is a difference between audits and compilations?

A) The auditor's objective is to obtain reasonable assurance that the financial statements are free of material misstatements, whereas the objective of a compilation is to assist management in presenting financial information without obtaining any level of assurance.

B) Audits do not require an understanding of the entity's internal controls and an assessment of fraud risk, whereas compilations require an understanding of the entity's internal controls and an assessment of fraud risk.

C) Audits have a narrower scope as compared to reviews, whereas compilations have a broader scope as compared to reviews.

D) Audits provide a reasonable level of assurance to the users of the financial statements, whereas compilations provide a limited level of assurance to the users of the financial statements.

Answer: A Explanation: A) Audits obtain reasonable assurance that the financial statements are free of material misstatements, whereas compilations assist management in presenting financial information without obtaining any level of assurance.

Diff: 2 LO: 5-1 AACSB: Analytical Thinking

4 .

5) Which of the following is true of the cost principle?

A) It highlights the proposition that value is not the focus of accounting and is not represented in financial statements.

B) Using this principle results in the subjectivity of value assessments.

C) Under this, costs are measured subjectively on actual basis.

D) It results in reflecting the current values of assets, liabilities, equity, revenues, and expenses shown on the financial statements.

Answer: A Explanation: A) The cost principle highlights the proposition that value is not the focus of accounting and is not represented in financial statements. To avoid the subjectivity of value assessments, the cost principle is used to measure, record, and report transactions. In applying the cost principle, costs are measured objectively on a cash or cash-equivalent basis. In other words, amounts shown on financial statements reflect historical costs, not current values.

Diff: 2 LO: 5-1 AACSB: Analytical Thinking 6) Which of the following is a fundamental accounting principle?

A) price principle B) objectivity principle C) subjectivity principle D) conformity principle Answer: B Explanation: B) The fundamental accounting principles include objectivity principle.

Diff: 1 LO: 5-1 AACSB: Analytical Thinking

5 .

7) Which of the following is a difference between conservatism principle and materiality principle?

A) Conservatism requires that financial reporting should neither disproportionately overstate nor understate a situation, whereas materiality holds that strict adherence to accounting principles is not required for items of little significance.

B) Conservatism is listed as a constraint in the conceptual framework determined by the American financial community, whereas materiality is no longer listed as a constraint in the conceptual framework.

C) Conservatism holds that strict adherence to accounting principles is not required for items of little significance, whereas materiality requires that financial reporting should neither disproportionately overstate nor understate a situation.

D) Conservatism requires that revenues be measured within the specific reporting period, whereas materiality requires that costs be deducted from the reported revenues to determine the period's net income.

Answer: A Explanation: A) The conservatism principle requires that financial reporting be conservative, neither disproportionately overstating nor understating a situation. The materiality principle holds that strict adherence to accounting principles is not required for items of little significance.

Diff: 2 LO: 5-1 AACSB: Analytical Thinking 8) Which of the following best defines the term earnings management?

A) It is the intervention by the management in the internal financial reporting process, with the intent of boosting the earnings of an organization.

B) It is the purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.

C) It is the legitimate alteration of internal reports by the management to influence contractual outcomes that depend on reported accounting numbers.

D) It is a systematic management of earnings of an organization by its external shareholders, with the intent of increasing future profits.

Answer: B Explanation: B) Earnings management, as defined by Schipper (1989), is the "purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain."

Diff: 1 LO: 5-2 AACSB: Analytical Thinking

6 .

9) Which of the following is an accounting choice that violates GAAP? A) recording sales after they are realized, not before it B) recording intangible assets C) recording fictitious inventory D) using estimates to determine provisions for bad debts Answer: C Explanation: C) Accounting choices that violate GAAP include: recording sales before they are realized, recording fictitious sales, backdating sales invoices, and overstating inventory by recording fictitious inventory.

Diff: 1 LO: 5-2 AACSB: Analytical Thinking 10) Which of the following accountants use a conservative reporting strategy?

A) Imogene reported a higher inventory than actual.

B) Malik understated the expense incurred during the year.

C) Lia capitalized the general maintenance expenses.

D) Yuriko used a higher depreciation rate for the assets.

Answer: D Explanation: D) Conservative accounting choices within GAAP include overly aggressive recognition of provisions or reserves, overvaluation of acquired in-process R&D in purchase acquisitions, and overstatement of restructuring charges and asset write-offs.

Diff: 2 LO: 5-2 AACSB: Analytical Thinking 11) Which of the following is one of Michael Porter's five competitive forces?

A) the bargaining power of suppliers B) the bargaining power of the government C) the threat of industrial slowdown D) the threat of technological obsolescence Answer: A Explanation: A) Porter's five competitive forces include: • The threat of new competitors • The threat of substitute products or services • The bargaining power of customers • The bargaining power of suppliers • The intensity of competitive rivalry Diff: 1 LO: 5-2 AACSB: Analytical Thinking

7 .

12) Which of the following is a difference between internal comparison and external comparison with regard to financial statement analysis?

A) An internal comparison reveals unexpected relationships within a company, whereas an external comparison reveals the absence of expected relationships outside a company.

B) An internal comparison involves comparing a company with the industry as a whole, whereas an external comparison involves comparing a company's current performance with its past experience.

C) An internal comparison is done by an accountant or auditor, whereas an external comparison is done by a forensic accountant.

D) An internal comparison allows the examination of changes within a company over time, whereas an external comparison reveals the company's relative performance and financial standing.

Answer: D Explanation: D) An internal comparison involves comparing the subject company's current performance and financial condition with its past experience. Such comparisons allow the examination of changes within a company over time. In contrast, external comparisons involve comparing the subject company with similar companies or with the industry as a whole (industry averages). Such comparisons reveal the company's relative performance and financial standing.

Diff: 2 LO: 5-2 AACSB: Analytical Thinking 13) Which of the following is a difference between a forensic accountant and an accountant or auditor?

A) A forensic accountant works with complete information, whereas an accountant or auditor works with incomplete information.

B) A forensic accountant commonly works backward, whereas an accountant or auditor typically works forward.

C) A forensic accountant works with financial ratios, whereas an accountant or auditor works with internal reports.

D) A forensic accountant uses professional skepticism while conducting the analysis, whereas an accountant or auditor has a more open mindset.

Answer: B Explanation: B) A forensic accountant commonly works backward, using incomplete information, whereas an accountant or auditor typically works forward from the source of an economic event to its representation in the financial records.

Diff: 2 LO: 5-2 AACSB: Analytical Thinking

8 .

14) Which of the following is true of a balance sheet?

A) It summarizes the performance of the organization over a specific period of time.

B) It supplements information provided by the income statement.

C) It shows the financial position of an organization on a specific date.

D) It explains some changes in the assets and liabilities of a company between two consecutive periods.

Answer: C Explanation: C) The purpose of the balance sheet is to show the financial position of an organization on a specific date. It reports major classes and amounts of assets (resources owned or controlled by the business), liabilities (external claims on those assets), and equity (owners' or investors' contributions or other sources of capital).

Diff: 1 LO: 5-2 AACSB: Analytical Thinking 15) Which of the following is true of the compound annual growth rate?

A) It reflects average annual growth over a period of multiple years.

B) It reflects total annual growth over a period of multiple years.

C) It reflects average annual growth for a year as compared to the previous year.

D) It reflects total annual growth for a year as compared to the previous year.

Answer: A Explanation: A) A valuable growth measure is the compound annual growth rate (CAGR), which reflects average annual growth over a period of multiple years.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 16) Which of the following is the correct formula for calculating sustainable growth rate?

A) Sustainable growth rate = Return on sales × Return on equity B) Sustainable growth rate = Retention ratio × Return on equity C) Sustainable growth rate = Retention ratio × Return on assets D) Sustainable growth rate = Return on sales × Return on assets Answer: B Explanation: B) Sustainable growth rate is calculated as the product of the retention ratio and return on equity.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking

9 .

17) Blue Angel, Inc. generated sales of $420,000 in the year 2014. The accountant provided the following additional information: Net profit margin Total Shareholder's equity Total assets

3% $112,000 $280,000

Using the DuPont model, calculate the return on equity of the company.

A) 1.8% B) 5% C) 11.25% D) 0.8% Answer: C Explanation: C) In the DuPont Model, ROE is broken down into three component ratios: net profit margin, total asset turnover, and the equity multiplier.

ROE = (Net income/Sales) × (Sales/ Total assets) × (Total assets/Total shareholders' equity) ROE = 0.03 × ($420,000/ $280,000) × ($280,000/$112,000) Diff: 3 LO: 5-3 AACSB: Analytical Thinking 18) Which of the following is a profitability ratio?

A) return on assets B) earnings per share C) price to earnings D) dividend yield Answer: A Explanation: A) The profitability ratios are gross margin percent, return on sales, return on assets, and return on equity.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 19) Which of the following is the correct formula for calculating dividend yield?

A) Dividend yield = Book value per share / Dividends per share B) Dividend yield = Dividends per share / Book value per share C) Dividend yield = Dividends per share / Market value per share D) Dividend yield = Market value per share / Dividends per share Answer: C Explanation: C) Dividend yield ratio = Dividends per share / Market value per share Diff: 1 LO: 5-3 AACSB: Analytical Thinking

10 .

20) Judith Corp. has current assets worth $50,000 and current liabilities worth $75,000. Current assets include inventory of $10,000. Calculate current ratio.

A) 1.500 B) 0.533 C) 0.625 D) 0.667 Answer: D Explanation: D) Current ratio = Current assets / Current liabilities Current ratio = $50,000 / $75,000 = 0.667 Diff: 1 LO: 5-3 AACSB: Analytical Thinking 21) Judith Corp. has current assets worth $50,000 and current liabilities worth $75,000. Current assets include inventory of $10,000. Calculate acid test ratio.

A) 1.500 B) 0.533 C) 0.625 D) 0.667 Answer: B Explanation: B) Acid test ratio = (Current assets - Inventory) / Current liabilities Acid test ratio = ($50,000 - $10,000) / $75,000 = 0.533 Diff: 1 LO: 5-3 AACSB: Analytical Thinking 22) Peaches Corp. has current assets worth $90,000 and current liabilities worth $75,000.

Current assets include inventory of $10,000. Calculate the net working capital of the company.

A) $80,000 B) $65,000 C) $15,000 D) $5,000 Answer: C Explanation: C) Net working capital = Current assets - Current liabilities Net working capital = $90,000 − $75,000 = $15,000 Diff: 1 LO: 5-3 AACSB: Analytical Thinking

11 .

23) Which of the following the correct formula for calculating acid test ratio?

A) Acid test ratio = (Current assets - Inventory) / Current liabilities B) Acid test ratio = (Current assets - Interest expense) / Current liabilities C) Acid test ratio = (Current assets - Current liabilities) / Current liabilities D) Acid test ratio = Current assets / Current liabilities Answer: A Explanation: A) Acid test ratio = (Current assets - Inventory) / Current liabilities Diff: 1 LO: 5-3 AACSB: Analytical Thinking 24) Which of the following is Altman's conventional Z-score model for publicly traded manufacturing firms?

A) Z = 0.717(X1) + 0.847(X2) + 3.107(X3) + 0.420(X4) + 0.998(X5) B) Z = 1.4(X1) + 0.847(X2) + 3.3(X3) + 1.05(X4) + 0.998(X5) C) Z = 6.65(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4) D) Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 0.999(X5) Answer: D Explanation: D) Altman's conventional Z-score model for publicly traded manufacturing firms follows: Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 0.999(X5) Diff: 3 LO: 5-3 AACSB: Analytical Thinking

12 .

25) Arcket, Inc. is a publicly traded nonmanufacturing company. The following information is available from its financial statements: Net working capital Retained earnings Earnings before Interest and taxes Market value of equity Book value of total debt Total assets Sales

$200,000 $125,000 $375,000 $1,015,000 $1,750,000 $2,500,000 $1,500,000

Calculate and interpret the Altman's Z-score for Arcket, Inc. A) 1.6084; Bankrupt B) 2.312; Zone of ignorance C) 1.40816; Zone of ignorance D) 2.9108; Non-bankrupt Answer: B Explanation: B) Altman's Z-score for publicly traded nonmanufacturing firms: Z = 6.65(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4) X1 = Net working capital / Total assets X1 = $200,000 / $2,500,000 = 0.08 X2 = Retained earnings/ Total assets X2 = $125,000 / $2,500,000 = 0.05 X3 = Earnings before interest and taxes/ Total assets X3 = $375,000 / $2,500,000 = 0.15 X4 = Market value of equity/ Book value of total debt X4 = $1,015,000 / $1,750,000 = 0.58 Z = 6.65(0.08) + 3.26(0.05) + 6.72(0.15) + 1.05(0.58) Z = 2.312 If Z is 1.10 to 2.60, it is the zone of ignorance.

Diff: 3 LO: 5-3 AACSB: Analytical Thinking 26) Which of the following is true of Altman's Z-Score Boundaries?

A) If a publicly traded non-manufacturing firm has a Z-score of 1.81, it predicts bankruptcy.

B) If a publicly traded manufacturing firm has a Z-score of 2.60, it indicates non-bankruptcy.

C) If a publicly traded manufacturing firm has a Z-score of 1.42, the firm is in the zone of ignorance.

D) The zone of ignorance for privately held manufacturing firms is 1.23 to 2.90.

Answer: D Explanation: D) The zone of ignorance for privately held manufacturing company is 1.23 to 2.90.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking 13 .

27) Which of the following is true of the application of ratio analysis?

A) These are as reliable as the source data.

B) Analysts should use simple rules of thumb when applying these.

C) These represent causes, not effects.

D) Accounting estimates in the data do not impact ratios.

Answer: A Explanation: A) When applying financial ratios, the inputs to these ratios (the balance sheet and income statement items that act as numerators and denominators) must be examined for validity.

After all, the results of financial statements analysis (or any type of analysis) are only as reliable as the source data.

Diff: 1 LO: 5-3 AACSB: Analytical Thinking 28) Which of the following does a discrepancy in cash flow reconciliation indicate?

A) The cash outflow is greater than the cash inflow.

B) The cash flow statement reflects entries for intercompany cash flows and transactions.

C) Certain cash transactions are not accurately reflected in the income statement and balance sheet.

D) There was an unexpected surge of cash flow during the period.

Answer: C Explanation: C) The starting point for cash flow analysis is ensuring that the net cash flow for a given year matches the change in the reported cash balance from the beginning of the year to the end. A discrepancy in this regard indicates that either: (a) the cash flow statement has not been prepared correctly, or (b) all cash transactions are not accurately reflected in the income statement and balance sheet.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking 29) The journal entry testing prescribed by SAS No. 99 identifies several common characteristics of fraudulent entries. Which of the following is one such characteristic?

A) an entry for credit sales to a buyer who does not pay his dues on time B) an entry for repairs and maintenance of plant made every period C) an entry for creating provisions for bad debts D) an entry for asset made by the managing director of the company Answer: D Explanation: D) The JE testing prescribed by SAS No. 99 identifies several common characteristics of fraudulent entries. Such characteristics may include entries made by individuals who do not normally make journal entries.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking

14 .

30) Which of the following is a limitation of computer-assisted audit tools?

A) These tools cannot replace skilled forensic accountants, but rather allow them to focus their efforts on the highest-risk journal entries.

B) These tools cannot analyze 100% of the data, but rather can choose and analyze samples from the journal entry database.

C) The conclusions arrived at using these tools cannot be supported with substantial quantitative data.

D) The forensic accountant will have to manually review the general ledger even after using these tools.

Answer: A Explanation: A) Despite the benefits, computer-assisted audit tools, like any tool, have their limitations. They do not replace skilled forensic accountants, but rather allow them to focus their efforts on the highest-risk journal entries.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking 31) Research conducted by Churyk and Clinton (2008) identified certain "tells" or communication characteristics in the context of the management discussion and analysis section of annual reports, related to financial statement deception. Which of the following characteristics is an indicator of such deception?

A) fewer words per sentences B) fewer past-tense words C) more optimistic words D) more self-references Answer: A Explanation: A) Research conducted by Churyk and Clinton (2008) identified certain "tells" or communication characteristics in the context of the MD&A section of annual reports, related to financial statement deception. Such characteristics include: • Significantly fewer colons • Fewer words per sentence • Fewer optimistic words • More words related to downward direction • Fewer words describing certainty • Fewer instances of the words note and see • Fewer self-references • More past-tense words • Fewer present-tense words Diff: 1 LO: 5-4 AACSB: Analytical Thinking

15 .

32) Which of the following is a systematic technique for categorizing words into content categories using special coding rules?

A) DuPont analysis B) content analysis C) Altman's Z-score D) content coding Answer: B Explanation: B) Content analysis is a systematic technique for categorizing words into content categories using special coding rules. It is a qualitative method of determining characteristics of interest based on grammatical structure, word content, and other fundamental characteristics of communication.

Diff: 1 LO: 5-4 AACSB: Analytical Thinking 33) Which of the following is true of financial statements?

A) They represent historical data.

B) They are prepared for management purposes.

C) They represent future estimates of the firm.

D) They provide a reasonable level of assurance to their users.

Answer: A Explanation: A) Financial statements represent historical data.

Diff: 1 LO: 5-4 AACSB: Analytical Thinking 34) Which of the following is a difference between personal financial statements and business financial statements?

A) Personal financial statements follow the cost principle, whereas business financial statements do not follow the cost principle.

B) Personal financial statements should present assets at estimated current values, whereas business financial statements should present assets at historical cost.

C) Personal financial statements are not governed by GAAP, whereas business financial statements are governed by GAAP. D) Personal financial statements are prepared for a specific period of time, whereas business financial statements are prepared for a general period.

Answer: B Explanation: B) Contrary to rules employed in the preparation of business financial statements (specifically, the GAAP cost principle), personal financial statements should present assets at their estimated current values and liabilities at their estimated current amounts.

Diff: 2 LO: 5-5 AACSB: Analytical Thinking

16 .

35) Which of the following is true of a personal balance sheet?

A) It provides a snapshot of an individual's financial condition at a specific point in time.

B) It reflects the historical cost of assets and the estimated current amounts of liabilities.

C) It is prepared by the manager for the personal use of the company.

D) It is prepared by a company for individual investors to reflect the data required by them.

Answer: A Explanation: A) A personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Diff: 2 LO: 5-5 AACSB: Analytical Thinking 5.3 Short-Answer Questions 1) Explain the matching principle.

Answer: A major objective of accounting is the determination of periodic net income, specifically by matching appropriate costs with revenues (the accrual method of accounting).

Because revenues continuously flow into a business, the matching principle requires that: a) A specific reporting period be selected (month, quarter, or year) b) Revenues be measured within the specific reporting period (earned regardless of receipt) c) Costs incurred be matched with the reported revenues d) Costs be deducted from the reported revenues to determine the period's net income Diff: 1 LO: 5-1 AACSB: Analytical Thinking 2) List and explain the three basic financial statements.

Answer: Financial statements are used to convey a concise picture of a company's operating activity over a period of time and its financial position on a specific date. The three basic statements include: • Balance sheet: The purpose of the balance sheet is to show the financial position of an organization on a specific date. It reports major classes and amounts of assets, liabilities, and equity. Assets are either purchased or generated through operations. They are, directly or indirectly, financed by the creditors or investors.

• Income statement: The purpose of the income statement is to summarize the performance of the organization over a specific period of time. It explains some changes in the assets, liabilities, and equity of a company between two consecutive balance sheet dates. If prepared using GAAP, the income statement is governed by the matching principle, which provides that performance can be measured only if revenues and related costs are accounted for during the same time period.

• Statement of cash flows: The cash flow statement covers the reporting period and serves to reconcile sources and uses of cash, which are classified as operating, investing, or financing activities. This statement helps explain changes in consecutive balance sheets and serves to supplement information provided by the income statement.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking 17 .

3) Give examples and explain techniques of cash flow manipulations which may not constitute GAAP violations.

Answer: Examples of cash flow manipulations, which may not constitute GAAP violations, include: • Stretching Out Payables. Perhaps the simplest means for a company to improve its operating cash flow is to slow down its payment to vendors. Although delaying vendor payments has traditionally been interpreted as a sign of cash flow strain, companies are now spinning this practice as a prudent cash-management strategy.

• Financing of Payables. A more complex variation of stretching out payables is the financing of payables. This involves a company borrowing from a third-party financial institution to pay its vendors in the current period, with the intent of paying off the loan in the subsequent period. Of course, the effect is to delay the timing of cash outflows.

• Securitization of Receivables. To accelerate cash inflows, a company can package its accounts receivable and transfer them to a financial institution. Under certain circumstances, GAAP allows the company to report the sale proceeds as an operating cash inflow.

Diff: 2 LO: 5-3 AACSB: Analytical Thinking 4) What is content analysis?

Answer: Content analysis is a systematic technique for categorizing words into content categories using special coding rules. Simply stated, it's a qualitative method of determining characteristics of interest based on grammatical structure, word content, and other fundamental characteristics of communication. The method tests for multiple indicators and statistically analyzes them to determine characteristic patterns reflecting deception.

Diff: 1 LO: 5-4 AACSB: Analytical Thinking 5) List the common disclosures that are to accompany a personal financial statement.

Answer: Like business financial statements, personal financial statements prepared in accordance with GAAP require sufficient disclosures to make them adequately informative. The following items are commonly disclosed: • Clear identification of the effective (as of) date of the financial statements • Proper identification of the individuals covered by the financial statements • Statement that the assets are presented at their estimated current values and liabilities are presented at their estimated current amounts • Identification of the methods used in determining the estimated current values of major assets and the estimated current amounts of major liabilities • Statement that the valuation methods used in determining the major categories of assets and liabilities have been employed consistently from one period to the next • Statement (qualification) regarding any assets held jointly with another person and the nature of the joint ownership Diff: 2 LO: 5-5 AACSB: Analytical Thinking 18 .

Forensic Accounting (Rufus) Chapter 6 Fraud and White-Collar Crime 6.1 True/False Questions 1) A criminal offense is a violation of local, state, or federal law that prohibits certain conduct.

Answer: TRUE Explanation: Fraud is a criminal offense. A criminal offense is a violation of local, state, or federal law that prohibits certain conduct.

Diff: 1 LO: 6-1 AACSB: Analytical Thinking 2) White-collar crimes have a potential for violence.

Answer: TRUE Explanation: White-collar crime is more complex than it might first appear, with a very real potential for violence.

Diff: 1 LO: 6-1 AACSB: Analytical Thinking 3) The most common type of financial statement fraud is overvaluation of assets.

Answer: FALSE Explanation: The most common type of financial statement fraud is overstatement of revenues.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 4) The fraud scale study proposes replacing the incentive component of the fraud triangle with integrity.

Answer: FALSE Explanation: The fraud scale study proposes replacing the rationalization component of the fraud triangle with integrity.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 5) General theory of crime explains crime as a natural consequence of constantly restraining human desire to seek pleasure and avoid pain.

Answer: FALSE Explanation: General theory of crime explains crime as a natural consequence of uncontrolled human desire to seek pleasure and avoid pain.

Diff: 1 LO: 6-3 AACSB: Analytical Thinking

1 .

6) Neutralization is a principal theory of rationalization.

Answer: TRUE Explanation: A principal theory of rationalization is neutralization, which proposes denial, condemnation, and higher loyalty as means by which offenders neutralize their role in a crime.

Diff: 1 LO: 6-3 AACSB: Analytical Thinking 7) External locus of control is a characteristic of a typical white-collar fraudster.

Answer: TRUE Explanation: Feeling a lack of control over circumstances (external locus of control) is a characteristic of a typical white-collar fraudster.

Diff: 1 LO: 6-4 AACSB: Analytical Thinking 8) White-collar crime offenders commonly receive light or no detention and rarely make full restitution.

Answer: TRUE Explanation: Even when tried and convicted, white-collar crime offenders commonly receive light or no detention and rarely make full restitution.

Diff: 1 LO: 6-5 AACSB: Analytical Thinking 9) Which financial crimes are prosecuted is determined by the local prosecuting attorney.

Answer: TRUE Explanation: Which financial crimes are prosecuted is determined by the local prosecuting attorney (federal or state) and generally selected based on probability of conviction, operating plan, budget, notoriety, and public impact.

Diff: 1 LO: 6-6 AACSB: Analytical Thinking 10) An indictment is a statement of fact.

Answer: FALSE Explanation: An indictment is not a statement of fact-it is simply an accusation.

Diff: 1 LO: 6-6 AACSB: Analytical Thinking

2 .

6.2 Multiple-Choice Questions 1) Which of the following is a white-collar crime as identified by FBI? A) foreign lottery fraud B) social security fraud C) robbery D) food and stamp fraud Answer: A Explanation: A) The FBI has identified and categorized eight major types of financial crime.

Mass marketing fraud such as advance fee fraud, overpayment fraud, and foreign lottery fraud is a white-collar crime.

Diff: 2 LO: 6-1 AACSB: Analytical Thinking 2) Which of the following best describes the term fraud?

A) use of force to persuade someone to surrender property B) use of one's wealth to gain power and influence decisions C) use of deception to persuade someone to surrender property D) unintentional misrepresentation of financial statements Answer: C Explanation: C) The term fraud refers to use of deception to persuade someone to surrender property.

Diff: 1 LO: 6-1 AACSB: Analytical Thinking 3) Which of the following is one of the six attributes of white-collar crimes?

A) lack of integrity B) concealment C) pretense D) loss of standing Answer: B Explanation: B) The six attributes of white-collar crime are deceit, intent, breach of trust, losses, concealment, and outward respectability.

Diff: 2 LO: 6-1 AACSB: Analytical Thinking

3 .

4) Why should financial crimes meet the "beyond a reasonable doubt" burden of proof standard?

A) because these are victimless B) because these do not involve violent acts C) because it is a criminal offense D) because it is the lowest standard of proof Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking 5) Which of the following describes fraud?

A) a crime of intent B) a crime of innocence C) a crime of revenge D) a crime of honor Answer: A Explanation: A) Fraud is a crime of intent. Black's Law Dictionary defines intent as a "state of mind accompanying an act."

Diff: 1 LO: 6-1 AACSB: Analytical Thinking 6) Which of the following types of financial crime is in the primary jurisdiction of the FBI? A) tax fraud B) Social Security fraud C) immigration fraud D) insurance fraud Answer: D Explanation: D) The FBI has identified and categorized eight major types of financial crime, one of which is insurance frauds. Other major categories of white-collar crime that are outside the primary jurisdiction of the FBI include tax fraud, mail fraud, Social Security fraud, food stamp fraud, immigration fraud, and bank fraud.

Diff: 1 LO: 6-1 AACSB: Analytical Thinking

4 .

7) Which of the following is required to establish fraudulent intent in the absence of a direct confession?

A) documentary evidence B) character evidence C) demonstrative evidence D) circumstantial evidence Answer: D Explanation: D) In the absence of direct evidence, circumstantial evidence is used to establish fraudulent intent.

Diff: 1 LO: 6-1 AACSB: Analytical Thinking 8) Which of the following factors is true of circumstantial evidence?

A) It provides "proof certain" of the actual intent of the subject.

B) It is a collection of fragmented evidence that supports one inference over another.

C) It is deemed highly reliable if alternative explanations do exist.

D) Its reliability is not affected by the degree of impact.

Answer: B Explanation: B) Circumstantial evidence is a collection of fragmented evidence that supports one inference over another. The reliability of circumstantial evidence for the purpose of establishing intent depends on two key factors: (1) alternative explanations, and (2) degree of impact.

Diff: 2 LO: 6-1 AACSB: Analytical Thinking 9) Which of the following is the most common type of financial statement fraud?

A) understatement of losses B) overvaluation of reserves C) overstatement of revenues D) undervaluation of liabilities Answer: C Explanation: C) The most common type of financial statement fraud is overstatement of revenues.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking

5 .

10) Who conducted the seminal research on which the fraud theory was founded?

A) Edwin Sunderland B) Donald Cressey C) Skousen and Wright D) Wolfe and Hermanson Answer: B Explanation: B) Fraud theory is founded in the seminal research of Donald Cressey. Cressey presented his research findings in the 1953 book Other People's Money, in which he theorized that fraud results from the convergence of three factors: pressure, opportunity, and rationalization.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 11) As per Cressey, which of the following is a need or nonshareable problem that precedes the criminal violation of financial trust?

A) opportunity B) rationalization C) pressure D) capability Answer: C Explanation: C) Cressey described pressure (which was identified in every inmate interview) as a need or nonshareable problem that precedes the criminal violation of financial trust.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 12) Which of the following is a factor in the fraud triangle?

A) incentive B) pressure C) capability D) expectation Answer: B Explanation: B) Cressey's research suggests that violations of trust (fraud occur when the position of trust (opportunity) is viewed by the trusted person as a rational means (solution) to solve a nonshareable problem (pressure). This research is the foundation for the fraud triangle, which proposes that three factors-pressure (or need), opportunity, and rationalization- constitute the conditions under which fraud occurs.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking

6 .

13) Which of the following are the three factors of the fraud triangle?

A) pressure, opportunity, and capability B) opportunity, capability, and rationalization C) pressure, opportunity, and rationalization D) pressure, capability, and rationalization Answer: C Explanation: C) In sum, Cressey's research suggests that violations of trust (fraud occur when the position of trust (opportunity) is viewed by the trusted person as a rational means (solution) to solve a nonshareable problem (pressure). This research is the foundation for the fraud triangle, which proposes that three factors-pressure (or need), opportunity, and rationalization- constitute the conditions under which fraud occurs.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 14) Which of the following is a process by which a person attempts to make his or her actual or intended behavior more logical or justified?

A) rationalization B) justification C) validation D) corroboration Answer: A Explanation: A) Rationalization is a process by which a person attempts to make his or her actual or intended behavior more logical or justified. This justification allows individuals to perceive violations of trust as a legitimate means for solving their nonshareable problems.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking 15) Which of the following is a red flag of personal fraud characteristics?

A) difficulty in controlling anger B) excessive gambling habits C) impulsive behavior D) depression Answer: B Explanation: B) Excessive gambling habits are a red flag of personal fraud characteristics.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking

7 .

16) Which of the following elements is present in a fraud diamond but not in a fraud triangle?

A) integrity B) capability C) pressure D) rationalization Answer: B Explanation: B) The underlying proposition of the fraud diamond is that, in addition to pressure, opportunity, and rationalization (the fraud triangle), offenders also need the "capability" to commit the act. Wolfe and Hermanson assert that opportunity opens the door, incentive and rationalization draw offenders toward the door, and capability pushes them through.

Diff: 2 LO: 6-2 AACSB: Analytical Thinking 17) Which of the following explains is the underlying proposition of fraud diamond?

A) Integrity, reflected in one's decisions, influences deviant behavior.

B) If incentive is present in an act, the suspect's capacity does not matter.

C) A suspect's capacity, not incentive, should be considered by the forensic accountant.

D) In addition to pressure, opportunity, and rationalization, offenders also need the capability to commit the act.

Answer: D Explanation: D) The "fraud diamond," was proposed in 2004 by Wolfe and Hermanson. The underlying proposition is that, in addition to pressure, opportunity, and rationalization (the fraud triangle), offenders also need the "capability" to commit the act.

Diff: 2 LO: 6-2 AACSB: Analytical Thinking 18) Which of the following components of the fraud triangle was replaced with integrity in the fraud scale?

A) capability B) pressure C) rationalization D) opportunity Answer: C Explanation: C) The fraud scale study proposes replacing the rationalization component of the fraud triangle with integrity.

Diff: 1 LO: 6-2 AACSB: Analytical Thinking

8 .

19) Which of the following is true of the fraud scale?

A) Fraud is more likely to occur when there is high pressure, greater opportunity, and low personal integrity.

B) Fraud is more likely to occur when there is low pressure, lesser opportunity, and low personal integrity.

C) Fraud is more likely to occur when there is high pressure, lesser opportunity, and low personal integrity.

D) Fraud is more likely to occur when there is low pressure, greater opportunity, and low personal integrity.

Answer: A Explanation: A) Fraud is more likely to occur when there is high (low) pressure, greater (less) opportunity, and low (high) personal integrity.

Diff: 2 LO: 6-2 AACSB: Analytical Thinking 20) According to the traditional economic theory, which of the following motivates smart, talented, well-educated, and seemingly respectable individuals to commit fraud?

A) self-interest B) incentive C) pressure D) desire Answer: A Explanation: A) Traditional economic theory suggests that smart, talented, well-educated, and seemingly respectable individuals are motivated by self-interest to commit fraud.

Diff: 1 LO: 6-3 AACSB: Analytical Thinking 21) Which of the following propositions is reflected by the calculus of fraud?

A) Individuals will commit fraud when the reward is lower than the product of the probability of getting caught and the perceived gravity of the loss.

B) Individuals will commit fraud when the product of the probability of getting caught and the perceived gravity of the loss is greater than the reward.

C) Individuals will commit fraud when the product of the probability of getting caught and the perceived gravity of the loss is lesser than the reward.

D) Individuals will commit fraud when the perceived gravity of the loss is greater than the product of the probability of getting caught and the reward.

Answer: C Explanation: C) The calculus of fraud reflects the simple proposition that individuals will commit fraud when the reward (R) is greater than the product of the probability of getting caught (P) and the perceived gravity of the loss (L). This relationship is formalized as follows: R > PL. This can also be stated as individuals will commit fraud when the product of the probability of getting caught and the perceived gravity of the loss is lesser than the reward.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking 9 .

22) Which of the following is true of neutralization?

A) It proposes rationale as a technique of rationalization.

B) Its techniques can only be used in combination, not singly.

C) It proposes condemnation as a technique of rationalization.

D) It opposes the rational choice theory.

Answer: C Explanation: C) Neutralization proposes denial, condemnation, and higher loyalty as means by which offenders neutralize their role in a crime.

Diff: 1 LO: 6-3 AACSB: Analytical Thinking 23) Under the knucklehead defense, an attorney argues that A) even though the client has the ability to commit the crime, he or she did not have the intent to do it.

B) even if the client was motivated to commit the crime and had the ability to carry it out, he or she did not have the opportunity for it.

C) even if the client had the opportunity to commit the crime, he or she did not have an incentive to do it.

D) even if the client was motivated to commit the crime and had the opportunity, he or she did not have the ability to carry it out.

Answer: D Explanation: D) A suspect's incapacity is often used as an argument by defense attorneys because of its proximity to the question of intent. Under the "knucklehead defense," an attorney argues that, even if the client was motivated to commit the crime and had the opportunity, he or she did not have the ability to carry it out.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking 24) Which of the following is a term used to describe an effort to neutralize one's actions by shifting blame to those who condemn the behavior?

A) defamation B) accusation C) denunciation D) condemnation Answer: D Explanation: D) Condemnation is an effort to neutralize one's actions by shifting blame to those who condemn the behavior (such as co-workers, employers, prosecutors, and law enforcement).

Diff: 1 LO: 6-3 AACSB: Analytical Thinking

10 .

25) Which of the following is suggested by the rational choice theory with regard to the criminal decision-making process?

A) Offenders choose courses of action such as fraud that produce optimal rewards regardless of the effort.

B) Specific crime is chosen through an analysis of opportunities and the cost-benefit trade-off.

C) Cost-benefit assessments are objective and rigid.

D) Objectivity of the decision process allows criminal behavior to be considered rational.

Answer: B Explanation: B) Rational choice suggests that offenders are "rational calculators" who choose courses of action such as fraud that produce optimal rewards with limited effort. The decision to commit crime is generally based on a number of factors, such as temperament, upbringing, selfperception, and previous experience with crime. Once a person has decided to commit a crime, the specific crime (for example, embezzlement) is chosen through an analysis of opportunities and the cost-benefit trade-off.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking 26) Which of the following is a technique of neutralization used by offenders?

A) acceptance of authority B) organizational misconduct C) higher loyalty D) criticism Answer: C Explanation: C) Fraudsters can rationalize their behavior to themselves, and to the world, in a variety of ways. A principal theory of rationalization is neutralization, which proposes denial, condemnation, and higher loyalty as means by which offenders neutralize their role in a crime.

Higher loyalty attempts to legitimize an action by reference to a stronger bond that exists with a group than with society in general.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking

11 .

27) Which of the following is true of the general theory of crime?

A) It states that individuals with low self-control consider the long-term consequences of their behavior.

B) It suggests that criminal motivation in and of itself results in a crime.

C) It is applicable to all types of crime, except white-collar crime.

D) It explains crime as a natural consequence of uncontrolled human desire to seek pleasure and avoid pain.

Answer: D Explanation: D) The general theory of crime explains crime as a natural consequence of uncontrolled human desire to seek pleasure and avoid pain. Crime is an attractive means of pursuing self-interest because it provides "immediate, easy, and short-term pleasure."

Diff: 2 LO: 6-3 AACSB: Analytical Thinking 28) According to the general theory of crime, which of the following is also necessary in addition to criminal motivation to produce a crime?

A) high rewards B) opportunity C) justifiable reason D) capability Answer: B Explanation: B) Criminal motivation in and of itself does not produce a crime. Even the most motivated criminals must have opportunity.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking 29) Which of the following is true of organizational misconduct?

A) It is defined as the misconduct performed by individuals on behalf of an organization.

B) It is generally not influenced by an organization's "tone at the top."

C) It is perpetrated by an organization's rivals or competitors to hinder the growth or success of its business.

D) It is perpetrated by the lower-level management out of loyalty to the organization.

Answer: A Explanation: A) Organizational misconduct is defined as misconduct performed by individuals on behalf of an organization. Research on organizational misconduct has historically focused on the why (why fraud occurs). The dominant working theory proposes that misconduct occurs when an individual in an organization encounters the right combination of pressure and opportunity, without the fear of detection.

Diff: 2 LO: 6-3 AACSB: Analytical Thinking

12 .

30) Which of the following is a characteristic of a typical white-collar fraudster?

A) uneducated B) lacks feelings of anxiety and empathy C) below-average intelligence D) risk averse Answer: B Explanation: B) A typical white-collar fraudster has several characteristics including: • Above-average intelligence • Relatively well-educated • Inclined to take risk • Lacks feelings of anxiety and empathy Diff: 1 LO: 6-4 AACSB: Analytical Thinking 31) Which of the following is true of typical white-collar fraudsters?

A) They have an internal locus of control.

B) They hold a lower management position.

C) They have below-average intelligence.

D) They are relatively well-educated.

Answer: D Explanation: D) Typical white-collar fraudsters have an external locus of control, hold a higher management position, have above-average intelligence, and are relatively well-educated.

Diff: 1 LO: 6-5 AACSB: Analytical Thinking 32) Which of the following is the goal of post-conviction strategies used by white-collar offenders?

A) to make oneself judgment-proof B) to ensure that no further legal actions are faced C) to protect oneself from being financially sued in the future D) to avoid payment of restitution Answer: A Explanation: A) Common post-conviction strategies include bankruptcy, living via cash (no bank accounts), and no accumulation of assets. The goal of such strategies is to make oneself judgment-proof.

Diff: 2 LO: 6-5 AACSB: Analytical Thinking

13 .

33) Which of the following scenarios indicate post-conviction strategies used by white-collar offenders?

A) Laviler, Inc. filed for bankruptcy after the banks refused to reschedule the repayment of loan dues.

B) Shay does not own any bank account or assets and keeps all his cash in his cupboard.

C) Kuriten, Inc. pays all her expenditures and debts in cash but insists on bank checks for all receipts.

D) Gisselle does not believe in accumulating assets and invests all her cash in mutual funds.

Answer: B Explanation: B) Common post-conviction strategies include bankruptcy, living via cash (no bank accounts), and no accumulation of assets.

Diff: 2 LO: 6-5 AACSB: Analytical Thinking 34) Which of the following statements is true of white-collar crime?

A) There are often easy and inexpensive to prove.

B) These are mostly victimless acts.

C) These are not committed by organizational agents.

D) These are often a low priority for law enforcement.

Answer: D Explanation: D) White-collar crimes are often a low priority for law enforcement. Even when law enforcement does pursue a case, financial crimes are often difficult and expensive to prove.

Diff: 1 LO: 6-6 AACSB: Analytical Thinking 35) Which of the following is an example of prosecutorial misconduct?

A) insider fraud B) exaggerating medical disability C) altering financial statements D) tampering with evidence Answer: D Explanation: D) Examples of prosecutorial misconduct include hiding, destroying, or tampering with evidence; failing to disclose evidence that might exonerate the defendant (exculpatory evidence); and threatening witnesses.

Diff: 2 LO: 6-6 AACSB: Analytical Thinking

14 .

6.3 Short-Answer Questions 1) List the six attributes of white-collar crime.

Answer: The six attributes of white-collar crime are as follows: • Deceit - Offenders misrepresent and conceal the truth.

• Intent - Fraud does not happen by accident.

• Breach of trust - Offenders are generally in a position of trust that is manipulated or breached to facilitate the fraudulent action.

• Losses - White-collar crime is the unlawful taking of another's property.

• Concealment - White-collar crime can continue for years or might never be discovered.

• Outward respectability - White-collar crime is commonly perpetrated by individuals (for example, professionals and executives) who are seemingly beyond reproach.

Diff: 2 LO: 6-1 AACSB: Analytical Thinking 2) Explain rationalization with respect to Cressey's fraud theory.

Answer: Cressey theorized that rationalization enables the violator to "adjust" or reconcile two sets of conflicting values and behavior patterns. Thus, rationalization is a process by which a person attempts to make his or her actual or intended behavior more logical or justified. This justification allows individuals to perceive violations of trust as a legitimate means for solving their nonshareable problems. Violators generally engage in rationalization before (or at the same time) the act takes place. Cressey explained that violations of trust are often rationalized as essentially noncriminal, part of some general irresponsibility for which the individual is not completely accountable. Examples of common rationalizations include the following: • "It was a loan."

• "Everyone does it."

• "I'm underappreciated and underpaid."

• "I did it to help other people."

• "It's covered by insurance."

Diff: 2 LO: 6-2 AACSB: Analytical Thinking

15 .

3) Write a short note on techniques of rationalization (neutralization).

Answer: Fraudsters can rationalize their behavior to themselves, and to the world, in a variety of ways. A principal theory of rationalization is neutralization, which proposes denial, condemnation, and higher loyalty as means by which offenders neutralize their role in a crime.

There are three common denial techniques: • Denial of responsibility. When offenders deny responsibility, they view their behavior as a result of circumstances beyond their control.

• Denial of injury. When offenders deny injury, they feel as though their behavior did not hurt anyone, even though it is against the law.

• Denial of the victim. When offenders deny the victim, they conclude that the victim was deserving of the injuries.

Condemnation is an effort to neutralize one's actions by shifting blame to those who condemn the behavior (such as co-workers, employers, prosecutors, and law enforcement).

For example, condemnation is commonly used by student cheaters, who claim that instructors are unfair, unethical, or uncaring. A final technique of neutralization is loyalty to a group with which the offender associates. Offenders may feel their crime is legitimized because a bond dictates greater relevance to this group than to conventional society.

Diff: 3 LO: 6-3 AACSB: Analytical Thinking 4) List any six characteristics of a typical white-collar fraudster.

Answer: A typical white-collar fraudster has the following characteristics: • Above-average intelligence • Relatively well-educated • 36-45 years old • Male • White • Inclined to take risk • Commits fraud against own employer • Works in collusion with another offender • Employed by the company for more than ten years • Holds a senior management position • Works in finance or accounting • Lacks feelings of anxiety and empathy • Feels a lack of control over circumstances (external locus of control) Diff: 2 LO: 6-4 AACSB: Analytical Thinking

16 .

5) Define the term prosecutorial misconduct.

Answer: Prosecutorial misconduct is an "act, especially involving an attempt to avoid required disclosure or to persuade the jury to wrongly convict a defendant or assess an unjustified punishment." Examples of prosecutorial misconduct include hiding, destroying, or tampering with evidence; failing to disclose evidence that might exonerate the defendant; and threatening witnesses.

Diff: 2 LO: 6-6 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 7 Conducting a Fraud Investigation 7.1 True/False Questions 1) Under the accrual method of accounting, income is accounted for (recognized) when earned.

Answer: TRUE Explanation: Under the accrual method, income is accounted for (recognized) when earned. It is not the actual receipt, but rather the right to receive, that governs. Expenses are recognized as incurred-that is, when all events have occurred that fix the amount of the item and determine the liability to pay.

Diff: 1 LO: 7-1 AACSB: Analytical Thinking 2) A hypothesis is simply a statement of fact.

Answer: FALSE Explanation: A hypothesis is not a statement of fact-it is simply an educated guess about how something works or an explanation for an event.

Diff: 1 LO: 7-2 AACSB: Analytical Thinking 3) Financial statements analysis may reveal unexpected relationships or the absence of expected relationships.

Answer: TRUE Explanation: Financial statements analysis is the examination of financial statements for the purpose of acquiring additional information about the activities of a business. This analysis may reveal unexpected relationships or the absence of expected relationships.

Diff: 1 LO: 7-3 AACSB: Analytical Thinking 4) Journal entries can potentially undermine the validity of financial statements and the financial reporting process.

Answer: TRUE Explanation: Journal entries (JEs) can potentially undermine the validity of financial statements and the financial reporting process.

Diff: 1 LO: 7-3 AACSB: Analytical Thinking

1 .

5) The interview sequence should always start with possible co-conspirators.

Answer: FALSE Explanation: The interview sequence should ideally start with neutral third parties.

Diff: 1 LO: 7-4 AACSB: Analytical Thinking 6) Diverting proceeds of business loans for personal use is known as unauthorized disbursements.

Answer: FALSE Explanation: Diverting proceeds of business loans for personal use is known as diversion of loan proceeds.

Diff: 1 LO: 7-5 AACSB: Analytical Thinking 7) Stealing cash revenue after it has been recorded in the accounting system is called cash larceny.

Answer: TRUE Explanation: Stealing cash revenue after it has been recorded in the accounting system is called cash larceny.

Diff: 1 LO: 7-5 AACSB: Analytical Thinking 8) The rate prescribed by the applicable state (or federal) statute to be applied to a determined amount of economic loss is called a penal interest.

Answer: FALSE Explanation: Statutory interest is a rate of interest, prescribed by the applicable state (or federal) statute, that is applied to a determined amount of economic loss.

Diff: 1 LO: 7-6 AACSB: Analytical Thinking 9) Mediation is less expensive than arbitration.

Answer: TRUE Explanation: Compared to litigation and arbitration, mediation is generally less expensive and time-consuming.

Diff: 1 LO: 7-7 AACSB: Analytical Thinking

2 .

10) An arbitration panel should include at least three lawyers.

Answer: FALSE Explanation: An arbitration panel should include at least one lawyer.

Diff: 1 LO: 7-7 AACSB: Analytical Thinking 7.2 Multiple-Choice Questions 1) Under the periodic inventory method A) inventory account is used to record the changes in inventory.

B) cost of goods sold is recorded after each purchase.

C) beginning inventory remains unchanged during the period.

D) inventory account is adjusted only once in three accounting periods.

Answer: C Explanation: C) Under the periodic inventory method, a purchases account is used, and the beginning inventory is unchanged during the period. At the end of an accounting period, the inventory account is adjusted by closing out the beginning inventory and recording the ending inventory, as determined by a physical inventory.

Diff: 1 LO: 7-1 AACSB: Analytical Thinking 2) Which of the following enhances client understanding and acceptance through interim (phase) reporting?

A) integrated approach B) unit approach C) incremental approach D) phased approach Answer: D Explanation: D) A phased approach has several advantages: it enhances client understanding and acceptance through interim (phase) reporting; it enables the management of client expectations for time, cost, and results; it reduces the client's risk by providing periodic options to terminate or adjust the scope of the investigation; and it facilitates a more effective and efficient utilization of investigative resources.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking

3 .

3) John Ambre has just accepted a forensic investigative engagement. Which of the following should be the first step to be taken by John?

A) Create a fraud hypothesis.

B) Confirm the reasonableness of the suspicions of fraud.

C) Conduct interviews and gather relevant data and evidence.

D) Test and refine the fraud hypothesis via financial statements analysis.

Answer: B Explanation: B) The first step to be taken after accepting a forensic investigative engagement is confirming the reasonableness of the suspicions of fraud.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking 4) The internal auditor of Trinity, Inc. suspected that the books of accounts did not show a true and fair value of the business. On his advice, the management of the company appointed Ravenwood to investigate into the matter. Ravenwood found that the suspicions of the internal auditor were reasonable. He created a fraud hypothesis and tested and refined the hypothesis via financial statement analysis and journal entry analysis. Which of the following should be Ravenwood's immediate next step?

A) Present recommendations for resolution and remediation of fraudulent activities.

B) Draw conclusions and communicate results of the analysis.

C) Test and refine the hypothesis via interactive evidence gathering.

D) Determine misappropriations if any and the specific scheme employed.

Answer: C Explanation: C) After testing and refining the fraud hypothesis via financial statement analysis and journal entry analysis, the forensic accountant should test and refine the hypothesis via interactive evidence gathering.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking 5) Red Ram, Corp. suspected that the revenues of the company are being overstated. Which of the following conditions can confirm the reasonableness of this suspicion?

A) The competition faced by the company increased due to the entry of a new competitor in the market.

B) The labor-force doubled over the previous year resulting in higher salaries and wages cost.

C) The expenses of the company increased by 150% as compared to the previous year.

D) The finance head has to show high turnover in order to avail a loan for the company's next project.

Answer: D Explanation: D) Increase in competition may affect the sales and increased expenses may result in higher outflow. However, these do not mean that the revenue earned cannot be high, and thus these do not support suspicions of fraud. The loan for the company's next project is a need, which is an element of the fraud triangle. It can serve as a basis for suspicion of fraud.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking 4 .

6) Ariel, the CFO of Zaria, Corp., suspects that the profits of the company are being overstated.

Ariel suspects that someone from the mid-level management is behind this. The bonus of the mid-level managers is directly linked to the growth of net profit. The mid-level managers have received no bonus since three years as the reported profit of Zaria has been declining. The books of accounts are only accessible to Ariel. Which of the following elements of the fraud triangle is missing in this case?

A) need B) rationalization C) opportunity D) integrity Answer: C Explanation: C) The fraud triangle has three elements-need, opportunity, and rationalization. In this case, the mid-level managers do have the need and rationalization. However, since the books of accounts are not accessible to the mid-level managers, the opportunity is missing.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking 7) Dylan, the accountant of Skylar Constructions, is being suspected for altering entries in the books of accounts and transferring the difference to a separate account. Dylan has recently bought a luxury car. You are appointed to investigate the fraud. Which of the following is a good preliminary hypothesis for the case?

A) Skylar uses perpetual inventory method which reduces the probability of detection of fraud.

B) Dylan shares a good rapport with the auditor of the company, enhancing the opportunity to commit fraud.

C) Dylan recently bought a luxury car, the sources of funds for which is yet to be determined.

D) The financial statements of the company are reported quarterly, increasing the probability of detection.

Answer: B Explanation: B) A hypothesis is not a statement of fact-it is simply an educated guess about how something works or an explanation for an event. In this case, the fact that Dylan shares a good rapport with the auditor of the company is a probable opportunity for committing the fraud and gives a possible explanation for the suspected fraud.

Diff: 2 LO: 7-1 AACSB: Analytical Thinking

5 .

8) Which of the following is the objective of journal entry testing in a forensic accounting engagement?

A) to create a preliminary hypothesis B) to identify and assess any inappropriate or unusual activity C) to confirm the reasonableness of the suspicions of fraud D) to determine the reliability of the recorded journal entries Answer: B Explanation: B) The objective of journal entry testing is to identify and assess any inappropriate or unusual activity.

Diff: 2 LO: 7-3 AACSB: Analytical Thinking 9) Which of the following is a characteristic of fraudulent journal entries?

A) These contain exact numbers or inconsistent ending numbers.

B) These are generally recorded at the beginning of the period.

C) These are made to regularly used accounts.

D) These are applied to intercompany or related parties.

Answer: D Explanation: D) Fraudulent JEs have several common characteristics: • JEs made to unrelated, unusual, or seldom-used accounts • JEs recorded at the end of the period or as post-closing entries with little or no explanation • JEs containing round numbers or a consistent ending number • JEs applied to intercompany or related parties Diff: 2 LO: 7-3 AACSB: Analytical Thinking 10) Which of the following journal entries is most likely a fraudulent journal entry?

A) an entry involving debit to Accounts Receivable and credit to Sales Revenue B) an adjusting entry involving debit to Sales and credit to Loans to Employees C) an entry involving debit to Cash and credit to Notes Receivable D) an adjusting entry involving debit to Depreciation Expense and credit to Furniture Answer: B Explanation: B) Involvement of unrelated accounts is a common characteristic of a fraudulent journal entry. A journal entry with a debit to Sales and credit to Loans to Employees is unusual as the accounts are unrelated. Therefore, this entry could be fraudulent.

Diff: 3 LO: 7-3 AACSB: Analytical Thinking

6 .

11) How does horizontal analysis of financial statements help forensic accountants in their investigations?

A) It compares key financial statement items over time to identify changes.

B) It uses Dupont model to calculate and compare the return on equity.

C) It helps forensic accountants in identifying fraudulent journal entries.

D) It allows the comparison of financial statements regardless of firm size.

Answer: D Explanation: D) Horizontal analysis compares key financial statement items over time (from one accounting period to the next) to identify changes that may warrant further investigation.

Diff: 1 LO: 7-4 AACSB: Analytical Thinking 12) Shiny Toys had failed to meet the projected revenues for the third year in a row. Yin, the owner, suspects Ginny, his long-time attendant, of skimming cash from the cash register with possible assistance from Aton, the cashier. Ginny is the only person apart from Yin and Anton who has the key to the shop. Rita, who comes to sweep the shop every morning, had seen Ginny hover around the cash register when Aton was at lunch. Yin enlists the help of a forensic accountant to investigate the possibility of a fraud. Which of the following statements are true?

A) Rita will be considered a neutral third party.

B) Ginny will be considered a suspected co-conspirators.

C) Yin will be considered the target.

D) Aton will be considered a corroborative witness.

Answer: A Explanation: A) Neutral third-parties - those having some knowledge but no involvement - in this case, Rita.

Corroborative witnesses - Those not directly involved but able to corroborate specific facts related to the offense - in this case, Yin. Suspected co-conspirators in the alleged offense-beginning with least culpable and proceeding to most culpable - in this case, Aton Target - the suspect - in this case, Ginny.

Diff: 3 LO: 7-4 AACSB: Analytical Thinking 13) An artful plot or plan, usually to deceive others is called a A) fraud scheme.

B) fraud hypothesis.

C) fraud arbitration.

D) fraud mediation.

Answer: A Explanation: A) A scheme is "an artful plot or plan, usually to deceive others."

Diff: 2 LO: 7-5 AACSB: Analytical Thinking

7 .

14) Which of the following scenarios involves skimming?

A) Ian deducted cash from check deposits of the company.

B) Keith removed cash from the safe after it had been entered into the cash book.

C) Natalie removed cash from the register before the entries were made into the books of accounts.

D) Olivia made false entries in a cash register to conceal the cash she removed without authorization.

Answer: C Explanation: C) Stealing cash revenue "off the top," before it is recorded in the accounting system is known as skimming.

Diff: 2 LO: 7-5 AACSB: Analytical Thinking 15) Which of the following terms describes the act of stealing cash revenue after it has been recorded in the accounting system?

A) cash larceny B) register disbursement C) less cash scheme D) skimming Answer: A Explanation: A) Stealing cash revenue after it has been recorded in the accounting system is known as cash larceny.

Diff: 2 LO: 7-5 AACSB: Analytical Thinking 16) Which of the following terms describes a fraud scheme in which two conspiring companies exchange payments and services for the sole purpose of inflating revenues?

A) billing scheme B) kickback C) switch contract D) swap transaction Answer: D Explanation: D) A swap transaction is a scheme in which two conspiring companies exchange payments and services for the sole purpose of inflating revenues.

Diff: 2 LO: 7-5 AACSB: Analytical Thinking

8 .

17) Which of the following is an example of false credits/discounts?

A) Bjorn issued many sales invoices in the name of "Power Top Agency." However, no such agency existed, and the invoices were raised for overstating the revenue of the company.

B) Russell recorded a sale of $10,000 as sale of $9,000 and $1,000 as sales discount. However, no such discount was provided to the customer.

C) Shun altered a few adjusting entries in the company's cash books to conceal $4,000 that he had removed from the cash register.

D) Armin is given a reimbursement for the medical expenses incurred by her and her family. She inflated her hospital bills to the extent of $1,500 to obtain a higher amount from the company.

Answer: B Explanation: B) False credits / discounts are the scheme of using false credits or discounts to disguise theft of revenue.

Diff: 3 LO: 7-5 AACSB: Analytical Thinking 18) A ________ is a payment back by a seller of a portion of the purchase price to a buyer to induce purchase or influence future purchases.

A) false discount B) expense reimbursement C) kickback D) check tampering Answer: C Explanation: C) A kickback is a payment back by a seller of a portion of the purchase price to a buyer to induce purchase or influence future purchases.

Diff: 2 LO: 7-5 AACSB: Analytical Thinking 19) Which of the following is a rate of interest, prescribed by the applicable state (or federal) statute, that is applied to a determined amount of economic loss?

A) federal rate B) economic rate C) statutory rate D) penal rate Answer: C Explanation: C) Statutory interest is a rate of interest, prescribed by the applicable state (or federal) statute, that is applied to a determined amount of economic loss.

Diff: 2 LO: 7-6 AACSB: Analytical Thinking

9 .

20) Which of the following is a difference between mediation and arbitration?

A) Mediation is a nonbinding structured process, whereas arbitration is a binding process.

B) Mediation is done in front of a panel, whereas arbitration is facilitated by an independent third party.

C) Mediation is generally time-consuming, whereas arbitration takes significantly less time.

D) Mediation is completely flexible, whereas arbitration is comparatively rigid.

Answer: A Explanation: A) Mediation is a confidential and nonbinding structured process. It is generally facilitated by an independent third party. Arbitration is a binding process, where both sides present evidence and argue their respective positions to an arbitration panel.

Diff: 2 LO: 7-7 AACSB: Analytical Thinking 21) Which of the following is true of arbitration?

A) It is formal as compared to a trial.

B) It is focused on fact finding.

C) It is less expensive than mediation.

D) It is a nonbinding structured process.

Answer: B Explanation: B) Arbitration is a binding process, where both sides present evidence and argue their respective positions to an arbitration panel, which usually includes at least one lawyer. This forum is considerably less formal than a trial and is generally focused on fact finding.

Diff: 2 LO: 7-7 AACSB: Analytical Thinking 22) Which of the following statements comparing alternative dispute resolution (ADR) with litigation is true?

A) ADR is more expensive than litigation.

B) ADR is more time-consuming than litigation.

C) Litigation is public whereas ADR maintains privacy.

D) Litigation has complete flexibility whereas ADR has limited flexibility.

Answer: C Explanation: C) ADR strategies maintain more privacy whereas litigation is public.

Diff: 2 LO: 7-7 AACSB: Analytical Thinking

10 .

7.3 Short-Answer Questions 1) Fraud is not an accounting problem - it is a social phenomenon. Explain.

Answer: Forensic accounting is rooted in law and economics, not psychology or criminology.

Thus, the interest in "why" people commit fraud, especially when conducting a fraud investigation, is explanatory (cause and effect), not predictive. Applying traditional economic theory, it is proposed that people commit fraud when the perceived reward ($) is greater than the probable loss-the calculus of fraud. Because fraud investigators are called in after a suspicion of fraud has been identified, the focus is who, when, how, and how much-not why.

Diff: 1 LO: 7-1 AACSB: Analytical Thinking 2) What are the common characteristics of fraudulent journal entries outlined in SAS No. 99?

Answer: As outlined in SAS No. 99, fraudulent journal entries have several common characteristics: • JEs made to unrelated, unusual, or seldom-used accounts • JEs recorded at the end of the period or as post-closing entries with little or no explanation • JEs containing round numbers or a consistent ending number • JEs applied to intercompany or related parties Diff: 1 LO: 7-3 AACSB: Analytical Thinking 3) What are the two alternative dispute resolution strategies which are available?

Answer: Alternative dispute resolution (ADR) is an alternative to litigation for resolving disputes. ADR strategies generally include mediation, arbitration, or some combination of the two.

Mediation is a confidential and nonbinding structured process. It is generally facilitated by an independent third party (for example, a retired judge), who facilitates the exchange of positions and encourages the identification of common ground. A successful mediation results in a mutually satisfactory resolution. Compared to litigation and arbitration, mediation is generally less expensive and time-consuming.

Arbitration is a binding process, where both sides present evidence and argue their respective positions to an arbitration panel, which usually includes at least one lawyer. This forum is considerably less formal than a trial and is generally focused on fact finding.

Diff: 1 LO: 7-7 AACSB: Analytical Thinking

11 .

Forensic Accounting (Rufus) Chapter 8 Transforming Data into Evidence (Part 1) 8.1 True/False Questions 1) Unlike the choice of methodology, the choice of technique is driven primarily by the nature of the problem.

Answer: FALSE Explanation: Unlike the choice of methodology, which is driven primarily by the nature of the problem, the choice of technique is more subjective in nature.

Diff: 1 LO: 8-1 AACSB: Analytical Thinking 2) In the context of a forensic accounting engagement, the terms method, tool, and technique can be used interchangeably.

Answer: FALSE Explanation: The terms method, tool, and technique are often used interchangeably in discussions of data analysis. However, in the context of a forensic accounting engagement, these terms have distinct meanings based on different functions.

Diff: 1 LO: 8-1 AACSB: Analytical Thinking 3) Use of bank statements to confirm components of financial statements and tax returns is an example of third-party data.

Answer: TRUE Explanation: Third-party data are obtained from entities that maintain records regarding the subject. For example, bank statements can be used to confirm components of financial statements and tax returns, such as cash balances, reported expenses, and loan payments.

Diff: 1 LO: 8-3 AACSB: Analytical Thinking 4) Forensic accountants often do not have access to the entire universe of relevant data.

Answer: TRUE Explanation: In most cases, forensic accountants do not have access to the entire universe of relevant data, nor the time and resources to analyze it all.

Diff: 1 LO: 8-4 AACSB: Analytical Thinking

1 .

5) In civil cases, the availability of data depends on the engaging party.

Answer: TRUE Explanation: In civil cases, the availability of data depends on the engaging party. If the forensic accountant has been engaged by the party who has possession of the data, the data may be obtained directly from the client or through the engaging attorney.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking 6) A subpoena duces tecum is a legal notice directing the attendance of a person at a deposition or trial.

Answer: FALSE Explanation: A subpoena is a legal notice directing the attendance of a person at a deposition or trial; similarly, a subpoena duces tecum directs the production of documents or other items.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking 7) A failure in the preparation of data may render the results of a test inaccurate.

Answer: TRUE Explanation: Any failures in data preparation will certainly be reflected in the analysis, either through inability to conduct a test or inaccurate results of the test.

Diff: 1 LO: 8-6 AACSB: Analytical Thinking 8) Since time is an objective measure, all measurements of time are reliable.

Answer: FALSE Explanation: Although time is an objective measure, this does not mean that all measurements of time are reliable.

Diff: 1 LO: 8-6 AACSB: Analytical Thinking 9) Relationship charts, which illustrate relationships and flows, are a form of link analysis.

Answer: TRUE Explanation: Relationship charts, which illustrate relationships and flows, are a form of link analysis.

Diff: 1 LO: 8-7 AACSB: Analytical Thinking

2 .

10) The end transcript of an interview is more important than the process of transcribing an interview.

Answer: FALSE Explanation: The process of transcribing an interview is equally as important as the end product.

Diff: 1 LO: 8-8 AACSB: Analytical Thinking 8.2 Multiple-Choice Questions 1) Which of the following is an example of qualitative data?

A) increase in profit margin over a five-year period B) average weight of employees of the organization C) preferred color of most employees in the organization D) number of units produced on a daily basis Answer: A Explanation: A) Qualitative data cannot be objectively measured, such as observations (sights, sounds, and smells) and words (documents and interviews).

Diff: 2 LO: 8-1 AACSB: Analytical Thinking 2) Diana, a forensic accountant, obtained the financial statements of Ryer Inc. from its accountant. She noted that Ryer generated a profit of $152.7 million in the previous year. This is an example of A) third-party data.

B) quantitative data.

C) fourth-party data.

D) qualitative data.

Answer: B Explanation: B) Quantitative data can be measured and expressed numerically, such as profit, weight, time, and age.

Diff: 2 LO: 8-1 AACSB: Analytical Thinking 3) Which of the following statements best defines the term data analysis?

A) It is the process of eliciting information.

B) It is the act of conducting a systematic enquiry or appraisal.

C) It is the separation of a whole into its component parts.

D) It is the process of consolidating data.

Answer: C Explanation: C) Analysis is defined as "separation of a whole into its component parts."

Diff: 1 LO: 8-1 AACSB: Analytical Thinking 3 .

4) Which of the following is a key consideration when evaluating sufficiency of data?

A) purpose of data B) application of data C) relevance of data D) availability of data Answer: D Explanation: D) When evaluating sufficiency, a key consideration is the availability of data. If only limited data are available, the relative threshold may be lower.

Diff: 1 LO: 8-1 AACSB: Analytical Thinking 5) In the context of a forensic accounting engagement, which of the following is an instrument that creates leverage in processing, understanding, and/or illustrating data?

A) tool B) technique C) method D) process Answer: A Explanation: A) A tool is described as an instrument that creates leverage in processing, understanding, and/or illustrating data.

Diff: 1 LO: 8-1 AACSB: Analytical Thinking 6) Rule 702 of Federal Rules of Evidence requires that A) the CPAs use complex technological analysis tools for gathering data.

B) any qualitative data presented is supported by quantitative data.

C) only direct evidence is used in a case.

D) the expert testimony is the product of reliable principles and methods.

Answer: D Explanation: D) Under FRE 702, expert testimony is admissible only if it is based upon sufficient facts or data, or is the product of reliable principles and methods, or the principles and methods have been applied reliably to the facts of the case.

Diff: 2 LO: 8-1 AACSB: Analytical Thinking

4 .

7) Descriptive statistics and digital analysis are examples of A) tools of analysis.

B) methods of analysis.

C) techniques of analysis.

D) systems of analysis.

Answer: B Explanation: B) Descriptive statistics and digital analysis are examples of methods of analysis.

Diff: 1 LO: 8-2 AACSB: Analytical Thinking 8) Which of the following terms is used to describe data in which specific items or time periods have been omitted?

A) missing data B) altered data C) nonexistent data D) hidden data Answer: A Explanation: A) Data in which specific items or time periods have been omitted are considered missing data.

Diff: 1 LO: 8-2 AACSB: Analytical Thinking 9) Which of the following is an example of nonexistent data?

A) The check slips for the month of June and July were misplaced. The bank maintains a copy of this at the client's request.

B) Some entries were changed to reflect a higher value of assets. The invoices containing the original amount are yet to be altered.

C) The client refused to divulge the details of the sale contract. The supplier does not have a copy of the contract.

D) The company maintains documents supporting transactions only for three years. The transaction in question was made five years ago.

Answer: D Explanation: D) Nonexistent data are data that simply do not exist, either now or at any time.

Some data are only maintained for a certain period of time. This may be years (for paper records) or only days/hours (for digital data). The analyst should consider whether the life of the data may be limited and, if so, take necessary actions to preserve it. Another possibility is that the data may exist, but not in a usable form for the intended analysis.

Diff: 2 LO: 8-2 AACSB: Analytical Thinking

5 .

10) Which of the following is true of first-party data?

A) These are obtained from published and unpublished reference sources.

B) These are obtained from are obtained from entities that maintain records regarding the subject.

C) These are obtained from individuals or entities that are related or connected to the subject.

D) These are obtained from an individual or an entity.

Answer: D Explanation: D) First-party data are obtained from an individual or an entity. Examples include the subject company in a business valuation, the plaintiff in an economic damages claim, and the victim of a suspected fraud.

Diff: 1 LO: 8-3 AACSB: Analytical Thinking 11) Which of the following is a difference between second-party data and third-party data?

A) Second-party data are obtained from individuals or entities that are related to the subject, whereas third-party data are obtained from entities that maintain records regarding the subject.

B) The advantage of second-party data is that it can be obtained independently by the forensic accountant, whereas the advantage of third-party data is that it is outside the subject's ability to manipulate.

C) Second-party data falls under the realm of primary research, whereas third-party data falls under the realm of secondary research.

D) Second-party data might require more time to obtain, whereas third-party data are readily available to the forensic accountant.

Answer: A Explanation: A) Second-party data are obtained from individuals or entities that are related to the subject, whereas third-party data are obtained from entities that maintain records regarding the subject.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking 12) Which of the following is an advantage of third-party data source?

A) It can be obtained independently by the forensic accountant, without the assistance of the subject or engaging counsel.

B) It is outside the subject's ability to manipulate.

C) It is direct and accessible.

D) It can give an insight on the environment in which the subject operates.

Answer: B Explanation: B) The primary advantage of third-party data source is that it is outside the subject's ability to manipulate.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking

6 .

13) Which of the following is a similarity between third-party data sources and fourth-party data sources?

A) Both data sources may have some firsthand knowledge of the subject's activities.

B) The information collected from both data sources does not reflect the actual activity of the subject.

C) Data received from both data sources fall under the category of secondary research.

D) Both data sources may involve associated costs.

Answer: D Explanation: D) Sometimes third-party data sources may have associated costs, for example, banks often charge a fee for producing copies of past bank statements. Some fourth-party data sources also require a fee.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking 14) Which of the following is a difference between fourth-party data sources and other data sources?

A) Fourth-party data sources do not reflect the actual activity of the subject, whereas the other data sources reflect the actual activity.

B) Fourth-party data sources are obtained from reference sources, whereas the other data sources are obtained from entities that maintain records regarding the subject.

C) The other data sources fall within the realm of secondary research, whereas fourth-party data sources fall within the realm of primary research.

D) The other data sources may have some firsthand knowledge of the subject's activities, whereas fourth-party data sources can only be used to confirm data obtained from other sources.

Answer: A Explanation: A) Unlike the other data sources, fourth-party data does not reflect the actual activity of the subject. Rather, it is used to gain insight on the environment in which the subject operates, including its local geographic market, its industry, and the broader economy.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking 15) Which of the following statements is true with respect to reliability of data sources?

A) First-party data have the highest reliability.

B) Second-party data may have a higher level of reliability than first-party data.

C) Third-party data are not very reliable as they can be influenced by the subject.

D) Fourth-party data are vulnerable to manipulations by subject.

Answer: B Explanation: B) In some cases, second-party data (provided by a related party) may have a higher level of reliability than first-party data.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking

7 .

16) As a part of a forensic accountant engagement, you interviewed all the first cousins of the subject. Which of the following types of data did you obtain?

A) first-party data B) second-party data C) third-party data D) fourth-party data Answer: B Explanation: B) Second-party data are obtained from individuals or entities that are related to the subject. The relationship may be personal or business.

Diff: 2 LO: 8-3 AACSB: Analytical Thinking 17) Which of the following is a benefit of a written data analysis plan?

A) It points out weaknesses in the data and assists the rectification of such weaknesses.

B) It lists the tools, methods, and techniques to be used during data analysis.

C) It forces the analyst to explicitly consider constraints.

D) It helps the analyst to identify data that is relevant and important.

Answer: C Explanation: C) A written data analysis plan (document) is commonly developed that outlines specific tasks and expected time requirements. Recording the plan forces the analyst to explicitly consider constraints.

Diff: 2 LO: 8-4 AACSB: Analytical Thinking 18) Which of the following is true of the universe of data?

A) Maintaining the proper boundaries of the data universe is an ongoing effort throughout the investigation.

B) After selecting a sample from the universe of data, conclusions are arrived at by using deductive reasoning.

C) In most cases, forensic accountants have access to the entire universe of relevant data.

D) It is often defined toward the end of the investigation.

Answer: A Explanation: A) Although the universe of data must be defined early in the investigation, maintaining the proper boundaries of the data universe is an ongoing effort.

Diff: 2 LO: 8-4 AACSB: Analytical Thinking

8 .

19) If the opposing party fails to comply with discovery requests or does not have access to the data, it may be necessary for the attorney to issue a A) writ.

B) subpoena.

C) order.

D) search warrant.

Answer: B Explanation: B) If the opposing party fails to comply with discovery requests or does not have access to the data, it may be necessary for the attorney to issue a subpoena.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking 20) Which of the following statements best describes the term subpoena?

A) It is a court order issued by a judge authorizing a law enforcement agency to perform a search of a person or location and confiscate any evidence that is found.

B) It is a document that directs the production of documents or other items.

C) It is the tracing of the incremental effects of some initial stimulus.

D) It is a legal notice directing the attendance of a person at a deposition or trial.

Answer: D Explanation: D) A subpoena is a legal notice directing the attendance of a person at a deposition or trial.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking 21) Which of the following is issued by a judge when data is to be obtained by law enforcement in a criminal case?

A) order B) subpoena C) search warrant D) writ Answer: C Explanation: C) In criminal cases, data can be obtained by law enforcement through a search warrant.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking

9 .

22) Data requests should be specific because A) vagueness is a basis for objection by the opposing party.

B) it requires lesser initial efforts.

C) with lesser specificity, there is a greater risk of accidental exclusions.

D) it eliminates the requirement of any supporting documents.

Answer: A Explanation: A) To encourage compliance, a data request should be as specific as possible.

Vagueness is a basis for objection (noncompliance) by the opposing party.

Diff: 1 LO: 8-5 AACSB: Analytical Thinking 23) Which of the following is the first step of data preparation?

A) standardization of data B) creating a data inventory C) classification of data D) creating a database Answer: B Explanation: B) The first step of data preparation is to create a data inventory of all items that have been received, including a list of specific items, sources, and dates requested/received.

Diff: 2 LO: 8-6 AACSB: Analytical Thinking 24) Which of the following is a typical example of document dumping in litigation?

A) Big Farm, Corp. reported that it has shredded all the original invoices provided by a particular vendor.

B) Nyntal, Inc. kept all its old receipts, copies of contracts and agreements, bank slips and all other documents, created right from the inception of the company, in a separate warehouse.

C) Sara requested Wilmerry, Inc. to produce four bank slips relating to the transactions under scrutiny. Wilmerry gave her all the bank slips of last two years.

D) Quinn agreed with Kensington, Corp. to destroy the findings of the engagement and drown the documents collected during the investigation for a monetary benefit.

Answer: C Explanation: C) In litigation, rather than failing to disclose a requested document, a party may choose to disclose it amid a volume of other irrelevant documents. This is a practice known as "document dumping" or "drowning with documents."

Diff: 2 LO: 8-6 AACSB: Analytical Thinking

10 .

25) Which of the following is a purpose of document dumping?

A) to get rid of unnecessary and outdated documents and retain only those documents that are relevant B) to conceal relevant and vital information from being tracked by the forensic accountants C) to destroy material documents that contain important data D) to make the document of interest more difficult to identify Answer: D Explanation: D) The purpose of document dumping is to make the document of interest more difficult to identify and to force the opposing side to expend time and money sorting through the irrelevant documents.

Diff: 2 LO: 8-6 AACSB: Analytical Thinking 26) An organized collection of data that has been created for a specific purpose is called a A) data request.

B) data dump.

C) database.

D) memo.

Answer: C Explanation: C) A database is an organized collection of data that has been created for a specific purpose.

Diff: 1 LO: 8-6 AACSB: Analytical Thinking 27) Which of the following is an advantage of data analysis tools?

A) They deal with quantitative data and hence have specific applicability.

B) They force the analyst to explicitly consider constraints in the data.

C) They allow the forensic accountant to extract the meaning of the data in a usable manner.

D) They are easy to apply, easy to customize, and easy to understand.

Answer: D Explanation: D) The value of data analysis tools stems from three key advantages: • They are widely applicable because they deal with qualitative data that are present in almost every engagement, such as people, places, times, events, relationships, and communications.

• They are multifunctional, serving to record, summarize, analyze, organize, or illustrate information.

• They are easy to apply, easy to customize, and easy to understand. A simpler approach is often more effective than a complex approach.

Diff: 2 LO: 8-7 AACSB: Analytical Thinking

11 .

28) Which of the following is a difference between relationship charts and timelines?

A) Relationship charts illustrate flows of information or funds, whereas timelines provide visual aid to highlight missing information.

B) Relationship charts illustrate a sequence of events, whereas timelines reveal unapparent relationships.

C) Relationship charts suggest causal relationships, whereas timelines identify parties of interest.

D) Relationship charts identify commonalities among objects and trace from cause to effect, whereas timelines comprise of shapes that represent individual objects and lines that connect them.

Answer: A Explanation: A) Relationship charts identify parties of interest and illustrate flows of information or funds. Timelines provide visual aid to highlight missing information, suggest causal relationships, and validate representations.

Diff: 2 LO: 8-7 AACSB: Analytical Thinking 29) ________ describes the tracing of the incremental effects of some initial stimulus.

A) Subpoena B) Ripple theory C) Butterfly effect D) Wind theory Answer: B Explanation: B) Ripple theory describes the tracing of the incremental effects of some initial stimulus.

Diff: 1 LO: 8-7 AACSB: Analytical Thinking 30) Which of the following is a drawback of link analysis?

A) It fails to reveal unapparent relationships.

B) It cannot be used in cases where the subject is unknown.

C) Compared to other investigative techniques, it can be time-consuming.

D) Too many links may affect the quality of the information.

Answer: C Explanation: C) The greatest drawback of link analysis, compared with other investigative techniques, is that it can be time-consuming. Substantial time and effort can be wasted following clue after clue in search of a link that turns out to be meaningless.

Diff: 2 LO: 8-7 AACSB: Analytical Thinking

12 .

31) Which of the following is true of timelines?

A) Timelines fail to highlight missing information in the sequence.

B) Timelines are prepared to reveal hidden relationships.

C) Timelines are more time-consuming than other data analysis tools.

D) Timelines are the most effective means of communicating a story.

Answer: D Explanation: D) Due to their simple and straightforward approach, timelines are widely recognized as the most effective means of communicating a story.

Diff: 2 LO: 8-7 AACSB: Analytical Thinking 32) Which of the following is true of the process of transcribing an interview?

A) The focus is on the transcript itself and not on the process.

B) Interview transcription involves data analysis and interpretation.

C) The forensic accountant does not play a very active role in the transcription process.

D) The interview should be transcribed by the person who conducted the interview.

Answer: D Explanation: D) The interview should be transcribed by the person who conducted the interview. First, it ensures that the record of the conversation is as accurate as possible and allows for the inclusion of contextual elements (such as aspects of the physical setting and sensory observations). Second, it is the forensic accountant's first opportunity to extract meaning from the data-to transform facts into a story.

Diff: 2 LO: 8-8 AACSB: Analytical Thinking 33) Which of the following describes the process of coding with regard to qualitative research?

A) transcribing the interview in order and then rearranging into categories based on themes B) transcribing the interview in order and then coding the transcript so that the information cannot be used by others C) transcribing the interview in order and then extracting meaning from the data D) transcribing the interview in order and then determining the information to be included Answer: A Explanation: A) Usually, interview notes are transcribed in order (that is, following the actual flow of the interview) and then rearranged into categories based on themes. In qualitative research, this is known as thematic analysis or coding.

Diff: 3 LO: 8-8 AACSB: Analytical Thinking

13 .

34) Which of the following is true with regard to identifying themes while transcribing interviews?

A) For less-structured interviews, themes could be based on experiences, behaviors, views, or any other factor that becomes apparent.

B) Interview questions are a good starting point for identifying themes if the interview was semistructured in nature.

C) In a fact-finding interview, themes may simply emerge from the flow of conversation.

D) The themes identified for the structure of the transcript may not always be in consistence with the objectives of the engagement.

Answer: B Explanation: B) In a fact-finding interview, themes are generally based on facts, but they could also be based on experiences, behaviors, views, or any other factor that becomes apparent. If the interview was semi-structured in nature, then the interview questions are often a good starting point for identifying themes. For less-structured interviews, themes may simply emerge from the flow of conversation.

Diff: 2 LO: 8-8 AACSB: Analytical Thinking 35) Which of the following best describes reduction as a key form of influence while transcribing an interview?

A) deciding how to reduce the information obtained in an interview in order to include only relevant information B) defining what information is relevant and what information is to be left out C) determining how the information obtained in an interview is reduced to words D) describing what should be the word count and language to be used in the transcript Answer: C Explanation: C) Reduction is determining how the information obtained in the interview is reduced to words.

Diff: 2 LO: 8-8 AACSB: Analytical Thinking

14 .

8.3 Short-Answer Questions 1) What are the benefits of a written data analysis plan?

Answer: A written data analysis plan (document) is commonly developed that outlines specific tasks and expected time requirements. Recording the plan has several benefits: (1) it forces the analyst to explicitly consider constraints; (2) it helps the analyst to remain on task, avoiding any unnecessary efforts that consume valuable time and resources; (3) it provides a standard against which to monitor the progress of the data analysis; and (4) it facilitates a detailed description of the analysis, which is a necessary component for communicating results at the completion of the engagement.

Diff: 2 LO: 8-4 AACSB: Analytical Thinking 2) Why is it important to define the universe of data?

Answer: Although the entire universe of data usually cannot be analyzed, it is important that it be defined. This involves identifying any relevant data that may exist and disregarding any irrelevant data. Without properly defining the universe, the forensic accountant cannot select a meaningful sample for detailed analysis. Although such an assessment must be performed early in the investigation, maintaining the proper boundaries of the data universe is an ongoing effort.

As new information surfaces, the analyst must determine whether and how it should be considered in the analysis.

Diff: 2 LO: 8-4 AACSB: Analytical Thinking

15 .

3) What functions does a data inventory serve?

Answer: The first step of data preparation is to create a data inventory of all items that have been received, including a list of specific items, sources, and dates requested/received. This inventory serves many functions: 1) A data inventory can be compared against the data request to determine which requested items are still outstanding.

2) Maintaining an inventory allows the analyst to note any gaps in the data, which may indicate missing records.

3) The data inventory enhances the efficiency of the analysis process by allowing the analyst to determine which tools or methods can be applied now and which must be delayed until additional data are received. Based on this information, the analyst can refine the data analysis plan to include a specific sequence of tests and an estimated time of completion for each. In addition to the functions noted previously, which provide value early in the analysis, the data inventory continues to serve a purpose throughout the entire engagement.

4) Data inventory is continuously updated as new data are received, acting as a progress meter for the data collection process.

5) When data (especially documents) are provided on a piecemeal basis or in no apparent order, organizing them can be a monumental effort before the actual analysis even begins. A data inventory can assist in this effort by facilitating a logical organization scheme.

6) The inventory is used at the conclusion of the engagement, when the report is being prepared.

Many reports include a list of items reviewed and/or analyzed as an exhibit or appendix.

Diff: 2 LO: 8-6 AACSB: Analytical Thinking 4) Time is an objective measure, hence timeline data are always highly reliable. Examine the validity of this statement.

Answer: When timelines are used as evidence, it is necessary that they be reliable. Of course, the reliability of a timeline depends on the reliability of its components-the timing of individual events. Although time is an objective measure, this does not mean that all measurements of time are reliable. As with all forms of data, a primary factor in assessing reliability is the source. Time can be obtained from any device that has a clock, which includes most computerized devices (such as personal computers, cell phones, cash registers, and ATMs). Investigators can also obtain timing information from other documents. For example, checks are dated, receipts are time-stamped, and computers record the time a file was created, accessed, and modified. The investigator must be aware that, while time is objective, the measurement of time is vulnerable to human manipulation and error. Computer clocks can be adjusted, power failures can produce inaccuracies, and people can misdate documents, either intentionally or unintentionally. Thus, it is important to assess the validity of time measurements before relying on them.

Diff: 2 LO: 8-7 AACSB: Analytical Thinking

16 .

5) Explain why an interview should be transcribed by the person who conducted the interview.

Answer: The process of transcribing an interview is equally as important as the end product.

Recognizing the importance of this process clarifies the value of writing as a method of inquiry, a characterization that is embraced in the qualitative research disciplines. As the interview is written, the scattered thoughts of the interviewer about the subject must be assembled into a coherent structure that facilitates understanding. Moreover, writing is the means by which this analytic process is made apparent and available for review. These propositions highlight two reasons why an interview should be transcribed by the person who conducted the interview.

First, it ensures that the record of the conversation is as accurate as possible and allows for the inclusion of contextual elements. Second, it is the forensic accountant's first opportunity to extract meaning from the data-to transform facts into a story.

Diff: 2 LO: 8-8 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 9 Transforming Data into Evidence (Part 2) 9.1 True/False Questions 1) A parameter is a measure that describes a sample.

Answer: FALSE Explanation: A measure that describes a population is called a parameter, and a measure that describes a sample is called a statistic.

Diff: 1 LO: 9-1 AACSB: Analytical Thinking 2) A positive skewness is when the distribution is more heavily weighted toward smaller numbers.

Answer: TRUE Explanation: When a distribution extends farther to the right than to the left, it is considered positively skewed, meaning the distribution is more heavily weighted toward smaller numbers.

Diff: 1 LO: 9-1 AACSB: Analytical Thinking 3) A bar graph cannot be used to chart multiple time series.

Answer: FALSE Explanation: In addition to charting a single time series, a bar graph can be used to chart multiple times series.

Diff: 1 LO: 9-2 AACSB: Analytical Thinking 4) A graph should always have a title.

Answer: TRUE Explanation: A graph should always have a title, as this is the first and primary means by which the graph communicates information.

Diff: 1 LO: 9-2 AACSB: Analytical Thinking 5) Data mining can detect a fraudulent transaction with certainty.

Answer: FALSE Explanation: Although data mining is a valuable fraud detection tool, it cannot detect a fraudulent transaction with certainty. Rather, it is limited to identifying irregular transactions that have a higher likelihood of being fraudulent.

Diff: 1 LO: 9-3 AACSB: Analytical Thinking 1 .

6) Decreasing the occurrence of Type I errors increases the occurrence of Type II errors.

Answer: TRUE Explanation: There is a trade-off between Type I and Type II errors: Decreasing the occurrence of one increases the occurrence of the other.

Diff: 1 LO: 9-3 AACSB: Analytical Thinking 7) Microsoft Access forces some structure on the data analysis project.

Answer: TRUE Explanation: A key difference between the Access and Excel programs is that Access forces some structure on the data analysis project, while Excel allows more flexibility.

Diff: 1 LO: 9-4 AACSB: Analytical Thinking 8) Audit software programs have high cost compared to basic programs and require extensive training to use them effectively.

Answer: TRUE Explanation: Major disadvantages of generalized audit software programs are their high cost compared to basic programs and the extensive training required to use them effectively.

Diff: 1 LO: 9-4 AACSB: Analytical Thinking 9) According to Benford's Law, the distribution of first digits is negatively skewed.

Answer: FALSE Explanation: According to Benford's Law, the distribution of first digits is positively skewed, or more heavily weighted toward smaller numbers.

Diff: 1 LO: 9-5 AACSB: Analytical Thinking 10) It is more difficult to identify significant deviations from Benford's profile in small data sets.

Answer: TRUE Explanation: Close conformity to Benford's Law requires a large data set, often defined as at least 1,000 observations, with numbers having at least four digits. The size of the data set is important because it is more difficult to identify significant deviations from Benford's profile in small data sets.

Diff: 1 LO: 9-5 AACSB: Analytical Thinking

2 .

9.2 Multiple-Choice Questions 1) Which of the following describes the descriptive measure "median"?

A) It is the center point of the data set, when the observations are ordered by magnitude.

B) It is the average value calculated by adding all the observations and dividing by the number of observations.

C) It is the average of the squared deviations of the observations from the mean.

D) It is the most frequently occurring value.

Answer: A Explanation: A) Median is the center point of the data set, when the observations are ordered by magnitude. This can be a single observation or a point between two observations.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking 2) Which of the following statements is true of the measures of variability?

A) Low variability indicates that the observations are located farther from the mean.

B) Two data sets can have the same number of observations and the same mean, median, and mode but have different variability.

C) Like the mean, the variance and standard deviation have the advantage of considering select observations in the data set.

D) Compared to the standard deviation, the variance is more easily interpreted because it is stated in terms of basic units.

Answer: B Explanation: B) Two data sets can have the same number of observations and the same mean, median, and mode but have different variability.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking 3) Which of the following is the first step in creating a histogram?

A) plotting the data B) determining frequency of observations C) defining the intervals D) analyzing the data Answer: C Explanation: C) The first step in creating a histogram is defining the intervals, which is a matter of judgment for the analyst.

Diff: 1 LO: 9-1 AACSB: Analytical Thinking

3 .

4) What does a positively skewed distribution mean?

A) The distribution is more heavily weighted toward larger numbers.

B) The median is lower than the mean, which is lower than the mode.

C) The distribution extends farther to the left than to the right.

D) The mean is greater than the median, which is greater than the mode.

Answer: D Explanation: D) When a distribution extends farther to the right than to the left, it is considered positively skewed, meaning the distribution is more heavily weighted toward smaller numbers.

For a right-skewed distribution, the mean is greater than the median, which is greater than the mode.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking 5) Which of the following terms describes a distribution that is more heavily weighted toward larger numbers?

A) negatively skewed B) positively skewed C) right-skewed D) symmetrically skewed Answer: A Explanation: A) When a distribution extends farther to the left than to the right, it is considered negatively skewed, meaning the distribution is more heavily weighted toward larger numbers.

Diff: 1 LO: 9-1 AACSB: Analytical Thinking 6) Which of the following is a feature of a normal distribution?

A) It is positively skewed.

B) Its mean, median, and mode are all equal.

C) It is completely described by its median and variance.

D) The normal distribution curve is s-shaped.

Answer: B Explanation: B) A normal distribution is symmetric, its mean, median, and mode are all equal.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking

4 .

7) Which of the following is an important dimension to be considered while evaluating the distribution of a data set?

A) accuracy of the data B) changes in internal variables C) timing of the distribution D) skewness of the distribution Answer: C Explanation: C) In addition to magnitude, timing is another important dimension for evaluating the distribution of a data set.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking 8) Which of the following is a reason why dynamic visual exhibits are utilized in a courtroom?

A) A long presentation is less likely to produce memorable highlights.

B) Visual tools bring a change in the pace of the presentation and prevent monotony.

C) It is easier to present data in a visual form than in words.

D) Information can be communicated more efficiently in visual form.

Answer: D Explanation: D) Visual tools are utilized for two primary reasons. First, images are more effective than words in conveying ideas, especially complex ideas. Second, information can be communicated more efficiently in visual form-that is, in less time and with more precision.

Diff: 1 LO: 9-2 AACSB: Analytical Thinking 9) Which of the following categories of data can be displayed by a pie chart?

A) data that sum to a total B) forensic data collected as evidence C) qualitative data D) time series data Answer: A Explanation: A) Pie charts are used to display categories of data that sum to a total.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking 10) Which of the following statements is true of a bar graph display?

A) It is the same as a line graph.

B) It allows for more than one category of data to be presented on the same graph.

C) It is used to display qualitative data.

D) It cannot be used to chart multiple time series.

Answer: B Explanation: B) Like pie charts, bar graphs can also display categorical data.

Diff: 1 LO: 9-2 AACSB: Analytical Thinking 5 .

11) Which of the following is the most common way to bias a graph?

A) by not including labels for individual data points B) by not including labels for the axes C) by manipulating the scale of the graph D) by using a scale that starts from zero Answer: C Explanation: C) Any exercise of discretion in creating a graph is an opportunity to introduce bias, whether intentional or unintentional. The most common way that graphs are biased is by manipulating the scale.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking 12) Which of the following is the first and primary means by which a graph communicates information?

A) label for data points B) scale of axes C) label of the axes D) title of the graph Answer: D Explanation: D) A graph should always have a title, as this is the first and primary means by which the graph communicates information.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking 13) Which of the following is true of presenting data in a graph?

A) Descriptive labels for the two axes may or may not be used.

B) The title of the graph need not be given.

C) Labels for individual data points should always be included.

D) The right approach is to always use a scale that includes zero.

Answer: A Explanation: A) Descriptive labels for the two axes may or may not be used, depending on their contribution to the overall clarity of the graph.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking

6 .

14) Which of the following is a bar chart, in which each bar represents a single interval and the height of the bar indicates the number of observations in the interval?

A) pie chart B) histogram C) line chart D) distribution chart Answer: B Explanation: B) Histogram is a bar chart, in which each bar represents a single interval and the height of the bar indicates the number of observations in the interval.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking 15) Which of the following is a reason why a forensic accountant uses data mining?

A) to generate population of data based on a small sample B) to collect observations that may be presented as evidence of misrepresentation of information C) to reduce a large number of observations to a smaller number that can be examined more closely D) to assist in providing random samples from a large set of data Answer: C Explanation: C) The forensic accountant uses data mining to reduce a large number of observations to a smaller number that can be examined more closely.

Diff: 2 LO: 9-3 AACSB: Analytical Thinking 16) Which of the following is true of data mining?

A) It cannot reflect the past behavior of the system being studied.

B) It cannot examine the relationships among various factors.

C) It cannot analyze an observation from multiple perspectives.

D) It cannot detect a fraudulent transaction with certainty.

Answer: D Explanation: D) Although data mining is a valuable fraud detection tool, it cannot detect a fraudulent transaction with certainty. Rather, it is limited to identifying irregular transactions that have a higher likelihood of being fraudulent.

Diff: 2 LO: 9-3 AACSB: Analytical Thinking

7 .

17) Which of the following is true of data mining?

A) Sorting is a form of data mining.

B) Data mining cannot be used for investment analysis.

C) Ratio analysis is a form of data analysis, not data mining.

D) Data mining can be used to identify all types of fraud.

Answer: A Explanation: A) A straightforward form of data mining is sorting. Once the data have been compiled into a spreadsheet with various data fields, they can be sorted by any of the individual data fields.

Diff: 1 LO: 9-3 AACSB: Analytical Thinking 18) Which of the following does the ratio of the smallest value to the second-smallest value identify?

A) a benchmark that can be tracked over time B) an outlier on the opposite side of the distribution C) a greater variation in the data set D) the magnitude of the deviation Answer: B Explanation: B) Ratio of the smallest value to the second-smallest value identifies outliers, but on the opposite side of the distribution.

Diff: 2 LO: 9-3 AACSB: Analytical Thinking 19) A larger ratio of the largest value to the smallest value indicates A) an outlier in the data set.

B) a lesser variation in the data set.

C) a greater variation in the data set.

D) an outlier on the opposite side of the distribution.

Answer: C Explanation: C) A larger ratio of the largest value to the smallest value indicates greater variation in the data set.

Diff: 2 LO: 9-3 AACSB: Analytical Thinking

8 .

20) Which of the following ratios is known as the relative size factor?

A) ratio of the largest value to the smallest value B) ratio of the largest (or smallest) value to the mean C) ratio of the smallest value to the second-smallest value D) ratio of the largest value to the second-largest value Answer: D Explanation: D) Ratio of the largest value to the second-largest value is known as the relative size factor (RSF).

Diff: 1 LO: 9-3 AACSB: Analytical Thinking 21) Which of the following is Type I error in statistics?

A) a false positive B) a miss C) an incorrect sample D) failure to identify a true signal Answer: A Explanation: A) In statistics, a false positive is called a Type I error, while a miss-that is, failure to identify a true signal-is called a Type II error.

Diff: 2 LO: 9-3 AACSB: Analytical Thinking 22) Which of the following is a basic data analysis program?

A) Microsoft Word B) Microsoft Excel C) Microsoft PowerPoint D) Microsoft Organizer Answer: B Explanation: B) Two basic data analysis programs are Microsoft Excel and Microsoft Access, which are included in the Microsoft Office suite that is distributed with many personal computers.

Diff: 1 LO: 9-4 AACSB: Analytical Thinking

9 .

23) Which of the following is a difference between the programs Microsoft Excel and Microsoft Access?

A) In Access, either a number or a formula can be entered into a cell, whereas Excel allows each field to store only one type of data for all the records.

B) In Access, it is not necessary to maintain consistency between column headings and the type of data contained in the column, whereas Excel requires it to be consistent.

C) In Access, a certain amount of structure is forced on the data analysis project, whereas Excel allows more flexibility in the project.

D) In Access, it is not possible to infer if a number appearing in a cell is data point or a calculation just by looking at it, whereas in Excel, the nature of the number is always clear.

Answer: C Explanation: C) A key difference between the two programs is that Access forces some structure on the data analysis project, while Excel allows more flexibility.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking 24) Which of the following is true of Microsoft Access?

A) The data analysis functions can be enhanced with add-ins.

B) Each field can store multiple types of data for all the records.

C) The layout of Access is different from the layout of an Excel spreadsheet.

D) All data-related functions are applied through the creation of queries.

Answer: D Explanation: D) All data-related functions are applied through the creation of queries, the results of which are displayed in reports. Thus, with Access, it is always clear whether you are looking at data (input) or results (output).

Diff: 2 LO: 9-4 AACSB: Analytical Thinking 25) Which of the following is true of Excel?

A) It does not require consistency to be maintained between column headings and the type of data contained in the column.

B) It has a well-defined structure that includes tables, queries, and reports.

C) In Excel, each field can store only one type of data for all the records.

D) In Excel, a useful feature known as the Database facilitates review of the database by another user or by the same user at a later time.

Answer: A Explanation: A) In Excel, column headings can be duplicated, and there is no requirement that consistency be maintained between column headings and the type of data contained in the column.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking

10 .

26) Which of the following is a disadvantage of basic data analysis programs?

A) They do not allow flexibility of application.

B) They cannot accommodate data in certain formats, in which case the data must be converted.

C) They do not support complex statistical calculations or similar higher functions.

D) They are not suitable for forensic accounting engagements that require data mining.

Answer: B Explanation: B) Basic data analysis programs cannot accommodate data in certain formats, in which case the data must be converted. This conversion process introduces yet another opportunity for the integrity of the data to be compromised.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking 27) Which of the following is an advantage of generalized audit software?

A) It facilitates alteration of data.

B) It costs the same as basic programs and is more efficient.

C) It can directly access and analyze data inside the database.

D) It does not require extensive training to use it effectively.

Answer: C Explanation: C) If the data reside in a database, specialized software can directly access and analyze the data inside the database. This is a read-only operation, in which the data cannot be altered. Such features help ensure the integrity of the data, which is critical in forensic accounting engagements.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking 28) Which of the following is a disadvantage of generalized audit software?

A) It cannot be customized for specific tasks.

B) It requires data to be converted to a format that can be processed by it.

C) It does support the creation of an audit trail or log.

D) It requires extensive training to use it effectively.

Answer: D Explanation: D) Major disadvantages of generalized audit software programs are their high cost compared to basic programs and the extensive training required to use them effectively.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking

11 .

29) To conform to Benford's Law, a number series must approximately follow a A) geometric sequence.

B) arithmetic sequence.

C) Fibonacci sequence.

D) decreasing sequence.

Answer: A Explanation: A) To conform to Benford's Law, a number series must approximately follow a geometric sequence.

Diff: 2 LO: 9-5 AACSB: Analytical Thinking 30) Which of the following is an example of numbers that display a geometric tendency?

A) Social Security numbers B) stock prices C) account numbers D) zip codes Answer: B Explanation: B) Almost all natural numbers display such a geometric tendency, including city populations, sizes of geologic objects, and accounting numbers (such as stock prices, company revenues, and trading volume).

Diff: 1 LO: 9-5 AACSB: Analytical Thinking 31) Which of the following is an example of numbers that does NOT follow Benford's Law? A) city populations B) stock prices C) zip codes D) company revenues Answer: C Explanation: C) Examples of numbers that do not follow Benford's Law are data sets with builtin maximums or minimums and assigned numbers (such as Social Security numbers, account numbers, and zip codes).

Diff: 1 LO: 9-5 AACSB: Analytical Thinking

12 .

32) Which of the following describes the profile for the first digit according to Benford's Law? A) upward slope B) U-curve C) bell-curve D) ski slope Answer: D Explanation: D) The profile for the first digit according to Benford's Law is a typical "ski slope."

Diff: 2 LO: 9-5 AACSB: Analytical Thinking 33) Which of the following is an advantage of the first-two-digits test?

A) It narrows the range of transactions to be investigated.

B) It identifies round numbers which are red flags for invented numbers.

C) It indicates instances where digits have been transposed to make the number larger.

D) It flags numbers that are repeated frequently as possible fictitious transactions.

Answer: A Explanation: A) The first-two-digits test offers more precision than the first-digit test because there are only 90 total combinations. This allows the user to narrow the range of transactions to be investigated.

Diff: 2 LO: 9-5 AACSB: Analytical Thinking 34) Which of the following is a use of the last-two-digits test?

A) It narrows the range of transactions to be investigated.

B) It identifies round numbers which are red flags for invented numbers.

C) It indicates instances where digits have been transposed to make the number larger.

D) It flags numbers that are repeated frequently as possible fraudulent transactions.

Answer: B Explanation: B) The last-two-digits test is useful for identifying round or whole numbers, which are red flags for invented numbers.

Diff: 2 LO: 9-5 AACSB: Analytical Thinking

13 .

35) Which of the following is a reason why the size of the data set is important to apply Benford's Law? A) Large data sets often have more irregularities than small data sets.

B) It is easier to test small data sets for frequencies of digits, both lower and higher.

C) It is more difficult to identify significant deviations from Benford's profile in small data sets.

D) The results of tests on large data sets are not as precise as the results of tests on small data sets.

Answer: C Explanation: C) The size of the data set is important because it is more difficult to identify significant deviations from Benford's profile in small data sets.

Diff: 2 LO: 9-5 AACSB: Analytical Thinking 9.3 Short-Answer Questions 1) Explain how a continuous distribution differs from a discrete distribution.

Answer: In a discrete distribution, the observations are countable, and there is a discrete "jump" between successive values. It is not necessary that the values be stated in whole numbers. Since money is measured to the cent, it is considered a discrete variable. In contrast, values in a continuous distribution can be measured to an infinitesimally small degree of accuracy. In other words, the values are continuous-there is no discrete jump. Examples of continuous variables include time, weight, and distance. Both discrete and continuous distributions can be graphed as histograms. The difference is that, with a continuous distribution, the measurement scale can be refined.

Diff: 2 LO: 9-1 AACSB: Analytical Thinking 2) Why important is it to include labels along with a graph?

Answer: Graphs can be manipulated by the inclusion (or lack thereof) of labels, including the title of the graph, labels of the horizontal and vertical axes, and labels of individual data points.

A graph should always have a title, as this is the first and primary means by which the graph communicates information. Descriptive labels for the two axes may or may not be used, depending on their contribution to the overall clarity of the graph. However, as noted previously, the scale of each axis should always be included. Finally, the choice of whether to include labels for individual data points depends on the purpose of the graph and the available space. If the trend is more important than individual values, then data labels may not be necessary.

Diff: 2 LO: 9-2 AACSB: Analytical Thinking

14 .

3) What is the purpose of data mining? Give examples of specific applications of data mining.

Answer: The purpose of data mining is to identify patterns and deviations from such patterns that provide information useful for making predictions. Examples of specific applications include the following: • Marketing research - predicting consumer demand and sales • Drug research - predicting the effectiveness of drugs and the likelihood of side effects • Credit scoring - predicting the likelihood of default or bankruptcy • Operations management - predicting input usage and productive efficiency • Investment analysis - predicting future changes in asset prices • Actuarial analysis - predicting life expectancies and probabilities of other insurable events • Fraud detection - predicting the likelihood that irregular transactions reflect unlawful practices The list is seemingly endless, as new applications are constantly being developed to address new problems. In forensic accounting, fraud detection is the most widely recognized application of data mining methods. Specific examples include credit card fraud, tax fraud, fraud in government benefit programs, money laundering, embezzlement, and telecommunications fraud.

Diff: 1 LO: 9-3 AACSB: Analytical Thinking 4) What are add-ins? What are the common add-ins that can be used with Excel?

Answer: The data analysis functions of Excel can be enhanced with add-ins, which are software programs designed to extend or enhance the capabilities of other software programs. Two common Excel add-ins are the Analysis Toolpak and ActiveData for Excel. The purpose of these programs is to increase productivity by streamlining various tasks that can be completed (with more time and effort) using basic Excel functions. Both programs are integrated into Excel, with the tools included in the Excel menu and ribbon bars.

• Analysis Toolpak: The Analysis Toolpak is included with Excel and can be accessed through a simple loading process. It includes several basic analysis tools, such as descriptive statistics, histogram, and sampling, as well as more complex statistical tests that are beyond the scope of our discussion. For example, with just one click, the descriptive statistics tool computes all the summary measures discussed in the first section of this chapter, among others.

• ActiveData for Excel: Many more tools (more than 100) are available in ActiveData, which must be purchased and installed. It is offered in two versions, a full Professional version and a cheaper Business version that contains limited features.

Diff: 2 LO: 9-4 AACSB: Analytical Thinking

15 .

5) What are the different data analysis tests which use Benford's Law to identify irregularities in data sets?

Answer: Several data analysis tests use Benford's Law to identify irregularities in data sets, which may be indicators of fraud, errors, biases, or processing inefficiencies. Different tests can be applied, based on the expected frequencies of different digits: 1. First-Digit Test - With the first-digit test, the first-digit profile of a data set is compared to Benford's first-digit profile.

2. First-Two-Digits Test - Similar to the first-digit test, the first-two-digits test compares the first two digits of a data set with Benford's profile for the first two digits.

3. Last-Two-Digits Test - The last-two-digits test compares the last two digits of a data set with Benford's profile for the last two digits.

Diff: 2 LO: 9-5 AACSB: Analytical Thinking

16 .

Forensic Accounting (Rufus) Chapter 10 Professional Responsibilities 10.1 True/False Questions 1) A professional association enjoys a high level of public trust and confidence even though it can never be legalized.

Answer: FALSE Explanation: A professional association can be legalized by a regulatory body, such as a state board of accountancy.

Diff: 1 LO: 10-1 AACSB: Analytical Thinking 2) AICPA's Code of Professional Conduct helps members to monitor their own behavior and provides a program for resolving disputes.

Answer: TRUE Diff: 1 LO: 10-2 AACSB: Analytical Thinking 3) Statement on Standards for Consulting Services (SSCS) No. 1 defines consulting services as all professional services rendered by any authoritative external regulatory force to their associate organizations.

Answer: FALSE Explanation: Statement on Standards for Consulting Services (SSCS) No. 1 defines consulting services as all professional services that employ the practitioner's technical skills, education, observations, experience, and knowledge of the consulting process.

Diff: 2 LO: 10-3 AACSB: Analytical Thinking 4) ACFE, the world's largest antifraud organization, requires its members to comply with six fundamental rules as per ACFE's Code of Professional Standards.

Answer: FALSE Explanation: ACFE, the world's largest antifraud organization, requires its members to comply with six fundamental principles, not rules, as per ACFE's Code of Professional Standards.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking

1 .

5) As professional standards serve to improve the consistency and quality of practice, various organizational standards would always be consistent with each other.

Answer: FALSE Explanation: Although professional standards generally serve to improve the consistency and quality of practice, there are some areas of inconsistency in various organizational standards (such as AICPA vs. NACVA) that must be reconciled.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking 6) The first opportunity to identify and eliminate or at least neutralize adversarial bias of testifying experts falls to expert witness himself.

Answer: TRUE Diff: 1 LO: 10-5 AACSB: Analytical Thinking 7) The final opportunity to identify and eliminate or at least neutralize adversarial bias of testifying experts falls to opposing counsel.

Answer: FALSE Explanation: The final opportunity to identify and eliminate or at least neutralize adversarial bias falls to the trier of fact.

Diff: 1 LO: 10-5 AACSB: Analytical Thinking 8) As per AICPA's Guide for Complying with Rules 102-505 (2008), if the threat is evaluated as significant the member should withdraw from the engagement at once.

Answer: FALSE Explanation: As per AICPA's Guide for Complying with Rules 102-505 (2008), if the threat is evaluated as significant safeguards must be applied. However, if a significant threat cannot be eliminated or reduced to an acceptable level by applying safeguards, the member is not in compliance with the rules and should withdraw from the engagement.

Diff: 2 LO: 10-6 AACSB: Analytical Thinking 9) As per AICPA's Guide for Complying with Rules 102-505 (2008), acceptable level is a level at which a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that compliance with the rules is not compromised.

Answer: TRUE Diff: 1 LO: 10-6 AACSB: Analytical Thinking

2 .

10) Advocacy is the threat that a member will promote a client or employer's position to the point that his or her objectivity is compromised.

Answer: TRUE Explanation: Diff: 1 LO: 10-6 AACSB: Analytical Thinking 10.2 Multiple-Choice Questions 1) Which of the following statements best differentiates a profession and a professional?

A) A profession is an occupation that requires advanced education and training and a professional is a person who oversees the behavioral actions of those who practice a profession.

B) A profession is a value-based internal force for behavioral action and a professional is a person who oversees the behavioral actions of those who practice a profession.

C) A profession is an occupation that requires advanced education and training and a professional is a person who practices a profession.

D) A profession is an occupation that requires advanced education and training and a professional is a value-based internal force for behavioral action.

Answer: C Explanation: C) A profession is an occupation that requires advanced education and training and a professional is a person who practices a profession.

Diff: 3 LO: 10-1 AACSB: Analytical Thinking 2) Which of the following statements is true of characteristics of a profession?

A) It enjoys a high level of public trust and confidence even though it is never legalized by a regulatory body.

B) It is organized into associations and there are specific requirements for admission into such associations and maintenance of membership.

C) There are published authoritative performance and ethical standards for a profession even though it is never legalized by a regulatory body.

D) Violations of a profession's performance and ethical standards would always result in expulsion from membership.

Answer: B Explanation: B) A profession is organized into associations and there are specific requirements for admission into such associations and maintenance of membership.

Diff: 2 LO: 10-1 AACSB: Analytical Thinking

3 .

3) Which of the following is an obligation that relates to professional responsibility?

A) to ensure all financial processes of the organization are insulated from fraudulent activities B) to always do exactly what a client wants no matter what the circumstances C) cooperate with other professional members to improve the art of accounting, maintain the public's confidence D) to employ the degree of knowledge, skill, and judgment ordinarily possessed by members of the profession Answer: D Explanation: D) Professional responsibility includes employing the degree of knowledge, skill, and judgment ordinarily possessed by members of the profession.

Diff: 2 LO: 10-1 AACSB: Analytical Thinking 4) Paul Lewis, forensic accountant, has been engaged by a claimant, Ovizone Company to access the financial loss suffered due to acquisition of Skinet Corp and testify it in the form of a report.

Ovizone claims that the acquisition occurred only because of the negligent business valuation made by Trufinance Company. Halfway through the engagement, Lewis realized that Ovizone suffered loss due to Trufinance's negligence in valuation. But, Lewis had very limited technical knowledge in business valuation. Which of the following AICPA Rules of Professional Conduct should Lewis focus on while rendering his testifying report?

A) Integrity and objectivity - Rule 102 B) Independence - Rule 101 C) General Standards - Rule 201 D) The public trust - Rule 203 Answer: C Explanation: C) General Standards - Rule 201 as Lewis appears to be lacking professional competence to perform the business valuation.

Diff: 3 LO: 10-2 AACSB: Analytical Thinking 5) The purpose of the AICPA's Code of Professional Conduct is to A) induce the accountants through guidance, rules, interpretations, and rulings to join the AICPA. B) help AICPA members monitor their own behavior.

C) employ the degree of knowledge, skill, and judgment possessed by a rational individual.

D) fulfil all the client requirements included in the engagement agreement.

Answer: B Explanation: B) The purpose of the AICPA's Code of Professional Conduct is to help AICPA members monitor their own behavior.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking

4 .

6) Which of the following is a principle of AICPA's Code of Professional Conduct?

A) be in compliance with professional standards of all professional bodies B) adequately plan and supervise all professional services C) cooperate with other professional members to improve the art of accounting and to maintain the public's confidence D) obtain sufficient and relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed Answer: C Explanation: C) Cooperating with other professional members to improve the art of accounting and to maintain the public's confidence is part of the responsibilities principle as per AICPA's Code of Professional Conduct.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 7) Which of the following statements is true of AICPA's Code of Professional Conduct?

A) Although AICPA membership is voluntary, membership mandates compliance with the Code of Professional Conduct.

B) The purpose of the Code is to induce the accountants through guidance, rules, interpretations, and rulings to join the AICPA. C) The code helps members monitor their own behavior but it does not provide a framework for resolving disputes.

D) The Code has two sections: principles and rationales.

Answer: A Explanation: A) Although AICPA membership is voluntary, membership mandates compliance with the Code of Professional Conduct.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 8) Which of the following statements best differentiates a principle and a rule as per AICPA's Code of Professional Conduct?

A) A principle is an external person who oversees the behavioral actions of those who practice a profession, while a rule is a value-based internal force for behavioral action.

B) A principle is an external person who oversees the behavioral actions of those who practice a profession, while a rule is an authoritative regulatory force for behavioral action.

C) A principle is a value-based internal force for behavioral action and a rule is an authoritative regulatory force for behavioral action.

D) A principle is regulatory force with advanced education and training and a rule is a valuebased internal force for behavioral action.

Answer: C Explanation: C) A principle is a value-based internal force for behavioral action and a rule is an authoritative regulatory force for behavioral action.

Diff: 3 LO: 10-2 AACSB: Analytical Thinking 5 .

9) Which of the following is the AICPA's Code of Professional Conduct principle that requires a member to observe the principles of objectivity, independence, and due care?

A) general standards B) integrity C) accounting principles D) due professional care Answer: B Explanation: B) Integrity requires a member to observe the principles of objectivity, independence, and due care.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 10) Which of the following statements best defines the principle of independence as per AICPA's Code of Professional Conduct, ET Sec. 55, Article IV? A) It requires a member to discharge professional responsibilities with competence and diligence.

B) It imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.

C) It precludes relationships that may appear to impair a member's objectivity in rendering various professional services.

D) It induces members to disclose any confidential client information without the specific consent of the client.

Answer: C Explanation: C) Independence precludes relationships that may appear to impair a member's objectivity in rendering various professional services.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 11) Which of the following statements best defines the principle of integrity as per AICPA's Code of Professional Conduct ET Sec. 54, Article III? A) It requires a member to be honest and candid within the constraints of client confidentiality.

B) It urges the members to adequately plan and supervise the performance of professional services.

C) It precludes relationships that may appear to impair a member's objectivity in rendering various professional services.

D) It induces members to disclose any confidential client information without the specific consent of the client.

Answer: A Explanation: A) Integrity requires a member to be honest and candid within the constraints of client confidentiality.

Diff: 3 LO: 10-2 AACSB: Analytical Thinking

6 .

12) As per AICPA's Code of Professional Conduct, ________ imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.

A) integrity B) independence C) diligence D) objectivity Answer: C Explanation: C) Diligence imposes the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 13) Which of the following is a rule of AICPA's Code of Professional Conduct?

A) discharging responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public B) be independent in the performance of professional services C) cooperating with other professional members to improve the art of accounting, maintaining the public's confidence D) carrying out the profession's special responsibilities for self-governance Answer: B Explanation: B) Rule 101 Diff: 2 LO: 10-2 AACSB: Analytical Thinking 14) As per AICPA's Code of Professional Conduct, the principle of ________ imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.

A) public trust B) independence C) diligence D) objectivity Answer: D Explanation: D) Objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking

7 .

15) As per AICPA's Code of Professional Conduct, ET Sec. 56, Article V, which of the following statements is true of the principle of due care?

A) It requires a member to be honest and candid within the constraints of client confidentiality.

B) It imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.

C) It requires a member to discharge professional responsibilities with competence and diligence.

D) It precludes relationships that may appear to impair a member's objectivity in rendering various professional services.

Answer: C Explanation: C) The principle of due care requires a member to discharge professional responsibilities with competence and diligence.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 16) Which of the following statements is true of AICPA's Code of Professional Conduct?

A) The principles of AICPA's Code of Professional Conduct are specific and enforceable.

B) The rules of the AICPA's Code of Professional Conduct call for a commitment to moral behavior and an emphasis on maintaining the public's trust.

C) A principle is an authoritative regulatory force for behavioral action and a rule is a valuebased internal force for behavioral action.

D) Principles provide a framework for rules by defining the spirit, reasoning, and meaning of the rules.

Answer: D Explanation: D) Principles provide a framework for rules by defining the spirit, reasoning, and meaning of the rules.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 17) As per AICPA's Code of Professional Conduct, the rules of ________ urge members to not knowingly misrepresent facts or subordinate their judgment to others.

A) general standards B) integrity and objectivity C) accounting principles D) independence and compliance Answer: B Explanation: B) The rules of integrity and objectivity urge members to not knowingly misrepresent facts or subordinate their judgment to others.

Diff: 1 LO: 10-2 AACSB: Analytical Thinking

8 .

18) Which of the following statements best defines the rule of compliance as per AICPA's Code of Professional Conduct, ET Sec. 200, Rule 202?

A) It requires a member to be honest and candid within the constraints of client confidentiality.

B) It urges the members to adhere the standards promulgated by various professional bodies designated by Council.

C) It precludes relationships that may appear to impair a member's objectivity in rendering various professional services.

D) It induces members to disclose any confidential client information without the specific consent of the client.

Answer: B Explanation: B) The rule of compliance urges the members to adhere the standards promulgated by various professional bodies designated by Council.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 19) Which of the following statements is true of the rule of accounting principles in the AICPA's Code of Professional Conduct, ET Sec. 200, Rule 203?

A) A member shall express an opinion or state affirmatively that the financial statements of an entity are presented in conformity with GAAP. B) A member shall state that he or she is not aware of any material modifications that should be made to financial statements if they contain any departure from accounting principles that has a material effect.

C) A member shall not state that he or she is aware of any material modifications that should be made to financial statements if they contain any departure from accounting principles that has a material effect.

D) A member shall not express an opinion or state affirmatively that the financial statements of an entity are presented in conformity with GAAP. Answer: D Explanation: D) A member shall not express an opinion or state affirmatively that the financial statements of an entity are presented in conformity with GAAP. Diff: 3 LO: 10-2 AACSB: Analytical Thinking

9 .

20) Which of the following are the four general standards a member has to comply as per AICPA Rules of Professional Conduct, Rule 201?

A) professional competence, due professional care, planning and supervision, and integrity and objectivity B) professional competence, due professional care, public trust, and sufficient relevant data C) professional competence, due professional care, planning and supervision, and sufficient relevant data D) independence, sufficient relevant data, due professional care, and integrity and objectivity Answer: C Explanation: C) Professional competence, due professional care, planning and supervision and sufficient relevant data are the four general standards a member has to comply as per AICPA Rules of Professional Conduct, Rule 201.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 21) Which of the following statements best defines the standard of client interest as per the consulting service standards contained in SSCS No. 1?

A) It requires a member to inform the client of conflicts of interest, significant reservations regarding the scope and benefits of the engagement, and significant findings.

B) It induces members to disclose any confidential client information without the specific consent of the client.

C) It urges the members to adhere the standards promulgated by various professional bodies designated by Council.

D) It requires a member to serve the client while maintaining integrity and objectivity.

Answer: D Explanation: D) The standard of client interest requires a member to serve the client while maintaining integrity and objectivity.

Diff: 2 LO: 10-3 AACSB: Analytical Thinking 22) As per Statement on Standards for Consulting Services (SSCS) No. 1, the standard of ________ requires a member to inform the client of conflicts of interest, significant reservations regarding the scope and benefits of the engagement, and significant findings.

A) client interest B) understanding with the client C) communication with the client D) professional competence Answer: C Explanation: C) The standard of communication with the client requires a member to inform the client of conflicts of interest, significant reservations regarding the scope and benefits of the engagement, and significant findings.

Diff: 2 LO: 10-3 AACSB: Analytical Thinking 10 .

23) As per Statement on Standards for Consulting Services (SSCS) No. 1, the standard of ________ requires a written or oral agreement with the client about each party's respective responsibilities and the nature, scope, and limitations of the engagement.

A) client interest B) understanding with the client C) communication with the client D) professional competence Answer: B Explanation: B) The standard of understanding with the client requires a written or oral agreement with the client about each party's respective responsibilities and the nature, scope, and limitations of the engagement.

Diff: 2 LO: 10-3 AACSB: Analytical Thinking 24) As per ACFE Standards of Professional Conduct, the principle of ________ require a member not to commit discreditable acts and to always conduct themselves in the best interests of the profession.

A) understanding with client B) integrity and objectivity C) communication with the client D) professional competence and confidentiality Answer: B Explanation: B) The principle of integrity and objectivity requires a member not to commit discreditable acts and to always conduct themselves in the best interests of the profession.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking 25) Which of the following statements is true of the principle of due professional care in the ACFE Standards of Professional Conduct?

A) It requires a member to commit discreditable acts and to always conduct themselves in the best interests of the profession.

B) It urges members to qualify the understanding with the client for any significant changes.

C) It requires members to adequately plan and supervise professional services.

D) It urges a member to express an opinion or state affirmatively that the financial statements of an entity are presented in conformity with GAAP. Answer: C Explanation: C) The principle of due professional care requires members to adequately plan and supervise professional services.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking

11 .

26) As per ACFE Standards of Professional Conduct, which of the following requires a member not to disclose privileged information obtained during the course of an engagement without the express consent of the client or order of a court?

A) confidentiality and integrity B) client interest and equal treatment C) professionalism and fair dealing D) due professional care and objectivity Answer: A Explanation: A) Confidentiality and integrity requires a member not to disclose privileged information obtained during the course of an engagement without the express consent of the client or order of a court.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking 27) Which of the following is a fundamental principle of NACVA's Professional Standards?

A) Accept all assignments that can reasonably be completed within the time provided by clients.

B) Always do exactly what a client wants no matter what the circumstances.

C) Express an opinion with qualification that the member or a firm has financial interest or contemplated interest in the subject business.

D) Serve the client's interest by seeking to accomplish the objectives established with the client, while maintaining integrity and objectivity.

Answer: D Explanation: D) Serving the client's interest by seeking to accomplish the objectives established with the client, while maintaining integrity and objectivity is the fundamental principle of client interest.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking 28) Which of the following statements is true of the standards of professional organizations?

A) NACVA's Professional Standards, which are applicable to its members when providing any taxation services, require compliance with the ten fundamental rules.

B) AICPA, the world's largest valuation services organization, requires its members to comply with six fundamental principles as per AICPA's Code of Professional Standards.

C) Seven consulting service standards are contained in Statement on Standards for Consulting Services No. 1, including the four general standards provided by Rule 203 of the ACFE Rules of Professional Conduct.

D) Six principles are identified in the AICPA Code of Professional Conduct and they call for a commitment to moral behavior and an emphasis on maintaining the public's trust.

Answer: D Explanation: D) Six principles are identified in the AICPA Code of Professional Conduct and they call for a commitment to moral behavior and an emphasis on maintaining the public's trust.

Diff: 3 LO: 10-4 AACSB: Analytical Thinking 12 .

29) ________ occurs when a testifying expert is specifically hired to represent the engaging attorney's theory.

A) Conscious bias B) Unconscious bias C) Witting bias D) Selection bias Answer: D Explanation: D) Selection bias occurs when a testifying expert is specifically hired to represent the engaging attorney's theory.

Diff: 1 LO: 10-5 AACSB: Analytical Thinking 30) Which of the following statements is true of unconscious adversarial bias for testifying expert witnesses?

A) It occurs when an expert is specifically hired to represent the engaging attorney's theory.

B) Identifying and eliminating, or at least neutralizing, unconscious bias is no big task.

C) It is extremely prevalent among law enforcement and government witnesses.

D) The first opportunity to identify and eliminate unconscious bias falls to opposing counsel.

Answer: C Explanation: C) Unconscious bias is extremely prevalent among law enforcement and government witnesses.

Diff: 2 LO: 10-5 AACSB: Analytical Thinking 31) Which of the following statements best defines the adverse interest threat as per AICPA's Guide for Complying with Rules 102-505 (2008)?

A) the threat that a member will not appropriately evaluate the results of a service performed by the member or by an individual in the member's firm as part of providing another service B) the threat that a member will promote a client or employer's position to the point that his or her objectivity is compromised C) the threat that a member will not be objective because his or her interests are in opposition to those of a client or employer D) the threat that, because of a long or close relationship with a client or employer, a member will become too sympathetic to that entity's interests or too accepting of its work Answer: C Explanation: C) Adverse interest threat is the threat that a member will not be objective because his or her interests are in opposition to those of a client or employer.

Diff: 3 LO: 10-6 AACSB: Analytical Thinking

13 .

32) As per AICPA's Guide for Complying with Rules 102-505 (2008), ________ implies that a member will subordinate his or her judgment to that of an individual associated with a client, employer, or other relevant third party because of the individual's reputation or expertise.

A) self-interest threat B) reputation threat C) undue influence threat D) self-review threat Answer: C Explanation: C) Undue influence threat implies that a member will subordinate his or her judgment to that of an individual associated with a client, employer, or other relevant third party because of the individual's reputation or expertise.

Diff: 2 LO: 10-6 AACSB: Analytical Thinking 33) Which of the following is a primary driver of professional responsibility failure?

A) practitioners overestimating their respective skill sets B) practitioners relying on fellow members' work C) practitioners specifically representing the engaging attorney's theory D) practitioners subordinating individual judgement to professional rules Answer: A Explanation: A) Practitioners overestimating their respective skill sets is a primary driver of professional responsibility failure.

Diff: 2 LO: 10-6 AACSB: Analytical Thinking 34) John Miller is employed at an auditing firm which offers forensic accounting and income tax services. His next engagement is with a tax client, a partnership firm, to assist in the determination of a withdrawing partner's entitlement. The withdrawing partner owns another firm also and John's elder brother is an employee in that firm. Which of the following is the threat faced by John Miller as per AICPA's Guide for Complying with Rules 102-505 (2008)?

A) self-interest threat B) advocacy threat C) familiarity threat D) self-review threat Answer: A Explanation: A) Self-interest threat because John can be influenced by the fact that the withdrawing partner is the employer of his brother and may act against the interest of other partners.

Diff: 2 LO: 10-1 AACSB: Analytical Thinking

14 .

35) Steven Smith has been engaged by a counsel to assist a fellow CPA in an accounting malpractice action against Krynton Company. Five years back, Steven's wife used to work as finance manager for Krynton. During the engagement, Krynton warned Steven that his wife will be sued for financial treachery if the prevailing accounting malpractice action is ruled against the company. Which of the following is the threat faced by Steven Smith as per AICPA's Guide for Complying with Rules 102-505 (2008)?

A) familiarity threat B) advocacy threat C) undue influence threat D) self-review threat Answer: C Explanation: C) Undue influence threat since Steven is coerced by Krynton to act in favor of the company by threatening to sue his wife.

Diff: 2 LO: 10-1 AACSB: Analytical Thinking 10.3 Short-Answer Questions 1) Briefly explain the term professional responsibility. Identify three obligations that relate to professional responsibility.

Answer: A professional is a person who practices a profession that requires advanced education and training, while responsibility involves a condition of accountability, obligation, or duty.

Black's Law Dictionary defines responsibility as being held accountable for one's duty, action/inaction, or obligation. Thus, professional responsibility refers to the accountability of professionals for towards their duty.

Professional responsibility includes the following obligations: • To employ the degree of knowledge, skill, and judgment ordinarily possessed by members of the profession • To follow the highest standards of conduct prescribed by each of the organizations to which the professional or firm belongs • To adhere to the provisions of any regulatory or licensing authority Diff: 2 LO: 10-1 AACSB: Analytical Thinking 2) What's the difference between a principle and a rule? Do principles provide a framework for rules and, if yes, how?

Answer: A principle, although conceptual in nature and thus not enforceable, is a value-based or internal force for behavioral action, such as honesty and integrity. A rule, on the other hand, is an authoritative or external regulatory force for behavioral action. Principles provide a framework for rules because principles define the spirit, reasoning, and meaning of the underlying rules.

Hence, principles must be considered when resolving disputes related to rule violations.

Diff: 2 LO: 10-2 AACSB: Analytical Thinking 15 .

3) Seven consulting service standards are contained in Statement on Standards for Consulting Services No. 1, including the four general standards provided by Rule 201 of the AICPA's Rules of Professional Conduct. Briefly explain the other three standards.

Answer: • Client interest: Requires the member to serve the client while maintaining integrity and objectivity. As previously discussed, integrity requires a member to be honest and candid within the constraints of client confidentiality, while objectivity requires the member to be impartial, intellectually honest, and free of conflicts of interest.

• Understanding with the client: Requires an understanding with the client (written or oral) about each party's respective responsibilities and the nature, scope, and limitations of the engagement.

• Communication with the client: Requires the member to inform the client of conflicts of interest, significant reservations regarding the scope and benefits of the engagement, and significant findings.

Diff: 2 LO: 10-3 AACSB: Analytical Thinking 4) "Forensic accountants must display the attribute of trustworthiness." Explain why trust is important in any forensic accountants' professional relationships.

Answer: Trust is important in any professional relationship, but especially so for forensic accountants given the adversary-advocacy nature of their work. Trust plays a role not only in the development of a forensic accountant's opinions, but also in the communication of those opinions, especially in a trial setting. The outcome of a case is ultimately decided by the trier of fact (for example, the jury in a jury trial). In this role, the trier of fact must assess the credibility of witnesses, including expert witnesses. To be deemed credible and thus facilitate a connection with the jury, forensic accountants must display the attribute of trustworthiness.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking 5) Explain the sequence of actions to be followed to reconcile inconsistencies in various organizational standards.

Answer: To reconcile inconsistencies in various organizational standards, the following sequence of actions is to be followed: 1. Contact each organization, in writing, regarding the perceived conflict. If this fails to provide a resolution, proceed to Step 2.

2. Follow the most rigorous standard that serves the client and the public good.

3. Inform the client which professional standards were applied and why.

4. Qualify the adopted standard in your report as an assumption or limiting condition.

Diff: 2 LO: 10-4 AACSB: Analytical Thinking

16 .

6) Explain the term adversarial bias of expert witnesses. What are the main sources of adversarial bias?

Answer: Adversarial bias refers to a testifying expert who works, consciously or unconsciously, as the client's advocate, offering a biased opinion.

Adversarial bias has at least three sources: • Conscious bias: an expert's opinion is intentionally biased.

• Unconscious bias: extremely prevalent among law enforcement and government witnesses.

• Selection bias: implying that the expert was specifically hired to represent the engaging attorney's theory.

Diff: 2 LO: 10-5 AACSB: Analytical Thinking 7) "Identifying and eliminating, or at least neutralizing, adversarial bias is no small task."

Explain the parties capable of identifying and eliminating, or at least neutralizing, adversarial bias.

Answer: Identifying and eliminating, or at least neutralizing, adversarial bias is no small task.

The first opportunity falls to the expert. Testifying experts have a duty to the court, the public, and the profession to offer objective and independent opinions that will assist the trier of fact.

The second opportunity falls to the trial judge, serving as the gatekeeper, who is tasked with excluding unreliable testimony under FRE 702. The third opportunity falls to opposing counsel, who can attempt to expose any bias during cross-examination of the expert. The final opportunity, of course, falls to the trier of fact.

Diff: 2 LO: 10-5 AACSB: Analytical Thinking 8) How is "A Guide for Complying with Rules 102-505 (2008)" useful in making and acting on informed ethical decisions? Briefly explain the threats and safeguard approach described in "A Guide for Complying with Rules 102-505 (2008)."

Answer: "A Guide for Complying with Rules 102-505 (2008)" provides an approach, known as the threats and safeguard approach, for evaluating situations and circumstances not explicitly addressed in the AICPA Professional Code of Conduct or its interpretations and rulings.

The threats and safeguard approach is a three-step process, including: (1) identifying threats to compliance with the Code (2) evaluating the significance of any threats identified, and (3) determining whether safeguards are available to eliminate the threats or reduce them to an acceptable level.

Diff: 2 LO: 10-6 AACSB: Analytical Thinking

17 .

Forensic Accounting (Rufus) Chapter 11 Fundamentals of Business Valuation 11.1 True/False Questions 1) Prospective data are more commonly used to value closely held companies.

Answer: FALSE Explanation: In practice, prospective data are rarely used to value closely held companies.

Diff: 1 LO: 11-2 AACSB: Analytical Thinking 2) The discount and capitalization rates are equal when the growth rate is positive.

Answer: FALSE Explanation: If the growth rate is zero, the discount and capitalization rates are equal.

Diff: 1 LO: 11-2 AACSB: Analytical Thinking 3) A calculation engagement is limited in scope to specific approaches and methods determined by agreement with the client.

Answer: TRUE Explanation: A calculation engagement is limited in scope to specific approaches and methods determined by agreement with the client, resulting in a calculated value.

Diff: 1 LO: 11-3 AACSB: Analytical Thinking 4) A valuation performed in litigation must conform to the reporting provisions of professional standards.

Answer: FALSE Explanation: A valuation performed in litigation is exempt from the reporting provisions of professional standards.

Diff: 1 LO: 11-3 AACSB: Analytical Thinking 5) A detailed report is a structured and comprehensive submission designed to provide the reader with a sufficient understanding of the data, reasoning, and analysis underlying the conclusion of value.

Answer: TRUE Explanation: A detailed report is a structured and comprehensive submission designed to provide the reader with a sufficient understanding of the data, reasoning, and analysis underlying the conclusion of value.

Diff: 1 LO: 11-3 AACSB: Analytical Thinking 1 .

6) Fair market value proposes an actual sale price for cash.

Answer: FALSE Explanation: Fair market value proposes a "hypothetical" sale price for cash.

Diff: 1 LO: 11-4 AACSB: Analytical Thinking 7) The book value of a business may or may not represent its fair market value.

Answer: TRUE Explanation: The book value of a business rarely represents its fair market value.

Diff: 1 LO: 11-4 AACSB: Analytical Thinking 8) The NAV method determines a company's value as the difference between the book value of its assets and the fair market value of its liabilities.

Answer: FALSE Explanation: The Net Asset Value (NAV) method determines a company's value as the difference between the fair market value of its assets and the fair market value of its liabilities.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 9) In practice, absent valid market comps, forensic accountants most commonly use the dividend payout method.

Answer: FALSE Explanation: In practice, absent valid market comps, forensic accountants most commonly use the NAV method (which establishes a floor) in combination with the COE method.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 10) The AICPA has more active credential holders (Certified Valuation Analysts) than all other valuation credentials combined.

Answer: FALSE Explanation: According to NACVA's Web site, it has more active credential holders (Certified Valuation Analysts) than all other valuation credentials combined.

Diff: 1 LO: 11-6 AACSB: Analytical Thinking

2 .

11.2 Multiple-Choice Questions 1) Which of the following is situation commonly drives a business valuation engagement?

A) hypothecation of assets B) shareholder dispute C) hedging a company's derivatives D) determination of dividend payout Answer: B Explanation: B) Business valuations are most commonly driven by one of three situationslitigation, transactions, and tax matters.

Diff: 1 LO: 11-1 AACSB: Analytical Thinking 2) Which of the following is a primary issue of the business valuation theory?

A) determining current benefits from the business B) estimating expected future benefits C) calculating historical benefits received D) calculating financial ratios Answer: B Explanation: B) The business valuation theory boils down to two primary issues-the expected stream of future benefits and the appropriate discount rate.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking 3) Which of the following is a difference between a forecast and a projection?

A) A forecast reflects conditions that may occur, whereas a projection reflects expected conditions based on current knowledge of trends in relevant factors.

B) A forecast is typically for a short period, whereas projections can be made several years into the future projection.

C) A forecast is based on hypothetical assumptions, whereas a projection is based on current knowledge of trends.

D) A forecast invites rebuttal arguments of speculation and bias, whereas a projection is deemed to be the most appropriate indicator of expected future benefits.

Answer: B Explanation: B) A forecast reflects expected conditions, based on current knowledge of trends in relevant factors. Because current knowledge is short-lived in today's business environment, forecast periods are typically short. In contrast, a projection reflects conditions that may occur, given the realization of one or more hypothetical assumptions regarding certain factors. Given their hypothetical nature, projections can be made several years into the future.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking

3 .

4) The management of Quills and Ink want to calculate the required rate of return (ROR) of the company. The following information is available: Risk free rate Equity risk premium Firm size premium Industry risk premium Specific company risk premium

5.30% 4.24% 2.16% 6.50% 3.00%

Calculate the ROR of Quills and Ink. A) 16.96% B) 21.20% C) 18.20% D) 19.40% Answer: B Explanation: B) Required rate of return = Risk-free rate + Equity risk premium + Firm size premium + Industry risk premium + Specific company risk premium ROR = 5.30% + 4.24% + 2.16% + 6.50% + 3.00% ROR = 21.20% Diff: 2 LO: 11-2 AACSB: Analytical Thinking 5) Which of the following premiums is generally calculated as the excess of stock market returns over government bond returns?

A) equity risk premium B) specific company risk premium C) industry risk premium D) firm size premium Answer: A Explanation: A) Equity risk premiums are generally calculated as the excess of stock market returns over government bond returns.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking 6) Which of the following gives the calculation of the capitalization rate?

A) the equity risk premium plus the specific company risk premium B) the required rate of return minus the risk free rate C) the dividend payout rate plus the long-term sustainable growth rate D) the discount rate minus the expected long-term sustainable growth rate Answer: D Explanation: D) The capitalization rate is equal to the discount rate minus the expected longterm sustainable growth rate in the proxy benefit.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking 4 .

7) Which of the following is true of capitalization?

A) It is the same as discounting.

B) It is more commonly used with prospective data.

C) It is applied to a single benefit stream.

D) It converts present values to future benefits.

Answer: C Explanation: C) Capitalization is applied to a single benefit stream.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking 8) Lilac, Inc. uses a discount rate of 17.5% its expected long-term sustainable growth rate is 1.5%. The net cash flows from operations of the company for the previous years are provided below.

Year 2009 2010 2011 2012 2013

Net Cash Flow $190,835 215,648 185,965 248,752 221,960

Calculate the value of business of Lilac, Inc. A) $1,063,160 B) $1,215,040 C) $1,328,950 D) $1,090,420 Answer: C Explanation: C) Value of business = Proxy benefit / Capitalization rate Proxy benefit = Average net cash flows from operations Proxy benefit = ($190,835 + $215,648 + $185,965 + $248,752 + $221,960) / 5 Proxy benefit = $1,063,160 / 5 = $212,632 Capitalization rate = Discount rate - Long-term sustainable growth rate = 17.5% - 1.5% = 16% Value of business = $212,632 / 16% = $1,328,950 Diff: 3 LO: 11-2 AACSB: Analytical Thinking

5 .

9) Egan, a forensic accountant, was appointed for a business valuation engagement by the management of Dreamsong, Inc. He qualified the purpose of the valuation, type of engagement, and the ownership interest to be considered. What should be Egan's next step?

A) Issue the valuation report.

B) Estimate the value of the business.

C) Gather the necessary information.

D) Analyze the information gathered.

Answer: C Explanation: C) In the context of business valuations, there are five basic steps: 1. Define the engagement.

2. Gather the necessary information.

3. Analyze the information gathered.

4. Estimate the value of the business.

5. Issue the valuation report.

Egan has performed the functions needed to define the engagement. The next step is to gather the necessary information.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 10) Which of the following is included in the first step of the valuation process?

A) issuing the valuation report B) analyzing the company's financial statements C) selecting and applying a valuation approach D) qualifying the ownership interest to be considered Answer: D Explanation: D) This first step in the valuation process includes qualifying the purpose, type of engagement, standard of value, premise of value, valuation date, and the ownership interest to be considered.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 11) Which of the following is a reason why purpose of business valuation is important?

A) It helps develop a suitable capitalization rate.

B) It can assist in representing the expected future benefits.

C) It determines the premise of value.

D) It identifies assumptions and limiting conditions.

Answer: D Explanation: D) Purpose may identify assumptions and limiting conditions.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking

6 .

12) Which of the following engagements allows the forensic accountants to apply any approaches and methods deemed appropriate?

A) valuation engagement B) calculation engagement C) consultation engagement D) standardization engagement Answer: A Explanation: A) A valuation engagement is a comprehensive effort wherein the forensic accountant is responsible for a full development of the case facts and is free to apply any approaches and methods deemed appropriate, resulting in a conclusion of value.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 13) Which of the following is a premise of value that is applied to business valuations?

A) going concern B) materiality C) substance over form D) neutrality Answer: A Explanation: A) Two premises of value apply to most business valuations: going concern or liquidation.

Diff: 1 LO: 11-3 AACSB: Analytical Thinking 14) Which of the following should be the first phase of analysis of information gathered for a business valuation engagement?

A) identifying significant relevant factors B) reconciling information collected with the financial statement analysis C) analysis of the company's financial statements D) developing a discount rate Answer: C Explanation: C) The first phase should be the analysis of the company's financial statements.

Diff: 1 LO: 11-3 AACSB: Analytical Thinking

7 .

15) As per the Rev. Rul. 59-60 (Sec. 4), which of the following factors should be considered in valuations?

A) the price earnings ratio of the company B) the earning capacity of the company C) the fair market value of the stock of the business D) the book value of stocks of similar companies Answer: B Explanation: B) Rev. Rul. 59-60 (Sec. 4) identifies eight valuation factors, although not allinclusive, that should be considered, which includes the earning capacity of the company.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 16) Which of the following is true of a summary report?

A) It is a structured and comprehensive submission.

B) It includes certain minimum elements already included in the detailed report.

C) It identifies the procedures and scope of work performed.

D) It is a limited scope report and should be explicitly titled as a "summary report."

Answer: B Explanation: B) A summary report offers an abbreviated version of the information contained in a detailed report, including certain minimum elements.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 17) Which of the following is true of nonoperating assets of a business?

A) These are included in the valuation depending on the approach used.

B) These are required to produce the expected future benefit stream.

C) These should be excluded from the valuation.

D) These should always be included in the valuation.

Answer: C Explanation: C) Nonoperating assets should be excluded from the valuation, regardless of which valuation approach and method is used.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking

8 .

18) Why it is important to distinguish between enterprise goodwill and personal goodwill in divorce valuations?

A) In many states, enterprise goodwill is not considered a marital asset while personal goodwill is.

B) In many states, enterprise goodwill is considered a marital asset while personal goodwill is not.

C) Enterprise goodwill can be valued reasonably, while it is not possible to value personal goodwill.

D) Enterprise goodwill cannot be separately identified, while personal goodwill can be identified.

Answer: B Explanation: B) In divorce valuations, it may be necessary to distinguish between enterprise goodwill, which is tied to the business entity, and personal goodwill, which is tied to a particular individual. This distinction is important because, in many states, enterprise goodwill is considered a marital asset while personal goodwill is not.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 19) ________ proposes a "hypothetical" sale price for cash. This hypothetical sale takes place in an open and unrestricted marketplace.

A) Book value B) Present value C) Historical value D) Fair market value Answer: D Explanation: D) Fair market value proposes a "hypothetical" sale price for cash. This hypothetical sale takes place in an open and unrestricted marketplace.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 20) Which of the following standards of value is mandated for all federal tax matters?

A) fair value B) book value C) fair market value D) investment value Answer: C Explanation: C) The most widely recognized standard of value is fair market value (FMV), which is mandated for all federal tax matters.

Diff: 1 LO: 11-4 AACSB: Analytical Thinking

9 .

21) Which of the following statements is true of fair value as a standard of valuation?

A) It is the most widely recognized standard of value.

B) It does not propose a hypothetical sale in an open and unrestricted market.

C) It is mandated for all federal tax matters.

D) Its operational meaning does not vary from state to state because it is statutorily defined.

Answer: B Explanation: B) Fair value does not propose a hypothetical sale in an open and unrestricted market.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 22) Which of the following standards of value is often used in dissenting minority interest in litigation?

A) fair value B) fair market value C) book value D) investment value Answer: A Explanation: A) The second most widely recognized standard of value is fair value (FV), which is often used in dissenting minority interest (or oppression) litigation.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 23) Which of the following situations will result in the investment value of a business approximating to the fair market value of the business?

A) when an investor's requirements and expectations are different than the fair value of the business B) when an investor's requirements and expectations are representative of the book value of the business C) when an investor's requirements and expectations are different than the market D) when an investor's requirements and expectations are representative of the market Answer: D Explanation: D) If an investor's requirements and expectations are representative of the market, investment value will approximate fair market value.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking

10 .

24) Which of the following is true of the standards of value used in business valuation?

A) The fair value proposes a hypothetical sale in an open and unrestricted market.

B) The investment value is often used in dissenting minority interest litigation.

C) The book value of a business rarely represents its fair market value.

D) The fair market value is usually greater than the investment value.

Answer: C Explanation: C) The book value of a business rarely represents its fair market value.

Nonetheless, many buy-sell agreements use net book value as the applicable measure of value.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 25) Which of the following is true of investment value as a standard of valuation?

A) Investment value is usually lesser fair value.

B) Investment value is usually lesser than fair market value.

C) Investment value is usually greater than book value.

D) Investment value is usually greater than fair value.

Answer: D Explanation: D) Investment value is usually greater than fair market value (and thus greater than fair value).

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 26) Which of the following standards of value is also known as strategic value?

A) investment value B) book value C) fair value D) fair market value Answer: A Explanation: A) Investment value is also known as strategic value.

Diff: 1 LO: 11-4 AACSB: Analytical Thinking 27) Which of the following methods is a logical selection when engaged to value a nonoperating company or a company pending liquidation?

A) net asset value method B) dividend payout method C) capitalization of earnings method D) guideline transaction method Answer: A Explanation: A) The NAV method is a logical selection when engaged to value a nonoperating company or a company pending liquidation.

Diff: 2 LO: 11-5 AACSB: Analytical Thinking 11 .

28) Which of the following methods is commonly used to establish a floor value for the company?

A) dividend payout method B) capitalization of earnings method C) net asset value method D) guideline transaction method Answer: C Explanation: C) The NAV method is a logical selection when engaged to value a nonoperating company or a company pending liquidation. Its most common use, however, is to establish a "floor" value for a company.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 29) Which of the following is true of the net asset method?

A) It requires the forensic accountant to adjust the company's balance sheet from book value to fair market value.

B) It determines a company's value as the difference between the book value of its assets and the fair market value of its liabilities.

C) It commonly requires the forensic accountant to use his or her judgment to arrive at the fair market value assessments.

D) It involves the development of a proxy benefit and the capitalization of this benefit to provide an indicated business value.

Answer: A Explanation: A) The net asset method requires the forensic accountant to adjust the company's balance sheet from book value to fair market value.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 30) Which of the following valuation approaches employs the time value of money?

A) asset approach B) liabilities approach C) market approach D) income approach Answer: D Explanation: D) The income approach employs the time value of money.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking

12 .

31) Which of the following methods is used under the income approach of business valuation?

A) net asset value method B) capitalization of earnings method C) dividend payout method D) guideline transaction method Answer: B Explanation: B) The most common method under the income approach is the capitalization of earnings (COE) method.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 32) Which of the following methods involves the development of a proxy benefit?

A) net asset value method B) guideline transaction method C) capitalization of earnings method D) dividend payout method Answer: C Explanation: C) The capitalization of earnings (COE) method involves the development of a proxy benefit and the capitalization of this benefit to provide an indicated business value.

Diff: 2 LO: 11-5 AACSB: Analytical Thinking 33) Which of the following methods is used in combination with net asset value method in the absence of valid market comps?

A) capitalization of earnings method B) guideline transaction method C) dividend payout method D) earnings payout method Answer: A Explanation: A) In practice, absent valid market comps, forensic accountants most commonly use the NAV method (which establishes a floor) in combination with the COE method.

Diff: 2 LO: 11-5 AACSB: Analytical Thinking

13 .

34) Which of the following is the foremost professional organization for the business valuation discipline?

A) the National Society of Business Appraisers B) the American Association of Business Valuators and Appraisers C) the American Society of Appraisers D) the National Association of Certified Valuators and Analysts Answer: D Explanation: D) The National Association of Certified Valuators and Analysts (NACVA) is the foremost professional organization for the BV discipline.

Diff: 2 LO: 11-6 AACSB: Analytical Thinking 35) Which of the following business valuation organizations merged with the NACVA in 2012?

A) the American Society of Certified Analysts B) the Institute of Business Appraisers C) the American Society of Appraisers D) the Institute of Valuation Analysts Answer: B Explanation: B) The Institute of Business Appraisers (IBA) merged with NACVA in 2012.

Diff: 1 LO: 11-6 AACSB: Analytical Thinking

14 .

11.3 Short-Answer Questions 1) What is the significance of industry risk premium and specific company risk premium?

Answer: The industry risk premium is the additional return required to compensate investors for investing in a particular industry. This premium reflects the risk of an industry relative to the risk of the market as a whole. Forensic accountants use authoritative third-party data sources to determine industry risk premiums.

The specific company risk premium is the additional return required to compensate investors for investing in the specific company. This factor reflects the risk of a company relative to other companies in the same industry, due to issues such as depth of management, customer concentration, financial strength, labor constraints, and pending litigation. Although forensic accountants can use market research to evaluate these factors, their quantification is largely based on professional judgment.

Diff: 2 LO: 11-2 AACSB: Analytical Thinking 2) Why is identification of the ownership interest to be valued important?

Answer: Identification of the ownership interest to be valued-either controlling or minority-is important because it determines the subject's ability to affect decisions. For example, a controlling interest can make a decision to sell or liquidate the business, while a minority interest cannot. Importantly, control rights are not determined solely by the percentage ownership (for example, 51% or 49%). Other factors, such as the company's dispersion of ownership and provisions contained in organizational documents (such as the corporate charter or an operating agreement) must be considered. For example, in a company with widely dispersed ownership, an interest below 50% may have the ability to exercise substantial powers of control. Moreover, for some companies, percentage ownership above 50% (a supermajority) is required for certain decisions or actions.

Diff: 2 LO: 11-3 AACSB: Analytical Thinking 3) Excluding valuation discounts allows for a more equitable determination of fair value.

Substantiate.

Answer: The second most widely recognized standard of value is fair value (FV), which is often used in dissenting minority interest (or oppression) litigation. Because FV is statutorily or judicially defined, its operational meaning varies from state to state (and even court to court).

Nonetheless, a common working definition is the pro-rata value of a business, as a going concern, without consideration of any valuation discounts. Importantly, FV does not propose a hypothetical sale in an open and unrestricted market. Dissenting shareholder litigation generally involves a willing buyer but not a willing seller. Moreover, the buyer-the controlling shareholder(s)-generally has more "inside" information than the seller. In such a context, it is argued that excluding valuation discounts allows for a more equitable determination of value.

Diff: 2 LO: 11-4 AACSB: Analytical Thinking 15 .

4) Explain the two methods that are commonly considered under the market approach of valuation of the company.

Answer: Under the market approach, a company's value is determined relative to market comparisons (or comps). Two methods that are commonly considered under this approach are the dividend payout method and the guideline transaction method. The dividend payout method is similar to the COE method, except dividends are capitalized instead of earnings and the capitalization rate is derived from dividend yields of publicly traded companies (thus, the market aspect). Guideline transactions may be previous transactions in the subject company's stock or sales of ownership interests in similar companies. Although various databases are available that collect and report transactions data for closely held companies, these databases may not offer the level of detail necessary to determine whether the transaction is indeed comparable. Due to difficulty in identifying valid comps, market methods are considered (perhaps for purposes of a "sanity check") but rarely employed as the primary indicator of value.

Diff: 1 LO: 11-5 AACSB: Analytical Thinking 5) What is the purpose of the Statement on Standards for Valuation Services (SSVS) No. 1 introduced by the AICPA? Answer: In June 2007, the AICPA introduced SSVS No. 1, its newly developed standards for BV. Specifically, the standards govern engagements to estimate the value of businesses, business ownership interests, securities, and intangible assets. SSVS No. 1 provides overall BV engagement considerations, along with specific development and reporting guidelines that address many of the issues covered in this chapter. This comprehensive pronouncement includes a sample list of assumptions and limiting conditions, a glossary of valuation terms, and interpretations of the standards.

Diff: 2 LO: 11-6 AACSB: Analytical Thinking

16 .

Forensic Accounting (Rufus) Chapter 12 Special Topics 12.1 True/False Questions 1) Methods of proof employed by forensic accountants can be either direct or indirect, but a combination of the two is not acceptable.

Answer: FALSE Explanation: Methods of proof employed by forensic accountants can be direct, indirect, or a combination of the two.

Diff: 1 LO: 12-1 AACSB: Analytical Thinking 2) Indirect methods of proof are founded on logic, common sense, critical thinking, and deductive reasoning.

Answer: TRUE Diff: 1 LO: 12-2 AACSB: Analytical Thinking 3) The net worth method is used when the subject-individual or business-consumes income rather than accumulates assets.

Answer: FALSE Explanation: The source and application of funds method is used when the subject (individual or business) consumers income rather than accumulates assets.

Diff: 2 LO: 12-3 AACSB: Analytical Thinking 4) Compensatory damages are meant to compensate a negligence of defendant, while punitive damages are meant to punish intentional nonperformance of duties by a defendant.

Answer: TRUE Diff: 2 LO: 12-5 AACSB: Analytical Thinking 5) Relevant damage categories for compensatory damages include damages that are compensable by law and are measurable within the realm of economics.

Answer: TRUE Diff: 2 LO: 12-6 AACSB: Analytical Thinking

1 .

6) Unlike the interest rate, which is determined by an economic expert, the applicable discount rate for past damages is the risk-free rate.

Answer: FALSE Explanation: Unlike the discount rate, which is determined by an economic expert, the applicable interest rate for past damages is jurisdiction-specific.

Diff: 2 LO: 12-7 AACSB: Analytical Thinking 7) While calculating economic damages, application of a risk-free rate allows the plaintiff to replicate the lost earnings stream by reinvesting the damages award in safe investments.

Answer: TRUE Diff: 1 LO: 12-7 AACSB: Analytical Thinking 8) Although high-quality municipal bonds are the most common proxy for a risk-free rate, Treasury bonds are another alternative.

Answer: FALSE Explanation: Although Treasury bonds are the most common proxy for a risk-free rate, highquality municipal bonds are another alternative.

Diff: 2 LO: 12-7 AACSB: Analytical Thinking 9) In computer forensics, the chain of custody describes the route evidence takes from the time it is collected until the investigation is completed and identifies everyone that had access to it along the way.

Answer: TRUE Diff: 1 LO: 12-10 AACSB: Analytical Thinking 10) Digital evidence can be time sensitive, because some data are intended for only temporary storage and may be overwritten on a regular basis.

Answer: TRUE Diff: 1 LO: 12-15 AACSB: Analytical Thinking

2 .

12.2 Multiple-Choice Questions 1) The direct method of proof is always preferable to the indirect method because it A) provides a lesser level of uncertainty.

B) is generally more dissuasive.

C) is easier to refute.

D) uses more circumstantial evidence.

Answer: A Explanation: A) The direct method of proof is always preferable to the indirect method because it provides a lesser level of uncertainty.

Diff: 2 LO: 12-2 AACSB: Analytical Thinking 2) Which of the following statements is true of the methods of proof?

A) Unlike the indirect method of proof, the direct method of proof is based on inference rather than personal knowledge.

B) The indirect method of proof provides a lesser level of uncertainty compared to the direct method of proof.

C) Unlike the indirect method of proof, the direct method of proof is built on circumstantial evidence.

D) The indirect method of proof is easier to refute compared to the direct method of proof.

Answer: D Explanation: D) The indirect method of proof is easier to refute compared to the direct method of proof.

Diff: 2 LO: 12-2 AACSB: Analytical Thinking 3) The indirect method of proof ________ compared to the direct method of proof.

A) provides a greater level of certainty B) is harder to refute in court C) is generally less persuasive D) is more easily understood Answer: C Explanation: C) The indirect method of proof is generally less persuasive compared to the direct method of proof.

Diff: 2 LO: 12-2 AACSB: Analytical Thinking

3 .

4) Although both paper and witness testimony can serve as evidence, paper is the more critical of the two in a direct method case because a witness A) provides a greater level of objectivity.

B) can be self-serving.

C) cannot change his/her mind.

D) is more persuasive.

Answer: B Explanation: B) Although both paper and witness testimony can serve as evidence, paper is the more critical of the two in a direct method case because a witness can be self-serving.

Diff: 2 LO: 12-2 AACSB: Analytical Thinking 5) Which of the following statements is true of the percentage markup method of indirect proof?

A) It extends the concept of application of funds to include the accumulation of assets and employs a balance sheet formula of sales minus costs equal net worth.

B) It is generally limited to wholesale establishments rather than retail establishments.

C) It requires reliable information regarding opening and closing inventories and the appropriate gross margin.

D) It focuses exclusively on expenditures made in bank deposits.

Answer: C Explanation: C) The percentage markup method requires reliable information regarding opening and closing inventories and the appropriate gross margin.

Diff: 2 LO: 12-3 AACSB: Analytical Thinking 6) ________ of indirect proof is generally limited to retail establishments rather than illegal businesses.

A) Cash method B) Gross margin method C) Expenditures method D) Bank deposits method Answer: B Explanation: B) Gross margin method of indirect proof is generally limited to retail establishments rather than illegal businesses.

Diff: 2 LO: 12-3 AACSB: Analytical Thinking

4 .

7) Which of the following statements is true of indirect methods of proof?

A) The cash method, which has limited application, is feasible only when the number of units and price can be determined easily.

B) When there is an accumulation of assets without a corresponding source of funds the unit and volume method is most commonly used.

C) The bank deposit method is used when the subject (individual or business) consumes income rather than accumulates assets.

D) Successful use of the net worth method requires a complete reconstruction of the subject's financial history, including all assets, liabilities, expenditures, and sources of funds.

Answer: D Explanation: D) Successful use of the net worth method requires a complete reconstruction of the subject's financial history, including all assets, liabilities, expenditures, and sources of funds.

Diff: 2 LO: 12-3 AACSB: Analytical Thinking 8) Bezone Corp. is being alleged of tax fraud for the financial year 2015-2016. The ending net worth for the period was $2.285m and beginning net worth was $1.595m. Expenditures (consumption) during the period amounted to $0.725m. The reported income in Bezone's tax return amounted to $0.69. Other legitimate sources of funds in the tax return reported an income of $0.31. Calculate the inferred unreported income using the net worth method of indirect proof.

A) $0 B) $0.725m C) $0.415m D) $0.075m Answer: C Explanation: C) Ending net worth $2.285m Beginning net worth $1.595m Change in net worth during the period $0.690m Expenditures (consumption) during the period $0.725m The sum of funds used for asset acquisitions and consumption (a) $1.415m Income as per tax return $0.690m Other income as per tax return $0.310m Total reported income (b) $1.000m Inferred unreported income (a) - (b) $0.415m Diff: 3 LO: 12-3 AACSB: Application of Knowledge

5 .

9) Bezone Corp. is being alleged of tax fraud for the financial year 2015-2016. The ending net worth for the period was $2.285m and beginning net worth was $1.595m. Expenditures (consumption) during the period amounted to $0.725m. The reported income in Bezone's tax return amounted to $0.69. Other legitimate sources of funds in the tax return reported an income of $0.31. Which of the following statements is true of Bezone?

A) Bezone has committed tax fraud as its reported other income is less than the expenditures during the period.

B) Bezone has not committed tax fraud as its reported income and expenditures during the period are the same.

C) Bezone has committed tax fraud even though its reported income and change in net worth during the period are the same.

D) Bezone has committed tax fraud as its reported income is less than the expenditures during the period.

Answer: C Explanation: C) Bezone has committed tax fraud even though its reported income and change in net worth during the period are the same.

Ending net worth Beginning net worth Change in net worth during the period Expenditures (consumption) during the period The sum of funds used for asset acquisitions and consumption (a) Income as per tax return Other income as per tax return Total reported income (b) Inferred unreported income (a) - (b) Diff: 3 LO: 12-3 AACSB: Application of Knowledge

$2.285m $1.595m $0.690m $0.725m $1.415m $0.690m $0.310m $1.000m $0.415m

10) Which of the following statements best defines economic damages in civil litigation?

A) It refers to the economic loss suffered by businesses as a result of lack of knowledge or ignorance of law.

B) It refers to the intentional nonperformance of duties which results in economic losses to the claimant.

C) It refers to the monetary compensation that is awarded in civil litigation against losses.

D) It refers to the economic loss suffered by businesses as a result of the negligence of a defendant.

Answer: C Explanation: C) Economic damages are the monetary compensation that is awarded in civil litigation.

Diff: 2 LO: 12-4 AACSB: Analytical Thinking

6 .

11) Which of the following statements is true of a testifying economic expert in civil litigation?

A) The expert is responsible for preparing or reviewing a report and critiquing the opposing expert's report when engaged by the defendant's counsel.

B) The primary role of an economic expert in a damages claim is to punish a defendant's intentional or reckless behavior.

C) An economic expert can be engaged by counsel for the plaintiff but not for the defendant in a damages claim.

D) An economic expert will usually prepare a report that sets forth his or her opinion of damages when engaged by the plaintiff's counsel.

Answer: D Explanation: D) In civil litigations, the testifying economic expert will usually prepare a report that sets forth his or her opinion of damages when engaged by the plaintiff's counsel.

Diff: 2 LO: 12-5 AACSB: Analytical Thinking 12) The primary role of an economic expert in a damages claim is to A) prepare a reviewing and critiquing the opposing expert's report.

B) place a dollar value on the various damages components that have been identified.

C) establish the facts of the damages claim to define the nature and extent of the injury.

D) establish the parameters of the damages determine the impact of the injury on the plaintiff.

Answer: B Explanation: B) The primary role of an economic expert in a damages claim is to place a dollar value on the various damages components that have been identified.

Diff: 2 LO: 12-5 AACSB: Analytical Thinking 13) Which of the following statements is true of the damages experts in litigation?

A) An economic expert relies on the opinions of those who establish the facts of the damages claim, who in turn relies on the opinions of those who establish the parameters of the damages.

B) The primary role of an economic expert in a damages claim is to establish the facts of the damages claim to define the nature and extent of the injury.

C) The economic expert has to rely solely on his own technical knowledge and skills in determining the damages as other experts can be biased by personal interests.

D) An economic expert is often the last witness to testify in a damages claim.

Answer: D Explanation: D) Whether an economic expert is engaged by the plaintiff or the defendant, the economic expert is often the last witness to testify in a damages claim.

Diff: 3 LO: 12-5 AACSB: Analytical Thinking

7 .

14) Which of the following statements best differentiates compensatory and punitive damages in civil litigation?

A) Compensatory damages are meant to reward a plaintiff, while punitive damages are meant to reward a defendant.

B) Compensatory damages are meant to compensate a plaintiff's loss, while punitive damages are meant to deter similar misconduct by the same defendant or other parties in the future.

C) Compensatory damages are meant to reward a defendant, while punitive damages are meant to punish a claimant.

D) Compensatory damages are benefit streams the plaintiff would have received if not for the injury, while punitive damages are the benefit streams the plaintiff will receive for future damages.

Answer: B Explanation: B) Compensatory damages are meant to compensate the plaintiff's loss while punitive damages are meant to deter similar misconduct by the same defendant or other parties in the future.

Diff: 3 LO: 12-6 AACSB: Analytical Thinking 15) The two components of lost earnings in a civil litigation claiming damages are A) expected lost earnings and unexpected lost earnings.

B) past lost earnings and recoverable lost earnings.

C) past lost earnings and future lost earnings.

D) past lost earnings and unexpected lost earnings.

Answer: C Explanation: C) Past lost earnings and future lost earnings are the two components of lost earnings in a civil litigation claiming damages.

Diff: 2 LO: 12-6 AACSB: Analytical Thinking 16) Which of the following statements is true of projected earnings in a damages claim?

A) Calculating lost wages requires the projection of two separate earnings streams: past lost earnings and recoverable lost earnings.

B) Lost earnings constitutes the difference between pre-injury earnings and post-injury earnings.

C) Pre-injury earnings and post-injury earnings are the two subcomponents of lost earnings in a civil litigation claiming damages.

D) Post-injury earnings is what the plaintiff would have earned if not for the injury.

Answer: B Explanation: B) Lost earnings constitutes the difference between pre-injury earnings and postinjury earnings.

Diff: 2 LO: 12-6 AACSB: Analytical Thinking

8 .

17) Which of the following statements is true of the calculation of economic damages in a civil litigation?

A) In economic damages calculations, risk is not an issue, since the discount rate is supposed to represent a risk-free rate.

B) All past economic damages must be reduced to present value, which requires the application of a discount rate.

C) Calculations of economic damages are often based on a set of foundational facts rather than assumptions.

D) An economic expert must convert future losses to present value using the applicable interest rate.

Answer: A Explanation: A) In economic damages calculations, risk is not an issue, since the discount rate is supposed to represent a risk free rate.

Diff: 2 LO: 12-7 AACSB: Analytical Thinking 18) Which of the following statements is true of the calculation of economic damages in a civil litigation?

A) All future economic damages must be reduced to present value, which requires the application of a discount rate.

B) Calculations of economic damages are often based on a set of foundational assumptions rather than facts.

C) Interest on past economic damages is always calculated by a forensic accountant.

D) Worklife expectancy is the period of time a person is expected to live past retirement.

Answer: A Explanation: A) All future economic damages must be reduced to present value, which requires the application of a discount rate.

Diff: 1 LO: 12-7 AACSB: Analytical Thinking

9 .

19) Which of the following statements is a valid reason for inconsistencies in opinions of damages experts?

A) A large component of economic damages is past damages, the calculation of which relies on projections of inherently uncertain past events.

B) Economic damages calculations require the application of logic, which allows for multiple interpretations.

C) Damages are calculated for specific individuals or entities, with many unique attributes that are universally perceived or evaluated.

D) All past economic damages must be reduced to present value, which requires the application of a discount rate.

Answer: B Explanation: B) Economic damages calculations require the application of logic, which allows for multiple interpretations which leads to inconsistencies in opinions of damages experts.

Diff: 2 LO: 12-7 AACSB: Analytical Thinking 20) Which of the following statements is true of forensic accountants in litigations involving computer forensics?

A) In cases where a computer expert is needed, the forensic accountant may rely on the computer expert's opinions in forming his or her own opinions but should not assist the court in selecting the expert.

B) In cases where a computer expert is needed, the forensic accountant may assist the court in selecting the expert but should not rely on the computer expert's opinions in forming his or her own opinions.

C) Although forensic accountants are not expected to evaluate a computer expert's analysis, they should have sufficient knowledge of the subject matter to identify any gross errors or failures.

D) Although forensic accountants are not expected to have sufficient knowledge of the subject matter to identify any gross errors or failures, they should evaluate a computer expert's analysis.

Answer: C Explanation: C) Although forensic accountants are not expected to evaluate a computer expert's analysis, they should have sufficient knowledge of the subject matter to identify any gross errors or failures.

Diff: 3 LO: 12-8 AACSB: Analytical Thinking

10 .

21) Which of the following statements is true of electronically stored information?

A) Deleting electronically stored information destroys it, just like burning or shredding a paper document would.

B) The volume of electronically stored information is usually much lesser than paper information but it is difficult to see how communication records quickly accumulate compared to paper information.

C) Unlike paper information, electronically stored information cannot be easily altered or damaged.

D) Few features of electronically stored information like metadata have no counterpart in paper form.

Answer: D Explanation: D) Few features of electronically stored information like metadata have no counterpart in paper form.

Diff: 2 LO: 12-9 AACSB: Analytical Thinking 22) Which of the following statements is true of flash memory media?

A) Data are recorded by a laser in this type of media that alters light-sensitive dyes within the disk.

B) The absence of moving parts or sensitive surfaces makes this type of media relatively less vulnerable to damage.

C) Data are stored by altering the magnetic polarity of chips.

D) The recording process introduces the possibility of mechanical failure in this type of media.

Answer: B Explanation: B) The absence of moving parts or sensitive surfaces makes flash memory media relatively less vulnerable to damage.

Diff: 2 LO: 12-9 AACSB: Analytical Thinking 23) Which of the following is an example of a flash memory media?

A) external solid-state disk (SSD) drives B) blu-ray disks C) DVDs which are not rewritable D) tape cartridges Answer: A Explanation: A) External solid-state disk (SSD) drives is an example of a flash memory media.

Diff: 1 LO: 12-9 AACSB: Analytical Thinking

11 .

24) Which of the following statements is true of magnetic media?

A) Data are recorded by a laser in this type of media that alters light-sensitive dyes within the disk.

B) The absence of moving parts or sensitive surfaces makes it relatively less vulnerable to damage.

C) Magnetic media on devices is usually maintained by others that can be accessed through the internet.

D) The recording process requires rotation of the disk or tape, which introduces the possibility of mechanical failure in magnetic media.

Answer: D Explanation: D) The recording process requires rotation of the disk or tape, which introduces the possibility of mechanical failure in magnetic media.

Diff: 2 LO: 12-9 AACSB: Analytical Thinking 25) Which of the following is an example of a writable optical media?

A) Blu-ray disks B) USB flash drives C) external solid-state disk (SSD) drives D) tape cartridges Answer: A Explanation: A) Blu-ray disks is an example of a writable optical media.

Diff: 1 LO: 12-9 AACSB: Analytical Thinking 26) Which of the following statements is true of the cloud storage media?

A) Data are recorded by a laser in this type of media that alters light-sensitive dyes within the disk.

B) Data are stored by altering the magnetic polarity of disks or tapes in this type of media.

C) Cloud storage media on devices is usually maintained by others that can be accessed through the Internet.

D) The recording process requires rotation of the disk or tape, which introduces the possibility of mechanical failure in cloud storage media.

Answer: C Explanation: C) The cloud storage media is usually maintained by others that can be accessed through the Internet.

Diff: 2 LO: 12-9 AACSB: Analytical Thinking

12 .

27) Which of the following is an example of data stored in "the clouds"?

A) Blu-ray disks B) USB flash drives C) Google Docs D) tape cartridges Answer: C Explanation: C) Google Docs is an example of data stored in "the clouds."

Diff: 1 LO: 12-9 AACSB: Analytical Thinking 28) Which of the following statements is true of a computer forensics engagement?

A) The type, make, or model of the subject storage devices must be identified because if the devices are not readily visible or perhaps stored out of sight, an expert can easily access the data.

B) Privacy rights related to confidential personal information must be observed, because improperly accessing data stored on electronic devices may constitute a violation of federal laws.

C) The location of the subject devices is not so important because even if the devices are not readily visible or perhaps stored out of sight, an expert can easily access the data.

D) The number of subject devices is a not primary factor in estimating the time necessary to complete the analysis.

Answer: B Explanation: B) Privacy rights related to confidential personal information must be observed in a computer forensics engagement, because improperly accessing data stored on electronic devices may constitute a violation of federal laws.

Diff: 3 LO: 12-10 AACSB: Analytical Thinking 29) Which of the following statements is true of static forensics?

A) It is the analysis of static data in which extraction processes are performed against live data rather than a copy.

B) It is the analysis of live data in which extraction processes are performed against dynamic data rather than a copy.

C) It is the analysis of static data which involves creating a copy of all the data stored on the subject device and analyzing the copy in a secure environment.

D) It is the analysis of static data on devices usually maintained by others that can be accessed through the Internet.

Answer: C Explanation: C) Static forensics is the analysis of static data which involves creating a copy of all the data stored on the subject device and analyzing the copy in a secure environment.

Diff: 3 LO: 12-12 AACSB: Analytical Thinking

13 .

30) Which of the following statements is true of digital data in computer forensics?

A) Latent data can be immediately seen, such as data files, program files, and files used by the operating system.

B) When deception or other wrongdoing is suspected, active data is often the primary focus.

C) Because archival data are not intended to be viewed, their recovery requires expertise and specialized tools.

D) Unlike a backup copy, a forensic copy is a bit-by-bit copy of the original drive, or an exact duplicate.

Answer: D Explanation: D) Unlike a backup copy, forensic copy is a bit-by-bit copy of the original drive, or an exact duplicate.

Diff: 2 LO: 12-12 AACSB: Analytical Thinking 31) The purpose of a ________ in computer forensics is to detect and recover data that has been concealed on a computer system.

A) file analysis B) timeframe analysis C) hidden data analysis D) active data analysis Answer: C Explanation: C) The purpose of hidden data analysis in computer forensics is to detect and recover data that has been concealed on a computer system.

Diff: 2 LO: 12-12 AACSB: Analytical Thinking 32) Under prevailing Rule 26 of the Federal Rules of Civil Procedure, an expert report A) is expected to be logically precise and short in length.

B) must contain a complete statement of all opinions to be expressed even if the basis and reason for them are absent.

C) must contain an expert's draft report and related disclosures.

D) must contain facts and data considered by the witness in forming the opinions.

Answer: D Explanation: D) Under prevailing Rule 26 of the Federal Rules of Civil Procedure, an expert report must contain facts and data considered by the witness in forming the opinions.

Diff: 2 LO: 12-13 AACSB: Analytical Thinking

14 .

33) After the December 2010 amendment of Rule 26 of the Federal Rules of Civil Procedure, ________ is protected from discovery.

A) communications regarding the expert's compensation B) an expert's draft report and related disclosures C) communications regarding the facts and data to be relied on by the expert in forming his or her opinions D) the qualifications of the expert witness Answer: B Explanation: B) After the December 2010 amendment of Rule 26 of the Federal Rules of Civil Procedure, an expert's draft report and related disclosures is protected from discovery.

Diff: 2 LO: 12-13 AACSB: Analytical Thinking 34) Which of the following statements is true of a forensic accountant's summary report?

A) It is structured to provide a comprehensive discussion of the assignment, allowing the reader to develop a greater understanding of the data, reasoning, and analyses leading to the conclusions stated.

B) A summary report usually mentions methodologies considered but not used.

C) When presenting a summary report, the objective is to provide a credible and legally sufficient communication within the time and cost limitations.

D) A summary report usually presents calculation of a range of values, given certain facts and assumptions and the result is shown as a calculated value.

Answer: C Explanation: C) When presenting a summary report, the forensic accountant's objective is to provide a credible and legally sufficient communication within the time and cost limitations.

Diff: 3 LO: 12-15 AACSB: Analytical Thinking 35) To make a report effective, a forensic accountant A) should be concise even if it not comprehensive.

B) should be mindful of the plaintiff requirements rather than audience.

C) should avoid redundant statements.

D) should not rely on others' work.

Answer: C Explanation: C) Forensic accountant must avoid redundant statements to make a report effective.

Diff: 2 LO: 12-15 AACSB: Analytical Thinking

15 .

12.3 Short-Answer Questions 1) What is a method of proof? Briefly explain the difference between a direct and an indirect method of proof.

Answer: Method of proof can be defined as the means by which evidence is developed and presented to establish (or not) the requisite degree of belief or standard of proof, either a preponderance of the evidence or beyond a reasonable doubt. Methods of proof employed by forensic accountants can be direct, indirect, or a combination of the two.

A direct method of proof is a clear-cut or definite means of conclusively establishing a fact at issue such as a false expense or unreported income without inference or presumption. Direct methods of proof typically rely on documentary evidence such as tax returns, books and records, bank statements, invoices, cancelled checks, and contracts and the testimony of witnesses with firsthand knowledge such as bookkeepers, tax return preparers, employees, bankers, or real estate agents.

An indirect method of proof is not straightforward, but is instead built on circumstantial evidence. Circumstantial evidence is based on inference rather than personal knowledge or direct observation. Indirect methods of proof are founded on logic, common sense, critical thinking, and deductive reasoning. Indirect methods are most commonly employed in the absence of reliable books and records.

Diff: 3 LO: 12-2 AACSB: Analytical Thinking 2) Briefly explain the defenses established by the courts to protect against abuse of evidence from net worth, source and application of funds and percentage markup methods of proof.

Answer: • Net worth method: The user must establish a beginning net worth with reasonable certainty, consider all relevant leads, and establish a likely source of funding for the increase in net worth.

Moreover, the defense is given wide latitude in presenting evidence of beginning net worth.

• Source and application of funds: The user must establish beginning cash on hand with reasonable certainty, and expenditures cannot be speculative or arbitrary.

• Percentage markup: The use of reliable percentages (ratios) and a supportable base are required. Even so, the IRS cautions against the use of this method, and no judicial precedent has been identified or cited.

Diff: 3 LO: 12-3 AACSB: Analytical Thinking

16 .

3) "Uniformity of opinions among damages experts in a damages claim is not to be expected for three primary reasons." Briefly explain the reasons for inconsistencies in expert opinions.

Answer: Uniformity of opinions among damages experts is not to be expected for three primary reasons: • Economic damages calculations require the application of logic, which allows for multiple interpretations (there is more than one way to solve a problem).

• Damages are calculated for specific individuals or entities, with many unique attributes that may not be universally perceived or evaluated.

• A large component of economic damages is future damages, the calculation of which relies on projections of inherently uncertain future events.

Diff: 3 LO: 12-7 AACSB: Analytical Thinking 4) What are the key considerations to be considered in computer forensics to ensure that the evidence is collected and stored safely throughout the entirety of the investigation?

Answer: Key considerations include the following: • Digital evidence is vulnerable to extreme temperatures, humidity, physical trauma, static electricity, and magnetic fields.

• Digital evidence can be time sensitive, because some data are intended for only temporary storage and may be overwritten on a regular basis.

• Digital evidence may be lost if the device loses power.

• Data on some devices, such as mobile phones, can be overwritten or deleted even after the device is seized, if it remains in the range of a communication signal. Specifically, software exists for mobile phones that can be remotely activated to render the phone unusable if it is lost or stolen. For this reason, all such devices should be transported and stored in signal-blocking material, such as aluminum foil or a faraday isolation bag.

• After collection, digital evidence should be inventoried and stored in a secure and climatecontrolled environment. Any subsequent access to the evidence should be documented with a chain of custody form.

Diff: 3 LO: 12-11 AACSB: Analytical Thinking

17 .

5) What are the greatest technology-related threats to organizations that forensic accounting practitioners should be aware of?

Answer: The following issues are the some of the technology-related threats to organizations in coming years: • Use of mobile phone devices: Today's smartphones are essentially miniature computers that contain a wealth of personal information.

• Malicious insiders: Threats from insiders increase in a deteriorating economy, due to financial pressures that contribute to the motivation element of the fraud triangle.

• Remote access: As the workforce becomes more mobile, employees are increasingly requiring access to systems at any time and from any location. New technology has enabled remote access capabilities, but security features have not kept pace, leaving organizations vulnerable to unauthorized access to key systems and data.

• Social networking: Social networking sites like Facebook, YouTube, Twitter, and Instagram can be useful for a variety of purposes, such as conducting a background investigation, impeaching a witness, establishing relationships among individuals, and confirming dates and locations of activities.

• Malware: Malware can be used to eavesdrop on communications, extract credit card information from transaction systems, and cause damage to targeted systems such as website crashes and data wiping.

Diff: 3 LO: 12-12 AACSB: Analytical Thinking

18 .