Fraud Examination Exam Solutions
Course Introduction
Fraud Examination explores the principles and methodologies used in detecting, investigating, and preventing financial fraud. Students are introduced to the nature of occupational fraud, including schemes involving asset misappropriation, corruption, and fraudulent financial statements. The course covers investigative techniques, the roles and responsibilities of fraud examiners, legal aspects of fraud, and the use of technology in uncovering fraudulent activities. Through case studies and real-world examples, students develop practical skills in conducting fraud risk assessments and designing effective internal controls to mitigate fraud risks in various organizations.
Recommended Textbook
Forensic Accounting 1st Edition by Robert Rufus
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Page 2
Chapter 1: Introduction to the World of Forensic Accounting
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Q1) Deductive reasoning draws conclusions from patterns.
A)True
B)False
Answer: False
Q2) Forensic accounting can be defined as the application of financial facts to legal situations.
A)True
B)False
Answer: True
Q3) 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 self-interest.Exercising critical thinking can help in the detection of blind spots.
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Page 3
Chapter 2: The Legal Environment of Forensic Accounting
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Q1) 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
Q2) 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
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Chapter 3: Screening and Staging Engagements
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Q1) When engaged as a testifying expert rather than consulting expert,the expert is not considered an agent of the attorney.
A)True
B)False
Answer: False
Q2) 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
Q3) 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.
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Page 5
Chapter 4: Gathering Evidence Interviews and Observations
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Q1) 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.
Q2) 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.
Q3) Which of the following is an example of internal noise?
A) time of day
B) bad phone connection
C) poor listening
D) internet problems
Q4) Write a short note on employee interviews.
Page 6
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Chapter 5: Financial Statements Analysis Reading
Between the Lines
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Q1) 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.
Q2) Arcket,Inc.is a publicly traded nonmanufacturing company.The following information is available from its financial statements: \[\begin{array} { l r }
\text { Net working capital } & \$ 200,000 \\
\text { Retained earnings } & \$ 125,000 \\
\text { Eamings before Interest and taxes } & \$ 375,000 \\
\text { Market value of equity } & \$ 1,015,000 \\
\text { Book value of total debt } & \$ 1,750,000 \\
\text { Total assets } & \$ 2,500,000 \\
\text { Sales } & \$ 1,500,000
\end{array}\] 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
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Chapter 6: Fraud and White-Collar Crime
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Q1) Neutralization is a principal theory of rationalization.
A)True
B)False
Q2) Explain rationalization with respect to Cressey's fraud theory.
Q3) 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
Q4) 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
Q5) White-collar crimes have a potential for violence.
A)True
B)False
Q6) Define the term prosecutorial misconduct.
Q7) List the six attributes of white-collar crime.
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Chapter 7: Conducting a Fraud Investigation
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Q1) 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.
Q2) Financial statements analysis may reveal unexpected relationships or the absence of expected relationships.
A)True
B)False
Q3) Fraud is not an accounting problem - it is a social phenomenon.Explain.
Q4) What are the two alternative dispute resolution strategies which are available?
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Page 9
Chapter 8: Transforming Data Into Evidence
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Q1) 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
Q2) 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
Q3) What functions does a data inventory serve?
Q4) Why is it important to define the universe of data?
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Page 10
Chapter 9: Transforming Data Into Evidence
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Q1) 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
Q2) 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
Q3) 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.
Q4) Why important is it to include labels along with a graph?
Q5) What is the purpose of data mining? Give examples of specific applications of data mining.
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Chapter 10: Professional Responsibilities
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Q1) 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
Q2) 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
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Page 12
Chapter 11: Fundamentals of Business Valuation
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Q1) 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
Q2) 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
Q3) 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
Q4) Why is identification of the ownership interest to be valued important?
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Chapter 12: Special Topics
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Q1) 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
Q2) 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.
Q3) 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.
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