Solution Manual For Forensic Accounting and Fraud Examination, 2nd Edition

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-1Chapter 1Introduction to Forensic Accounting and Fraud ExaminationTeaching NotesThis chapter presents the opportunity to get students excited about the fieldsof forensicaccountingand fraud examination. Suggested points to stress:•GeneraloForensic Accounting breaks out from the traditional image of accounting asboring.oThere are many specialty opportunities within forensic accounting.oFraud Examination is one very important opportunity within forensicaccounting.oForensic accounting is a challenging field that requires many special skills.•Learning ObjectivesoLO1: Define forensic accountingand fraud examination.▪Differentiate from traditional accountingoLO2: Describe the difference between forensic accounting and auditing.▪Forensic accounting includes auditing, special auditing methods, andother services in additional to auditing (e.g., litigation support)oLO3: Explain the role of forensic accountantsand fraud examiners.▪Forensic accountants are needed in almost every area of business.Where there is money involved, a forensic accountant can play a role.Fraud examiners are needed to assist in preventing, detecting,investigating, and reporting on fraud.oLO4: Identify the knowledge and skills that forensic accountantsand fraudexaminersare expected to possess.▪Must not only be good with accounting numbers, but also withpsychology, IT, and so on. The AICPA offers a special forensicaccounting certification toCPAs.oLO5: Describe the opportunities that exist for those who choose to work asforensic accountantsand fraud examiners.▪Some specialties within forensic accounting (e.g., expert testimony,expert consultant) can result in some of the highest-paying careeropportunities in business.oLO6: Identify the organizations that support the work of forensic accountantsand fraud examiners.▪The organizations and professional certifications demonstrate thatforensic accounting is a well-recognized accounting specialty.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-2Review Questions1. To what does the word forensic pertain?a.Financial audits when fraud is involved.These types of audits are forensic audits, but the term “forensic” applies in a moregeneral sense.b.A particular type of accountingForensic accounting is one type of accounting, but the term “forensic” applies in a moregeneral sense.c.Matters relating to law and courts of law.Correct.Forensic is a general term that relates to law and courts of law.d.Prosecutorial investigations.These represent forensic investigations, but the term “forensic” is more broadlyapplicable.2. For an act to be considered fraud, which of the following ingredient is required?a.Large loss.Fraud can involve losses of any size.b.Legal entity (e.g., a corporation, partnership, or trust).Fraud can be committed against both legal entities and individuals.c.Intentional harm.Fraud can involve accidental harm or harm not realized by the victim. For example, if byfraud one steals an object from someone, that someone is still a victim offraud even ifshe never misses the stolen object.d.Intentional action or inaction.Correct.Fraud generally does not include accidents.3. Which of the following is outside the area of forensic accounting?a.Corporate acquisitions.Forensic accountants routinely review documents and provide consulting services inrelation to acquisitions.b.Divorce.For example, forensic accountants might search for hidden assets in a divorce proceeding.c.Contract disputes.For example, forensic accountants might search for evidence of fraud in contractdisputes.d.None of the above.Correct. None of the above isoutside of the area of forensic accounting.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-34. Which area of accounting is most closely associated with forensic accounting?a.Information systems.b.Managerial accounting.c.Consulting.d.Auditing.Correct.Fraud investigation and examination, a primary area within forensic accountingrelies heavily on auditing techniques. All of the above areas of accounting are at leastsomewhat related to forensic accounting, although strictly speaking consulting is not anarea of accounting but rather a mode of accounting practice.5. The Sarbanes-Oxley Act requires which of the following?a.Auditors to receive specialized training in the act.Auditors must be familiar with PCAOB standards relating to the act, but such familiarityis not really specialized training.b.The CEO to certify the financial statements.Correct.One of the primary requirements of the act is to requireceosandceosto certifythe financial statements under liability for criminal penalty.c.Management to institute a zero tolerance policy for fraud.d.None of the above.6. How do the objectives differ for forensic accountants (fas) and external financialauditors (efes)?a.Fasare more thorough.Bothfasandefasmust do their work thoroughly.b.Efasaudit a broader range of transactions.Although this may be correct in a particular case of fraud,fasmust potentially audit thefull range of transactions.c.Efastend to concentrate their work more.The opposite is true.d.Fastend to concentrate their work more.Correct.Fastend to focus on particular problem areas, such as areas of suspected fraud.7. How many categories does the American Institute of Certified Accountants use toclassify forensic accounting?a.1.b.2.Correct.The 2 categories are investigative services and litigation services.c.3.d.4.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-48. A forensic accountant who determines the amount of lost profits due to businessinterruption would be working in which of the following areas?a.Valuation.Correct.In this case, the forensic accountant would be assigning a value to lost profits.b.Estimation.c.Financial determination.d.Auditing.9. Corporate scandals prompted companies to beginusing which of the following?a.Forensic audits.Forensic audits are focused andintensive, and most useful when a particular area of focuscan be identified from the circumstances.b.Fraud-intensive audits.Fraud-intensive audits are most applicable when fraud is suspected in a particular area.c.Proactive fraud checkups.Correct.Corporate executive are eager take proactive measures to avoid becominganother scandal.d.Internal control systems.This answer is also correct to a letter extent. Further, companies don’t just begin usinginternal control systems because of the scandals. Companies have always used internalcontrol systems.10. Which of the following is the most recognized fraud credential?a.CPA.WhileCPAsmay be generally competent to investigate fraud, the CPA is not a fraud-specific credential.b.CMA.c.CFE.Correct.The CFE is a fraud-specific credential, and it happens to be the most widely-recognized fraud-specific credential.d.None of the above.Discussion Questions11.Contrast and compare the role of the following:a.The internal auditor.b.The external auditor.c.The external forensic accounting consultant in an external audit.The internal auditor focuses on maintaining adequate internal control processes. Theexternal auditor focuses on attesting to financial statements. The external forensicaccounting consultant in an external audit is likely to focus ona specific area ofconcern, one that is likely to involve suspected or actual fraud.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-512.Mary Soto, the controller of the My Citizens Company, has gone over its inventoryrecords many times and is concerned that one or more company employees has stolenlarge amounts of the company’s inventory. However, she is not absolutely sure that anytheft has actually taken place because large portions of the written and computer recordsare missing for unknown reasons. Still, rough calculations, based on total purchases andsales, show that perhaps 20% of the inventory is missing. Mary spoke to her internalauditors and demanded that they give her an explanation, but they said no explanationwas possible without the missing records.What should Mary Soto do? Should she contact the police? Should she hire anexternal forensic accountant? How might a forensic accountant help in this case?Specifically, what could the forensic accountant do that the Mary’s internalauditors could not do?It is unlikely that the police would respond to this situation, since there is nostrong evidence that any fraud has been committed. The police aren’t likely tospend significant amounts of resources without any evidence that any crime hasbeen committed. A forensic accounting consultant might be able to help inreconstructing the records, but in the absence of sufficient records it may beimpossible to ever find out what happened. However, if the fraud is ongoing, theforensic accountant might be helpful in providing sufficient documentation for thepolice to investigate or even make an arrest. The forensic accountant might alsoadvise Mary on how to make proper off-site backups of critical accounting data.13.Section 404 of the Sarbanes-Oxley Act requires companies to perform self-assessments of risks for business processes that affect financial reporting.What are some business processes that could result in risks affecting financial reporting?The accounting system itself is a business process. Poor security and weakcontrols in the accounting system could lead to errors or intentionalmiscalculations in reporting. Failures in other business processes could also leadto incorrect financial reporting: internal auditing and management review ofreports.14.List the various elements of fraud within the organization. Give several examples ofeach.This is a thinking question, since the various types of fraud are not discussed inthis chapter. But common sense provides a basic list. Various types of fraudinclude, for example, theft of assets, theft of information, improper purchases, andimproper hiring. Assets can be stolen by their unauthorized conversion to personaluse and embezzlement. Information can be stolen in a variety of ways; examplesof such ways include by smuggling disks out of the office and by emailinginformation to unauthorized. Improper hiring may include, for example, hiringfriends or family without disclosing the relationship, or by hiring friends or familyand improperly inflating their salaries or wage rates.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-615.How important are information technology skills to the forensic accountant? Givefive examples of ways that forensic accountants use information technology skills.IT skills are very important to the forensic accountant. The main areas of forensicaccounting include auditing and investigation. Both these areas involve computersand information technology. Examples: 1) forensic auditing in an IT environment,3) security consulting, 3) expert testimony in computer crimes, 4) recoveringerased data from computers used in computer crimes, 5) tracing the source of anemail message relating to a computer crime.16.Explain the roles played by forensic accountants in areas besides those relating tofraud.Examples of non-fraud-related forensic accounting roles include valuation,dispute resolution, due diligence in mergers and acquisitions, expert testimony indivorce or bankruptcy proceedings.17.List and explain the most important skills required of forensic accountants.Forensic accountants must be skilled a working with people, withcommunications, must have excellent analytical and investigative skills, and havegood overall accounting skills. Forensic accountants must also have variousspecialized skills, including those in the areas of valuation and expert consultingand expert testimony. Results of investigations and analyses are of little valueunless the forensic accountant is skilled at communicating such results to others.18.What are some special considerations for forensic accountants in working with lawenforcement investigations?Evidence and the chain of custody for evidence must not be compromised in anyway. Suspects’ rights must be protected.19.Westag Mills Company is considering a merger with a competitor. Westag’s CEO hashired a forensic accounting firm to investigate the competitor. What types ofinvestigations could the forensic accounting firm conduct? What types of externalassistance could the forensic accounting firm need?The forensic accountant might investigate the competitor’s financial statementsfor possible fraud. The forensic accountant might also provide valuation estimatesfor the competitor, for assets the competitor proposes to offer in consideration forthe merger. In the case of valuing the competitor’s assets, the forensic accountantmight need to hire specialized appraisers to estimate the value of specific assets.

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Chapter 01-Introduction to Forensic Accounting and Fraud Examination1-720.Whom should you call first if you suspect fraud in your company, your forensicaccounting firm, or your external audit firm? Why?You could contact either firm first. If your external audit firm is large, there is agood chance it provides forensic accounting services. Further, if the suspectedfraud is likely to materially affect the financial statements, then it is important toat least notify the external audit firm. On the other hand, if your audit firm issmall, it might be best to call your forensic accountant first, though you shouldstill notify your external auditor of any events that could have a material impacton the financial statements.

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Chapter 02-The Forensic Accounting Legal Environment2-1Chapter 2The Forensic Accounting Legal EnvironmentTeaching NotesThis chapter presents the opportunity for students to get their first view of the “forensic”side of forensic accounting. Suggested points to stress:•General•Chapter 1 should have developed the students’ enthusiasm for forensicaccounting. In that chapter they learned that forensic accountants need specializedskills and knowledge. The logical place to begin with specialized knowledge isthe legal system, since, as students learned, “forensic” refers to legal matters.•This chapter focuses on criminal versus civil procedures, though both arediscussed in parallel. This is because business schools routinely offer business lawcourses, which covers civil procedures. It’s also the authors’ experience that thecriminal side of the law tends to generate more enthusiasm in accounting students,much because of their experience with television shows and movies.•Finally, many courses in law devote little or no attention to trial procedures andrules of evidence. But such information is critical to forensic accountants who arelikely to gather evidence for trials, and possibly serve as expert consultants andwitnesses for trials.•Students can be motivated by explaining to them how expert witnesses can garnerthousands of dollars for a brief amount of court testimony as an expert witness. Ofcourse, accountants have to establish themselves as experts and develop theirexperience and training, but the place to begin is in understanding how the legalprocesses work.•Learning Objectives•LO1: Explain the sources of U.S. law.oThe procedures relating to arrests (e.g., Miranda rights), investigations(e.g., search warrants), and trials (e.g.) are shaped by the Bill of Rights•LO2: Explain the basic structure of the U.S. court systems.oForensic accountants need to be able to work with attorneys, and tocommunicate well with them they need to have some basic understandingof the court systems.oForensic accountants don’t need to be attorneys, but they do need to havea basic understanding of the law.

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Chapter 02-The Forensic Accounting Legal Environment2-2•LO3: Understand the general issues relating to investigations.oThe section covers basic concepts (such as the fraud triangle and chain ofcustody) that are developed more in later chapters.•LO4: Describe arrest and pretrial procedures.oBefore students read this chapter, ask them how they define “beingarrested.” Many will not realize that no arrest really takes place unlessthere is a formal booking process. Some might also be surprised to learnthat one can be charge with a crime (by an indictment or citation) withoutfirst being arrested.•LO5: Explain basic criminal trial procedures.oThe discussion on the rules of evidence is especially relevant to laterchapters. The discussion explains how the expert witness is given aprivileged position in court by being exempted from the personalknowledge rule.•LO6: Describe and contrast and compare various common law financial crimes.oBefore beginning this chapter, ask students to define embezzlement. Thenask them if the secretary for a finance manager commits embezzlementwhen she secretly uses herboss’spassword to send her checks in the mail.She covers up the fraud by using the same account to add false supportingdetails for the payment transactions. This isn’t embezzlement because thesecretary never has legal custody of the funds she steals. The main point isthat student will typically not know the difference between larceny,embezzlement, and, perhaps, robbery.oMany students will be surprised with the degree of criminal liability thatcan derive from participating in a conspiracy.•LO7: Explain various major federal criminal statutes relating to financial crimes.Review Questions1. The usual penalty in a civil case is:a.Monetary damages.b.Imprisonment.c.Equitable relief.d.Any of the above.e.Only a and c.Correct.In civil cases, courts routinely award monetary damages or equitable relief.Imprisonment applies to criminal cases.

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Chapter 02-The Forensic Accounting Legal Environment2-32. The burden of proof in a criminal case is:a.Beyond a reasonable doubt.Correct.For civil cases the burden of proof is the preponderance of the evidence.b.The preponderance of the evidence.c.More than 50 percent of the evidence.d.100 percent assurance.e.Probable cause.f.All of the above.3. Which of the following is/are a source of law in the United States?a.Case law.b.Constitutional law.c.Administrative law.d.Statutorylaw.e.a, b, and d only.f.All of the above.Correct.4. The first 10 amendments to the U.S. Constitution are commonly referred to as:a.The Privileges and Immunities clauses.b.The Bill of Rights.Correct.The Bill of Rights provides many of the rights applicable to criminalproceedings.c.The enabling clauses.d.The Declaration of Independence.5. Direct appeals of U.S. district court cases are heard by the:a.U.S. Supreme Court.TheSupreme Courthears very few cases relative to the total number of cases.b.StateSupreme Court.Appeals of federal courts are not heard in state courts.c.U.S. district court of appeals.Correct. This is the best answer. The U.S. district court of appeals is also called the U.S.circuit court of appeals.d.Original trial judge.e.All of the above.

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Chapter 02-The Forensic Accounting Legal Environment2-46. Which of the following has the discretion to bring charges against a suspect?a.Judge.b.Prosecutor.c.Defense attorney.d.Grand jury.e.Either b or d.Correct. Grand juries also have broad investigative powers and can keep theirproceedings secret. In federal courts, grand jury indictments are required for felonies. Instate courts, prosecutors can typically bring indictments for felonies without the use ofgrand juries.f.None of the above.7. Which of the following elements must be present in a criminal matter?a.Intent.In some cases, a willful disregard for the consequences of one’s actions may yield acrime. For example, injuries stemming from reckless driving generally lead to criminalliability.b.Premeditation.Second-degree murder is murder without premeditation.c.Guilty act.d.Damages.Correct.Although damages tend to exist, at least theoretically, in manycrimes, it is theact itself along with one’s state of mind that generally defines a crime. For example, it isgenerally illegal to conspire to commit a crime, and the mere act of conspiring creates acriminal offense even if the actual crime is never committed.e.All of the above.f.a and c.Correct.8. Which of the following does not occur at an arraignment?a.Bail is set.b.Defendant enters a plea.c.Prosecutor presents the defendant a written list of the charges being brought.d.Pretrial motions are heard.Correct.Arraignments typicallytake only a few minutes, evenwith arguments over bail.e.Defendant may request a court-appointed lawyer.9. What is name of the process by which the judge could rule out certain evidence?a.Voir dire.Voir dire is the process of questioning prospective jurors.b.Motion inlamine.Correct. Such motions are typically heard at the very beginning of the trial process andbefore witnesses are called.c.Double jeopardy.d.Exclusionary process.e.Prima facie process.

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Chapter 02-The Forensic Accounting Legal Environment2-510. Which of the following is/are an exception to the hearsay rule?a.Dying declaration.b.State of mind.c.Business and governmental records.d.Excited utterance.e.Prior inconsistent statements.f.All of the above.Correct.11. Identify the communication(s) not privileged.a.Doctor patient.b.Spouse spouse.c.Teacher student.d.Clergy congregant.e.Attorney client.f.All of the above.Correct. In some cases, laws may permit the privilegeto be abandoned in favor of thepublicgoodor in cases where important evidence can not be obtained in any other way.12. The crime of intentionally and permanently converting another’s property to one’sown use is:a.Burglary.b.Embezzlement.With embezzlement it is typically illegal to temporarily convert another’s property toone’s own use. Also, with embezzlement, the property must first be entrusted to theperson committing the crime.c.Larceny.Correct.When there is intent to only convert the property temporarily, a different crimemay arise. For example, borrowing a car without permission generally leads to the crimeof joy riding and not larceny.d.Robbery.e.Fraud.f.Extortion.13. The crime of using the threat of force to gain some benefit from a victim is:a.Robbery.Correct.Robbery requires the threat of force to be in the presence of the victim.b.Extortion.Correct. Extortion involves the threat of future force.c.Larceny.d.Embezzlement.e.Fraud.f.Aiding and abetting.

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Chapter 02-The Forensic Accounting Legal Environment2-6True/ FalsePlease revise any false statement to make it true.14. In a criminal investigation, the prosecutor represents the interest of the defraudedparty.False.In a criminal investigation, the prosecutor represents “the people”15. In a criminal case, there is no constitutional right to a jury trial.False. The sixth amendment provides the right to a jury in a criminal matter.16. A state constitution may not override the U.S. Constitution.True. The US Constitution is the supreme law. State constitutions may provide additionalprotections, but may not restrict the US Constitution.17. A U.S. district court is considered a trial court.True.18. The judge is responsible for deciding which charges are brought against a defendantin a criminal matter.False. The prosecutor or District Attorney is responsible for determining which chargesare brought against a defendant.19. A search warrant or arrest warrant is always required before arresting a suspect.False. Sometimes, an office only requires probable cause to search or make an arrest.20. More than one charge may be brought against a suspect in a certain situation.True.21. Suspects are entitled to an attorney before being booked for a crime.False. There is no right to an attorney until the suspect has been booked.22. Discovery in a criminal trial usually favors the defense.True.

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Chapter 02-The Forensic Accounting Legal Environment2-723. Hearsay evidence is not allowed at a preliminary hearing.False. The purpose of a preliminary hearing is to weed out the cases not strong enoughfor trial, accordingly, the judge will hear all evidence, including hearsay in determiningwhether amateur should be set for trial.24 The defense is not required to call any witnesses on the defendant’s behalf.True.25 A jury verdict of not guilty in a criminal case may be appealed by the prosecution.False. This would subject the defendant to double jeopardy.26. Generally, an attorney is allowed to ask leading questions of a witness.False. Generally, leading questions are only allowed on cross-examination.27. Attorney-client privilege extends to the forensic accountant hired by the attorney.True.28. All communication between an attorney and a client are privileged.False. Information about future crimes is not privileged.29. Recruiting or hiring someone to commit a crime is called aiding and abetting.False. This is the crime of solicitation.30. To be convicted of 18 USC 96 (RICO), at least two federal or state crimes must becommitted.True.Discussion Questions31. What does the term full faith and credit mean, as indicated in the Article 4 of the U.S.Constitution?Thefull faith and creditconcept requires that states “recognize” the public acts, records,and judicial proceedings of other states

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Chapter 02-The Forensic Accounting Legal Environment2-832. Explain the concept of double jeopardy.Double jeopardy is the process of being tried for the same crime twice, which isnot permitted under the Fifth Amendment of the U.S. Constitution, althoughindividuals may be tried separately in state and federal courts for the same crime.Once the jury is seated in a jury trial or when the first witness takes the stand in abench trial, the criminal defendant is said to be in jeopardy and after that point,the defendant cannot be retried for the same crime if there is a verdict of notguilty or the judge33. Explain how the concept of preemption applies when there is a conflict between locallaws, state laws, and federal laws.The general principle of preemption applies to statutory laws: When there is aconflict between federal, state, or local statutes, the statutes of the higher authoritypreempt those of the lower authority. This prevents states making laws thatconflict with U.S. laws. For example, New York could not pass a law thatexempts its citizens from paying U.S. income taxes.34.Discuss how case law evolves. In other words, once a case has been decided, whatwould be the process for changing the result?Case law evolves from appellate decisions. When the appellate decisions disagreefrom one court (or jurisdiction) to the next, theSupreme Courtmay render adecision that resolves the differences between the lower courts.35.Who is responsible for enforcing administrative laws?Enforcement of laws generally falls under the executive branch of government.36.Explain the jurisdictional limitations of the federal courts.Federal courts all have limited jurisdiction. The U.S. district courts try only casesthat involve criminal or civil federal law. The only exception is “diversityjurisdiction,” which means that these courts have jurisdiction over civil disputesbetween citizens of different states for amounts more than $75,000.

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Chapter 02-The Forensic Accounting Legal Environment2-937.Discuss the rights, duties, and obligations of a forensic accountant hired to assist in acivil or criminal investigation.This is a thinking question, since the answer is not explicitly spelled out in thetext. Various rights may be applicable in the court systems, such as the generalrights of those who participate in trials. Duties and obligations include compliancewith applicable laws and regulations, and ethical conduct.38.What are the elements of the fraud triangle?Pressure, opportunity, and rationalization.39.Is a search warrant always required to obtain evidence?No. Evidence in plain sight may sometimes be seized, evidence can be suppliedvoluntarily, and subpoenas instead of search warrants are often used.40.What is the fruit of the poisonous tree doctrine?Under the fruits of the poisonous tree doctrine, evidence subsequently obtainedbecause of a defective search warrant or improper procedure can be excludedfrom evidence in court.An exception may exist when the evidence could have orwould have been obtain anyway by other means.41.What is the purpose of discovery?The general exchange of information and evidence between prosecutors anddefendants iscalled discovery. In the interests of promoting justice, avoidingsurprises during trials, and in facilitating the more rapid settlement of cases,prosecutors are typically required to provide the defense copies of the arrestrecords, search warrants, witness statements, and, in general, access to allevidence in the case. However, local discovery rules vary from one jurisdiction tothe next, and in federal courts, prosecutors are not required to supply the defensepretrial statements from government witnesses. In somejurisdictionsandcircumstances defendants may also have discovery obligations. In civil cases,both the plaintiff and defendant are required to submit to discovery from theopposing side.42.Why is hearsay allowed in a preliminary hearing?Preliminary hearings seek to weed out weak cases, and since there is nodetermination of guilt or innocence, their rules of evidence are much more lax.

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Chapter 02-The Forensic Accounting Legal Environment2-1043.What is the voir dire process?In thevoir direprocess, the attorneys or the judge asks potential jurors questionsabout their attitudes and backgrounds and may automatically exclude some jurorsusing “peremptory challenges.” Additional jurors may also be excluded if anattorney can show just cause for, say, extreme bias, but judges routinely acceptthe word of prospective jurors who promise to set aide admitted biases.44.What options does a defense attorney have to counter the testimony of a witness?The defense attorney can cross examine the witness and/or call defense witnessesto counter the witness’s testimony.45.Discuss the importance of jury instructions.The final part of the jury trial before the case goes to the jury is that the judgegives jury instructions on the legal principles that the jury must apply to the case.The jury instructions are critical because they typically define the elements of thecrimes (or civil wrongs) under consideration, reasonable doubt, permissibleconsiderations in evaluating the credibility of the witnesses, and the mechanics ofthe deliberations.46.Discuss the rules of evidence.In criminal trials, the rules of evidence control both the content of the evidenceand the manner in which it is presented. In federal and most state courts, the rulesof evidence are set forth in statutory codes.The number one rule relating to evidence is that it can be introduced only if it isshown to be relevant, meaning that the attorney must logically connect it to thequestions at hand. However, not all relevant evidence is admitted. For example,judges may exclude relevant evidence that is deemed to be overly prejudicial orinflammatory to the emotions.A second major rule of evidence, the personal knowledge rule,is that witnessescan testify only to things that they personally know through one or more of theirown senses.The major exception to the personal knowledge rule applies to expert witnesses,who are permitted to draw expert conclusions based on facts admitted intoevidence. For example, a handwriting expert could testify that in her opinion, adefendant forged a given document, even though the expert did not personallywitness the act of forgery.

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Chapter 02-The Forensic Accounting Legal Environment2-11A third major rule of evidence content excludes certain written and oralstatements made out of court. One type of statement that is excluded is a hearsaystatement,which is a witness statement that may be offered into evidence for itsown truth.There are many exceptions to the hearsay rule: dying declarations, excitedutterances, defendant admissions, statements that show someone’s state of mind,written government and business records, and prior inconsistent statements. Mostof these exceptions are fairly self-evident, but the state-of-mind exceptiondeserves some explanation. Any out-of-court statements that indicate a person’semotions, beliefs, or intent generally may be admitted despite the fact that theywere made out of court if they are otherwise admissible. For example, the defensecould impeach a prosecution eyewitness by introducing another witness whoheard the eyewitness speaking angrily and jealously about the defendant one daybefore the alleged crime took place.Another important rule of evidence content relates to the chain of custody, whichapplies to tangible evidence (exhibits) introduced into evidence. The generalrequirement is that before a tangible exhibit can be introduced, the attorney mustshow that it is what it is purported to be and that it has not been changed in anymaterial way since the alleged crime was committed.The rules relating to the manner of witness testimony prohibit the attorney fromasking on direct examination leading questions that suggest a particular answer.On the other hand, the attorney may ask leading questions on cross-examination.Some other types of questions are completely forbidden, including those that“badger” the witnesses, questions that assume facts not in evidence, questions thatmisquote witnesses, and questions that ask the witness to speculate or drawimproper conclusions,47.What element is common to the crimes of solicitation, arson, forgery, and burglary?These crimes all, like crimes in general, involve intent.48.Discuss the consequences of violating the Sarbanes-Oxley Act of 2002.In effect, SOX’s main effect on criminal liability is not to create new crimes butto increase penalties for crimes such as mail and wire fraud, which were increasedfrom 5 to 20 years in prison, for example. The act does, however, establishcriminal liability (10 to 20 years in prison) for corporate officers who either fail tocertify or improperly certify the financial statements of their companies. The actalso makes it a crime (with 5 years in prison) for an independent auditor not tomaintain its working papers from an audit for 5 years.

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Chapter 02-The Forensic Accounting Legal Environment2-1249.Compare and contrast the role of the forensic accountant in the investigation of a civilmatter as compared to a criminal matter. Are there any similarities in the nature of theinvestigations? Are the goals of the investigation the same? Is there any specific traininga forensic accountant would need to conduct the different investigations?The criminal and civil processes are very similar. Criminal cases may need toinvolve law enforcement, and in criminal cases the discovery rules favor thedefendant much more than they do in civil cases.50.Suppose the laws of a certain state require the use of either a Subchapter Scorporation or a limited partnership in operating an accounting practice. What happens ifthe U.S. Constitution is amended prohibiting accounting firms from operating as limitedpartnerships? What options would an existing accounting firm have once the constitutionis amended? Would the firm be required to change its method of operation?The U.S. Constitution is the supreme law of the land, and so state laws mandatingaccounting firms to operate as limited partnerships would become invalid. Also,accounting firms could no longer operate as limited partnerships even if theywanted to. States would likely introduce new laws to cover the situation.51.Why are the legal standards different for criminal and civil matters? Separatelyidentify the differences between these two types of matters from the perspectives of thedefendant and the plaintiff/prosecutor.The main difference in legal standards involves the burden of proof required bythe prosecutor versus the plaintiff. In criminal cases, the prosecutor must proveguilt beyond a reasonable doubt. On the other hand, plaintiffs in civil cases mustprove their cases by a preponderance of the evidence.52.In the investigation of a criminal or civil matter, how does the forensic accountantobtain the necessary information? Discuss the use of all investigative tools, including thesubpoena, the grand jury, and the search warrant.In criminal cases law enforcement may subpoena information when there isprobably cause that a crime has been committed.Subpoenas can sometimes takeweeks to obtain the desired information and may or may not require a judge’ssignature, depending on the jurisdiction. Warrants, on the other hand, arenormally signed by a judge and permit authorities to immediately seize evidence.Warrants are normally needed to seize evidence contained in a suspect’s home.

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Chapter 02-The Forensic Accounting Legal Environment2-13Grand juries normally have subpoena power, and the power to summon witnessesand compel them to give testimony under oath.In civil cases, attorneys typically act as officers of the court and issue subpoenasas part of the discovery process.53.Why is bail required? Are there any mitigating factors that could decrease the amountof bail? Are there any charges for which there is no bail? What protection does a bailbond seller have?Bail is a “security deposit” aimed at insuring the defendant will appear for trial.Bail bond sellers typically require collateral (such as a home mortgage) to ensurethey can collect the full amount of the bail in the event that the defendant does notappear for trial.Judges consider many factors in setting bail, including the nature of the crime, thestrength of the prosecution’s evidence, and the background of the accused.Judges can waive bail for any charges; theamount of bail is typically at thediscretion of the judge.54.Discuss the constitutional right of a defendant to have a jury trial. Are there instanceswhen a defendant would prefer to have a trial by judge? Would the prosecutor have apreference? Discuss the benefits and detriments of both jury and judge trials from eachperspective.Federal judges are appointed for life and relatively immune to political pressure.Therefore in federal cases a defendant might prefer a trial by judge in a case inwhich it appears likely the jury will be negatively affected by political pressures.In some cases, judges might be more capable of handling complex technicalissues and thus be preferable for this reason.Jury trials often favor the defendant, especially in criminal cases in which aunanimous verdict is required, because the defense is able to participate in thejury selection process, and it takes only one dissenting vote to prevent aconviction.55.Which side has the burden of proof in a trial? Are there instances when the burdenlies with the opposite party? Are there instances when the burden lies with both parties?In general the burden of proof lies with the plaintiff or prosecutor. But as apractical matter, the burden can shift to the defense after a prosecutor or plaintiffputs on a case with very strong evidence. When such happens the defendant willlikely lose the case unless he presents a case to the jury or judge.

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Chapter 02-The Forensic Accounting Legal Environment2-1456.Why does the hearsay rule exist? When are exceptions to the hearsay ruleallowed? Is there any consistency between the rule and exceptions; in otherwords, can you devise an explanation as to why allowing exceptions to thehearsay rule does not violate the rationale for it?The hearsay rule exists because the defendant has a right to question those whotestify against her. It’s impossible to cross examine someone who does not appearin court. There are many exceptions to the hearsay rule: dying declarations,excited utterances, defendant admissions, statements that show someone’s state ofmind, written government and business records, and prior inconsistent statements.In general, hearsay exceptions do not prevent a defendant from cross examininghearsay witnesses.57.Discuss different crimes that have arisen because of the use of computers. Is thecommon theme of these crimes the use of a computer or the underlying act that isinvolved? Would any of these crimes still exist if accomplished without the use of acomputer?Technology makes certain crimes easier, especially crimes that involved theft ofinformation. Computer networks, including the Internet, make it possible forhackers and unauthorized users to access centralized database and quickly steallarge amounts of information. This in turn can lead to crimes such as identitytheft.Computers also tend to make it more difficult to identify the perpetrators ofcrimes. Computer hackers leave not fingerprints or blown-off safe doors.Most computer-related crimes would in fact exist without computers, thoughmany of them would be less prevalent.

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Chapter 02-The Forensic Accounting Legal Environment2-1558.Review each of the followingamendments (the Bill of Rights) to the U.S.Constitution. Evaluate each amendment and explain how its provisions would affect botha prosecutor and a defense attorney.The Bill of Rights, have an especially important impact on civil and criminalprocedures. The Fourth Amendment prevents unreasonable searches, the FifthAmendment sets the right against double jeopardy (being tried twice for the samecrime), the right against-self incrimination (testifying against oneself), and thefoundation for due process (the right to be given notices of charges or claims and theopportunity to defend against them). The Sixth Amendment grants the right to aspeedy trial, a jury, an attorney in criminal cases, to confront accusers,and tocompelwitnesses to testify. The Seventh Amendment grants the right to a jury trial in certaincivil cases; the Eighth Amendment forbids excessive bail and cruel and unusualpunishment; the Ninth Amendment states that the set of citizens’ rights can bebroader that those elaborated in the Constitution. The Tenth Amendment states thatwhatever authority is not vested in the federal government rests in the states.59.Research the fraud triangle. Specifically look for its application to accountants (theAICPA Web site ishttp://www.aicpa.org).Discuss specific steps the forensic accountantcould take in each area of the triangle to combat fraud.Pressure: Run credit checks on prospective employees. Employees with creditproblems may be under pressure to steal.Opportunity: This is the one are in which the business has a good deal of control.Strong internal controls and ethics systems tend to reduce opportunities to defraud thecompany.Rationalization: Background checks and personality tests may help to identify somewho are at higher risk for defrauding the company. Promoting close relationshipsbetween the company and employees can help inspire loyalty to the company.

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Chapter 02-The Forensic Accounting Legal Environment2-1660.Find examples of each of the following as it pertains to the role of a forensicaccountant:Statutory law.Administrative law.Constitutional law.Case law.Statutory law: tax laws (IRS Tax Code), criminal statutesAdministrative law: SEC RegulationsConstitutional law: defendants’ rights in criminal casesCase law: applicable law in civil disputes61.You are studying for your criminal law final. To help you prepare for your exam, youcreated flashcards identifying different steps in the criminal process. Arrange the cards sothey are in the order in which they occur in the criminal process. Attach a briefexplanation of each step. The cards in alphabetical order are:AppealArraignmentArrestClosing argumentDiscoveryOpening argumentPlea bargainPretrial motionSearch warrantBill of RightsFlash cards reordered:Bill of Rights—pertains to all phasesSearch warrant—incriminating information based on probable causeArrest—formal processof takingdefendant into custody and booking the defendantPlea bargain—often takes place before any trialArraignment—formal charges read to the defendant, bail set, attorney appointed ifneededDiscovery—obtaining information about the prosecutor’s casePretrial motion—motions to exclude evidence, transfer jurisdiction, reduce bail, andso onOpening argument—beginning of trialClosing argument—after witnesses have been calledAppeal—after verdict is rendered

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Chapter 02-The Forensic Accounting Legal Environment2-17Amendment ICongress shall make no law respecting an establishment of religion, or prohibiting thefree exercise thereof; or abridging the freedom of speech, or of the press; or the rightof the people peaceably to assemble, and to petition the government for a redress ofgrievances.Amendment IIA well regulated militia, being necessary to the security of a free state, the right of thepeople to keep and bear arms, shall not be infringed.Amendment IIINo soldier shall, in time of peace be quartered in any house, without the consent ofthe owner, nor in time of war, but in a manner to be prescribed by law.Amendment IVThe right of the people to be secure in their persons, houses, papers, and effects,against unreasonable searches and seizures, shall not be violated, and no warrantsshall issue, but upon probable cause, supported by oath or affirmation, andparticularly describing the place to be searched, and the persons or things to beseized.Amendment VNo person shall be held to answer for a capital, or otherwise infamous crime, unlesson a presentment or indictment of a grand jury, except in cases arising in the land ornaval forces, or in the militia, when in actual service in time of war or public danger;nor shall any person be subject for the same offense to be twice put in jeopardy of lifeor limb; nor shall be compelled in any criminal case to be a witness against himself,nor be deprived of life, liberty, or property, without due process of law; nor shallprivate property be taken for public use, without just compensation.Amendment VIIn all criminal prosecutions, the accused shall enjoy the right to a speedy and publictrial, by an impartial jury of the state and district wherein the crime shall have beencommitted, which district shall have been previously ascertained by law, and to beinformed of the nature and cause of the accusation; to be confronted with thewitnesses against him; to have compulsory process for obtaining witnesses in hisfavor, and to have the assistance of counsel for his defense.Amendment VIIIn suits at common law, where the value in controversy shall exceed twenty dollars,the right of trial by jury shall be preserved, and no fact tried by a jury, shall beotherwise reexamined in any court of the United States, than according to the rules ofthe common law.

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Chapter 02-The Forensic Accounting Legal Environment2-18Amendment VIIIExcessive bail shall not be required, nor excessive fines imposed, nor cruel andunusual punishments inflicted.Amendment IXThe enumeration in the Constitution, of certain rights, shall not be construed to denyor disparage others retained by the people.Amendment XThe powers not delegated to the United States by the Constitution, nor prohibited byit to the states, are reserved to the states respectively, or to the people.

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Chapter 03-Fundamentals I: Accounting Information Systems3-1Chapter 3Fundamentals I: Accounting Information SystemsTeaching NotesThis chapter provides students with a basic understanding of business processes andinternal control processes. Even students who have already had a course in AIS maybenefit from the coverage, even if only for review purposes. Suggested points to stress:•General•The materials in this chapter are essential for students to properly understandingauditing, and auditing is essential for students to understand fraud examination,and fraud examination is a primary area of forensic accounting.•Students with no accounting (or AIS) background need to master the materials inthis chapter along with auditing, before covering the fraud examination chapter.•Learning Objectives•LO1: Explain the meaning of business processes.oStudents without a systems background are accustomed to anorganization-chart view of the business enterprise. In this chapter, theylearn about how business processes span multiple departments and don’tfollow the organization chart.oMany students will already be familiar with the accounting cycle, whichtraces transactions from journals, to ledgers, to the financial statements.The accounting cycle should be distinguished from business processes,which flow along different lines. Actually, the accounting cycle is abusiness process in of itself, distinct from the basic transaction cycles.•LO2: Identify and explain the basic transaction cycles.oThe major operations of the business can be explained by the basictransaction cycles.•LO3: Define and explain business processes.oStudents should be asked to compare the SAP view covered in the chapterto the transaction cycle view. Ask the students to explain what is includedin the SAP view but not in the transaction cycle view. Student will observethat other business processes exist besides those in the basic transactioncycles.

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Chapter 03-Fundamentals I: Accounting Information Systems3-2•LO4: Apply internal control principles to business situations.oThe most difficult thing for many students to grasp is the extent of theactivities that accountants should not perform in order to maintainsegregation of duties. For example, accountants should not open the mail,as it might contain payment from customers. (Accountants should nothandle checks.) Similarly, the person who opens the mail should not beposting payments to accounts receivables or reconciling bank statements.•LO5: Definesystems developmentand discuss major development issuesoThis chapter provides very brief coverage of systems development. Ratherthe focus is on tools most relevant to auditing and fraud examination.Review Questions1.Abusiness processis a set of coordinated activities and tasks thata.Create secure systems.b.Constitute a transaction cycle.c.Accomplish some organizational goal.Correct.d.Do none of the above.2.Generally accepted accounting principles (GAAP) dictate which of the following?a.The structure of the four basic transaction cycles.Although there are four basic transaction cycles, they are dictated by economiccircumstances and not by GAAP.b.The structure of the three basic transaction cycles.c.The structure of the five basic transaction cycles.d.None of the above.Correct.3.Which of the following is a term some business processes are called?a.Inbound or outbound transaction loops.b.Cycles.CorrectSome business processes are called cycles because they repeat themselves overand over again.c.Iterative processes.d.None of the above.4.SAP is organized ina.ERP groups.b.Cycles.c.Modules.Correct.d.None of the above

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Chapter 03-Fundamentals I: Accounting Information Systems3-35.In SAP, the revenue, expenditure, production, and finance cycles are incorporated intowhich of the following areas?a.Operations and ERP logistics supply chain.b.ERP operations and financials.c.Operations and ERP financialsCorrect. This can be seen from the SAP figure in the chapter.e.Sales, services, and product deployment.f.None of the above.6.In practice, which way do companies tend to develop their information systems?a.Life cycle.b.Modular.Correct.For example, companies may focus on modules for inventories, sales orders,supply chain management, or customer relations management.c.Cycle based.d.Grouped.e.None of the above.7.Those auditing the financial statements are most concerned about which of thefollowing?a.System optimization.b.Transaction cycles.c.Flow of transactions through the accounts.Correct. Auditors typically trace transactions as they flow through the accounts andmake their way to the financial statements.d.Overall operational effectiveness.e.None of the above.8.On which of these does internal control focus?a.Processes.Correct. Internal control is a process in of itself.b.Processes outcomes.c.Process effectiveness.d.None of the above.9.When properly implemented, internal controlsa.Eliminate large loss exposures.b.Eliminate material risks.c.Minimize loss exposures.Correct. Internal control never provides assurance that particular losses will be preventedor eliminated. Rather, internal control reduces the risk that losses will occur.d.Prevent large losses.e.None of the above.

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Chapter 03-Fundamentals I: Accounting Information Systems3-410.Which of the following isnota specific objective of internal control?a.Ensuring compliance with applicable laws, regulations, professional rules,and contractual obligations.b.Promoting strategic, tactical, and operational efficiency and effectiveness.c.Promoting ethics in the corporate culture.Correct.While ethics are essential, promoting ethics is not one of the specific objectivesof internal control. Rather, it is one means of achieving the specific objectives of internalcontrol.d.All of the above are specific objectives of internal control.11.In many types of frauds, such as embezzlement, the cover-up isa.The easiest part of the fraud.b.The most difficult part of the fraud.Correct. Embezzlement is normally only possible when an employee hascontrol overboththe accounting records and cash. In this case, it’s relatively easy for the employee tosteal cash. For example, an employee with control of the daily cash deposits could simplypocket part of one day’s deposits; that would take only a moment. But it would be muchmore difficult for the employee to manipulate the accounting records to cover up thetheft.c.The defining characteristic of the fraud.d.The primary characteristic of the fraud.12.Segregation of duties relates primarily to which of the following?a.Control activities.Correct. Segregation of duties serves as a foundation for internal control, and internalcontrol processes cannot function without segregation of duties.Other control activitiesinclude, for example, adequate documentation and records and controlled access toassets.b.Information and communication.c.The control environment.d.None of the above.13.Approval applies to transactions thata.Have been not yet been authorized.b.Are pending authorization.c.Are fully authorized.Correct. Authorization permits the initiation of a transaction. Approval ratifies theauthorization and permits continued processing of the transaction. For example, amanager might authorize a purchase requisition, but both purchasing and accountingapprovals may be required before the purchase can be completed.d.All of the above.

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Chapter 03-Fundamentals I: Accounting Information Systems3-514.Segregation of duties applies to separating which three functions?a.Sales, purchasing, and expenditures.b.Ordering, receiving, and accountingc.Accounting, authorization, and custody.Correct.d.None of the above.15.Audit trail permits auditors toa.Balance and reconcile accounts.Auditors may do somereconciliationas crosschecks, but the ability to do this is notdirectly linked to the existence of an audit trail.b.Provide SOX-compliant documentation to the SEC.c.Trace of the flow of transactions backward from accounts to sourcedocuments.Correct. This process is sometimes called vouching. This is a primary means thatauditors use to verify the validity of account balances.d.None of the above.16.When fully operating, control processesa.Must be periodically monitored.b.Do not require monitoring.c.Must be continually monitored.Correct.Control processes are of little value if they don’t function. The only way to besure they are functioning all the time is to monitor them continually.d.Must be monitored when failures are evident.17.Two types of transaction processing controls area.Operating controls and planning controls.b.Application and environmental controls.c.Planning and efficiency controls.d.None of the above.Correct. The two main types of transaction controls are general controls and applicationcontrols.18.Application controls help ensurea.Data accuracy, integrity, efficiency.b.Elimination of errors.c.Accuracy, integrity, and security.Correct.Application controls help ensure the accuracy, integrity, and security of theprocesses of collecting input data, processing input data, and distributing processed data,respectivelyd.All of the above.

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