Forensic Accounting Final Exam Study Guide

In a normal Chapter 11 bankruptcy, what is the normal order of events? (For this question, assume that there are no priority claimants and no dispute over the plan of reorganization). Put the events in their normal chronological order. 1.Filing of bankruptcy petition 2.Automatic stay 3.Filing proofs of claim 4.Development of plan of reorganization 5.Confirmation of the Plan of Reorganization 6.Non-priority creditors are paid some or all of the outstanding debts in accordance with the Plan of Reorganization

1.Filing of bankruptcy petition 2.Automatic stay 3.Filing proofs of claim 4.Development of plan of reorganization 5.Confirmation of the Plan of Reorganization 6.Non-priority creditors are paid some or all of the outstanding debts in accordance with the Plan of Reorganization

Which of the following is NOT a role or responsibility of the board? 1.Evaluating the performance of management, challenging management and asking tough questions. 2.Directing the execution of the external audit. 3.Establishing or approving corporate strategies, including risk management strategies. 4.Setting the tone at the top, and establishing expectations about integrity, corporate, values and accountability. 5.Maintaining professional skepticism. 6.All of these are responsibilities of the board.

2.Directing the execution of the external audit. Response Feedback: The correct answer is " Directing the execution of the external audit. " While the board may retain the external auditors, and communicates with them, the auditor has primary responsibility for the execution of the audit.

Which of the following is always a characteristic of fraud? 1.Criminal enforcement 2.Collusion 3.Personal enrichment of the perpetrator 4.Deception

4.Deception

Frozen Fish Company had a profitable contract to provide 50 cases of frozen specialty fish products to SuperDuperMarket each week for a year. After the first two weeks of the contract, SuperDuperMarket cancelled and refused to take shipments. At the time that SuperDuperMarket had cancelled, Frozen Fish Company had already purchased all the goods it needed to fulfill the contract and had the goods stored in their freezer. No other buyer wanted these specialty fish products. After many attempts, Frozen Fish Company ultimately sold them at a steep discount to another customer. The case went to trial 2 years after the date of the SuperDuperMarket's cancellation of the contract. SuperDuperMarket was found to have acted wrongfully. Normally, what would be the damage period? Indefinite. Frozen Fish's business value will be permanently impaired. 52 weeks. Frozen Fish's entire contract period was affected by the alleged breach. 50 weeks. The remaining period of the contract after the breach. 102 weeks. There were 50 weeks remaining in the contract. Frozen Fish might have been able to renew the contract for another year.

50 weeks. The remaining period of the contract after the breach

Which of the following are human resources-related fraud control activities? (Check ALL that apply.) A hospital has a high volume of billing for patient services. On a monthly baiss, the hospital performs analytics to search for unusual patterns in cash receipts transactions and accounts receivable balances. A company conducts background investigations for all new recruits at the manager level and above. The audit committee talks with the external auditors about observations arising from the review of quarterly financial statements. A technology retailer company conducts fraud risk management training for its internal audit staff and all store managers. A clothing manufacturing changes the dyes in its manufacturing process to reduce environmental impact. A consulting company conducts an annual employee survey that includes questions about employee satisfaction, understanding of corporate objectives, whether the employees have observed misconduct in the most recent year and whether they feel comfortable in reporting misconduct. An insurance company routinely conducts exit interviews with departing employees to determine the reasons for their resignation. During that interview, they ask about whether the departing employee has any concerns about integrity of their supervisors or misconduct at the organization.

A company conducts background investigations for all new recruits at the manager level and above. A technology retailer company conducts fraud risk management training for its internal audit staff and all store managers. A consulting company conducts an annual employee survey that includes questions about employee satisfaction, understanding of corporate objectives, whether the employees have observed misconduct in the most recent year and whether they feel comfortable in reporting misconduct. An insurance company routinely conducts exit interviews with departing employees to determine the reasons for their resignation. During that interview, they ask about whether the departing employee has any concerns about integrity of their supervisors or misconduct at the organization.

Which of the following is NOT a potential red flag of timing or cutoff issues in revenue recognition? An accounting clerk discards dating evidence provided by the third-party carrier (Fedex) so that sales near quarter end are not questioned. A company has strict procedures for the period closing process, including last dates and times for shipments to be recorded in the quarter. Financial reporting team members obtain dating evidence for transactions near the close. The shipping manager alters the dates of shipment to ensure that the department meets performance objectives. The dates of email communications relating to orders, the date of the entry into the accounting system and the dates on the paper-based documents appear out of order and inconsistent.

A company has strict procedures for the period closing process, including last dates and times for shipments to be recorded in the quarter. Financial reporting team members obtain dating evidence for transactions near the close. Response Feedback: The correct answer is " A company has strict procedures..." The other answers are potential red flags of improper revenue cutoff, which can potentially relate to financial reporting fraud. See pp. 186-187 of the Guide to Forensic Accounting Investigation for further discussion.

What are the required elements of an expert report under U.S. Federal Rules of Civil Procedure, Rule 26? A complete statement of all opinions, the qualifications of the witness, a list of all publications authored by the witness in the preceding 10 years, the compensation to be paid for the study and testimony, and a listing of other cases in which the witness has testified at trial or deposition within the preceding 4 years. A complete statement of all opinions, the basis and reasons for the opinions, the qualifications of the witness, a list of all publications authored by the witness in the preceding 10 years, the compensation to be paid for the study and testimony, and a listing of other cases in which the witness has testified at trial or deposition within the preceding 4 years. A complete statement of all opinions, the basis and reasons for the opinions, any exhibits, the qualifications of the witness, a list of all publications authored by the witness in the preceding 10 years, the compensation to be paid for the study and testimony, and a listing of other cases in which the witness has testified at trial or deposition within the preceding 4 years. A complete statement of all opinions, the basis and reasons for the opinions, any exhibits, the qualifications of the witness, a list of all publications authored by the witness in the preceding 10 years, the compensation to be paid for the study and testimony, a listing of other cases in which the witness has testified at trial or deposition within the preceding 4 years, and a disclosure of any cases in which the witness' testimony has been ruled inadmissable.

A complete statement of all opinions, the basis and reasons for the opinions, any exhibits, the qualifications of the witness, a list of all publications authored by the witness in the preceding 10 years, the compensation to be paid for the study and testimony, and a listing of other cases in which the witness has testified at trial or deposition within the preceding 4 years.

Identify ALL the asset misappropriation schemes from the list below. (Check ALL that you identify. Correct answers receive credit. Incorrect answers lose credit) A manager sets up his own company, "JKL and Co." The manager prepares invoices from JKL and Co which purport to reflect purchases of $2,500 in paper clips, markers, and printer ink, although JKL and Co sent no such goods. The manager approves the invoices for payment and a disbursement is sent to JKL and Co. The manager later transfers the money to his own account. Two employees in the purchasing department collude with a contractor to ensure that the contractor's bid for construction of a new building is accepted. The supplier sends the two employees on an all-expense paid vacation. Sheng owns a software development company in Massachusetts. Sheng wants to increase sales for the quarter to meet the expectations of his investors. Annette owns a rival company in New Hampshire. At a recent trade meeting, they discussed how unreasonable investors can be, and the possibility of partnering together on projects. In the meantime, they each agreed to buy a license each other's software products for $100,000. There is a potential that they might use the software in their joint venture. In the meantime, they will both have $100,000 in additional sales. Since they will both buy each other's products, no cash will need to change hands. An employee in the stockroom identifies damaged goods that can no longer be sold as first quality. The employee sells the goods on eBay as scrap, consistent with company policy. The scrap proceeds are returned to the company and is used to pay for the holiday party. Bathi works in the payables department. Jane works in corporate accounting and has responsibility for bank reconciliations. Bathi cuts a check made payable to Jane. Jane alters the bank reconciliation to hide the transaction and later, records an entry to reflect the check as a severance payment to a terminated employee. Jane deposits the check and splits the money with Bathi. An employee in the stockroom reports that several items are damaged and have been discarded. The employee sells the items on eBay and keeps the money. An employee overstates her overtime hours to earn money than she is entitled to. A manager has analyzed accounts receivable and concluded that he needs to increase the allowance for doubtful accounts to fairly state the net accounts receivable. But, he delays recording the increase to the allowance for doubtful accounts until after the quarter end because he and his teammates will not otherwise meet the profit targets in the bonus program. He tells himself that he should give the customers more time to pay the receivables, especially since the economy is improving. Bob is the store manager for Badtonio's Pizza. Bob enters all the sales that are paid by credit card and check into the cash register. Sometimes he enters cash transactions into the cash register, but other cash sales are put into an envelope. At the end of the day, Bob destroys the customer order tickets for these cash sales. Bob keeps the cash, but never records the sales. An employee uses his corporate card to fill up the gas tank on his RV before his vacation. He reports the expenditure as business-related and is reimbursed for all his corporate card expenditures.

A manager sets up his own company, "JKL and Co." The manager prepares invoices from JKL and Co which purport to reflect purchases of $2,500 in paper clips, markers, and printer ink, although JKL and Co sent no such goods. The manager approves the invoices for payment and a disbursement is sent to JKL and Co. The manager later transfers the money to his own account. Bathi works in the payables department. Jane works in corporate accounting and has responsibility for bank reconciliations. Bathi cuts a check made payable to Jane. Jane alters the bank reconciliation to hide the transaction and later, records an entry to reflect the check as a severance payment to a terminated employee. Jane deposits the check and splits the money with Bathi. An employee in the stockroom reports that several items are damaged and have been discarded. The employee sells the items on eBay and keeps the money. An employee overstates her overtime hours to earn money than she is entitled to. Bob is the store manager for Badtonio's Pizza. Bob enters all the sales that are paid by credit card and check into the cash register. Sometimes he enters cash transactions into the cash register, but other cash sales are put into an envelope. At the end of the day, Bob destroys the customer order tickets for these cash sales. Bob keeps the cash, but never records the sales. An employee uses his corporate card to fill up the gas tank on his RV before his vacation. He reports the expenditure as business-related and is reimbursed for all his corporate card expenditures.

Which statement is true? A positive corporate culture has a positive affect on all three sides of the fraud triangle (pressure and incentives, rationalization, and oppotunity) The easiest way to build a strong corporate culture is to hire ethical people. Although a positive corporate culture keeps employees happy and reduces the incentives to commit fraud, the impact cannot be quantitatively measured. Companies should have a consistent, one-time communication about expectations and code of conduct. It should be communicated in a written policy at the time of hire.

A positive corporate culture has a positive affect on all three sides of the fraud triangle (pressure and incentives, rationalization, and oppotunity) Response Feedback: Strong ethics and fraud deterrence communicatons are ongoing. They may be communicated at the time of hire, but they shouldn't be "one and done". They have a measurable positive impact on all aspects of the fraud triangle.

Skimming is defined as: A scheme in which cash receipts are stolen from an enterprise before they are recorded on the books and records. A scheme in which the perpetrator alters the company's checks and converts them to inappropriate us A scheme that involves cash thefts by setting up one or more fictitious employees on the payroll system. A scheme involving fraudulent wire transfers to a personal account.

A scheme in which cash receipts are stolen from an enterprise before they are recorded on the books and records.

Which of the following controls are primarily preventive in nature? (Check ALL that apply.) A telecommunications company uses valuable copper wiring for repairs of its transmission lines. The inventory of wiring is kept in locked storage facility when not needed by the repair team members. A company's business process requires signature of a manager outside the accounting function before allowing a cash disbursement. A company's information technology department is off-site and physically secured from intrusion. A credit card processing company uses a technology that risk-scores transactions and prevents them from occurring if they are deemed too high risk. A small not-for-profit company outsources is cash disbursement function. Any disbursement requests are faxed to the outsourced provider, they are loaded to a password protected on-line portal. The CEO reviews and approves disbursements on the on-line portal. The outsourced provider cuts the checks and mails them. A company conducts exit interviews, in which it asks departing employees about any ethical violations and their reasons for leaving. A manufacturing company conducts month-end data analytics to identify stores with low sales. Internal audit focuses on these stores during its periodic audits. A company conducts a physical inventory and conducts a book-to-physical reconciliation every six months.

A telecommunications company uses valuable copper wiring for repairs of its transmission lines. The inventory of wiring is kept in locked storage facility when not needed by the repair team members. A company's business process requires signature of a manager outside the accounting function before allowing a cash disbursement. A company's information technology department is off-site and physically secured from intrusion. A credit card processing company uses a technology that risk-scores transactions and prevents them from occurring if they are deemed too high risk. A small not-for-profit company outsources is cash disbursement function. Any disbursement requests are faxed to the outsourced provider, they are loaded to a password protected on-line portal. The CEO reviews and approves disbursements on the on-line portal. The outsourced provider cuts the checks and mails them.

Which of the following organizations (or credentials) is NOT recognized for providing training and credentials in business valuation? AICPA - Certified Global Managment Accountant (CGMA) American Society of Appraisers (ASA) National Association of Certified Valuators and Analysts (NACVA) Certified Financial Analyst (CFA)

AICPA - Certified Global Managment Accountant (CGMA) Response Feedback: The CGMA is a recognized credential for managerial accounting, not for business valuation.

Which of the following elements is NOT part of COSO's comprehensive fraud risk management strategy? Monitor the fraud risk management process, report results and improve the process. Establish a fraud reporting process and coordinated approach to investigative and corrective action. Establish a frad risk management policy as part of organizational governance. Select, develop and deploy preventive and detective fraud control activities. Perform a comprehensive fraud risk assessment. All of the above are elements of COSO's comprehensive fraud risk management strategy.

All of the above are elements of COSO's comprehensive fraud risk management strategy.

Bribes are often mischaracterized as other types of transactions in the books and records of a business. Which of the following is NOT an example of transaction used to mischaracterize bribery? Commissions Consulting fees Sales and marketing expense Scientific incentive or studies Travel and entertainment expense Rebates or discounts After sales service fees Miscellaneous expense Petty cash withdrawals Free goods (e.g. for demonstration) Intercompany transactions Supplier or vendor payments Write-offs All of the above have been used, at some time, as a means to mischaracterize bribes.

All of the above have been used, at some time, as a means to mischaracterize bribes. Response Feedback: The answer to this statement can be found on p. 39 of the FCPA Resource Guide.

Which kinds of techniques are used in both forensic settings and in external audit settings? Interviews of knowledgeable people Ratio analysis Vouching or tracing selected transactions All of the above.

All of the above.

Isabella is a financial expert in a matter in U.S. Federal Courts. She is asked to provide answers to interrogatories, provide an expert deposition and testify at trial. Which of them is considered sworn statements under oath? None of these are sworn statements under oath. Trial testimony and deposition testimony are sworn statements under oath, but answers to interrogatories are not. All of them are sworn statements under oath. At trial, the expert testifies under oath, but the other activities are not sworn statements.

All of them are sworn statements under oath.

Which of the following is NOT a potential basis for exclusion of an expert report based on a reliability challenge? Lisa prepared an opinion of value based on a using a shortcut rule of thumb often used by industry participants, without other bases for her opinion. None of these are potential bases to exclude an expert report based on challenges to reliability of the opinion. Jane performed a statistical analysis of securities prices, but omitted 5 trading days from the data set. Carl is testifying as a financial expert. He analyzed all the transactions that were provided by counsel, but the information that the attorneys provided was incomplete. All of these are potential bases to exclude an expert report based on challenges to reliability of the opinion.

All of these are potential bases to exclude an expert report based on challenges to reliability of the opinion.

Which of the following schemes are examples of "pay-and-return" schemes? An accounts payable employee creates two payments for the same legitimate invoice. Then, they call the vendor to request that one of the checks be returned. When the check is returned, the employee intercepts the check and converts it to her benefit. An accounts payable employee intentionally pays the wrong vendor for a legitimate invoice. After the check is mailed, the employee contacts the vendor to report the "mistake" and asks that the check be returned. When the check is returned, the employee intercepts the check and converts it to her benefit. An accounts payable employee overpays a legitimate vendor, then contacts the vendor to request a refund of the overpayment. When the funds are returned, the employee intercepts the payment and converts it to his benefit. All of these are variations of pay-and-return fraud schemes. None of these are pay-and-return fraud schemes.

All of these are variations of pay-and-return fraud schemes.

Which of the following is NOT a characteristic of potentially fraudulent round-tripping transactions? A complex, convoluted or unusual structure or explanation for the transaction. Lack of candor, mischaracterization or failure to disclose the true relationships, rights and obligations among the parties to the transactions. Similar amounts of money changing hands or fully-offsetting transactions, such as swaps or rights exchanges. Attempts to disassociate the subject trasnactions from each other when they are actually dependent or conditions to the transaction. All of these could potentially indicate fraudulent round-tripping transactions.

All of these could potentially indicate fraudulent round-tripping transactions. Response Feedback: The correct answer is "All of these could potentially indicate fraudulent round-tripping transactions." Round-tripping is discussed in the Guide to Forensic Accounting Investigation at p. 215.

Which of the following is not a common source of fraud investigation evidence? Electronic communications, including email. General ledger and transaction data. Observation Interviews of knowledgeable people Data analytics Google and public records searches Documents and contracts All of these might be investigation evidence.

All of these might be investigation evidence.

What is an investigation predicate? An allegation or reason to investigate. An initial fraud theory. A custodian of paper or electronic evidence. The person or governing body that is responsible for the decision-making about the investigation.

An allegation or reason to investigate.

Which of the following is NOT likely to be a potentially voidable transfer in bankruptcy? Preference payments made within 90 days that do not fall within a safe harbor. A dividend to the equity holders of a closely-held company made 18 months before the bankruptcy at a time when the company was insolvent. An employment bonus to the CEO made 6 months before the bankruptcy, at a time when the company was solvent. Transfers that hinder or delay creditors access to assets.

An employment bonus to the CEO made 6 months before the bankruptcy, at a time when the company was solvent. Response Feedback: An employment bonus made to the CEO six months before the bankruptcy is not a preference payment (because they are usually limited to 90 days pre-petition.) If the company was solvent at the time of the transfer, the bonus would not be considered a constructively fraudulent transfer. There's no evidence that the payment was actually fraudulent, so this payment would not be voidable.

Which of the following best describes the role of an expert witness? An expert witness has specialized knowledge that helps a judge or jury understand the evidence and can influence the decisions made by them. An expert witness works for an attorney to advocate for a client. An expert witness has a duty to take the client's position in the matter. Because of their specialized skills, knowledge, education and training, judges and juries must accept the opinion of the expert.

An expert witness has specialized knowledge that helps a judge or jury understand the evidence and can influence the decisions made by them.

Which of the following is NOT an inventory-related asset misappropriation scheme? An inventory manager misstates the excess and obsolete inventory reserve to improve the reported net income for the quarter. An inventory manager falsifies inventory records of incoming shipments of goods to conceal thefts of inventory. Two employees collude to steal inventory and record adjustments to inventory records to conceal the losses. A store manager posts adjustments to reflect that inventory is damaged and cannot be sold. The store manager sells the inventory to customers and pockets the sales proceeds.

An inventory manager misstates the excess and obsolete inventory reserve to improve the reported net income for the quarter.

Turbine Group has sued its supplier, Air Equipment Inc. for breach of contract to supply air handling equipment in support of Turbine Group's requirements. As a result of not having the equipment it needed, Turbine Group lost a number of customer contracts. Which of the following services would NOT normally be provided by forensic accountants in this kind of dispute? Assistance with developing or managing the electronic documents repository for the litigation matter,including the management of electronically-stored information. Calculation of the profits that Turbine Group would have earned if they had not lost the customer contracts. Analysis of the contract provisions involving supply interruptions and determination of potential legal remedies. Gathering business records and evidence associated with the litigation matter and preparation of materials for production in the discovery process.

Analysis of the contract provisions involving supply interruptions and determination of potential legal remedies.

Which of the following is NOT a technique for the detection of revenue-related frauds? Analyze transactions with the managers in charge of the sales function to identify inappropriate travel and expense reimbursement. Analyze large sales transactions, especially those at end of period, with a large or unusual customer or with related parties. Analyze sales returns or contract cancellations occurring subsequent to period ends. Perform cut-off testing to analyze all the documentation associated with sales near period end and look for unusual dating evidence.

Analyze transactions with the managers in charge of the sales function to identify inappropriate travel and expense reimbursement. Response Feedback: The correct answer is "Analyze transactions with the managers in charge of the sales function to identify inappropriate travel and expense reimbursement." Although the employees have sales-related responsibilities, this technique is used to detect asset misappropriation. The other techniques are discussed in the Guide to Forensic Accounting Investigation at pp. 188-189.

Which of the following are complexities associated with managing global fraud risk management programs? Cultural differences about reporting potential wrongdoing. Differing opportunities for fraud outside the scrutiny of corporate headquarters and in differing business environments. Communication challenges associated with different language and diluted communications. Global ERP accounting and information systems. Answers 1, 2 and 3 are additional complexities associated with global fraud risk management programs. All of the above are additional complexities associated with global fraud risk management programs. None of these are additional complexities associated with global fraud risk management programs.

Answers 1, 2 and 3 are additional complexities associated with global fraud risk management programs. Response Feedback: Answers 1, 2 and 3 are true. Global ERP systems are generally helpful in reducing fraud risk.

Which are major provisions of the U.S. Foreign Corrupt Practices Act? (Check ALL that apply.) Anti-bribery provisions United Kingdom provisions Accounting provisions Justice provisions

Anti-bribery provisions Accounting provisions Response Feedback: The FCPA's major provisions are the anti-bribery provisions and the accounting provisions.

When an opposing attorney takes a forensic accounting expert's deposition, what is his or her goal? To identify and highlight the weaknesses in the expert's report and in the opponent's case, in order to encourage settlement or, at a minimum, to force the expert to correct the analysis before trial. To size up the witness and to learn as much as possible about the opinions and the bases for the opinions that will be offered at trial. To identify weaknesses in the expert's report without alerting the expert, so that the weaknesses can be revealed at trial. Then, the expert's testimony may be discredited and be given little or no weight by the judge and jury. Any or all of these answers could be one of the goals of an expert deposition. None of these are goals of an expert deposition.

Any or all of these answers could be one of the goals of an expert deposition.

Kurt has a consulting business. All of his agreements with clients have dispute resolution provisions that stipulate how disputes will be resolved. Kurt's agreements with his clients all require the use of confidential binding arbitration, instead of court proceedings. What are some of the potential advantages of this approach for Kurt and his business? (Check ALL that apply.) An arbitration is more advantageous for Kurt, because he can almost always successfully challenge the arbitrator's decision in court to achieve a better outcome. Arbitration proceedings can be confidential, so the existence of a dispute is less likely to harm Kurt's business reputation. Arbitration proceedings almost always result in more extensive discovery to allow the parties to dig more deeply into the facts in dispute. An arbitration process can be more flexible than a court proceeding, allowing for more control over the decision makers, the procedures and the potential solution to the dispute.

Arbitration proceedings can be confidential, so the existence of a dispute is less likely to harm Kurt's business reputation. An arbitration process can be more flexible than a court proceeding, allowing for more control over the decision makers, the procedures and the potential solution to the dispute.

Which of the following is a form of alternative dispute resolution (ADR)? Hearings in the Business Session of the Massachusetts Superior Court A lawsuit in the bankruptcy court Family and probate court hearings Arbitration proceedings presided by a retired judge

Arbitration proceedings presided by a retired judge

Which of the following is NOT a potentially improper type of revenue recognition? Recognizing sales for goods that are shipped to the customer with special rights of return, such as trial or evaluation products. Holding the books open to ensure that all transactions that are in process at the quarter end are included in the quarter, even if the shipments are not complete until a day or so afterwards. Recognizing revenue for transactions that are shipped to a warehouse leased to by the seller for goods that the customer will need in the next six months. The customer has scheduled the future orders but is unwilling to take delivery because they don't have the space to store the goods. Asking the shipping department to ensure that all outstanding orders are shipped before quarter end.

Asking the shipping department to ensure that all outstanding orders are shipped before quarter end. Response Feedback: The correct answer is "Asking the shipping department to ensure that all outstanding orders are shipped before quarter end." The other answers are potentially misstated revenue. See p. 185 of the Guide to Forensic Accounting Investigation for further discussion.

Which of the following AICPA standards or rules do NOT apply to CPA members who are performing litigation services engagements? Attestation standards Confidential Client Information Rule Sufficient Relevant Data rules Integrity and Objectivity Rule

Attestation standards

Which phrases describe a legal privilege that might potentially pertain to the work of attorneys and investigators in a fraud investigation or legal dispute? (Check ALL that apply.) Attorney-client privilege. CPA-client privilege. Doctrine of investigational authority. Attorney work product doctrine.

Attorney-client privilege. Attorney work product doctrine.

Which of the following are appropriate factors for consideration when selecting an appropriate damages model? (Select ALL that apply.) Whether the expert has a conflict with the plaintiff or defendant Avoiding redundancy or overlapping elements of damages Whether the model is consistent with the underlying case of the damages, the effect on the plaintiff or claimant, and the type of injury suffered Practices and approaches that are accepted by professional peers and academic study. Background of the case The Atlas-Barre factors

Avoiding redundancy or overlapping elements of damages Whether the model is consistent with the underlying case of the damages, the effect on the plaintiff or claimant, and the type of injury suffered Practices and approaches that are accepted by professional peers and academic study. Background of the case

Which of the following is NOT a true statement about bankruptcy? Bankruptcy services can include a wide range of forensic accounting activities, including financial analysis, asset searches, investigations, and business valuation. Bankruptcy is a legal process. Most bankruptcies are governed by state laws, which vary from state to state. Creditors may object to a debtor's plan of reorganization and offer a competing plan. Chapter 11 of the Bankruptcy Code governs the process for corporate reorganizations in bankruptcy.

Bankruptcy is a legal process. Most bankruptcies are governed by state laws, which vary from state to state. Response Feedback: Most bankruptcies are governed by federal laws, most importantly Title 11 of the federal code (the Bankruptcy Code). While some bankruptcies are handled under state jurisdiction, this is less common.

Which of the following statements is not true? Because fraud allegations are non-routine and vary significantly based on the facts and circumstances, it is best to wait until events to occur before planning investigation processes. Knee-jerk or emotional responses to fraud allegations are unhelpful, but common. An organization can improve its chances of loss recovery, while minimizing exposure to litigation and damage to reputation, by establishing and carefully prepallning investigation and corrective actions and processes. As an organization undertakes investigations of potential fraud, it should give due consideration to the scope, severity, credibility, and implications of the allegation.

Because fraud allegations are non-routine and vary significantly based on the facts and circumstances, it is best to wait until events to occur before planning investigation processes.

Business valuation in litigation and lost profits calculations have some commonalities. Which is NOT true? Business valuations typically evaluate the whole business, or a stand alone element of the business. Lost profits analysis, by contrast, may only focus on a particular element of the business. Both business valuation and lost profit require the careful consideration of discount rates that appropriately reflect the market and risk characteristics of the related economic benefits. Both lost profits and business valuation require the analyst to consider the projected future benefits as of a specific point in time. Both lost profits and business valuation analyses typically require adjustments for marketability, size and control.

Both lost profits and business valuation analyses typically require adjustments for marketability, size and control. Response Feedback: Lost profits analyses do not necessarily require adjustments for size, premiums and control. Usually, lost profit are focused on lost income. Any such considerations, if needed, are embedded within the selection of a discount rate.

Which of the following is true regarding the calculation of lost earnings damages? If a plaintiff can work, but chooses not to do so, the defendant will likely have to pay the entire amount of lost wages. Calculations of lost earnings may include incentive compensation, such as commissions or bonuses, because such damages are contingent on performance criteria. Past earnings are generally irrelevant, since prior performance is no guarantee of future earnings. Lost earnings generally exclude passive income, such as income from securities or dividends.

Calculations of lost earnings may include incentive compensation, such as commissions or bonuses, because such damages are contingent on performance criteria.

Chez is a CPA and a member of the AICPA. He just put up a website to promote his firm. He has had two prior engagements to provide expert witness services. In both cases, the jury verdicts were completely consistent with his expert testimony and his clients were successful in their litigation matters. His website describes the services that he provides, and states "Chez has a 100% success rate in winning for his clients. Chez' wins cases for clients. Call us to find out how we will help you win your case." Which is true? Chez's claims are potentially improper because they are potentially misleading and suggest a lack of objectivity. Chez's claims are entirely proper. He won 100% of the cases he worked on, so the statements he made are true. Chez's statements are potentially improper because CPA's are not allowed to advertise their services. Chez's statements are entirely proper because he doesn't make any specific promise regarding a specific case.

Chez's claims are potentially improper because they are potentially misleading and suggest a lack of objectivity.

Which of the following statements is true? A fraud risk management program should be kept confidential so that potential fraud perpetrators cannot anticipate controls. It is important to document the fraud risk management program using the proscribed format articulated by the Fraud Risk Management Guide in order to comply with COSO requirments. Communication of the fraud risk management program needs to be sufficient so that all personnel and vendors understand their responsibilities. The board should participate in the execution of fraud risk control procedures in order to ensure adequate oversight of the company.

Communication of the fraud risk management program needs to be sufficient so that all personnel and vendors understand their responsibilities. Response Feedback: The correct answer is: "Communication of the fraud risk management program needs to be sufficient so that all personnel and vendors understand their responsibilities."

Raj owns a chain of small store-front gyms that provide small group fitness training. Most of the customers pay by monthly membership. Stephanie is the store manager for own of Raj's gyms, located in Amherst. Stephanie allows some of the customers to pay by Square card reader. The has set up the Square account to transfer the cash receipts into her own bank account, and not into the business bank account. Raj has noticed that store receipts are down, but Stephanie explained (falsely) that several customers had dropped their membership. Which controls are MOST likely to detect the scheme? Comparison of cash receipts to people actually showing up at the gym. Analysis of cash receipts recorded in the business bank account Audit confirmation of the business bank account. Investigative interview of Stephanie.

Comparison of cash receipts to people actually showing up at the gym.

The first legal pleading in a civil litigation matter in the U.S. is called the _____________?

Complaint

Jenny is a CPA. Jenny is aware that Minuteman Landscaping and Supply Company ("Minuteman") has filed suit in Federal Court against BigAgriculture Supply Company (Big Ag) alleging that Big Ag breached its contract to provide seeds and fertilizer supplies to Minuteman on specified dates. What are the potential forensic services that Jenny could perform in the context of the litigation? (Check ALL that apply.) Providing legal advice Computation of damages Establishing accountant-client privilege Analysis of business information and evidence gathered in discovery Assessment of the strengths and weakness of the case and development of case strategy Providing arbitration services Representing the client in court as an advocate Auditing the financial statements as part of a forensic engagement Assistance in formulating discovery requests Testifying expert services

Computation of damages Analysis of business information and evidence gathered in discovery Assistance in formulating discovery requests Testifying expert services

Which of the following is NOT a required expert witness disclosure for witnesses testifying in US Federal courts? Compensation to be paid for the study and testimony in the case. Copies of expert reports associated with other cases in which the expert has testified. Facts or data considered by the witness in forming the opinion(s) to be expressed. A complete statement of all the expert's opinions that will be presented at trial. All of these are required.

Copies of expert reports associated with other cases in which the expert has testified.

Which of the following is NOT one of the three commonly recognized stages of the money laundering process? Criminal proceeds Layering Integration Placement

Criminal proceeds Response Feedback: The three commonly recognized stages of money laundering are placement, layering and integration.

Which of the following is not a major category of occupational fraud according to the Association for Certified Fraud Examiners (ACFE)? Cybersecurity Corruption Asset misappropriation Financial reporting fraud

Cybersecurity

There is a special type of financing that is provided to companies that are in the process of Chapter 11 reorganization. It is called ________ financing.

DIP Debtor-in-possession debtor in possession Response Feedback: The correct answer is "DIP" financing. Blackboard should accept either "DIP", "debtor-in-possession" or "debtor in possession" as correct answers.

The seminal court case that provides guidance on the admissability of expert testimony in U.S. federal courts is: Shadow Traffic Network, et al. v. The Superior Court of Los Angeles County Plessy v. Ferguson Mattco Forge, Inc. v. Arthur Young and Co. Daubert v. Merrell Dow Pharmaceuticals

Daubert v. Merrell Dow Pharmaceuticals

In a recent legal case, the Court ordered Defendant Corporation to pay damages to Plaintiff Corporation. The amount of the damages was calculated based on the gains that Defendant Corporation had earned as a result of its wrongful conduct. What kind of damage award was this? Disgorgement or restitution damages Compensatory damages Lost profits damages Punitive damages

Disgorgement or restitution damages

Frozen Fish Company had a profitable contract to provide 50 cases of frozen specialty fish products to SuperDuperMarket each week for a year. After the first two weeks of the contract, SuperDuperMarket cancelled and refused to take shipments. At the time that SuperDuperMarket had cancelled, Frozen Fish Company had already purchased all the goods it needed to fulfill the contract and had the goods stored in their freezer. No other buyer wanted these specialty fish products. After many attempts, Frozen Fish Company ultimately sold them at a steep discount to another customer. (This paragraph is the same as the prior question.) Which of the following is likely to be the best evidence associated with costs in a damage calculation? Cost estimates based on benchmarking studies. Documents suppoting the actual costs incurred and any budgets or forecasts of costs that Frozen Food had prepared before the breach occurred. Monte Carlo analysis Costs of other market participants.

Documents suppoting the actual costs incurred and any budgets or forecasts of costs that Frozen Food had prepared before the breach occurred.

You are investigating an allegation that vendors may be submitting invoices twice in the hope that they will be paid multiple times. Which of the following data analyses would be the easiest way to identify such invoices? Textual analysis Duplicate search Correlation analysis Benford's law analysis

Duplicate search

Which of the following is a true statement about an external auditor's assessment of fraud risk? External auditors may rely on a written letter of management's representations as a basis for their assessment of fraud risk, if it includes sufficient, competent disclosures about controls. External audits are among the best control activities for detecting asset misappropriation, assuming that they consider sufficient evidential matter and are timely in execution. During audit planning, external auditors are required to brainstorm about potential risks of financial statement fraud, including how management could perpetrate and conceal fraudulent financial reporting and how assets of the entity could be misappropriated. Typically, external audits include a review of management communications and email to detect management override.

During audit planning, external auditors are required to brainstorm about potential risks of financial statement fraud, including how management could perpetrate and conceal fraudulent financial reporting and how assets of the entity could be misappropriated. Response Feedback: The correct answer is that audit planning must include a discussion among all key team members about fraud risks, including management override. While written letters of representation are important audit evidence, they are insufficient for audit planning and conclusions about fraud. Management's representations will not usually identify management's override of controls. External audits are not the best control for detecting fraud, based on the ACFE's Report to the Nations. Email analysis is often used in investigations, but is rarely a part of external audits unless there is a predicate of fraud.

Eleanor is analyzing the business value of Mixed Up Mechanics LLC. She is currently focusing on the income approach. Eleanor has performed the following procedures: She developed a model of expected future cash flows to equity shareholders using reasonable and well-supported assumptions Mixed Up Mechanics had some unusual expenses, mostly related to payments to family members of the owner. Eleanor made normalizing adjustments to eliminate these expenses and ensure that projected cash flows were consistent with other companies Eleanor tested the reasonableness of the expected growth rate based on existing business plans, company-specific factors and the growth of the industry as a whole. She discounted the expected cash flows using the Weighted Average Cost of Capital (WACC) Which of the following is a TRUE statement about Eleanor's work? Eleanor should NOT have used the WACC to discount the projected cash flows, since she had projected the cash flows to equity holders. Eleanor should NOT have considered the existing plans for the business, because this is prohibited in an Ex Ante analysis. Eleanor improperly adjusts the expected expenses to eliminate expenses to family members, since such adjustments depart from historical experience. All of Eleanor's procedures were appropriate.

Eleanor should NOT have used the WACC to discount the projected cash flows, since she had projected the cash flows to equity holders. Response Feedback: The correct answer is "Eleanor should NOT have used the WACC to discount the projected cash flows, since she had projected the cash flows to equity holders." In the income approach, the discount rate should match the cash flows to be discounted. So, equity rates of return should be used to discount cash flows to equity. Weighted-average cost of capital should be used to discount cash flows to the enterprise (both equity and debt).

You have been asked to read and analyze the expert report of Elisabeth Forensic. Her report discloses that she is a CVA, an ASA and an ABV. Which of the following is true? Elisabeth has specialized credentials in business valuation and likely also has a CPA. Elisabeth has no accounting expertise, since her credentials primarily relate to business valuation. Elisabeth is not governed by the AICPA's professional standards. All of Elisabeth's credentials are issued by the American Institute of Certified Public Accountants (AICPA).

Elisabeth has specialized credentials in business valuation and likely also has a CPA.

Which of the following is NOT a business valuation approach? Equity approach Income approach Market approach Asset approach

Equity approach Response Feedback: The three broad types of business valuation approaches are the Income Approach, the Market Approach and the Asset Approach. The equity approach was made up.

A small construction company has 15 employees. There is only one person that works in the office, other than the owner. The office manager handles all aspects of cash disbursement, cash receipts and bookkeeping. The owner understands that he cannot adequately segregate the duties in the office. Which two mitigating controls would be most effective in reducing the risk of cash-related frauds? Ask the office manager to annually certify her bookkeeping work. Every month, as part of their management meeting, the owner and construction foreman review a list of all disbursements and all customer accounts to identify any unusual transactions. Conduct periodic background checks on the office manager. Have a copy of the bank statement sent directly to his house, and review the bank reconciliation prepared by the office manager.

Every month, as part of their management meeting, the owner and construction foreman review a list of all disbursements and all customer accounts to identify any unusual transactions. Have a copy of the bank statement sent directly to his house, and review the bank reconciliation prepared by the office manager.

Josh has been asked to express an opinion of value for Elemental Jewelry Incorporated, a private company. The valuation date for Josh's analysis will be December 31, 2018. Josh is aware that there was a fire at the main production facility in March 2019. Josh is planning to exclude the impact of the fire in the valuation opinion, since it had not occurred as of the valuation date. What is the term to describe this analytical perspective? Ex ante analysis Ex post analysis Subsequent events analysis Daubert analysis

Ex ante analysis Response Feedback: The correct answer is "Ex ante analysis." For more information on Ex ante and Ex postanalyses, see the Litigation Services Handbook, p. 11.5.

A "demurrer" is a witness's out-of-court testimony that is reduced to writing for later use in court or for discovery purposes. True False

False

A 2020 PwC study of Daubert challenges to financial experts found that for the most recent year (2019) more than one-half of Daubert challenges of financial experts were successful, in that they resulted in the exclusion of all or some part of the expert's planned testimony. True False

False

AICPA professional standards prohibit fee retainers on litigation services engagements. True False

False

All Certified Fraud Examiners are CPAs. True False

False

Another term for "expert witness" is "percipient witness". True False

False

Chaofan is a sole practitioner CPA. He has been a tax compliance specialist for 30 years. One of his tax clients has asked him to serve as an expert in a matter involving patent infringement. The client needs an expert to testify as to the reasonable royalty to be paid for licensing telecommunications technology. Chaofan knows the client very well and has been considering the tax consequences of intellectual property for the client as part of his tax engagement. Chaofan has attended a CPE seminar on intellectual property taxation, but has never been involved in the licensing of technology or had any training in the subject. Chaofan believes that he can take the engagement, because he is willing to study the subject diligently and because his CPA is a well-recognized credential. Is this true? True False

False

Damage calculations never use business valuation approaches, since courts will not award goodwill and intangible values in the context of litigation. True False

False

If a fraud risk assessment is competent and thorough, it rarely needs to be updated. True False

False

In order to maximize fraud deterrent effects, all the elements of the fraud control structure should be made known to employees, vendors and stakeholders. True False

False

Inez is a financial expert in a civil litigation matter. She has been asked to assist the attorneys taking the deposition of an opposing expert. The most common approach for this kind of work is for Inez to ask the deposition questions that are related to her area of expertise. True False

False

Luella is a member of the AICPA and a member of NACVA. Because there is an integration agreement between the two organizations, Luella needs to comply only the AICPA code of conduct when she provides accounting services. Similarly, she needs to comply only with the NACVA standards when she provides valuation services. True False

False

Many attorneys insist on contingent fee arrangements for testifying expert services, since winning the case is the ultimate goal. True False

False

Most litigation support engagement fall under AICPA Agreed-Upon Procedures standards, because the CPA and the clients must agree upon a tailored scope of work. True False

False

Once an accountant has become an experienced forensic practitioner, they are qualified to provide legal advice regarding whether legal privileges will apply to specific investigation outputs. True False

False

People who perpetrate frauds are usually identified by formal background checks, when they are performed. True False

False

Proximate causation means that the losses were reasonably certain. True False

False

Punitive damages are directly tied to the plaintiff's economic losses. True False

False

The Federal Rules of Civil Procedure and Federal Rules of Evidence apply to all expert witness services provided in the United States True False

False

The Statement on Standards of Forensic Services No. 1 typically prohibits the practitioner from executing confidentiality orders in the context of the litigation services. True False

False

The professional standards of the AICPA prohibit CPAs from serving as a neutral arbitrator or mediator in commercial dispute. True False

False

Under the Federal Rules of Civil Procedure, it is relatively common to "ambush" the opponent in litigation by providing new evidence or expert opinions during the trial phase of a litigation case. True False

False

When evaluating the significance of a risk exposure, the forensic accountant's only focus should be the potential dollar value of exposures in comparison to 5% of assets or other quantitative measure of materiality. True False

False

The risks of management override of internal controls can be eliminated through a robust fraud risk management program, including active and vigorous oversight by the board. True False

False Response Feedback: Because management is primarily responsible for the design, implementation, and maintenance of internal control, the entity is always exposed to the danger of management override of controls, whether the entity is publicly held, private, not-for-profit, or governmental. A strong fraud risk management program and active oversight by the board can mitigate this risk, but does not eliminate it.

Josef's company paid gifts to a government official in order to win a contract, but the contract was ultimately awarded to another company. Josef believes that his company cannot be prosecuted, because it did not benefit from the payments. Is this true or false? True False

False Response Feedback: This is a false statement. The FCPA focuses on "corrupt intent" and does not require that the corrupt act must succeed in its purpose. (See FCPA Resource Guide, p. 14)

If errors and irregularities exceed 5% of revenue, they are material. If not, they are not material. True False

False Response Feedback: This is false. As discussed on p. 235 of the Guide to Forensic Accounting Investigation, the 5% threshold is frequently used as a starting point for the assessment of what is or is not material. Materiality is a judgmental standard that can be defined as "the magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement." In short, if it matters to the users of the financial statements, it is material. That includes qualitative differences or differences that fall below a 5% metric.

Fair value is a well-recognized standard of value with a clear definition that is consistent from court to court. True False

False Response Feedback: This is false. As noted in the Litigation Services Handbook at p. 11.5, the term "fair value" has several uses with different meanings. In certain kinds of cases, fair value has a specific legal meaning defined by state law and case law. They are not necessarily consistent between jurisdictions and case types. Experts should consult with the attorney or client to ascertain the appropriate standard of value for the case at hand.

Cookie-jar reserves describes the normal ways that generally accepted accounting principles permit a company to manage earnings within certain boundaries of integrity, by applying judgment in the application of accounting principles and estimates. True False

False Response Feedback: This is false. At page 184, the Guide to Forensic Accounting Investigation acknowledges that there is judgment in the application of accounting principles. However, cookie-jar reserves describe an abusive and potentially fraudulent practice of manipulating judgmental reserves. See the discussion at p. 233.

Medicines-R-Us Co. develops and sells pharmaceutical products. It wanted its products to be included in the formulary (list of approved products) in an Asian country with a government-run health care system. In order to build support for its products, it hosted a medical conference to which the doctors and government officials in the industry. The corporation hired an event planner, who was able to increase attendance at the event by 50%. Soon after the event, Medicines-R-Us Co.'s products were added to the formulary. Medicines-R-US Co.'s chief compliance officer later learned that the event planner included gift cards to all attendees in the welcome packet. Medicine-R-Us Co.'s Vice President of Sales is delighted with the event planner's success and argues that Medicines-R-Us Co. has no potential exposure to FCPA liability, because the payments at attendees were not made in cash, because Medicines-R-Us Co. didn't directly offer the gift cards, and because Medicines-R-Us Co. didn't instruct the event planner to provide gifts to the attendees. Is the argument that Medicines-R-Us Co. has no exposure to FCPA liability true or false? True False

False Response Feedback: This is false. Medicines-R-Us Co. may have violated the FCPA regardless of whether or not the payments were made in cash or in other forms of value. A company can be held liable for the acts of its agents and intermediaries, even if they didn't explicitly direct the improper conduct.

COSO's Principle 8 requires the establishment of a comprehensive fraud risk management program. True False

False Response Feedback: This statement is false. Principle 8 requires that "the organization considers the potential for fraud in assessing risks to the achievement of objectives." The comprehensive fraud risk management program articulated in the Fraud Risk Management Guide is a best practice, but the requirement in the principles is more narrow.

Which of the following is NOT a red flag of a possible bust-out scheme? Reliance on part-time employees, leased facilities and llitle substantive business activity. Taxes not paid or filed. Fictitious submission of inflated invoices by bankruptcy professionals. Short-lived companies with little business history.

Fictitious submission of inflated invoices by bankruptcy professionals. Response Feedback: Fictitious invoices by bankruptcy professionals may be fraudulent, but they are not part of bust-out schemes.

Erika works at WriteNow Publishing. She set up a corporate entity in Wyoming, a state which doesn't require public disclosure of ownership. The name of Erika's company is Super Editing. Erika filled out the required paperwork to set up a new vendor in the WriteNow Publishing approved vendor master file and forged the signature of the required approver. As a result, Super Editing was set up as an approved vendor. Erika is authorized to sign for editorial services up to $5,000. Each month, she creates an invoice for an amount between $4,200 and $4,7500 for "Editorial services", approves the invoice and submits it for payment. Because the vendor is already approved, a disbursement is generated without further review or approvals. Erika deposits the payment to Super Editing into a bank account that she has set up for her company. From there, she can spend or transfer the money wherever she wants. What kind of fraud scheme is this? Bill-and-hold scheme Pay-and-return scheme Sales process larceny Fictitious vendor scheme

Fictitious vendor scheme

________________ means "suitable for use in a court of law."

Forensic

Franz is analyzing the value of shareholder's interest in Lizst Pianos, Inc. Lizst Pianos is a private company and the shareholder owns a 10% interest. The shareholder holds restricted shares that cannot be freely traded. Franz has gathered valuation guidance using the market approach to value. The information he has gathered includes pricing guidance from the market values of similar public companies and valued paid to acquire whole companies based on recent similar merger and acquisition transactions. Which of the following is TRUE? The indications of value from publicly-traded companies usually represent values of controlling interests. Franz should make adjustments to derive a value for a minority interest with limited marketability. The indications of value from merger and acquisitions transactions usually represent values of minority interests. The market approach cannot be used for valuation of restricted shares, since they are not freely marketable.

Franz should make adjustments to derive a value for a minority interest with limited marketability. Response Feedback: The correct answer is that Franz should make adjustments to derive a value for a minority interest with limited marketability. The pricing guidance from the public market is for minority interests that are freely traded. The pricing guidance from M&A transactions is for a controlling interest. To value the minority interest with trading restrictions, Franz will have to make adjustments.

QRST Corporation has 1,500 employees worldwide. In a recent internal audit finding, QRST Corporationidentified that 10 of their employees have the same address and direct deposit information. The internal auditor should suspect which type of scheme? Slush fund payments. Expense reimbursement fraud Fictitious vendor frauds involving employees Ghost payroll schemes

Ghost payroll schemes

Which of the following are data visualization techniques? None of these are types of data visualization. All of these are types of data visualization. Pivot tables of Excel data Heat maps Analyses of photographs and images

Heat maps

Which of the following is a true statement about staffing and supervision of litigation services engagements? If an error is found in an expert report, and the error is shown to have been the result of the work of junior staff, then expert is not deemed to be at fault. There are no specific AICPA requirements for supervision of litigation services engagements. An AICPA member is only required to provide an opinion that is free of material error and admissable in court. Generally, expert witnesses work alone and have few staff members supporting them. For this reason, supervision and control have less importance in litigation assignments than in other CPA services. If an expert fails to adequately direct and supervise the work performed, the expert may not be in compliance with Statement on Standards of Forensic Services No. 1 and may be attacked for inadequate foundation for the opinions offered.

If an expert fails to adequately direct and supervise the work performed, the expert may not be in compliance with Statement on Standards of Forensic Services No. 1 and may be attacked for inadequate foundation for the opinions offered.

Which of the following is a true statement? If a chief executive officer (CEO) has been accused of wrongdoing, the Internal Audit Director is generally considered to be independent, as long as they are sufficiently critical and even-handed in their approach. If an investigation has not been competently executed, it can always be reperformed to obtain a reliable result. If the investigation is not competently executed by objective people, it may not be reliable. If an investigation team is not independent, as defined by the American Institute of Certified Public Accountants, the investigation outputs may not be relied upon.

If the investigation is not competently executed by objective people, it may not be reliable.

Which statement is not true about whistleblower allegations? They can come to the organization's attention in many ways. If they come from disgruntled employees, they should be given less weight. Organizations should have a business process for triaging allegations that results in review by someone with appropriate authority. If the whisteblower allegation involves a member of senior management, the allegation should be reviewed by a designated member of the board.

If they come from disgruntled employees, they should be given less weight.

In 2000, WorldCom began improperly classifying operating costs as long-term capital investments. What kind of fraud scheme was this? Improper capitalization of expenses Round-tripping Understatement of liabilities Investment advisor fraud

Improper capitalization of expenses Response Feedback: The correct answer is "Improper capitalization of expenses." See the Guide to Forensic Accounting Investigation at p. 223 for more discussion of this topic.

Ella is a partner in RegionalStar LLP, a mid-tier accounting firm. Ella is an actuary and CPA, and usually provides insurance-related consulting services. She has agreed to serve as an expert witness in a litigation matter involving pension-related actuarial calculations and the reporting of pension liabilities for tax purposes. Ella has had a team of 4 people working on the underlying assignment. None of them have worked on a litigation assignment before. The staff members have built the actuarial models in the same way as usual, and make the same kinds of assumptions that are normally made for this kind of analysis. The senior manager on the team has done all the detailed technical review. Ella has confidence in her team and their skill. Ella has been briefed on the model, has performed a top-side review and has handled all the client interaction. Ella is preparing for her deposition. Which of the following is a TRUE statement? In order to be adequately prepared for her deposition, Ella should personally review all the relevant underlying evidence, including any evidence that is in conflict with her analysis, understand the bases for all assumptions, and be familiar with all the detailed calculations before her deposition. Since the assumptions in the financial model are consistent with those used in non-litigation engagements, Ella does not need to form a basis for them with underlying evidence. Ella can reasonably rely on the work of her team without conducting a detailed review because of the skill and experience of the senior manager. Ella's work did not comply with the Statement on Standards for Forensic Services No. 1 because Ella relied on the work of subordinates who had no training or experience in providing forensic services.

In order to be adequately prepared for her deposition, Ella should personally review all the relevant underlying evidence, including any evidence that is in conflict with her analysis, understand the bases for all assumptions, and be familiar with all the detailed calculations before her deposition.

Which of the following is NOT a true statement about the market approach? There are databases of merger and acquisition transactions that can be used to gather pricing guidance by reference to completed transactions for companies similar to the subject company. One important decision in the guideline company method is the selection of a group of publicly-traded companies for the purposes of pricing guidance. It's important to select companies with similar characteristics to the subject company. In order to ensure the reliability of the business valuation, valuation analysts rarely adjust the pricing guidance derived from public markets. Market prices are usually expressed as a multiple of some business measure, such as earnings or cash flow. These multiples are then used to price the same measures for the subject company.

In order to ensure the reliability of the business valuation, valuation analysts rarely adjust the pricing guidance derived from public markets. Response Feedback: It is incorrect to say that analysts uses the pricing guidance without adjustments. Normalizing adjustments are frequently made so that the information from the guideline companies is comparable to that of the subject company.

The American Institute of Certified Public Accountants describes two types of forensic accounting services. They are (check two): Detective services Investigative services Litigation services Insurance services Enforcement services

Investigative services Litigation services

Which of the following is a true statement? It is a leading practice to assign the responsibility for fraud risk management to a a single senior executive to establish and organizational commitment and to ensure accountability for the program. Once a senior executive has been given responsibility for a fraud risk management program, the governance over the program shifts to that executive. If a single senior executive were assigned responsibility for fraud risk management, other executives would not put significant emphasis on fraud. The performance objectives for the people with responsibility for fraud risk management should include metrics on th reduction in reports of fraud allegations over time.

It is a leading practice to assign the responsibility for fraud risk management to a a single senior executive to establish and organizational commitment and to ensure accountability for the program. Response Feedback: It is important to assign the responsibility for fraud risk management to a single senior executive to establish and organizational commitment and to ensure accountability for the program. The other answers are not true. Assigning one person to be accountable for the program does not reduce the responsibility of everyone in the organization to be accountable for fraud risk management. Although the person who has responsibility for fraud risk management should be accountable, it would not be appropriate to incentivize for a reduction in reports of fraud. In fact, reporting of potential frauds should be encouraged. Finally, governance responsibility remains with the board.

When an employee misappropriates case by diverting a payment from one customer for their own use, and then hides the defalcation by diverting cash receipts from another customer to offset the receivable from the first customer, the scheme is called _________________. Lapping Application error Account shelling Off-loading

Lapping

Trusts, offshore banks and bank transfer activity are typically elements of what kind of money laundering stage? Proceeds of crime Integration Placement Layering

Layering Response Feedback: Layering is the process of moving, dispersing an disguising funds to conceal their illegal origin and make them more useful. Offshore banks, trusts and transfers of money are frequently used to layer assets.

Which of the following attributes should be evaluated in a fraud risk assessment? (Check all that apply.) Likelihood of occurrence Country of origin Significance of exposure Availability of data for analytics

Likelihood of occurrence Significance of exposure

Accounting Firm LLC is the auditor for Public Company Inc. Public Company, an SEC registrant, is in the middle of litigation with one of its suppliers. Can a partner of Accounting Firm LLC serve as an expert witness in this litigation matter? Yes No

No

LMNOP Accounting Firm conducted an audit of Little Company Inc. Little Company was sued by Stan Shareholder, and LMNOP's audit partner was called to testify as a fact witness about some statements that the CEO made during a board meeting at which the audit partner was present. LMNOP's audit partner will not testify as an expert. Will this testimony impair LMNOP's independence for next year's audit? Yes No

No

Crandall Well Drilling Supplies Co. has a standard contract for sales of goods. Steve, a sales executive with the company, negotiated a large order with a key customer. To place the large order, the customer demanded special terms and conditions, including special rights of return. The special terms and conditions were memorialized in a side letter to the standard contract. The side letter and the standard contract were forwarded to the accounting department who evaluated all the terms and conditions in determining the proper revenue to be recognized. When Pam, the auditor, saw the side agreement, she concluded that it was improper because it was a side agreement with unusual terms and conditions. Is Pam correct? Yes No

No Response Feedback: No. Pam is not correct. Having a side letter isn't the issue. The reason that side letters are so frequently improper is that they are used to hide special terms and conditions from the accounting department, management and auditors. As long as a full and complete understanding of the terms and conditions are included in the analysis of the revenue recognition, a side letter can be proper.

Abby is a forensic accounting practitioner. An attorney has contacted her to serve as an testifying expert in a matter involving Manhattan Landlord Co. The attorney plans to send Abby a package of confidential documents for her initial review. What should Abby do first? Perform a conflict check to ensure that neither she nor her firm has a conflict of interest that would prevent her retention. Review the confidential documents on a no-names basis to ensure that the case is appropriate for her expertise. Describe her experience by sharing the details of her work for other clients, including the challenges the clients faced, their legal strategies and how she addressed them in her work. Sign an engagement letter to ensure that liability and confidentiality provisions are in place.

Perform a conflict check to ensure that neither she nor her firm has a conflict of interest that would prevent her retention.

Which of the following is NOT a recommended strategy for strengthening the board's knowledge of business and financial statement risks? Communication with internal and external auditors. Understanding the incentives, pressures, motivations and opportunities for wrongdoing within the company. Maintaining a broad network of information sources inside and outside the organization. Performing ratio analysis on detailed accounts and tracing transactions to underlying support.

Performing ratio analysis on detailed accounts and tracing transactions to underlying support. Response Feedback: The correct answer is "Performing ratio analysis on detailed accounts and tracing transactions to underlying support." Ratio analysis and tracing have great value, but such detailed procedures are not the primary tools used by audit committees or boards, except in unusual circumstances.

Jack is valuing a business called Teetering Inc. It is struggling financially. Teetering Inc. has a lot of specialized equipment. If the company is able to stay afloat, the equipment will help the company be profitable over the long term. But, if the company is forced to liquidate it could take a long time to find a buyer for the specialized equipment. Jack's opinion of value of the company will differ based on whether it is considered to be a going concern, whether it is liquidated in orderly manner, or if it is liquidated in a fire sale. The assumption regarding the most likely set of transaction circumstances related to Teetering, Inc. is called the ______of value.

Premise

Which of the following are NOT forensic accounting services? Preparation of a tax return which includes a tax deduction for litigation costs. Gathering evidence necessary to support or refute a claim. Preparation of a tax return which includes a tax deduction for litigation costs. Reconstructing business records after an embezzlement. Testifying as an expert witness on economic damages associated with a business dispute

Preparation of a tax return which includes a tax deduction for litigation costs.

Identify all the potential forensic accounting techniques, as identified in the AICPA's Practice Aid entitled "Forensic Accounting - Fraud Investigation" (Check ALL that apply.) Public document review and background investigation Undercover operations Physical surveillance and observation Case law Attorneys' opening statements in court Interviews of knowledgeable people Jury instructions Analysis of financial transactions Confidential sources Analysis of physical and electronic evidence

Public document review and background investigation Undercover operations Physical surveillance and observation Interviews of knowledgeable people Analysis of financial transactions Confidential sources Analysis of physical and electronic evidence

Which of the following is NOT a characteristic of skepticism? Search for knowledge A questioning mind Autonomy or a conviction to decide for oneself Suspension of judgment Self esteem Interpersonal understanding Requiring proof of all assertions.

Requiring proof of all assertions. Response Feedback: Skepticism does not require micro-management or proof for all assertions. The other elements are characteristics of skepticism.

Big Smile Company's internal auditor has begun to investigate unusual sales transactions. She has identified 3 problem transactions, all of which were entered after midnight when the office is closed. She searches the remaining population for any other transactions entered after midnight. What kind of data analytic test is this? Rules-based test Time-series analysis Keyword search Link analysis

Rules-based test

Elena has been retained by the attorney for the Creditors Committee to assist in a forensic search for concealed assets in a corporate bankruptcy matter. Which of the following is NOT an appropriate strategy to search for assets? Search for unbilled client accounts that might indicate assets that have not been recorded Searching Forms W-2 for undisclosed assets Search for intangible or non-book assets. Review of vendors and accounts payable to search for payments that are not for legitimate business purposes

Searching Forms W-2 for undisclosed assets Response Feedback: The correct answer is "Forms W-2". These are helpful for individual bankruptcies, but would not be a significant source for information in a corporate bankruptcy. For more on this topic, see Essentials of Forensic Accounting, pp. 279-280.

Lydia is a partner in a small CPA firm. She has several litigation and expert witness engagements and two of the cases have deadlines on the same week. Lydia hired a new staff person to help. The staff member was a recent college graduate and had little experience this type of engagement. Her staff member assembled an Excel model for economic damages and drafted the expert report. Because she had little time, Lydia copy and pasted the report into her letterhead format, signed and submitted the report, without performing any additional procedures. What section of the code did Lydia most likely violate? (Use the code section numbering currently is use.)

Section 300

According to the AICPA, which of the following are threats to compliance with the Code of Professional Conduct? (Check ALL that apply. Each correct answer receives credit. Each incorrect answer deducts credit.) Acts discreditable Self-interest threat Undue harshness threat Advocacy threat Adverse interest threat Daubert challenge Latency threat Self-review threat

Self-interest threat Advocacy threat Adverse interest threat Self-review threat

Jane and Judy are divorcing. Jane is the sole owner of a profitable business. The business was the primary source of income for the family during the marriage. Judy has been a homemaker for years while Jane has built her business. In this jurisdiction, Judy is entitled to receive some portion of the value of Jane's business in the divorce. Which of the following is NOT true? Since family law is unique, the expert need not consider the normal standards of business valuation in studying the value of Judy's business in the context of divorce. Generally, in determining the profitability of Judy's business, the expert should identify any nonbusiness expendiures paid through the business and any above- or below-market compensation and make necessary adjustments. The expert should carefully consider the laws and generally accepted approaches in the courts in which Jane and Judy's divorce proceedings will be heard. A financial expert should consider the interplay between the value of the business and the calculation of income available for child support or spousal support.

Since family law is unique, the expert need not consider the normal standards of business valuation in studying the value of Judy's business in the context of divorce.

Gabriel is an accountant at LittleGuy, Inc. LittleGuy is in litigation with SuperBig Corp. SuperBig has subpoenaed all of LittleGuy's records involving a specific contract. Gabriel realizes that some of the documents covered by the subpoena will undermine LittleGuy's legal case. Instead of producing the documents, Gabriel shreds them late at night. Later, he confesses to having done so. What is the term for Gabriel's actions?

Spoliation

Identify all the examples and indicators of a positive corporate culture that promotes ethics and deters fraud. (Check ALL that apply. Correct answers earn points. Incorrect answers lose points.) The company's top three salesman drive a significant amount of revenue. Their supervisors are aware that they routinely take clients out to lavish entertainment, including dinner, sports events, and rock concerts, some of which is not compliant with the company's stated policies. The salesman are reimbursed for their expenses associated with client entertainment and receive year-end bonuses for closing sales. A not-for-profit organization has a clear statement of values and ethics. They developed the statement with input from the board, management and lower level staff. It talks about the real challenges that the organization faces. The organization put the statement on its website and the senior management continues to cite the statement when describing the reasons for some of their decisions. The CEO of the company has an annual "Chairman's Values Award" which honors an employee that best exemplifies the company's ethical standards. The CFO was recently divorced. During the divorce proceedings, the CFO's former husband .alleged that she had withheld critical financial information and lied to the the court. The court ruled that she had made significant misstatements and ruled in favor of her husband. It caused a great deal of gossip in the company, but the CEO made clear that personal matters, like a divorce, had no bearing on the CFO's role within the company. A company conducts annual training on ethics, fraud and regulatory compliance matters. Each year, they update the training to focus on areas of highest risk. Completion of training is considered in year end performance reviews. The Chief Operating Officer has driven down employee expense reimbursements by 15%, but takes the corporate jet to his vacation home. An accounting staff member identified a potential issue in the financial statements that would cause them to be misstated. He raised the concern with his supervisor, and the issuance of the financial statements was delayed. The day the delay in issuing financial results was announced, the company's stock price dropped 16%. The accounting staff member and the supervisor received positive performance reviews at year end. A company has a code of conduct and whistleblower policy that was authored by a leading law firm based on its standard recommendations to its clients. The company has operations in 12 countries, but all the documentation is in English. The company plans to retain the law firm to update it, since it hasn't been revised in 3 years. Sridhar works for ABC Corp. He is concerned that his supervisor's instruction to reduce inventory reserves is not appropriate, because the inventories in the warehouse for his his business unit are increasingly obsolete and unsaleable. He checked the code of conduct, and it included specific guidance on how to raise his concerns and reconcile differences of opinion. He was reassured by statements that there will be no retaliation if he uses this procedures. The company conducts an annual employee survey that measures employee satisfaction and other metrics. The survey asks specific questions about whether employees and their supervisors are aware of the code of conduct and feel comfortable reporting suspected wrongdoing. The board has set overall objectives for the fraud risk management at the company, but delegates the responsibility for executing the program to the head of internal audit. The audit committee chair meets quarterly with the head of internal audit to receives progress reports on the program and identify any potential fraud occurrences. Board members are well-informed about the economic environment and the business conditions. They ask good, detailed questions about the organization's operations, financial reports and future prospects. They seek differing sources of information, including various members of management and outsiders.

Sridhar works for ABC Corp. He is concerned that his supervisor's instruction to reduce inventory reserves is not appropriate, because the inventories in the warehouse for his his business unit are increasingly obsolete and unsaleable. He checked the code of conduct, and it included specific guidance on how to raise his concerns and reconcile differences of opinion. He was reassured by statements that there will be no retaliation if he uses this procedures. The company conducts an annual employee survey that measures employee satisfaction and other metrics. The survey asks specific questions about whether employees and their supervisors are aware of the code of conduct and feel comfortable reporting suspected wrongdoing. The board has set overall objectives for the fraud risk management at the company, but delegates the responsibility for executing the program to the head of internal audit. The audit committee chair meets quarterly with the head of internal audit to receives progress reports on the program and identify any potential fraud occurrences. Board members are well-informed about the economic environment and the business conditions. They ask good, detailed questions about the organization's operations, financial reports and future prospects. They seek differing sources of information, including various members of management and outsiders. An accounting staff member identified a potential issue in the financial statements that would cause them to be misstated. He raised the concern with his supervisor, and the issuance of the financial statements was delayed. The day the delay in issuing financial results was announced, the company's stock price dropped 16%. The accounting staff member and the supervisor received positive performance reviews at year end. A company conducts annual training on ethics, fraud and regulatory compliance matters. Each year, they update the training to focus on areas of highest risk. Completion of training is considered in year end performance reviews. A not-for-profit organization has a clear statement of values and ethics. They developed the statement with input from the board, management and lower level staff. It talks about the real challenges that the organization faces. The organization put the statement on its website and the senior management continues to cite the statement when describing the reasons for some of their decisions. The CEO of the company has an annual "Chairman's Values Award" which honors an employee that best exemplifies the company's ethical standards.

Which of the following is not a true statement? Forensic accountants analyze business issues in legal disputes. Testimony as an expert witness and communicating findings is outside the work of forensic accountants. Forensic accountants sometimes focus on financial statement frauds and embezzlements. Forensic accountants work as part of government enforcement agencies, such as the FBI.

Testimony as an expert witness and communicating findings is outside the work of forensic accountants.

Peter is a CPA. Peter has been retained to provide expert testimony on behalf of the defendant in a business litigation matter in U.S. Federal Court. The plaintiff's counsel filed an objection with the court, asserting that Peter is not qualified to provide expert testimony in this matter. What kind of information could Peter and defendant's counsel provide to the Court that might overcome this objection? Testimony regarding his knowledge, skill, experience training or education in technical matters relating to this case. Affidavits and letters of recommendation attesting to his integrity. Evidence obtained from the plaintiff in discovery. The underlying calculations and workpapers he generated in executing the engagement.

Testimony regarding his knowledge, skill, experience training or education in technical matters relating to this case.

Which of the following is NOT a red flag of related party transaction that may be a sham? The CEO of a privately-held company sold a plot of land to the company. It will be used for the company's new distribution center. The purchase price was based on an independent appraisal. The transaction was approved by independent board members. The CEO of a privately-held company sold a plot of land to the company. The land is a summer vacation home that the CEO uses for corporate entertaining. The CEO's family uses the property for vacations in the summer. The agreements state that the purchase price is fair market value. The sale price was within the CEO's authority, so no board vote was taken on the transaction. Company A has invested in a joint venture with Company B. The Joint Venture is a separate legal entity. Company A sells products to the Joint Venture company. At the same time, the Joint Venture Company also provides services to the Company A. The sales to the Joint Venture are more profitable than most of Company A's business. A software company sells English-language publishing software. Near the end of the quarter, they entered into a partnership agreement with a Bulgarian distributor for rights to sell the product in Bulgaria only. The distributor will provide a substantial up front payment for the rights to sell the software in Bulgaria. The sale is material to the revenue for the company's quarterly results. All of these are red flags of potential sham transactions.

The CEO of a privately-held company sold a plot of land to the company. It will be used for the company's new distribution center. The purchase price was based on an independent appraisal. The transaction was approved by independent board members. Response Feedback: The correct answer is "The CEO of a privately-held company sold a plot of land to the company. It will be used for the company's new distribution center. The purchase price was based on an independent appraisal. The transaction was approved by independent board members." In this case, there appears to be a bona fide business use for the property, evidence of fair market value, and approval by independent directors. This looks real. A discussion of this topic is in the Guide to Forensic Accounting Investigation pp. 204-205.

The AICPA's Code of Professional Conduct states that various relationships or circumstances may create threats to the members compliance with applicable rules. One of these potential threas is called the "advocacy threat". Which of the following is true about the advocacy threat? The advocacy threat relates to situations in which the member promotes the client's interest to such an extent that objectivity and independence is compromised. Forensic accountants rarely experience advocacy threats, since attorneys are usually serving as the legal advocate. Advocacy threat describes situations in which the AICPA member advocates for their own professional opinion in a court setting. Advocacy threat exists when a close friend of the member is employed with one of the law firms involved in an investigation or litigation matter.

The advocacy threat relates to situations in which the member promotes the client's interest to such an extent that objectivity and independence is compromised.

Frozen Fish Company had a profitable contract to provide 50 cases of frozen specialty fish products to SuperDuperMarket each week for a year. After the first two weeks of the contract, SuperDuperMarket cancelled and refused to take shipments. At the time that SuperDuperMarket had cancelled, Frozen Fish Company had already purchased all the goods it needed to fulfill the contract and had the goods stored in their freezer. No other buyer wanted these specialty fish products. After many attempts, Frozen Fish Company ultimately sold them at a steep discount to another customer. (This paragraph is the same as the prior question.) The case went to trial 2 years after the date of the SuperDuperMarket's cancellation of the contract. SuperDuperMarket was found to have acted wrongfully. What would be an appropriate measure of lost revenues? The revenues that Frozen Fish might have earned over the contract term plus any potential contract renewals. The amount of revenues anticipated under the contract terms, less the revenues actually earned. The difference between the revenues stipulated in the agreement and the market value of the contract. The revenues under the contract.

The amount of revenues anticipated under the contract terms, less the revenues actually earned.

Jonathan is investigating whether the 500 company employees have obtained expense reimbursements that they were not entitled to. He pulled 3 months of his expense reimbursement activity, and plans to vouch all of the transactions over $500 to the supporting documentation. This approach yielded 2000 transactions to investigate. What is one of the risks of this strategy? It is illegal in the US to investigate expense reimbursement allegations without providing legal counsel to the employees. The approach may be overly broad, resulting in wasted effort and a large number of false positives. This approach may be risky for Jonathan's career. If the expense reimbursments are proper, Jonathan will be criticized. Tracing and vouching are not appropriate forensic techniques for identifying improper expense reimbursement, since they are external audit procedures.

The approach may be overly broad, resulting in wasted effort and a large number of false positives.

Which of the following is a TRUE statement based on the ACFE's 2020 Report to the Nations? An annual external audit is the most common way that occupational fraud is initially detected. Employees in purchasing and sales functions pose the greatest risk of fraud, in part because of their interactions with customers and third parties. The most common method of initial detection of occupational fraud is by a tip or by accident. Because of their responsibility for donor funds and their mission-focus, nonprofit organizations typically have less vulnerability to fraud.

The most common method of initial detection of occupational fraud is by a tip or by accident.

Which of the following is a FALSE statement regarding the Statement of Standards of Forensic Services No. 1 (SSFS No. 1)? SSFS No. 1 generally prohibits contingent fee engagements. If a forensic practitioner performs procedures to support an audit engagement, audit standards will usually apply, but forensic standards will usually not apply. The objective of an investigation assignment is the expression of an opinion as to the existence of fraud. If an AICPA member takes an engagement related to a potential litigation matter, SSFS No 1 will apply, even if the client decides not to file a claim in court.

The objective of an investigation assignment is the expression of an opinion as to the existence of fraud.

What is an investigation sponsor? The person or business that provides the financial resources necessary to execute the investigation. The person who recommends indviduals for membership in the Association for Certified Fraud Examiners. The person or governing body that has decision-making authority over the investigation. The law firm or lawyer that provides legal counsel. to the investigation team.

The person or governing body that has decision-making authority over the investigation.

What is the definition of fair market value? The price in cash at which an asset will change hands between a buyer or seller, acting at arms' length, on a going concern basis, in an open and unrestricted process and with reasonable knowledge of relevant facts. The price in cash at which an asset will change hands between a hypothetical buyer or seller, acting at arms' length, not under compulsion, in an open and unrestricted market and with reasonable knowledge of relevant facts. The price in cash at which an asset will change hands between a specific buyer and specific seller, acting at arms' length, not under compulsion, in an open and unrestricted market and with reasonable knowledge of relevant facts. The value determined by a qualified business appraiser using the average of market, income and asset approaches with reasonable and appropriate assumptions

The price in cash at which an asset will change hands between a hypothetical buyer or seller, acting at arms' length, not under compulsion, in an open and unrestricted market and with reasonable knowledge of relevant facts. Response Feedback: The correct answer is: "The price in cash at which an asset will change hands between a hypothetical buyer or seller, acting at arms' length, not under compulsion, in an open and unrestricted market and with reasonable knowledge of relevant facts."

Based on the KPMG study entitled, "Global Profiles of the Fraudster" (2016), which of the following is NOT true? The study reveals that there is a clear profile of the fraudster. Based on that profile, we can predict who will commit fraud with reasonable certainty. Fraud threats are constantly changing and companies need to conduct regular risk assessments and adjust their anti-fraud approaches, as needed. Technology both enables fraud, but also can assist in combatting fraud. Weak internal controls are a contributing factor in many frauds

The study reveals that there is a clear profile of the fraudster. Based on that profile, we can predict who will commit fraud with reasonable certainty.

Jorge is a CPA and works for a member firm of the AICPA. He is also a CFE. He has been retained as a forensic accounting expert in a litigation matter. It is expected that he will be called to testify about his opinion at trial. Which of the following is a TRUE statement? There are legal standards as to whether an expert is qualified to testify at trial. If Jorge is not found to be qualified to express a particular opinion, he will not be able to testify. Because of Jorge's expertise, he is permitted to express an opinion as to whether specific conduct is fraudulent. Jorge's work is subject to the AICPA standards, but ACFE standards only apply if the matter relates to occupational fraud. Jorge should conduct his forensic work in accordance with generally accepted auditing standards (GAAS).

There are legal standards as to whether an expert is qualified to testify at trial. If Jorge is not found to be qualified to express a particular opinion, he will not be able to testify.

Mary Beth is the CFO of a company that sells advertising on the web. She is well-qualified for the job, with a CPA, an MBA and many years of experience in accounting and finance for internet companies. The company places ads for various companies and receives payment based on the number of times the ad is clicked. The amount of click-based revenue continues to grow as a proportion of the company's overall income, and there are a number of difficult accounting judgments associated with revenue recognition. Roughly half of Mary Beth's compensation is paid as a part of the year-end bonus on earnings results. Mary Beth has a good relationship with the audit team and the board. They ask about revenue recognition every quarter. Mary Beth is always on top of things and has all the information that anyone asks for. Based on the information Mary Beth has presented, the revenue looks solid. Which of the following is NOT true? There is little risk of revenue-related fraud, since Mary Beth is well-qualified, has command of the relevant information, there is an external audit and the board is asking questions each quarter. The existence of a significant amount of variable compensation based on earnings increases the risk of fraud or manipulation of earnings results to meet performance targets. Although Mary Beth seems entirely competent, there is always a risk of management override, particularly if the auditors and the board are reliant on Mary Beth for most of their information. The existence of complexity in the internet-based revenues and the accounting judgments increases the opportunity for fraud, as compared to a simple, objective revenue process.

There is little risk of revenue-related fraud, since Mary Beth is well-qualified, has command of the relevant information, there is an external audit and the board is asking questions each quarter. Response Feedback: The correct answer is "There is little risk of revenue-related fraud, since Mary Beth is well-qualified, has command of the relevant information, there is an external audit and the board is asking questions each quarter." There are several risk factors present in this discussion, including the confidence and trust of the auditors and board, the complexity of the revenue recognition judgments, the pressures associated with the variable compensation structure. Even though Mary Beth is a trusted, competent person, the risk of management override is present.

Select ALL of the statements below that describe red flags associated with bribes through third parties. There is no consulting agreement, or the agreement only vaguely describes the services to be performed. The payments for the intermediary or third-party must be made to offshore accounts. The third-party consultant is knowledgeable and provides a bona fide service. The distributor or intermediary receives free goods or unreasonably large discounts. A government official specifically requested or insisted on using this consultant. A consultant has the same nationality or ethnic background as the government official with authority over business. The consultant is a foreign national or is based in a country outside the United States. The payments to the third-party agents or consultants are excessive when compared with market rates.

There is no consulting agreement, or the agreement only vaguely describes the services to be performed. The payments for the intermediary or third-party must be made to offshore accounts. The distributor or intermediary receives free goods or unreasonably large discounts. A government official specifically requested or insisted on using this consultant. The payments to the third-party agents or consultants are excessive when compared with market rates. Response Feedback: The answers for this question can be found at the FCPA Resource Guide on pp. 22-23.

Which of the following is NOT true about expert depositions? Information gathered during the deposition may be used to form a basis to exclude the expert's testimony in whole or in part. There is no professional liability exposure for CPAs providing litigation services. The witness is obligated to testify under oath and answer all questions truthfully. Information gathered during the deposition may be used to develop critiques and cross-examination questions at trial.

There is no professional liability exposure for CPAs providing litigation services.

A fraud risk assessment should be documented. One method for documentation is a matrix that lists identified fraud risks, and documents the evaluation of the likelihood of occurrence, the significance of the exposure, the personnel or departments involved, existing fraud control activities, their effectiveness, the residual fraud risks, and the responses to those residual risks. True False

True

Attorney-client privilege is the attorney's client's right to refuse to disclose and to prevent any other person from disclosing confidential communications between the client and his or her attorney. True False

True

Disqualification of an expert due to a lack of appropriate credentials for the subject matter of the testimony or because of a poor analysis of the facts can impair a witness not only for the matter at hand but also for years to come. True False

True

During an investigation, investigators may document the chain of custody of evidence, which reflects the order in which a piece of evidence was acquired and handled and the unbroken train of accountabilty for that evidence. True False

True

During the discovery phase of litigation, the financial expert may identify and collect evidence, educate counsel about the financial aspects of the matter, analyze facts, develop any necessary assumptions and form an expert opinion. True False

True

Expert opinions are exempt from generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS), although the application of GAAP and GAAS may be relevant if they are the subject matter of the dispute. True False

True

Family law engagements can include both fraud investigation elements, such as searching for undisclosed or diverted assets, and business valuation elements. True False

True

Forensic accountants working in family law may be asked to trace the origin of assets to determine whether the property should be classified as marital or community property or the separate property of one spouse. True False

True

Forensic accounting is the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, research and investigative skills to collect, analyze, interpret and communicate findings. True False

True

Frozen Fish Company had a profitable contract to provide 50 cases of frozen specialty fish products to SuperDuperMarket each week for a year. After the first two weeks of the contract, SuperDuperMarket cancelled and refused to take shipments. At the time that SuperDuperMarket had cancelled, Frozen Fish Company had already purchased all the goods it needed to fulfill the contract and had the goods stored in their freezer. No other buyer wanted these specialty fish products. After many attempts, Frozen Fish Company ultimately sold them at a steep discount to another customer. (This paragraph is the same as the prior question.) Frozen Fish Company's efforts to sell the specialty products to another buyer is an example of mitigating damages. True False

True

In determining the lost earnings of children, the expert generally cannot rely on established earnings history. For these cases, the expert may be able to calculate projected earnings using national average earnings rates by age, gender and education level based on government surveys and otherwell-recognized studies. True False

True

In the context of litigation, damages are generally NOT recoverable for losses beyond an amount that the evidence permits to be established with reasonable certainty. True False

True

Keyword searching scans free text fields and unstructured data to identify suspicious or high-risk language within data. True False

True

Lost profits generally means the difference in profits between (a) what the plaintiff would have earned but for the defendant's actions and (b) the actual profits made by the plaintiff. True False

True

Management has the primary responsibility for preparing financial statements and safeguarding assets. True False

True

Mediation generally involves the use of a neutral third party to facilitate the parties' negotiations in the context of a dispute. The mediator renders no decision and has no authority to impose a solution. Rather, the mediator seeks to resolve the dispute through a voluntary process. True False

True

One method for accomplishing litigation discovery is "request for production". These are requests for one party in a litigation to produce or make available certain specifically identified evidence, such as documents or electronic evidence. True False

True

Periodic reassessment of fraud control activities should include: Ensuring that existing controls are working as designed; Refreshing and updating the fraud risk assessment and design of the controls; and Seeking efficiencies and filling gaps. True False

True

Prejudgment interest is used to compensate the plaintiff for the interest not earned on lost profits from the date of the incident or event giving rise to damages to the date of trial. True False

True

Prior to accepting a litigation-related engagement, the forensic accountant should consider whether they or their firm is professionally competent, objective and free of conflicts of interest with respect to the litigation matter. True False

True

The "before and after" method and the "but for" method describe the same general approach to damages. The underlying theory is that damages should be determined by comparing: a. the profits or net worth before the event or action that caused a loss to b. the profits or net worth after the event or action that cause a loss. True False

True

The AICPA has issued various practice aids for forensic and litigation services professionals. They are non-authoritative and are designed to assist the practitioner when performing forensic accounting and fraud examination services. - True - False

True

The biggest frauds tend to be those in which management overrides controls or when multiple people collude to circumvent controls. True False

True

The method of determining pre-judgment interest and the applicable interest rate will depend on many factors, including the court, the jurisdiction and the facts and circumstances of the case. True False

True

Weak internal controls or gaps in internal controls are a common root cause for failure to prevent or detect fraudulent activity. True False

True

When a business takes in cash receipts, it is important to have strong controls to create a record of cash receipts at the earliest possible point and to deposit the cash into the back as soon as possible. True False

True

Under the "books and records provisions" (or accounting provisions), companies are required to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of companies subject to the FCPA. True False

True Response Feedback: This is a true statement

A forensic accountant can serve in a variety of roles in a bankruptcy setting, including consultant, administrator of the estate, examiner, financial analyst or investigator. All of these roles share a common requirement to fulfill the requirements of the law to the bankruptcy estate while preventing fraud or material errors. True False

True Response Feedback: This is a true statement.

Money laundering is the act of concealing or disguising funds obtained through illegal activity so that they appear to have been generated through legal, legitimate sources. True False

True Response Feedback: This is a true statement.

One fundamental difference between an accounting error and a fraudulent misstatement is intent. True False

True Response Feedback: This is a true statement.

Transparency International' s Corruption Perception Index can be used to identify or score higher risk transactions and business environments. True False

True Response Feedback: This is a true statement.

Bust-out and bleed-out schemes are both abusive schemes that involve intentional actions to transfer value out of a business for the benefit of managers, owners and insiders, while leaving fewer assets available for payment to creditors. True False

True Response Feedback: This is a true statement. For more on this topic, see Essentials of Forensic Accounting, pp. 281-282.

One of the reasons that revenue recognition frauds tend to grow over time is that timing irregularities effectively "borrow" future sales. The next quarter, these sales need to be made up, exacerbating the pressures to find revenues in future quarters. True False

True Response Feedback: This is a true statement. For further information, see p. 187 of the Guide for Forensic Accounting Investigation.

It's generally better to consider the risk of management override as a separate risk during brainstorming. True False

True Response Feedback: This is a true statement. Often, when management override is not considered separately, it is never really addressed at all. It's a difficult dialogue, especially if management is part of the discussion. Making it an explicit element of the fraud risk management program helps make sure it is fully addressed.

External auditors who are engaged to examine the effectivness of an organization's internal control over financial reporting can assess the organization's implementation of COSO's internal control principle number 8 by using the Fraud Risk Management Guide. True False

True Response Feedback: This is a true statement. See additional information in the Fraud Risk Management Guide.

True or False? A petition filed under the Bankruptcy Code results in an automatic stay of the creditors' actions and prohibits any party, with some exceptions, from interfering with the debtor or its property until the court has modified or removed the stay. True False

True Response Feedback: This is a true statement. See p 25.10 of the Litigation Services Handbook for more information about the automatic stay.

Channel stuffing describes the abusive practice of offering deep discounts, extended payment terms or other concessions to customers to induce the sale of products to distributors and retailers, often without properly accounting for the risk or amount of returns or assessing the likelihood of sell-through to the ultimate customers. True False

True Response Feedback: This is a true statement. See pp. 195-196 of the Guide to Forensic Accounting Investigation for further discussion.

Generally, under the U.S. federal bankruptcy laws, liabilities are quantified by class. All of the priority claims must be paid in full before any payments will be made to general unsecured claims. True False

True Response Feedback: This is a true statement. See the lecture segment for more on this topic.

One of the responsibilities of the board of directors (or the audit committee of the board) is oversight of management, including mitigating the risk of management override of controls. True False

True Response Feedback: This is a true statement. See the reading "Management Override of Internal Control: The Achilles' Heel of Fraud Prevention."

One key defense against the risk of management override of internal controls is a vigorous whistleblowerprogram. True False

True Response Feedback: This is a true statement. This is referenced in several of the readings, including the ACFE's Report to the Nations (where "tip" is one of the most common mechanisms for fraud detection.

Which of the following is true with respect to damage calculations? The expert must establish commercial damages with reasonable certainty, but the damages associated with lost earnings of individuals does not need to meet this standard, because of the difficulty in predicting earnings into the future. When calculating the damages for breaches of commercial contracts, expert must use reliable methods and assumptions. If they do not, their testimony may be excluded or may be subject to rigorous cross-examination. Commercial damages, including measurement of lost profits, are typically calculated on an after-tax basis. Damages for the lost earnings of individuals are usually calculated on an pre-tax basis.

When calculating the damages for breaches of commercial contracts, expert must use reliable methods and assumptions. If they do not, their testimony may be excluded or may be subject to rigorous cross-examination.

Which of the following is NOT true with respect to cost of capital used in business valuation? One source for information about costs of capital is the historical observed rates of return for various kinds of assets. The development or selection of cost of capital is an important valuation judgment that is based on market rates of return, the risks associated with the stream of economic benefits being analyzed and other factors. CAPM, Build Up Method and the Black-Scholes-Merton models are all approaches for developing the cost of capital. When discounting a stream of benefits to equity holders, the analyst typically uses the weighted average cost of capital (WACC).

When discounting a stream of benefits to equity holders, the analyst typically uses the weighted average cost of capital (WACC). Response Feedback: The correct answer is " When discounting a stream of benefits to equity holders, the analyst typically uses the weighted average cost of capital (WACC)" WACC is a weighted average cost of capital for both debt and equity (enterprise value). When discounting a stream of benefits to equity holders, the analyst typically uses the cost of equity capital.

Which of the following is NOT an appropriate factor to consider as to whether an expert's testimony or an expert's report will be admissable in Court? Whether the analytical approach used achieves the result or opinion that the client desires. Whether the theory or technique is tested or testable. Whether the approach or methodology has been subjected to peer review or publication. Whether the approach used by the expert is generally accepted within the professional community. All of the above are appropriate considerations.

Whether the analytical approach used achieves the result or opinion that the client desires.

A company has a whistleblower system that is entirely in English. Since their headquarters is in Boston, there is no need to develop systems for reports in languages other than English. Right or wrong? Right Wrong

Wrong

Juan opened a new burrito store. It had been open only two months when a truck from the Big Food Supply Company (BFS) drove through the storefront. Luckily, no one was injured, but the store had to be closed for 6 months while repairs were made. Juan sued BFS, who was found to be responsible. Juan never prepared business plans or forecasts, and he had only two start up months transaction history. It is clear that the first two months were not representative of what the burrito store would have earned in future months, since there were a lot of start up costs and sales patterns had not yet normalized. Which approach would be most appropriate to determine his lost profits? A disgorgement approach based on Big Food Supply Company's profits. Yardstick or benchmark approaches comparing Juan's store to other businesses just like his. A "before and after" approach relying on the two start-up months' data. Juan's damages can not be calculated because there is no way to establish damages with insufficient sales and cost history.

Yardstick or benchmark approaches comparing Juan's store to other businesses just like his.

Charlie works in the forensic accounting group at XYZ LLP, an accounting firm. Charlie is a CPA and a member of the AICPA. Charlie's spouse Pat works for Aerospace Contractor Inc. Pat has a job analyzing optics technology in the research and development department of Aerospace Contractor Inc. Big Law LLP wants to retain XYZ LLP to conduct a forensic investigation of an embezzlement in the accounts payable department of Aerospace Contractor Inc. Charlie heard about the potential engagement and notified the partner about Pat's employment at the company. The partner has considered the relationship and concluded that the ethical threats associated with the relationship are not significant because Pat's role is not associated with the subject matter of the investigation and because Charlie will not participate in the engagement in any way and will have no access to confidential engagement information. The partner concluded that any threat has been mitigated to an acceptable level. She documented her conclusion in the files. Did XYZ LLP comply with the AICPA code of professional conduct? Yes No

Yes

Robert is a CPA and a member of the AICPA. He has been asked to serve as an arbitrator in a business dispute. This type of service is a forensic accounting service. Three years ago, Robert's firm worked on a consulting project for the Claimant in the dispute. Robert is also a neighbor of one of the lawyers working for the Respondent in the dispute. Before accepting the engagement, Robert obtained the consent of the Claimant to disclose the fact of his prior engagement as a consultant. Then, he disclosed both situations (the prior consulting project and the fact that he was neighbors with one of the lawyers) to both of the parties, together with the relevant facts and circumstances. Both parties consented to Robert's retention. Robert documented the parties' consent in the signed engagement letter. Under the AICPA rules, is Robert permitted to serve as an arbitrator in this matter? Yes No

Yes

Robert is the CFO of a privately-owned company. The company had acquired three other businesses in the last few years. The balance sheet includes goodwill and intangibles associated with the acquisition of three other businesses. Robert has conducted recent impairment testing and believes that the goodwill and intangibles are fairly stated because the underlying businesses are profitable. The assets on the corporate balance sheet far exceed the liabilities. However, because of the debt that the corporation has undertaken, and because of the timing of certain corporate expenses, the corporate division has been spending much more cash than is coming in. As a result, the company does not have enough money to pay all the employees this month. Is the company insolvent? Yes No

Yes Response Feedback: Yes, the company is insolvent under the cash flow test. Even though the company has assets in excess of liabilities (the balance sheet test), it is unable to pay its debts when they come due (cash flow insolvency.)

Eileen is a CPA who has been retained by McNulty, McSweeney and McDonald LLP law firm to provide forensic accounting services in a litigation matter. She had a variety of tasks in the engagement, including gathering and analyzing financial records of the defendant and reviewing the financial documents produces by the other side. Another CPA was hired to testify on accounting and auditing matters and an investments specialist was hired to testify on investment strategy matters. Eileen provided comments and suggestions to the CPA and investment specialist, assisted in the quality review of their reports, and helped them prepare for their depositions. Eileen also assisted in analyzing and critiquing the opposing expert's work. Eileen's involvement was never disclosed to the opponents and none of her work product was produced in response to a legally valid subpoena that requested for production of the workpapers of the testifying experts. Did Eileen's work comply with AICPA professional standards and normal litigation requirements in US Federal Court? No, because Eileen's engagement is inappropriate under AICPA standards. Yes, because AICPA requirements prohibit disclosure of confidential client information in this situation. Yes, because Eileen was a consulting expert and was not a testifying expert. No, because all CPAs working on the litgation matter are required to produce all relevant documents whether or not they are testifying.

Yes, because Eileen was a consulting expert and was not a testifying expert.