Fraud 505 - Ch 8 (with Solutions)

Checks are excellent sources of physical evidence. a. True b. False

False Checks are documentary evidence.

Assume that you have selected a random sample of 15 checks from a population of 800 checks. The checks you have selected are the following numbers: 664, 789, 650, 136, 365, 538, 800, 657, 110, 136, 398, 645, 214, 544, and 777. You have determined that no fraud exists in the sample of 15 checks you evaluated. Based on this sample of 15 randomly selected checks, you may conclude that no fraud exists in the population. a. True b. False

False If fraud is not present in the sample, you cannot know for sure whether fraud exists in the population. You would need to examine all checks to be 100 percent sure that fraud does not exist. Based on your sample size, you can state that, at a certain confidence level, the probability of fraud is not more than a certain percent. If you want to be more confident or reduce the probability of fraud, you must take a larger sample.

Photocopies are always preferable to original documents as evidence. a. True b. False

False Original documents are always preferable to photocopies as documentary evidence.

Bates numbers are identifying numbers used by attorneys involved in litigation to track all documents. a. True b. False

True Bates numbers are used by attorneys involved in litigation to track all documents.

Even if photocopies of original documents are allowed to be introduced as evidence in a court of law, they are still considered secondary evidence. a. True b. False

True Depending on the jurisdiction, only four situations usually permit the introduction of photocopies, which are considered secondary evidence, in a court of law.

Marlin Company has suspected something "fishy" for several months. It has noticed that its profits have been slowly decreasing, while revenues have been increasing. After consulting with you, a fraud expert, the company has decided to investigate the purchasing patterns of its three purchasing agents—Curly, Larry, and Moe. You decide that a good method for investigation into the matter is examining a random sample of purchase invoices and verifying their accuracy and validity. Curly's invoices are numbered 0001 through 0999, Larry's are 1000 through 1999, and Moe's are 2000 through 2999. When you approach Curly, Larry, and Moe, they seem somewhat defensive. They begin to harass one another, blaming each other for the mess in which they are involved. Moe even twitches their noses and slaps their heads. Curly attempts to retaliate by poking Moe in the eye, but misses and hits Larry instead. When the three were done, the CFO, Mr. Rutin-Tutin, exclaimed, "Would you three stooges quit fooling around and produce the invoices immediately?" The three shuffled off to their offices, grumbling all the way. They returned a couple of hours later with photocopies of their invoices. When Mr. Rutin-Tutin asked where the original invoices were, they explained that they always copy and destroy the originals for easier storing purposes. Rather annoyed and fed up with the three morons, Mr. Rutin-Tutin directs them to return to their offices. He then asks if you think fraud is occurring, and you reply that there does appear to be something wrong. First of all, they could only produce photocopies of the invoices, which is not acceptable. The fact that it took them a couple of hours to produce these documents also causes suspicion. Mr. Rutin-Tutin hands you the stacks of photocopied invoices and tells you to do your thing. You decide to use discovery sampling as a first step in your examination of the invoices. The results of the sample will provide a basis for making inferences from the sample to the population. Although discovery sampling allows inferences to be made about the population, there is still the possibility that the sample will not be representative of the population; this is labeled sampling risk. Generally, this risk is greater when the fraudulent records relate to a limited number of transactions and/or the fraud occurs at irregular intervals in the dataset. a. True b. False

True Fraudulent (intentional) changes in data occur when the fraud occurs. With some frauds, this may be at regular intervals throughout the dataset, and discovery sampling tends to be effective in such situations. With other frauds, the fraudulent records may be in a limited number of transactions that are not representative of the population, or the fraud may occur at irregular intervals. Statistical sampling can be risky in these situations, but it can be the only method available in tests like sending confirmation letters to third parties. Because of sampling risks involved in discovery sampling, full population analysis should be used wherever possible. The use of computers to automate full population testing is a primary method of eliminating sampling risk. Discovery sampling is an important method in the investigator's toolkit but be sure to evaluate when and where it is most appropriate and useful.

A canceled check typically shows the account number of the person who presented the check, the teller who processed the check, and the sequence number of the transaction. a. True b. False

True If you were investigating a kickback or a forgery scheme, this check would direct you to the teller who processed the transaction and who may remember valuable information about the suspect. In addition, a check would allow you to complete a paper trail of the entire transaction. In e-commerce situations, XML documents and other files provide similar information.

Which of the following is usually the best way to obtain documentary evidence? a. Computer-based queries of full-population accounting and other databases. b. A statistically sound sampling approach like discovery sampling. c. Chance, accident, or tip discovery. d. None of the above are effective methods of discovering evidence.

a. Computer-based queries of full-population accounting and other databases. When these methods are used during concealment investigation, the potential scheme has already been identified and the investigation is underway. The best way to obtain documentary evidence is through computer-based queries of accounting and other databases. As discussed previously, these methods allow full-population analysis and are able to pinpoint evidential records within huge record populations.

Which of the following is not a benefit of statistical sampling? a. It allows auditors to be certain that fraud does not exist in a population. b. It allows quantification of risk. c. It allows inference about a population. d. It is helpful when populations are large.

a. It allows auditors to be certain that fraud does not exist in a population. Discovery sampling is an important method in the investigator's toolkit. However, it is important to evaluate when and where it is most appropriate and useful. Discovery sampling is the easiest of all statistical sampling methods to understand and implement, especially since most audit software applications like ACL and IDEA have functions that perform it. Investigators should never forget that even with discovery sampling, they can never be certain that fraud does not exist in a population of checks. Although discovery sampling does allow inferences to be made about the population, there is still the possibility that the sample will not be representative of the population; this is labeled sampling risk. Another risk can also lead to the wrong conclusion. In this instance, the auditor might examine a fraudulent check and not recognize it; this is known as non-sampling. Discovery sampling is widely used for both audit and fraud discovery purposes. It is very effective at finding errors and control weaknesses because these problems often occur throughout a dataset. Since they are unintentional, they usually occur at regular intervals over time—for example, whenever a control breaks down. Statistical samples are usually fairly representative of the population. Because of sampling risks involved in discovery sampling, full population analysis should be used wherever possible.

What can a fraud examiner conclude if his or her tests confirm that no instances of fraud are present in a sample taken from a population? a. Only that no fraud is present in that particular sample. b. There is virtually no risk that fraud exists in the population. c. The sample is most likely not representative of the population as a whole. d. The population contains no fraud.

a. Only that no fraud is present in that particular sample. The investigator should be aware of the sampling and non-sampling risks associated with discovery sampling. Sampling risk is the risk that the sample was not representative of the population. To reduce sampling risk, the investigator can increase the sample size or use a random number generator to select the items to be examined. As stated previously, sampling risk can be significant when looking for fraud because fraud is often conducted in just a few transactions.

Programs like CaseMap, CaseCentral, ZANTAZ, Ringtail, and DatiCon are examples of: a. Software packages used to index and store evidence. b. Link analysis software. c. Software that implements discovery sampling techniques. d. Forensic software used to investigate hard drives and other digital devices.

a. Software packages used to index and store evidence. The FBI has one of the most sophisticated and advanced document examination laboratories in the world. The organization has been digitizing documents for many years, but it made a significant push in the early 2000s. That effort continues today. Like all information technology efforts, the underlying technology has changed and adapted as it has matured and as needs have changed. One of the most recent statements on the repository was in 2011, when the FBI stated that its Bureau Investigative Document Management and Analysis System (BIDMAS) used a commercial solution to scan and import documents into a central location. Some of the more popular programs used to index and store evidence are CaseMap and MasterFile, but many exist. Web searches for "case management software" and "litigation support software" will reveal current products with many different features.

Enron, one of the largest corporations to ever file for bankruptcy protection, was number 7 on the Fortune 500 list of the largest companies in America as ranked by revenues at the time of its bankruptcy. It was alleged that Enron executives were involved in questionable accounting practices and financial statement fraud, the disclosure of which led to the downward spiral in Enron's stock price and the financial ruin of thousands of employees and investors. In addition to Enron's internal accounting problems, it is alleged that its auditor, one of the large accounting firms, instructed employees to destroy documents related to its work for Enron. Based on your understanding of the role of documentary evidence in fraud investigations, which of the following statements is not true? a. Concealment is generally accomplished by manipulating documentary evidence. b. Documentary evidence generally is not considered by fraud examiners to be as persuasive or reliable as eyewitness testimony. c. Documents make up a significant portion of the evidence in most fraud cases. d. The best way to obtain documentary evidence is through computer-based queries of accounting and other databases.

b. Documentary evidence generally is not considered by fraud examiners to be as persuasive or reliable as eyewitness testimony. Review the discussion in Chapter 8 under the heading "Concealment Investigative Methods." When faced with a choice between an eyewitness and a good document as evidence, most fraud experts choose the document. Unlike witnesses, documents do not forget, they cannot be cross-examined or confused by attorneys, they cannot commit perjury, and they never tell inconsistent stories on two different occasions. In today's interconnected financial world, it is nearly impossible to transfer money without creating documents along the process. Documents are almost always available to the fraud investigator who knows where to find them because most fraud involves money at some point.

Documentary evidence such as private tax returns can usually be obtained only by: a. Subpoena. b. Search warrant. c. Voluntary consent. d. All of these.

d. All of these. Some documentary evidence, while valuable, is extremely difficult to obtain. The most common examples of difficult evidence are Web-based e-mail accounts, private bank records, tax returns, and brokerage records. There are often only three ways to obtain such documentary evidence: (1) by subpoena, (2) by search warrant, or (3) by voluntary consent. Subpoenas are orders issued by a court or a grand jury to produce documents.