(Test Bank) Forensic Accounting

Rufus,Miller,Hahn, 1

Business

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Author(s): Rufus, Miller, Hahn

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1 Copyright © 2015 Pearson Education, Inc. Forensic Accounting (Rufus) Chapter 1 Introduction to the World of Forensic Accounting 1.1 True/False Questions 1) Forensic accounting can be defined as the application of financial facts to legal situations. Answer: TRUE Explanation: Forensic acco unting can be defined as the application of financial facts to legal situations. Diff: 1 LO: 1 -1 AACSB: Analytical Thinking 2) "Trust, but verify" is the general rule while exercising professional skepticism. Answer: TRUE Explanation: Forensic account ants must exercise a healthy dose of professional skepticism. This reflects a proactive, questioning mindset, where nothing is as it seems and "trust, but verify" is the general rule. Diff: 1 LO: 1 -1 AACSB: Analytical Thinking 3) Fraud detection and fra ud examination describes reactive strategies while fraud deterrence describes proactive strategies. Answer: TRUE Explanation: Fraud deterrence differs from fraud detection and fraud examination in that it describes proactive (rather than reactive) strate gies. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 4) The need or motive of the fraud is not the immediate challenge of a fraud examination. Answer: TRUE Explanation: The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committed it, when it was committed, how much was taken, and who else was involved. The why (need or motive), although important to the overall understanding of fraud, is not the immediate challenge. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 5) Fraud deterrence strategies include statistical analysis. Answer: FALSE Explanation: Statistical analysis is a fraud detection strategy. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 2 Copyright © 2015 Pearson Education, Inc. 6) Fact witnesses can express opinion s but expert witnesses cannot. Answer: FALSE Explanation: Expert witnesses differ from fact witnesses in that they can express opinions. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 7) The accounting process has three basic steps: recording, classifying , and summarizing. Answer: TRUE Explanation: The accounting process has three basic steps: recording, classifying, and summarizing. Diff: 1 LO: 1 -3 AACSB: Analytical Thinking 8) The first line of defense against accounting failures within an organizat ion is the external auditor. Answer: FALSE Explanation: The first line of defense against accounting failures within an organization is the internal auditor. Diff: 1 LO: 1 -3 AACSB: Analytical Thinking 9) Deductive reasoning draws conclusions from patt erns. Answer: FALSE Explanation: Inductive reasoning draws conclusions from patterns. Diff: 1 LO: 1 -4 AACSB: Analytical Thinking 10) Expert reports prepared in the course of litigation are exempt from professional report writing standards. Answer: TR UE Explanation: Expert reports prepared in the course of litigation are exempt from professional report writing standards. Diff: 1 LO: 1 -4 AACSB: Analytical Thinking 3 Copyright © 2015 Pearson Education, Inc. 1.2 Multiple -Choice Questions 1) Which of the following best describes the term for ensic accounting? A) It is a discipline that deals with the preparation and analysis of financial statements of companies. B) It is the use of accounting principles to consolidate financial statements of foreign corporations. C) It is a discipline that pri marily deals with methods of preparation of financial budgets of a company. D) It is the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony. Answer: D Explanation: D) Forensic accounting can be d efined as the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony. In other words, it is the application of financial facts to legal situations. Diff: 2 LO: 1 -1 AACSB: Analytical Thinking 2) Whic h of the following is recognized as the first forensic accountant? A) Frank J. Wilson B) Maurice Peloubet C) Alphonse Capone D) Leslie A. Shuway Answer: A Explanation: A) The term forensic accountant was first used by Maurice Peloubet in 1946 in the Journal of Accountancy to recognize and celebrate IRS Special Agent Frank J. Wilson as the man who brought down Capone. Diff: 1 LO: 1 -1 AACSB: Analytical Thinking 3) Which of the following statement is true of forensic accountants? A) They should have a rea ctive mindset. B) They should focus their investigations on numbers rather than looking beyond them. C) They should embrace systematic thinking. D) They must trust their preexisting judgments. Answer: C Explanation: C) Forensic accountants need to be int ellectually curious. In addition to this, they must embrace systematic thinking and exercise a healthy dose of professional skepticism. Diff: 1 LO: 1 -1 AACSB: Analytical Thinking 4 Copyright © 2015 Pearson Education, Inc. 4) Which of the following shows Paul, a forensic accountant, indicating an intellectually curious mindset? A) He relies on the reports given by the management to form an opinion on the financial viability of the business. B) He bases his judgments on the existing industry standards and not on the environment in which the organiz ation operates. C) He gives room for the possibility that mistakes maybe attributable to negligence. D) He questions his understanding of an issue, in spite of being an expert in the field. Answer: D Explanation: D) An intellectually curious individual p ossesses a restless mind -one that is never satisfied with his or her understanding of an issue, regardless of experience and expertise. Moreover, forensic accountants must have the instinct to explore problems that challenge conventional wisdom. Diff: 2 LO: 1-1 AACSB: Reflective Thinking 5) Which of the following situations shows Kelcie, a forensic accountant, exercising professional skepticism? A) Kelcie argues that the immediate previous year's records serve as a better basis for the investigation than the earlier years. B) Kelcie believes that the reputation of the external auditor is an indicator of the reliability of the audit report. C) Kelcie believes in the phrase "guilty, until proved otherwise" and does not presume innocence until she has reason able doubt. D) Kelcie verifies the reports given by the internal auditor against available evidence before using it in her reports. Answer: D Explanation: D) Forensic accountants must exercise a healthy dose of professional skepticism. This reflects a pr oactive, questioning mindset, where nothing is as it seems and "trust, but verify" is the general rule. Kelcie follows this general rule, which indicates professional skepticism. Diff: 2 LO: 1 -1 AACSB: Reflective Thinking 5 Copyright © 2015 Pearson Education, Inc. 6) Which of the following stat ements is true of forensic accounting investigative services? A) These are provided in connection with actual, pending, or potential legal or regulatory proceedings -criminal or civil. B) These are only performed after a crime has occurred. C) These include fraud detection, fraud examination, and fraud deterrence. D) These generally involve actual or threatened litigation. Answer: C Explanation: C) Investigative services provided by forensic accountants are generally related to corporate investigations, wh ich are initiated for the purpose of protecting the organization and its assets from internal or external threats. Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 7) Which of the following is a technique of fraud detection? A) perception of detection B) analy sis of financial statement C) preemployment screening D) evaluation of hiring practices Answer: B Explanation: B) Fraud detection includes a variety of strategies, such as internal control procedures, statistical analysis, financial statements analysis, and anonymous reporting channels (such as hotlines). Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 8) Which of the following is NOT the primary focus of a fraud examination by a forensic accountant? A) Who committed the fraud? B) How was the fraud committe d? C) When was the fraud committed? D) Why was the fraud committed? Answer: D Explanation: D) The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committed it (the fraud scheme), when it was committed (time frame and duration), how much was taken, and who else was involved. The why (need or motive), although important to our overall understanding of fraud, is not the immediate challenge. Diff: 2 LO: 1 -2 AACSB: Analytical Thinkin g 6 Copyright © 2015 Pearson Education, Inc. 9) Which of the following is a difference between fraud examination and fraud detection? A) Fraud examination is done before a fraud has been committed, whereas fraud detection is done after a fraud has been committed. B) Fraud examination is the inves tigation specific allegations or suspicions of fraud, whereas fraud detection is the identification of an error or irregularity after it has occurred. C) Fraud examination focuses on the time and duration of the fraud, whereas fraud detection focuses on th e need or motive of the fraud. D) Fraud examination adapts proactive strategies, whereas fraud detection adapts reactive strategies. Answer: B Explanation: B) Fraud detection is simply the discovery of fraud. Detective procedures are designed to identify an error or irregularity after it has occurred. A fraud examination's purpose is to investigate specific allegations or suspicions of fraud. Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 10) Which of the following is most likely a short -term strategy for f raud deterrence? A) financial statement analysis B) employee invigilation C) time series analysis D) evaluation of hiring practices Answer: D Explanation: D) Examples of short -term (or procedural) strategies include evaluation of hiring practices, intern al controls, and performance monitoring. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 11) Which of the following is a proactive employee strategy of fraud deterrence? A) perception of detection B) analysis of financial statement C) analysis of statistical data D) employee contracts Answer: A Explanation: A) Proactive employee strategies include preemployment screening, employee training, employee monitoring, perception of detection (through internal controls and external audits), and organizational cultu re. Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 7 Copyright © 2015 Pearson Education, Inc. 12) Which of the following forensic accounting services primarily focuses on determining who committed the fraud, the scheme of the fraud, the time frame and duration, how much was taken, and who else was involved? A) fraud detection B) fraud deterrence C) fraud examination D) fraud anticipation Answer: C Explanation: C) The primary focus of a fraud examination is to determine the following elements of the fraud: who committed the fraud, how they committe d it (the fraud scheme), when it was committed (time frame and duration), how much was taken, and who else was involved. Diff: 2 LO: 1 -2 AACSB: Reflective Thinking 13) Which of the following forensic accounting investigation services includes proactive employee strategies such as preemployment screening, employee training, and employee monitoring strategies? A) fraud detection B) fraud deterrence C) fraud examination D) fraud anticipation Answer: B Explanation: B) Because fraud requires individual actor s (the offenders), a reasonable starting point for fraud deterrence is employee relations. Proactive employee strategies include preemployment screening, employee training, employee monitoring, perception of detection (through internal controls and externa l audits), and organizational culture. Diff: 2 LO: 1 -2 AACSB: Reflective Thinking 14) Which of the following best describes a whistle blower complaint? A) It is an informal disclosure of personal issues of an employee with other employees within an organization. B) It is a disclosure by a person of wrong doing or misconduct within an organization. C) It is an annual complaint forum designed to discuss issues of an organization. D) It is a complaint raised by the SEC toward an organization. Answer: B Explanation: B) A whistleblower complaint is a disclosure by a person (usually an employee) of wrongdoing or misconduct within the organization. Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 8 Copyright © 2015 Pearson Education, Inc. 15) Which of the following is the most significant practice compon ent of forensic accounting As indicated by the results of a 2011 AICPA survey? A) bankruptcy B) business valuations C) insolvency and reorganization D) computer forensic analysis Answer: B Explanation: B) The results of a 2011 American Institute of Certi fied Public Accountants survey indicate that business valuations are by far the most significant practice component. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 16) Which of the following are the two major components of forensic accounting services? A) fr aud detection services and fraud deterrence services B) expert services and consulting services C) investigative services and litigation services D) fraud examination services and business valuations services Answer: C Explanation: C) Forensic accounting services are commonly divided into two major components: investigative services and litigation services. Diff: 1 LO: 1 -2 AACSB: Analytical Thinking 17) Which of the following is a difference between an external auditor and a forensic accountant? A) An external auditor captures and records all economic transactions of the organization, whereas a forensic accountant ensures compliance with policy and procedures. B) An external auditor manages the organization's accounting and internal control system, wher eas a forensic accountant validates effectiveness of controls in various processes or areas of the organization. C) An external auditor adds credibility to reported financial information, whereas a forensic accountant provides assurance that management is adequately identifying and mitigating risks. D) An external auditor forms an opinion on the overall financial statements taken as a whole, whereas a forensic accountant addresses a specific question/issue. Answer: D Explanation: D) An external auditor fo rms an opinion on the overall financial statements taken as a whole, whereas a forensic accountant addresses a specific question/issue. Diff: 2 LO: 1 -3 AACSB: Analytical Thinking 9 Copyright © 2015 Pearson Education, Inc. 18) Which of the following is a difference between an internal auditor an d an external auditor? A) An internal auditor conducts the audit because a deficiency has been identified, whereas an external auditor conducts audits on a recurring basis. B) An internal auditor manages accounting and internal control of an organization, whereas an external auditor examines the financial data of an organization. C) An internal auditor's reports are used by the users of the financial statements, whereas the external auditor's reports are used by the management and internal auditor. D) An in ternal auditor reports on the level of compliance with a company's internal policies, whereas the external auditor reports on the level of compliance with external laws and regulations. Answer: A Explanation: A) The internal auditor conducts an audit acc ording to a plan or because a deficiency has been identified. An external auditor conducts an audit on a recurring basis. Diff: 1 LO: 1 -3 AACSB: Analytical Thinking 19) Which of the following is true of transactional accountants? A) They evaluate the int ernal control systems of an organization and test the accounts to ensure that all economic events are recorded and reported properly. B) They form and express an opinion as to whether an organization's financial statements, taken as a whole, reflect its fi nancial position on a given date and the results of its operations for a given period. C) They report on the adequacy of internal controls, the accuracy and propriety of transactions. D) They employ generally accepted accounting principles (GAAP) to proces s information useful in decision making. Answer: D Explanation: D) Accountants working for an organization employ generally accepted accounting principles (GAAP) to process information useful in decision making. Diff: 1 LO: 1 -3 AACSB: Analytical Thinki ng 10 Copyright © 2015 Pearson Education, Inc. 20) The internal auditor's functions exist to support the other three representatives of an organization: A) the board of directors, executive management, and the external auditor. B) the board of directors, executive management, and the transactional accountant. C) the transactional accountant, board of directors, and the external auditor. D) the transactional accountant, executive management, and the external auditor. Answer: A Explanation: A) The internal auditor's function is to report on the ade quacy of internal controls, the accuracy and propriety of transactions, the extent to which assets are accounted for and safeguarded, and the level of compliance with a company's internal policies as well as external laws and regulations. This function exi sts to support the other three representatives of an organization: the board of directors (BOD), executive management, and the external auditor. Diff: 2 LO: 1 -3 AACSB: Analytical Thinking 21) Which of the following is true of an internal auditor? A) The responsibilities of an internal auditor extend beyond the processing functions of a transactional accountant. B) A qualified opinion from the internal auditor adds credibility to the organization and its financial statements. C) The internal auditor issue s reports that are used by the stakeholders and other users to understand the financial statements of an organization. D) The budgets, cash flow statements, income statement, and balance sheet of an organization is prepared by the internal auditor. Answer: A Explanation: A) Aside from management, the first line of defense against accounting failures within an organization is the internal auditor, whose responsibilities extend beyond the processing functions of a transactional accountant. Diff: 1 LO: 1 -3 AACSB: Analytical Thinking 22) The purpose of the ________ is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a gi ven period. A) forensic accountant B) external auditor C) transactional accountant D) internal auditor Answer: B Explanation: B) The purpose of the external auditor is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period. Diff: 2 LO: 1 -3 AACSB: Analytical Thinking 11 Copyright © 2015 Pearson Education, Inc. 23) A ________ records, classifies and summarizes the financial transactions a company. A) transactional accountant B) internal auditor C) external auditor D) management accountant Answer: A Explanation: A) Accountants working for an organization employ generally accepted accounting principles (GAAP) to process information useful in decision m aking. The accounting process has three basic steps: recording, classifying, and summarizing. To facilitate this process, transactional accountants require core accounting skills. Diff: 1 LO: 1 -3 AACSB: Reflective Thinking 24) Which of the following exe mplifies the role of an internal auditor? A) Chloe classifies the transactions of Pole Star, Inc. and records it in the books of accounts. B) Chloe reports on the sufficiency of the insurance policies taken out on the assets of Pole Star, Inc. C) Chloe rep orts on the financial position of Pole Star, Inc. at the end of the accounting period. D) Chloe assists the management of Pole Star, Inc. to determine the taxes and tax benefits.. Answer: B Explanation: B) The internal auditor's function is to report on the adequacy of internal controls, the accuracy and propriety of transactions, the extent to which assets are accounted for and safeguarded, and the level of compliance with a company's internal policies as well as external laws and regulations. Diff: 2 LO: 1-3 AACSB: Reflective Thinking 25) Which of the following exemplifies the role of an external auditor? A) Victor recorded the transactions entered in to by Trident, Inc. in the proper accounting period. B) Victor prepared the annual budget of Trident, Inc., and he also helped the department heads prepare budgets for each department. C) Victor evaluated the internal controls of Trident, Inc. and reported on the financial position as at the year end. D) Victor conducted an investigation into the affairs o f Trident, Inc. to allay suspicions of mismanagement of funds. Answer: C Explanation: C) External auditors, who work for CPA firms, are hired by organizations to evaluate their internal control systems and test their transactions and accounts to ensure t hat all economic events are recorded and reported in the proper accounting period. Diff: 2 LO: 1 -3 AACSB: Reflective Thinking 12 Copyright © 2015 Pearson Education, Inc. 26) Which of the following is the objective of an external auditor? A) form an opinion on the overall financial statements tak en as a whole B) capture and record all economic transactions of the organization C) ensure compliance with policy and procedures; offer recommendations for improvement of internal controls D) address a specific question/issue Answer: A Explanation: A) T he purpose of the external auditor is to form and express an opinion as to whether the organization's financial statements, taken as a whole, reflect its financial position on a given date and the results of its operations for a given period. Diff: 2 LO: 1-3 AACSB: Analytical Thinking 27) Which of the following defines the term deductive reasoning? A) It is defined as reasoning from the general to the specific. B) It is defined as reasoning from a logically valid conclusion to the premises. C) It is defi ned as generalizing results to arrive at a valid conclusion. D) It is defined as reasoning from particular facts to general conclusions. Answer: A Explanation: A) Deductive reasoning is defined as "reasoning from the general to the specific, or from the premises to a logically valid conclusion." Diff: 1 LO: 1 -4 AACSB: Analytical Thinking 28) Which of the following is a process flowing from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion? A) intuitive reasoning B) inductive reasoning C) deductive reasoning D) critical reasoning Answer: B Explanation: B) In contrast to deductive reasoning, inductive reasoning draws conclusions from patterns. The inductive reasoning process flows from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion (that is, bottom up). Diff: 1 LO: 1 -4 AACSB: Analytical Thinking 13 Copyright © 2015 Pearson Education, Inc. 29) All kids like Jelly Bean. Sam is a kid. Therefore, we can conclude that Sam likes Jelly Bean. Which type of reasoning does this indicate? A) intuitive reasoning B) inductive reasoning C) deductive reasoning D) critical reasoning Answer: C Explanation: C) Deductive reasoning is defined as "reasoning from the general to the specific, or from the premises to a logically valid conclusion." In other words, identify two or more general premises (either known or assumed to be true) and then apply these accepted truths to a specific situation. The major premise is "All kids like Jelly bean." The minor premise i s "Sam is a kid." The conclusion is "Sam likes Jelly bean." Diff: 2 LO: 1 -4 AACSB: Reflective Thinking 30) All clouds are white. Some clouds are round. Which of the following can be concluded using deductive reasoning? A) Some clouds are white. B) No co nclusion can be obtained. C) White clouds are round. D) Round clouds are white. Answer: D Explanation: D) In deductive reasoning, identify two or more general premises and then apply these accepted truths to a specific situation. The major premise is "Al l clouds are white." The minor premise is "Some clouds are round." Since all clouds are white, it can be concluded that round clouds are also white. Diff: 2 LO: 1 -4 AACSB: Reflective Thinking 31) All birds have wings. Kiwis have wings. Which of the follo wing can be concluded using deductive reasoning? A) Kiwis are birds. B) No conclusion can be obtained. C) All birds are Kiwis. D) Kiwis can fly. Answer: B Explanation: B) In deductive reasoning, identify two or more general premises (either known or assumed to be true) and then apply these accepted truths to a specific situation. In this case, the major premise is "All birds have wings." However, this does not mean that all winged creatures are birds. Hence, the minor premise "Kiwis have wings" cannot lea d to the conclusion that kiwis are birds. Diff: 2 LO: 1 -4 AACSB: Reflective Thinking 14 Copyright © 2015 Pearson Education, Inc. 32) Which of the following is a primary responsibility of a testifying expert? A) to render an opinion that will assist the judge in understanding the evidence B) to re nder an opinion that will assist the attorney in advocating for the client C) to render an opinion that will assist the attorney in understanding the evidence D) to render an opinion that will assist the trier of fact in reaching a judgment Answer: A Expl anation: A) One of the primary responsibilities of a testifying expert is to render an opinion that will assist the trier of fact (judge or jury) in understanding the evidence. To that end, an expert's opinion must be stated in a legally sufficient manner and must be based on reliable facts, data, and methodology. Diff: 2 LO: 1 -4 AACSB: Analytical Thinking 33) In 2008, the sales of the Trident Inc. went up by 10% and its stock prices increased by 20%. In 2010, the sales of the Trident Inc. went up by 15 % and its stock prices increased by 30%. You conclude that in 2013, since the sales increased by 5%, the stock price will increase by 10%. Which type of reasoning are you using? A) deductive reasoning B) intuitive reasoning C) suggestive reasoning D) induc tive reasoning Answer: D Explanation: D) Inductive reasoning draws conclusions from patterns. The inductive reasoning process flows from a set of specific observations, facts, or data to a working hypothesis and then a general conclusion (that is, bottom up). Here, the pattern in increase in sale along with corresponding increase in stock prices is forming the base for conclusion. Diff: 3 LO: 1 -4 AACSB: Analytical Thinking 34) Which of the following represents the relative importance of the three compon ents of oral communication? A) body language - 55%, voice tone - 35%, and words - 10% B) body language - 30%, voice tone - 50%, and words - 20% C) body language - 45%, voice tone - 25%, and words - 30% D) body language - 20%, voice tone - 10%, and words - 70% Answer: A Explanation: A) The relative importance of the three components of oral communication is: (1) body language, which accounts for roughly 55% of the message; (2) voice tone, which accounts for roughly 35% of the message; and (3) words, which account for only 10% of the message. Diff: 2 LO: 1 -4 AACSB: Analytical Thinking 15 Copyright © 2015 Pearson Education, Inc. 35) Which of the following organizations provide forensic accounting certifications? A) Institute of Certified Cost & Management Accountants B) Institute of Management Acco untants C) American Institute of Certified Public Accountants D) Chartered Financial Analyst Institute Answer: C Explanation: C) American Institute of Certified Public Accountants provides Accredited in Business Valuation and Certified in Financial Foren sics certifications. Diff: 1 LO: 1 -5 AACSB: Analytical Thinking 1.3 Short -Answer Questions 1) Define forensic accounting. Answer: Forensic accounting is a discipline that is focused on: (1) the prevention, detection, and investigation of both occupa tional fraud and financial statement fraud; and (2) the rendering of other litigation -support services. Diff: 1 LO: 1 -1 AACSB: Analytical Thinking 2) Apart from fraud -related investigations, what other investigations are forensic accountants commonly en gaged in? Answer: In addition to the fraud -related investigations previously discussed, forensic accountants are commonly engaged to conduct investigations unrelated to fraud. Examples of such investigations include whistleblower complaints and financial viability concerns. A whistleblower complaint is a disclosure by a person of wrongdoing or misconduct within the organization. Usually, a forensic accountant is utilized when the allegation is considered serious or when the appearance of independence is im portant. Financial viability investigations include short - or long -term assessments of financial and managerial sustainability or the reasonableness of insurance claims. Diff: 2 LO: 1 -2 AACSB: Analytical Thinking 16 Copyright © 2015 Pearson Education, Inc. 3) Write a short note on career opportun ities for forensic accountants in both the private and public sectors. Answer: The forensic accounting profession offers great variety of opportunities, including roles for individuals with different skills and talents. The private sector offers many such roles. Various companies and organizations require forensic accountants for the post of internal auditors and compliance officers. CPA firms and consulting firms need highly skilled professionals to play the role of external auditors, valuation analysts, expert witnesses, consulting experts, and fraud investigators. In insurance companies, forensic accountants can use their knowledge to work as claims examiners or fraud investigators. The public sector also offers a wide spectrum of careers to choose from. Forensic accountants can pursue a career in law enforcement (state and federal) as documents examiners, digital analysts, forensic analysts (FBI), or special agents (FBI). Regulatory agencies (for example, Federal Reserve or SEC) require talented professi onals to act as financial analysts and examiners. Internal revenue services give scope for careers as tax examiners, tax specialists, tax compliance officers, internal revenue agents, and criminal investigators. Government accountability offices are in nee d of financial analysts, financial auditors, and criminal investigators. Diff: 3 LO: 1 -6 AACSB: Analytical Thinking 4) Write a short note on value of critical thinking for forensic accountants. Answer: Critical thinking is a necessary skill for any typ e of investigation, research, or scientific inquiry. The analytical processes employed by forensic accountants are based on a scientific approach. This involves (1) identifying a question, (2) gathering sufficient relevant data, (3) analyzing the data, (4) drawing conclusions, and (5) communicating results. In this context, critical thinking serves as a guiding frame to preserve the integrity of the scientific process. Various threats to the integrity of this process are manifested in the concept of "blind spots." Blind spots are caused by mistakes in reasoning, human irrationality, biases, distortions, and self - interest. Exercising critical thinking can help in the detection of blind spots. Diff: 2 LO: 1 -4 AACSB: Analytical Thinking 17 Copyright © 2015 Pearson Education, Inc. 5) List the major ar eas of the body of knowledge covered in the Certified in Financial Forensics (CFF) Exam and Accredited in Business Valuation (ABV) Exam. Answer: Areas covered in CFF Exam: 1 - Professional responsibilities and practice management 2 - Fundamental forensic knowledge 3 - Specialized forensic knowledge, such as fraud, business valuations, computer forensics, and economic damages calculations Areas covered in ABV Exam: 1 - Qualitative and quantitative analysis 2 - Valuation analysis 3 - Related topics, such as defining the engagement and professional standards Diff: 1 LO: 1 -5 AACSB: Analytical Thinking 1 Copyright © 2015 Pearson Education, Inc. Forensic Accounting (Rufus) Chapter 2 The Legal Environment of Forensic Accounting 2.1 True/False Questions 1) In criminal cases, sanctions generally involve compensation for loss or wrongs suffered. Answer: FALSE Explanation: In civil cases, sanct ions generally involve compensation for loss or wrongs suffered (for example, economic damages). Diff: 1 LO: 2 -1 AACSB: Analytical Thinking 2) Personal justice is justice concerned with the private affairs of citizens and their respective rights. Answer : FALSE Explanation: Justice concerned with the private affairs of citizens and their respective rights is known as civil justice. Diff: 1 LO: 2 -1 AACSB: Analytical Thinking 3) Tax evasion, health care frauds, and bank frauds are covered under civil l aws. Answer: FALSE Explanation: Tax evasion, health care frauds, and bank frauds are covered under criminal laws. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 4) In the case of a jury trial, the trial stage begins with the selection of a jury. Answer: TRUE Explanation: The trial stage begins with the selection of a jury. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 5) The burden of proof is the obligation of the defendant to prove his or her innocence. Answer: FALSE Explanation: The burden of proof is the obligation of the plaintiff or prosecution to prove liability (in a civil case) or guilt (in a criminal case). The defendant is not required to prove his or her innocence -it is presumed. Diff: 1 LO: 2 -3 AACSB: Analytical Thinking 2 Copyright © 2015 Pearson Education, Inc. 6) Mediation is a "mini trial" wherein each party presents its case to one or more mediators, who render a binding decision that generally cannot be appealed. Answer: FALSE Explanation: Mediation is a non -binding informal process wherein a mediator (mutually selected by the parties) evaluates the arguments of both sides and helps the parties reach common ground. Diff: 1 LO: 2 -3 AACSB: Analytical Thinking 7) An expert's testimony is more credible than that of other witnesses. Answer: TRUE Explanation: A higher level of credibility is generally attached to an expert's testimony. Diff: 1 LO: 2 -4 AACSB: Analytical Thinking 8) The trial judge is challenged to carefully qualify the expert but not the testimony of the expert. Answer: FALSE Explanation: The trial judge is challenged to carefully qualify both the expert and his or her testimony. Diff: 1 LO: 2 -4 AACSB: Analytical Thinking 9) A Daubert hearing decides whether the expert is correct. Answer: FALSE Explanation: As provided in Daubert, the "court must focu s on the methodology, not on the conclusions generated by the methodology." In other words, a Daubert hearing is not to decide whether the expert is correct. Diff: 1 LO: 2 -6 AACSB: Analytical Thinking 10) Rule 705 allows an expert to state an opinion wi thout first testifying to the underlying facts or data. Answer: TRUE Explanation: Rule 705 allows an expert to state an opinion without first testifying to the underlying facts or data. Diff: 1 LO: 2 -5 AACSB: Analytical Thinking 3 Copyright © 2015 Pearson Education, Inc. 2.2 Multiple -Choice Questions 1) Which of the following is an example of sanctions in civil cases? A) capital punishment B) home confinement C) probation D) compensation for economic damages Answer: D Explanation: D) In civil cases, sanctions generally involve compensation for loss or wrongs suffered (for example, economic damages). Diff: 1 LO: 2 -1 AACSB: Analytical Thinking 2) Which of the following best describes civil justice? A) justice between parties to a dispute, regardless of any larger principles that might be i nvolved B) justice concerned with the private affairs of citizens and their respective rights C) justice fairly administered according to the rules of substantive law (such as a fair trial) D) justice that conforms to a moral principle Answer: B Explanati on: B) Justice concerned with the private affairs of citizens and their respective rights, including certain freedoms of speech and action and equal treatment, protection, and opportunities regardless of race, sex, or religion is known as civil justice. Diff: 1 LO: 2 -1 AACSB: Analytical Thinking 3) Which of the following forms of justice is fairly administered according to the rules of statutory law? A) social justice B) civil justice C) substantial justice D) criminal justice Answer: C Explanation: C ) Substantial justice is justice fairly administered according to the rules of substantive law (such as a fair trial). Diff: 2 LO: 2 -1 AACSB: Analytical Thinking 4 Copyright © 2015 Pearson Education, Inc. 4) Which of the following scenarios, if identified, can result in a mistrial? A) Ginny, one of the jury, avidly followed the polls conducted by the media to know the people's opinion on the trial. B) Derek, the defense attorney, concealed his client's drinking habit as he felt it would be prejudicial to the client in the ongoing case of banking fraud. C) Silvia, the attorney for the prosecution, raised an objection for every evidence presented by the defense attorney. D) Rico, an expert witness, stated an opinion on the evidence without first testifying to the underlying facts. Answer: A Explana tion: A) Verdicts are (or are expected to be) decided based on the evidence presented during the trial. Consideration of outside information, which has not been subjected to challenge, violates the rules of evidence. If identified, such violations can res ult in removal of the juror/s, mistrials, or appeals. Diff: 2 LO: 2 -1 AACSB: Analytical Thinking 5) Igor, a wealthy entrepreneur, was involved in embezzlement of cash from the office and tax evasion. If discovered, which of the following will he be char ged under? A) criminal law B) constitutional law C) administrative law D) civil law Answer: A Explanation: A) Embezzlement cases are covered under criminal law. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 6) Which of the following is true of our justic e system? A) The law is fast; litigation lasts for one or two hours. B) Trials (aside from the verdict) provide a lot of drama. C) Closing arguments and cross examination are the most important parts of a trial. D) The role of the jury is not passive. Answ er: D Explanation: D) Jury selection and opening statements are the most important parts of a trial. The role of the jury is not passive. Because jurors serve as the trier of fact, they must actively evaluate the evidence and decide who and what to belie ve. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 5 Copyright © 2015 Pearson Education, Inc. 7) Which of the following rules of Federal Rules of Civil Procedure limits discovery of an expert's communications with engaging counsel and any report drafts that may be prepared? A) Rule 26(b)(1) B) Rule 26(b)(4) C) Rule 26(a)(2) D) Rule 26(e)(2) Answer: B Explanation: B) Rule 26(b)(4) of Federal Rules of Civil Procedure limits discovery of an expert's communications with engaging counsel and any report drafts that may be prepared. It also limits discove ry of facts and opinions held by an expert who is engaged to assist counsel in trial preparation (a consulting expert) but not expected to be called as a witness. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 8) Which of the following stages applies to a c riminal case but not to a civil case? A) pleading stage B) discovery stage C) trial stage D) sentencing stage Answer: D Explanation: D) The basic structure of a criminal case is similar to that of a civil case, with the addition of a fourth stage -sentenc ing. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 9) Which of the following is a difference between criminal cases and civil cases? A) A complaint should be accompanied by an investigator's affidavit to initiate a civil case, whereas filing a complaint is sufficient to initiate a criminal case. B) A defendant has an amount of time (20 days) to respond to the complaint in a civil case, whereas he or she enters a plea to the charge during the first appearance in a criminal case. C) A defendant can only enter a plea of guilty or not guilty to charges in a civil case, whereas he or she can also claim lack of sufficient knowledge to respond or assert affirmative defenses in a criminal case. D) Failing to file a timely response can result in a default judgment in a civil case, whereas failing to file a timely response can result in a declaratory judgment in a criminal case. Answer: B Explanation: B) In a civil case, once a defendant has been served with the complaint, the individual or entity has a limited amoun t of time (20 days) to respond by filing an answer. In a criminal case, during the first appearance, the defendant also enters a plea to the charge or charges -guilty or not guilty. Diff: 3 LO: 2 -2 AACSB: Analytical Thinking 6 Copyright © 2015 Pearson Education, Inc. 10) Which of the following is a difference between civil law and criminal law? A) The purpose of civil law is to resolve disputes between individuals or entities, whereas the purpose of criminal law is to convict and punish offenders. B) Under civil law, the burden of proof is on the government, whereas under criminal law, the burden of proof is on the plaintiff. C) Under civil law, the responding party is the government, whereas under criminal law, the responding party is the defendant. D) Civil law sanctions may include imprisonments , whereas criminal law sanctions include compensations but not imprisonments. Answer: A Explanation: A) The purpose of civil law is to resolve disputes between individuals or entities, whereas the purpose of criminal law is to convict and punish offender s. Diff: 2 LO: 2 -2 AACSB: Analytical Thinking 11) Which of the following is true of a civil proceeding? A) The pleading stage is followed by the trial stage. B) The evidence is evaluated by the judge in order to reach a verdict. C) Failure on the part o f the defendant to file a timely response can result in a declaratory judgment. D) The discovery process is governed by the Federal Rules of Civil Procedure in federal courts. Answer: D Explanation: D) In federal courts, the discovery process is governed by the Federal Rules of Civil Procedure (FRCP). Although states may determine their own rules, most have adopted rules that are modelled after the FRCP. Diff: 1 LO: 2 -2 AACSB: Analytical Thinking 12) Andre LeFevre, a testifying expert, failed to includ e changes to the case. These were not been previously presented in his report. He is expecting that this information will be offered at the trial. Which of the following rules of the Federal Rules of Civil Procedure has been violated by Andre? A) Rule 26(b )(1) B) Rule 26(b)(4) C) Rule 26(e)(2) D) Rule 26(a)(2) Answer: C Explanation: C) Rule 26(e)(1) requires a testifying expert to supplement his or her report to include any changes or additional information that has not been previously presented but is expected to be offered at trial. Diff: 3 LO: 2 -2 AACSB: Reflective Thinking 7 Copyright © 2015 Pearson Education, Inc. 13) The trial stage of a legal proceeding involves the voir dire process. What does this process involve? A) It is a process wherein residents from the local county are randomly s elected and summoned to the court to serve as prospective jurors. B) It is a process wherein the jurors collectively evaluate the evidence to render a verdict. C) It is a process wherein all evidence is presented to the jury through witnesses (such as a forensic accountant). D) It is a process wherein the judge and the attorneys question prospective jurors about their backgrounds and beliefs. Answer: D Explanation: D) The jury is selected through a process known as voir dire , wherein the judge and the att orneys question prospective jurors about their backgrounds and beliefs. Diff: 2 LO: 2 -2 AACSB: Analytical Thinking 14) Which of the following best describes the meaning of burden of proof in a trial? A) It is the obligation of the plaintiff or prosecuti on to prove liability or guilt. B) It is the obligation of the jury to prove guilty and reach a verdict after a trial. C) It is the obligation of the defendant to prove his or her innocence. D) It is the obligation of the expert witness to prove his or her reliability in the court. Answer: A Explanation: A) The burden of proof is the obligation of the plaintiff or prosecution to prove liability (in a civil case) or guilt (in a criminal case). The defendant is not required to prove his or her innocence -it is presumed. Diff: 2 LO: 2 -3 AACSB: Analytical Thinking 15) Which of the following statements is true of standards of proof? A) Preponderance of evidence is a higher standard of proof than clear and convincing evidence. B) In a civil case, the requisite standard is a preponderance of the evidence. C) Clear and convincing evidence is evidence that is probably true. D) Preponderance of evidence is evidence that can be proved beyond a reasonable doubt. Answer: B Explanation: B) In a civil case, the requis ite standard is a preponderance of the evidence -more likely than not (>50% probability). Diff: 2 LO: 2 -3 AACSB: Analytical Thinking 8 Copyright © 2015 Pearson Education, Inc. 16) Which of the following statements is true of the two means of settling disputes between parties? A) Alternative dispu te resolution is less expensive than litigation. B) Litigation is faster than alternative dispute resolution. C) Litigation allows for greater privacy than alternative dispute resolution. D) Alternative dispute resolution allows for more transparency than litigation. Answer: A Explanation: A) Alternative dispute resolution may be preferred over litigation because it is less expensive, is generally faster, and allows for greater privacy. Diff: 1 LO: 2 -3 AACSB: Analytical Thinking 17) Which of the follow ing statements is true of rules of evidence? A) The rules of evidence allow expert witnesses greater latitude than other witnesses to testify based on evidence that would not otherwise be admissible. B) The rules of evidence allow other witnesses greater l atitude than expert witnesses to testify based on evidence that would not otherwise be admissible. C) The rules of evidence do not allow both expert witnesses and other witnesses to testify based on evidence that is not admissible. D) The rules of evidence allow expert witnesses and other witnesses great latitude to testify based on evidence that would not otherwise be admissible. Answer: A Explanation: A) The rules of evidence allow expert witnesses greater latitude than other witnesses to testify based on evidence (such as hearsay evidence) that would not otherwise be admissible. Diff: 1 LO: 2 -4 AACSB: Analytical Thinking 18) Which of the following is the purpose of the Federal Rules of Evidence? A) to set standards for evidence to be admissible in co urt B) to dictate the manner in which evidence is to be presented to the jury C) to seek justice and truth in a fair and reasonable manner D) to reduce the delay in trial due to unavailability of evidence Answer: C Explanation: C) The purpose of the Fede ral Rules of Evidence is to seek justice and truth in a fair and reasonable manner. Diff: 1 LO: 2 -5 AACSB: Analytical Thinking