Forensic Accounting 1e Robert Rufus Laura Miller William Hahn
(Solutions Manual All Chapters, 100% Original Verified, A+ Grade)
SOLUTIONS CHAPTER 1
Introduction to the World
of Forensic Accounting
COVERAGE OF LEARNING OBJECTIVES
WORKPLACE CHAPTER
LEARNING OBJECTIVE QUESTIONS APPLICATIONS PROBLEMS
LO1. Explain what forensic 1, 2, 3, 4, 5,
accounting is. 23
LO2. Identify common types of 6, 7, 8, 9,
forensic accounting engagements. 24, 25
LO3. Compare and contrast the role of
the forensic accountant with the roles of 10, 11, 12
transactional accountants and auditors.
LO4. Identify the necessary skills of 13, 14, 15,
forensic accountants. 16, 17, 18, 33, 35 36, 37, 38
27, 28, 29, 30
LO5. Recognize major providers of
forensic accounting certification and 20, 31 39
continuing education.
LO6. Identify potential careers in
21, 25 34
forensic accounting.
Questions
1-1. Al Capone was sentenced to eleven years in federal prison in 1931 for tax evasion and
failure to file income tax returns for years 1928 and 1929.
1-2. Frank J. Wilson is commonly recognized as the first forensic accountant and rightfully
credited with bringing down Al Capone. His net worth method was the first indirect method
to receive judicial approval and continues to be used by IRS and FBI agents and, of course,
forensic accountants. The net worth method is conducted using the following steps:
Step
1 Determine Ending Net Worth
2 Determine Beginning Net Worth
3 Calculate (–) Change in Net Worth (= $ used for asset acquisitions)
4 Determine Expenditures (= $ consumed)
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, 5 Calculate (+) Total Acquisitions and Consumption
6 Determine Reported Income + Legitimate Sources
7 Calculate (–) Unreported Income
1-3. Forensic accounting is defined in a number of ways by different organizations. Forensic
accounting can be broadly defined as applying accounting, finance, economics, statistics,
law, research, and investigative methods used in the collection, analysis, and
communication of findings for a specific engagement.
1-4. Mindset is a person’s mental state, which evolves from education, experience, and
prejudices. Specifically, a mindset consists of mental processes that dictate how a
person responds to situations or challenges. Activating one mindset instead of another
may change a person’s observations; for example, a particular mindset will impact what
you see, how you see it, which questions you ask, which judgments you form, and which
decisions you make.
For example, students must have a different mindset for different types of exams. If the
exam is taken in essay format, students need to approach the exam with comprehensive
knowledge of the concepts to be covered, but the mindset must be focused on how to
present question responses in a logical and readable manner, with attention to grammar
and punctuation.
On the other hand, if an exam is structured in multiple-choice format, students still need
to approach the exam with comprehensive knowledge of the concepts to be covered, but
the mindset must be focused on how questions are structured, what specifically is being
asked by each question, and what models and techniques might be useful in determining
a correct response. Unlike an essay exam, the presentation of the response is not a
mindset consideration for a multiple-choice exam.
1-5. The four phases of a forensic accounting engagement are: (1) defining the engagement
(i.e., why are we doing this?); (2) discovery, through the gathering of evidence;
(3) analysis, which involves interpreting the evidence; and (4) communication, which
involves presenting evidence or opinions, either orally or in writing.
1-6. Investigative services provided by forensic accountants are:
a. Forensic accounting investigations are engagements that do not involve (at least at the
outset) actual or threatened litigation.
b. Fraud detection is the actual discovery of fraud. Fraud detection includes a variety of
techniques, such as internal control procedure review, statistical analysis, financial
statement analysis, and the use of anonymous reporting channels (e.g., hotlines).
c. A fraud examination is conducted after a crime has been committed. The immediate
challenge is to investigate the allegations or suspicions of fraud—that is, who, when,
how, how much, and who else.
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, d. Fraud deterrence describes proactive (rather than reactive) strategies to prevent fraud.
e. Other investigations include merger and acquisition evaluations, insurance claims,
divorce, and small business valuations, to name a few.
1-7. Litigation services offered by forensic accountants are provided in connection with
actual, pending, or potential legal or regulatory proceedings. These may be criminal or
civil. The two broad categories are expert witness and consulting expert services.
a. An expert witness is an individual who possesses specialized knowledge or expertise
and is engaged to assist a judge or jury in evaluating complex evidence.
b. A consulting expert assists an attorney in advocating for a client. The duties are
similar to those of an expert witness, except that the forensic accountant does not
offer expert testimony in front of a judge or jury.
1-8. The primary differences between an expert witness (testifying) and a consulting expert
(nontestifying) include the following:
Expert Witness Consulting Expert
a. Has specialized expertise Yes Yes
b. Gathers evidence Yes Yes
c. Analyzes quantitative data Yes Yes
d. Prepares an expert opinion report Yes May or may not
e. Prepares questions for witnesses Yes Yes
f. Prepares trial exhibits Yes May or may not
g. Testifies at a deposition or trial Yes No
h. Remains objective Yes May advocate
i. Covered by attorney/client privilege No Yes
j. Helps develop key arguments May or may not May or may not
1-9. Nonfraud engagements that a forensic accountant might perform are numerous. Students
will select different engagement types from among the following:
a. Family law, including business valuations
b. Merger and tax (estate or gift) business valuations
c. Calculation of economic damages
d. Bankruptcy
e. Insolvency and reorganization
f. Computer forensic analysis
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, 1-10. The role of a transactional and forensic accountant are different in the following ways;
see Table 1-2 in the textbook for additional comparisons:
Role Transactional Accountant Forensic Accountant
Timing Day-to-day and month-to-month Conducted on an as-needed
(nonrecurring) basis
Scope Manage the organization’s Defined by the specific
accounting and internal control engagement
system
Objective Capture and record all Address a specific
economic transactions of the question/issue
organization
Purpose Prepare financial statements for Defined by the specific
decision makers engagement
Value Information useful for decision Completion of stated
making purposes engagement objective
Source of Original transactions for the Review detailed financial and
Evidence/Methodology acquisition and employment of nonfinancial data, search
assets, liabilities, equity, public records, conduct
revenue, and expense in the interviews, and make
conduct of business observations.
Sufficiency of Evidence Reasonable assurance Establish facts to support the
conclusion/opinion
Audience Management at all levels and Engaging party
the BOD
1-11. The role of an external auditor and a forensic accountant is different. Some differences
are set forth below (see textbook Table 1-2 for additional comparisons):
Role External Auditor Forensic Accountant
Timing Conducted on a recurring basis Conducted on an as-needed
(nonrecurring) basis
Scope Examination of financial data Defined by specific
engagement
Objective Form an opinion on the overall Address a specific
financial statements taken as a question/issue
whole
Purpose Usually required by third-party Defined by specific
users of financial statements engagement
Value Adds credibility to reported Completion of stated
financial information engagement objective
Source of Evidence / Inquiry, observation, Review detailed financial and
Methodology examination, and nonfinancial data, search
reconstruction of accounting public records, conduct
transactions to support financial interviews, and make
statement representations observations
Sufficiency of Evidence Reasonable assurance Establish facts to support the
conclusion/opinion
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