Forensic Accounting and Fraud Examination, 2e Richard Riley, Mary-Jo Kranacher
(Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters
Solutions Manual Supplement files download link at the end of this file.
End of Chapter Material
Chapter 1
ANSWER KEY – CHAPTER 1 END OF CHAPTER MATERIAL
CRITICAL THINKING
CT-1 Anthony and Cleopatra. Everything needed to answer the question “how did they die?” is
contained in the following passage:
Anthony and Cleopatra are lying dead on the floor in a villa. Nearby on the floor is a broken
bowl. There is no mark on either of their bodies, and they were not poisoned. With this
information, determine how they died.
Solution. Suffocation. Why? Anthony and Cleopatra are fish. This fact would be observed as soon as the
investigator enters the room. Fish out of water, “lying dead on the floor” would lead to suffocation as
the most likely cause of death. The issue is one of assumptions. Most readers assume that Anthony and
Cleopatra are people. This tends to limit the ability of the reader to “think outside the box” to derive the
proper solution. The challenge is that most people make assumptions and do not even realize that an
assumption is being made. For forensic accounting and fraud examination professionals, it’s critical to
keep an open mind, overtly (to the extent possible) identify all assumptions and base conclusions solely
on the evidence available.
CT-2 The Light Switch. A man stands at one end of a 100 meter curved hallway where he cannot see
the end. Next to him are three light switches, and at the end of the hall is one incandescent light.
How many feet will the man have to walk to definitively say which light switch operates the light?
Solution. 100 meters. How do we know for sure?
Flip on switch 1 and leave it one for a minute or two, then switch it off
Flip on switch 2 and immediately walk 100 meters to the end of the hallway
If:
• The Light is On, Then Switch 2 Controls the Light;
• The Light is Off but Warm, Then Switch 1 Controls the Light;
• The Light is Off and Cold, Then Switch 3 Controls the Light
REVIEW QUESTIONS
1-1 Define fraud and identify a potentially fraudulent situation.
Answer: Fraud is an intentional deception, whether by omission or co-mission, that
causes its victim to suffer an economic loss and/or the perpetrator to realize a gain.
Potentially fraudulent situations may include, for example:
• Misappropriation of funds, securities, supplies, or other assets.
• Impropriety in the handling or reporting of money or financial transactions.
• Profiteering as a result of insider knowledge of company activities.
• Disclosing confidential and proprietary information to outside parties.
• Disclosing to others, securities activities engaged in or contemplated by the company.
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, • Accepting or seeking anything of material value from contractors, vendors, or persons
providing services/materials to the Company. Exception: Gifts less than US $50 in value.
• Destruction, removal, or inappropriate use of records, furniture, fixtures, and
equipment.
1-2 Differentiate between fraud and abuse.
Answer: Although both fraud and abuse involve an intentional deception that causes its
victim to suffer an economic loss and/or the perpetrator to realize a gain, abuse does
not rise to the level of fraud. Abuse is often a way to describe a variety of petty crimes
and other counterproductive behavior, such as surfing the web while at work, coming to
work late or leaving early, using sick leave when not sick, that have become common
and even silently condoned in the workplace.
1-3 Describe the services that a forensic accountant might provide related to a marital
dispute.
Answer: Forensic accountants may assist attorneys with assembling the financial
information necessary to either bolster (if hired by the plaintiff) or undercut (if hired by
the defendant) a case. This may include, for example, locating hidden marital assets or
income, calculating the present value of future cash flow from retirement plans and
providing testimony in the case.
1-4 Explain the differences between an audit, fraud examination, and forensic accounting
engagement.
Answer: Audits, fraud examinations, and forensic accounting engagements have six major
differences:
1. Timing - Audits are conducted on a regular recurring basis while a fraud examination is
nonrecurring and is only conducted on sufficient predication. A forensic accounting
engagement is also nonrecurring and is only conducted after an allegation of
misconduct.
2. Scope - The scope of an audit is general while the scope of a fraud examination or
forensic accounting engagement is specific. Audits are a general examination of
financial information for material misstatements while fraud examiners and forensic
accountants are engaged to resolve a specific allegation.
3. Objective - The objective of auditing is to express an opinion on the financial statements
of an organization. The objective of a fraud examination is to determine whether or not
fraud has taken place and to determine who is responsible, while a forensic accounting
engagement is to determine the financial impact of the allegations.
4. Nature of the relationship - Auditing is non-adversarial while fraud examination is
adversarial in nature. The forensic accountant is independent.
5. Methodology - Auditing primarily entails examining financial data, while fraud
examination and forensic accounting involve gathering sufficient financial and non-
financial evidence to meet their objective.
6. Approach - Auditors are required to approach an audit with professional
skepticism while fraud examiners and forensic accountants attempt to establish
sufficient proof to meet their objective.
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, 1-5 Explain the theory of the fraud triangle.
Answer: The fraud triangle provides an explanation for the conditions necessary for
fraud to occur – perceived pressure, perceived opportunity, and rationalization.
1-6 List the legal elements of fraud.
Answer: Under common law, fraud includes four essential elements:
1. A material false statement
2. Knowledge that the statement was false when it was spoken
3. Reliance on the false statement by the victim
4. Damages resulting from the victim’s reliance on the false statement
1-7 Identify common fraud schemes.
Answer: Common fraud schemes include asset misappropriation, corruption, and false
statements.
1-8 Give examples of non-fraud forensic and litigation advisory engagements.
Answer: Engagements may be criminal, civil or administrative cases that involve
economic damage claims, workplace or matrimonial disputes, or asset and business
valuations.
1-9 Describe the fraud examiner/forensic accountant’s approach to investigations.
Answer: Fraud examination and forensic accounting entail examining documents,
reviewing records, and interviewing witnesses.
1-10 Explain fraud examination methodology.
Answer: Fraud examination involves obtaining documentary evidence, interviewing
witnesses and potential suspects, writing investigative reports, testifying to findings, and
assisting in the general detection and prevention of fraud.
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not an essential element of fraud?
a. A material false statement
b. Knowledge that the statement was false when it was spoken
c. Evidence that the statement was false
d. Damages resulting from the victim’s reliance on the false statement
Answer: C. Evidence is not an essential element. Evidence supporting each element is assumed.
2. Select from the following situations the one that should not be defined as abuse:
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, a. A human resources employee surfs the Internet, including searching for college
friends on social media during working hours.
b. A human resources employee calls in sick and then spends the day getting a car
repaired, going to the DMV and shopping at a local retail outlet.
c. A human resources employee surfs the Internet, including social media during working
hours for information about prospective employees.
d. A human resources employee takes their laptop home for the weekend to search for
college friends on social media.
Answer: C. Because the search is “for information about prospective employees” is not an inappropriate
use of company assets.
3. Which of the following is true with regard to the relative importance of interviewing?
a. Auditors never interview clients and interviewing plays little role in auditing.
b. In a civil litigation setting, very little interviewing is performed by attorneys through the
deposition process.
c. Interviewing is an integral part of auditing, fraud examination and forensic accounting and
all such professionals should develop and refine interviewing skills.
d. In general, auditors are provided exceptional training in interviewing skills and
techniques.
Answer: C. Interviewing is an integral part of auditing, fraud examination and forensic accounting and all
such professionals should develop and refine interviewing skills.
4. Which scenario is an example of larceny?
a. Brook borrowed a company computer and didn’t intend to return it.
b. Larry took cash from the register and replaced it with an IOU.
c. Mary used a company vehicle without her supervisor’s permission.
d. Daniel accepted a new car from a vendor to influence his current company to
purchase additional merchandise from this vendor.
Answer: A. larceny is a “naked” theft with no effort at concealment. Answer B provide some element of
concealment. Answer C doesn’t imply that the usage was for personal purposes. Answer D is more
consistent with corruption.
5. The following evidence might help anti-fraud professionals understand and possibly identify
which of the following types of fraud perpetrators?
a. The perpetrator who has stolen from and been fired by two previous employers in the
last 4 years.
b. Two perpetrators who collude to steal hundreds of thousands of dollars and split the
stolen cash.
c. A financially well-off perpetrator who has been stealing from his House of Worship
every week for the last 15 years.
d. The perpetrator whose spouse is diagnosed with a rare cancer that is not covered by
the employee’s health insurance but whose treatment will be very expensive and cost
more than the employee earns and the employees was the only one with access to bank
accounts and accounting records.
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