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Created By: A SolutionSolutions for Fraud Examination 7th Edition by W.
Steve Albrecht A+
Solution and Answer Guide
ALBRECHT, FRAUD EXAMINATION, 7E, ©2025, 9780357721759; CHAPTER 1: THE NATURE
OF
FRAUD
DISCUSSION QUESTIONS
1. What is fraud?
Answer: Fraud always involves deception, confidence, and trickery. The following is one of the
most common definitions of fraud:
a. “Fraud is a generic term, and embraces all the multifarious means that human ingenuity
can devise, which are resorted to by one individual, to get an advantage over another by false
representations. No definite and invariable rule can be laid down as a general proposition in
defining fraud, as it includes surprise, trickery, cunning and unfair ways by which another is
cheated. The only boundaries defining it are those which limit human knavery.”
Fraud is deception that includes the following elements:
1. A representation
2. About a material point
3. That is false
4. Intentionally or recklessly so
5. That is believed
6. And acted upon by the victim
7. To the victim’s damage
2. How does fraud affect individuals, consumers, and organizations?
Answer: Fraud affects individuals, consumers, and organizations in various ways. Fraud
usually lowers organizations’ net income dollar for dollar. To recover these costs, consumers
and individuals must pay more for goods and services. For example, health care fraud and
insurance fraud increase premiums that individuals must pay. The cost of fraud eventually
reaches every part of the economy, including individuals, consumers, and organizations.
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The 2008 study by The Association of Certified Fraud Examiners estimates that U.S.
organizations lose roughly 7 percent of their annual revenues to fraud. Applied to the
U.S. gross domestic product (GDP), this 7 percent figure translates to approximately
$994 billion in fraud losses.
3. List and describe the five different types of frauds.
Answer:
a. Employee embezzlement: In this type of fraud, employees deceive their employers by
taking company assets. Embezzlement can be either direct or indirect.
b. Management fraud: Distinguished from other types of fraud both by the nature of the
perpetrators and by the method of deception. In its most common form, management fraud is
deception perpetrated by top management’s manipulation of financial statements. The victims
of management fraud are typically stockholders, lenders, and others who rely on financial
statement information.
c. Investment scams or consumer scams: A type of fraud that is perpetrated when fraudulent
and usually worthless investments are sold to unsuspecting investors.
d. Vendor fraud: Perpetrated by vendors; comes in two main varieties: fraud perpetrated by
vendors acting alone, and fraud perpetrated through collusion between buyers and vendors.
Vendor fraud usually results in an overcharge for purchased goods, the shipment of inferior
goods, or the nonshipment of goods even though payment was made.
e. Customer fraud: Usually involves customers not paying for goods purchased, getting
something for nothing, or deceiving organizations into giving them something they should not
have.
4. What is the difference between civil and criminal law?
Answer:
a. Criminal law is the branch of law that deals with offenses of a public nature. Criminal
laws generally deal with offenses against society as a whole. Violators of criminal laws are
prosecuted either federally or by a state for violating a statute that prohibits some type of
activity.
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b. Civil law is the body of law that provides remedies for violations of private rights. Civil
law deals with rights and duties between individuals. The purpose of a civil lawsuit is to
provide compensation for harm done to an individual. Unlike criminal cases, where juries
consist of 12 jurors, juries in civil cases may have as few as six jurors, and the verdict of the
jury need not be unanimous. Additionally, judges often hear civil cases instead of juries. In
civil lawsuits, plaintiffs must only prove their case by the “preponderance of the evidence.” In
other words, there need be only slightly more evidence supporting the plaintiff than supporting
the defendant.
5. For each of the following, indicate whether it is a characteristic of a civil or a criminal
case:
a. Jury may consist of fewer than 12 jurors.
b. Verdict must be unanimous.
c. Multiple claims may be joined in one action.
d. Proven “beyond a reasonable doubt.”
e. Purpose is to right a public wrong.
f. Purpose is to obtain remedy.
g. Consequences of jail and/or fines.
h. Juries may have a less than unanimous verdict.
Answer:
a. Civil
b. Criminal
c. Civil
d. Criminal
e. Criminal
f. Civil
g. Criminal
h. Civil
6. Why was Charles Ponzi so successful with his fraud scheme?
Answer: Charles Ponzi was successful for several reasons. First, Charles Ponzi built confidence
in his scheme by giving early investors a return on their initial investments. Second, Charles
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Ponzi presented his coupon scheme in a way that was easy for investors to understand.
Although the coupon scheme never made any real profits, investors believed that it had. Third,
Ponzi was extremely talented at manipulating victims’ emotions. Ponzi was able to capitalize
on individuals’ greed. When people began to see their friends and family members receive
dividends from investments, they too wanted in on the investment scam.
7. What are some of the different types of fraud-fighting careers?
Answer: As the number of frauds and the amounts of fraud losses increase, so do the
opportunities for successful careers in fraud prevention and detection. In Chapter 1, we have
listed five areas in fraud fighting that will be rewarding and have high demand in the future.
They include the following:
a. Government: This includes FBI, postal inspectors, Criminal Investigation Division of the
IRS, U.S. marshals, inspectors general of various governmental agencies, state investigators,
and law enforcement officials.
b. CPA firms, forensic accounting firms, litigation support firms, and law firms: These
individuals will conduct investigations, support firms in litigation, do bankruptcy- related fraud
work, serve as expert witnesses, consult in fraud prevention and detection, and provide other
fee-based work.
c. Corporations: Individuals who work for corporations will prevent, detect, and investigate
fraud within a company. This category includes internal auditors, corporate security officers,
and in-house legal counsels.
d. Lawyers: Lawyers will defend or prosecute organizations in civil and criminal cases.
e. Consulting: University professors, hospital management, technology corporations, and
the like. People who work in these areas will consult, serve as expert witnesses, extract
evidence from computers and servers, investigate public records, and serve on grand or trial
juries.
8. How do employee fraud and management fraud differ?
Answer: When employee fraud takes place, employees deceive their employers by taking
company assets. Management fraud is distinguished from employee fraud and other types of
fraud in that top management typically commits it to deceive financial statement users.
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