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Forensic Accounting 1e Robert Rufus, Laura Miller, William Hahn
(Solutions Manual All Chapters)
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Copyright © 2015 Pearson Education, Inc. 1
SOLUTIONS CHAPTER 1
Introduction to the World of Forensic Accounting
COVERAGE OF LEARNING OBJECTIVES
LEARNING OBJECTIVE
QUESTIONS
WORKPLACE
APPLICATIONS
CHAPTER
PROBLEMS
LO1. Explain what forensic accounting is.
1, 2, 3, 4, 5,
23 LO2. Identify common types of forensic accounting engagements.
6, 7, 8, 9,
24, 25
LO3. Compare and contrast the role of the forensic accountant with the roles of transactional accountants and auditors.
10, 11, 12
LO4. Identify the necessary skills of forensic accountants.
13, 14, 15,
16, 17, 18,
27, 28, 29, 30
33, 35 36, 37, 38
LO5. Recognize major providers of forensic accounting certification and continuing education.
20, 31 39
LO6. Identify potential careers in forensic accounting. 21, 25 34
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
- Determine Ending Net Worth
- Determine Beginning Net Worth
- Calculate (–) Change in Net Worth (= $ used for asset acquisitions)
- Determine Expenditures (= $ consumed) 2 / 4
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- Calculate (+) Total Acquisitions and Consumption
- Determine Reported Income + Legitimate Sources
- 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:
- Forensic accounting investigations are engagements that do not involve (at least at the
- Fraud detection is the actual discovery of fraud. Fraud detection includes a variety of
- A fraud examination is conducted after a crime has been committed. The immediate
outset) actual or threatened litigation.
techniques, such as internal control procedure review, statistical analysis, financial statement analysis, and the use of anonymous reporting channels (e.g., hotlines).
challenge is to investigate the allegations or suspicions of fraud—that is, who, when, how, how much, and who else. 3 / 4
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- Fraud deterrence describes proactive (rather than reactive) strategies to prevent fraud.
- 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.
- An expert witness is an individual who possesses specialized knowledge or expertise
- A consulting expert assists an attorney in advocating for a client. The duties are
and is engaged to assist a judge or jury in evaluating complex evidence.
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
- Has specialized expertise Yes Yes
- Gathers evidence Yes Yes
- Analyzes quantitative data Yes Yes
- Prepares an expert opinion report Yes May or may not
- Prepares questions for witnesses Yes Yes
- Prepares trial exhibits Yes May or may not
- Testifies at a deposition or trial Yes No
- Remains objective Yes May advocate
- Covered by attorney/client privilege No Yes
- 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:
- Family law, including business valuations
- Merger and tax (estate or gift) business valuations
- Calculation of economic damages
- Bankruptcy
- Insolvency and reorganization
- Computer forensic analysis
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