01 Planning and Conducting a Fraud Examination Flashcards
(25 cards)
Which of the following should be done to prepare an organization for a formal fraud investigation?
A. Notify key decision makers that the investigation is about to begin
B. Notify the organization’s legal counsel when the investigation is about to commence
C. Prepare the managers of the employees who will be involved in the investigation
D. All of the above
D. All of the above
Before commencing a formal investigation (and especially before starting the evidence-collection process), it might be necessary to prepare the subject organization for the investigation. Preparing an organization for an investigation involves such things as preparing the managers of the employees who will be involved in the investigation, notifying key decision makers that the investigation is about to begin, and notifying the organization’s in-house or outside counsel when the investigation is about to commence.
Each fraud examination should be conducted with the assumption that the case will end in litigation.
A. True
B. False
A. True
Each fraud examination should be conducted with the assumption that the case will end in litigation. This will ensure that the fraud examiner maintains accordance with the proper rules of evidence and remains well within the guidelines established by the legal systems.
Which of the following terms is defined as the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, or will occur?
A. Predication
B. Suspicion
C. Fraud theory
D. Declaration
A. Predication
Fraud examinations must adhere to the law; therefore, fraud examiners should not conduct or continue fraud examinations without proper predication. Predication is the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, or will occur. In other words, predication is the basis upon which a fraud examination, and each step taken during the examination, is commenced.
A fraud examiner acts on predication when there is a sufficient basis and legitimate reason to take each step in an examination.
Accordingly, fraud examiners should begin a fraud examination only when there are circumstances that suggest fraud has occurred, is occurring, or will occur, and they should not investigate beyond the available predication. If fraud examiners cannot articulate a factual basis or good reason for an investigative step, they should not do it. Therefore, fraud examiners should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, fraud examiners should continually reevaluate whether there is adequate predication to take each additional step in the examination.
If fraud examiners act without predication, they might expose themselves and their clients or employers to liability.
Which of the following is the LEAST appropriate participant on a team assembled to investigate fraud?
A. Security personnel
B. Auditors
C. Suspect’s supervisor
D. Legal counsel
C. Suspect’s supervisor
Fraud examinations usually require a cooperative effort among different areas of expertise; therefore, if members of management decide to investigate suspicions of fraud, they must determine who should lead and be involved in the investigation.
Typically, participants on a fraud investigation team should not include individuals with vested personal or corporate interest in the matter or individuals with a close personal or professional relationship with the subject or the complainant. Thus, in most situations, the suspect’s supervisor should not be included on a fraud investigation team.
The don’ts for selecting the participants on a team assembled to investigate fraud include:
* Don’t select team members based on friendship.
* Don’t select team members to repay a favor.
* Don’t select team members with negative attitudes.
* Don’t overlook team members with untraditional knowledge that can contribute to the investigation (e.g., people with experience in a particular industry).
* Don’t select members who might have personality conflicts with other members.
* Don’t select members with a vested personal or corporate interest in the matter.
* Don’t select members with a close personal or professional relationship with the subject or the complainant.
* Don’t select members who lack restraint and a sense of discretion.
Forensic accounting differs from fraud examination in that forensic accounting is the use of professional accounting skills in matters involving potential or actual civil or criminal litigation and may or may not involve fraud.
A. True
B. False
A. True
Forensic accounting is the use of professional accounting skills in matters involving potential or actual civil or criminal litigation. The word forensic is defined by Black’s Law Dictionary as “used in or suitable to courts of law or public debate.” Therefore, forensic accounting is actually litigation support involving accounting. Accordingly, many fraud examinations can be considered forensic accounting, but not all forensic accounting is fraud examination. For example, an individual hired to appraise the property in a minority shareholder derivative suit would engage in forensic accounting even if the engagement does not involve fraud.
Which of the following is the most accurate statement about a fraud investigation plan?
A. An investigation plan should inform employees at all levels about the investigation.
B. An investigation plan should make a commitment to eradicate the fraudulent activity.
C. An investigation plan should establish the investigation’s time frame.
D. An investigation plan should establish which individuals violated the law.
C. An investigation plan should establish the investigation’s time frame.
Once it is determined that an allegation or issue will be investigated, those responsible should develop an investigation plan. An investigation plan should not establish which employees violated the law. In general, an investigation plan should encompass matters such as the goals of the investigation, the scope of the investigation, the team members’ roles and tasks, the time frame, and the course of action.
An investigation plan should not include an organization-wide communication that notifies employees about the investigation. It should also refrain from promising a particular outcome.
When evidence of fraud arises, management should respond by:
A. Conducting an initial assessment
B. Preserving relevant documents
C. Identifying who should be informed
D. All of the above
D. All of the above
Generally, when evidence of fraud arises, management should respond by engaging in the following actions:
* Activating the response team
* Engaging legal counsel, if necessary
* Considering whether to contact insurance providers
* Addressing immediate concerns (e.g., preserving relevant documents and identifying who should be informed)
* Conducting an initial assessment
* Documenting the initial response
To preserve the confidentiality of a fraud investigation by ensuring that it is afforded protection under a legal professional privilege, the investigation should be conducted at the direction of, or under the supervision of, a government official.
A. True
B. False
B. False
To prevent third parties, including the subject of the investigation, from having access to the investigative materials, management should consider conducting the investigation under any applicable evidentiary privilege that provides the right to keep certain information from being disclosed without permission. If an evidentiary privilege applies to information, the general rule is that the court and the party seeking the information will be denied access to it, and the triers of fact must disregard any evidence they do actually hear if it is deemed privileged afterward; however, legal jurisdictions vary on which communications are protected by such privileges.
Typically, the most relevant types of evidentiary privileges for keeping investigations confidential are legal professional privileges. These privileges protect the communications between a professional legal advisor (e.g., solicitor, barrister, or attorney) and his clients, and in some situations, fraud investigations can be structured so that they are afforded protection under such privileges. Generally, to receive protection under a legal professional privilege, an investigation must be conducted at the direction of, or under the supervision of, a legal professional, not a government official.
Management of the ABC Company hired Michael, a fraud examiner, to investigate Deborah, an employee in ABC’s accounting department, for embezzlement. According to the fraud examination methodology, which of the following individuals should Michael interview first?
A. John, Deborah’s spouse
B. Deborah
C. Amanda, a neutral employee, who is the director of ABC’s accounting department
D. Roger, an employee for the ABC Company, who is suspected of being an accomplice to Deborah’s scheme
C. Amanda, a neutral employee, who is the director of ABC’s accounting department
Fraud examinations should begin with general information that is known, starting at the periphery, and then move to the more specific details. In most examinations, fraud examiners should start interviewing at the periphery of all possible interview candidates and move toward the witnesses who appear more involved in the matters that are the subject of the examination. Thus, neutral third-party witnesses should generally be interviewed first, followed by parties suspected of complicity, starting with the least culpable and moving to the most culpable. The primary suspect should be interviewed last.
A fraud response plan outlines the actions an organization will take when suspicions of fraud have arisen.
A. True
B. False
A. True
When evidence of misconduct arises, management must respond in an appropriate and timely manner. During the initial response, time is critical. To help ensure that an organization responds to suspicious fraud-related activity efficiently, management should have a response plan in place. A fraud response plan outlines the actions an organization will take when suspicions of fraud have arisen.
Which of the following best describes predication?
A. The initial phase of an interview
B. The basis upon which a fraud examination is undertaken
C. The initial phase of the investigative process
D. The means by which individuals justify their unethical actions
B. The basis upon which a fraud examination is undertaken
Fraud examinations must adhere to the law; therefore, fraud examiners should not conduct or continue fraud examinations without proper predication. Predication is the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, or will occur. In other words, predication is the basis upon which a fraud examination, and each step taken during the examination, is commenced.
A fraud examiner acts on predication when there is a sufficient basis and legitimate reason to take each step in an examination.
Accordingly, fraud examiners should begin a fraud examination only when there are circumstances that suggest fraud has occurred, is occurring, or will occur, and they should not investigate beyond the available predication. If fraud examiners cannot articulate a factual basis or good reason for an investigative step, they should not do it. Therefore, fraud examiners should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, fraud examiners should continually reevaluate whether there is adequate predication to take each additional step in the examination.
If fraud examiners act without predication, they might expose themselves and their clients or employers to liability.
Fraud examination is best described as which of the following?
A. A methodology for resolving fraud allegations from inception to disposition
B. The science of detecting fraud
C. A method for proving the culpability of a suspect
D. A method for finding evidence of guilt
A. A methodology for resolving fraud allegations from inception to disposition
The term fraud examination refers to a process of resolving allegations of fraud from inception to disposition, and it is the primary function of the anti-fraud professional. The fraud examination process encompasses a variety of tasks that might include:
* Obtaining evidence
* Reporting
* Testifying to findings
* Assisting in fraud detection and prevention
Which of the following is a recommended procedure for protecting a fraud investigation’s case information?
A. Store all confidential documents in locked file cabinets or rooms accessible only to those who have a need to know
B. Avoid talking about the investigation in public or in any place where other employees could hear the communications
C. Avoid using email or other electronic means to transmit confidential case information
D. All of the above
D. All of the above
To help preserve confidentiality, the investigation team members should guard case information. Here are some recommended procedures for protecting case information:
* Store all confidential documents in locked file cabinets or rooms accessible only to those who have a need to know.
* Protect all electronic information via firewalls, encryption, and passwords.
* Clear desks of any case information before stepping away.
* Lock computers when leaving workstations.
* Mark all case information, whether tangible or electronic, as confidential.
* Avoid using email or other electronic means (e.g., text messages or instant messages) to transmit confidential case information.
Which of the following is NOT considered good practice when selecting the participants on a team assembled to investigate fraud?
A. Select team members who are likely to have compatible personalities.
B. Select team members who have demonstrated restraint and a sense of discretion.
C. Select team members who can bring both conventional and untraditional knowledge to the investigation.
D. Select team members who possess a vested personal or corporate interest in the matter.
D. Select team members who possess a vested personal or corporate interest in the matter.
The following are considered good practice when selecting the participants on a team assembled to investigate fraud:
* Consider the team’s size.
* Check for conflicts of interest between internal and external team members.
* Ensure that there are no reporting issues (e.g., team members feel pressure to report all details of the investigation to their direct manager, even though their manager does not have a need to know). Reporting issues can be prevented by establishing confidentiality rules in the beginning of the investigation.
* Select team members who fit the investigation’s demands and objectives.
* Recruit team members with the skills needed to conduct the investigation.
To properly prepare an organization for a formal fraud investigation, all employees should be notified of the investigation’s existence and purpose.
A. True
B. False
B. False
It is not good practice to alert all of an organization’s employees that an investigation will be taking place, nor is it a good idea to explain the investigation’s purpose to those employees. However, it might be necessary to take some steps to prepare the subject organization for the formal investigation before it officially commences (and especially before starting the evidence-collection process).
Preparing an organization for an investigation involves such things as preparing the managers of the employees who will be involved in the investigation, notifying key decision makers that the investigation is about to begin, and notifying the organization’s in-house or outside counsel when the investigation is about to commence. Note that while it might be necessary to prepare the managers of the employees who will be involved in the investigation, those responsible should not do so by explaining the investigation’s purpose, why the investigation is happening, when it is happening, or who is involved.
Which of the following is NOT part of the fraud examination process?
A. Testifying to findings
B. Determining whether the subject is guilty or innocent
C. Writing reports
D. Assisting in the detection and prevention of fraud
B. Determining whether the subject is guilty or innocent
The term fraud examination refers to a process of resolving allegations of fraud from inception to disposition, and it is the primary function of the anti-fraud professional. The fraud examination process encompasses a variety of tasks that might include:
* Obtaining evidence
* Reporting
* Testifying to findings
* Assisting in fraud detection and prevention
When conducting fraud examinations, fraud examiners should adhere to the fraud theory approach.
A. True
B. False
A. True
When conducting fraud examinations, fraud examiners should adhere to the fraud theory approach. The fraud theory approach is an investigative tool designed to help fraud examiners organize and direct examinations, based on the information available at the time. According to the fraud theory approach, when conducting investigations into allegations or signs of fraud, the fraud examiner should:
* Analyze the available data.
* Create a hypothesis.
* Test the hypothesis.
* Refine and amend the hypothesis.
To preserve the confidentiality of a fraud investigation, management should always implement a blanket policy prohibiting employees from discussing anything related to employee investigations.
A. True
B. False
B. False
To preserve the confidentiality of an investigation, management might (if legally permissible) remind participants to refrain from discussing investigation information with anyone or require participants to sign a confidentiality oath vowing not to divulge any information regarding the investigation.
Generally, an employer can ask employees to keep an investigation confidential when there are legitimate business justifications for making such requests.
However, it is usually not wise for management to implement a blanket policy prohibiting employees from discussing employee investigations, because doing so could violate certain employee rights. Some jurisdictions guarantee private-sector employees the right to organize and engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection. If an employer in such a jurisdiction has a routine policy or practice of asking employees not to discuss matters that are under investigation, the policy or practice might violate the employees’ right to organize and engage in other concerted activities. Therefore, it is best to tailor confidentiality requests to the specific case at hand and not use automatic, absolute policies.
An organization’s fraud response plan should outline how the organization will conduct fraud examinations in every single case, regardless of the type of fraud being conducted.
A. True
B. False
B. False
When evidence of misconduct arises, management must respond in an appropriate and timely manner. During the initial response, time is critical. To help ensure that an organization responds to suspicious fraud-related activity efficiently, management should have a response plan in place.
A fraud response plan outlines the actions that members of an organization will take when suspicions of fraud have arisen. Because every fraud is different, the response plan should not outline how a fraud examination should be conducted. Instead, it should help organizations manage their responses and create environments to minimize risk and maximize the potential for success.
While the appropriate response will vary based on the event, management should include a range of scenarios in the response plan.
Which of the following general statements about a fraud investigation plan is CORRECT?
A. An investigation plan should identify the scope of the investigation
B. An investigation plan should establish the goals of the investigation
C. An investigation plan should establish the investigation’s time frame
D. All of the above
D. All of the above
Once it is determined that an allegation or issue will be investigated, those responsible should develop an investigation plan. An investigation plan should not establish which employees violated the law. In general, an investigation plan should encompass matters such as the goals of the investigation, the scope of the investigation, the team members’ roles and tasks, the time frame, and the course of action.
Carter, a Certified Fraud Examiner for Universal Design, learns that Wallace, a shrewd salesperson with an unscrupulous attitude, has close relationships with several Universal Design customers. Carter also knows that Wallace has excessive gambling habits, due in part to his strong desire for personal gain. Carter has sufficient predication to:
A. Directly accuse Wallace of having committed fraud.
B. Alert management that Wallace might have committed fraud.
C. Look for evidence of misconduct in Wallace’s computer and desk area.
D. Conduct discreet inquiries into Wallace’s work as a salesperson.
D. Conduct discreet inquiries into Wallace’s work as a salesperson.
Fraud examinations must adhere to the law; therefore, fraud examiners should not conduct or continue fraud examinations without proper predication. Predication is the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, or will occur.
Fraud examiners should begin a fraud examination only when there are circumstances that suggest fraud has occurred, is occurring, or will occur, and they should not investigate beyond the available predication. If fraud examiners cannot articulate a factual basis or good reason for an investigative step, they should not do it. Therefore, fraud examiners should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, fraud examiners should continually reevaluate whether there is adequate predication to take each additional step in the examination.
Carter’s actions should match the predication. There is insufficient predication to confront Wallace or to make any direct allegations about fraud, but Carter does have adequate predication to make discreet inquiries into Wallace’s work as a salesperson.
In general, the subject of an investigation should be interviewed first.
A. True
B. False
B. False
Fraud examinations should begin with general information that is known, starting at the periphery, and then move to the more specific details. In most examinations, fraud examiners should start interviewing at the periphery of all possible interview candidates and move toward the witnesses who appear more involved in the matters that are the subject of the examination. Thus, neutral third-party witnesses should generally be interviewed first, followed by parties suspected of complicity, starting with the least culpable and moving to the most culpable. The primary suspect should be interviewed last.
Which of the following statements about how fraud examiners should approach fraud examinations is CORRECT?
A. Fraud examinations should begin with general information that is known, starting at the periphery, and then move to the more specific details
B. In most examinations, fraud examiners should start interviewing the suspect and then work outward
C. If an individual appears to be involved in the fraud scheme, he should be interviewed first
D. All of the above
A. Fraud examinations should begin with general information that is known, starting at the periphery, and then move to the more specific details
Fraud examinations should begin with general information that is known, starting at the periphery, and then move to the more specific details. In most examinations, fraud examiners start interviewing at the periphery of all possible interview candidates and move toward the witnesses who appear more involved in the matters that are the subject of the examination.
Which of the following is a measure that can be taken to avoid alerting suspected perpetrators who are under investigation?
A. Investigate during nonbusiness hours
B. Know what information the suspect can access
C. Only inform those who need to know
D. All of the above
D. All of the above
When responding to a sign or allegation of fraud, those responsible must work to avoid alerting those suspected of fraud. Here are some basic measures organizations can take to avoid notifying suspected perpetrators who are under investigation:
* Know who is being investigated and what they can access.
* Limit the extent of any discussions.
* Only inform those who need to know.
* Inform employees of the consequences of a confidentiality breach.
