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Fraud Examination Midterm > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is Forensic Accounting?

A

Intersection of accounting and the law
- Application of financial principles at issue in legal dispute
- Issues are complex and require complex accounting data

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2
Q

What is fraud and what kind of crimes?

A

Intentional deception, by omission or co-mission, causing its victim to suffer an economic loss
- Any crime for gain that uses deception as its principal techniques

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3
Q

Legal Elements of Fraud

A
  1. Materially false statement
  2. Knowledge that the statement was false when spoken
  3. Reliance on the false statement by the victim
  4. Damages resulting from the victims reliance on false statement

Acronym: MKRD - My Krazy Real Deception

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4
Q

What is larceny?

A

Taking of money or property of another, without the consent of the owner, with the intent to deprive owner of its use
- Criminal Act

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5
Q

What is Conversion?

A

Unauthorized assumption and exercise of the right of ownership over goods belonging to another, to alter their condition or exclude the owner’s rights
Ex: Taking Property not belonging to you
Civil Wrong

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6
Q

What is Embezzlement?

A

To take or convert to ones own use, another persons $ or property of which the wrongdoer acquired possession lawfully, by reason of employment or position of trust

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7
Q

Define Fiduciary and Fiduciary Capacity

A

Fiduciary - Person holding a character in respect to trust and confidence involved in it & the good faith & candor required

Fiduciary Capacity - Acting not for own benefit, but for another person rquiring a high degree of confidence and trust on one side and good faith on the other side - act in best interest of who you represent

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8
Q

Breach of Fiduciary Duty Consists of:

A
  1. Fiduciary relationship existed btw plaintiff and defendent
  2. Fiduciary breached his duty to the P
  3. The breach resulted in harm to the P or benefit to the fidicuary
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9
Q

Three Major Categories of Fraud and what do they entail?

A
  1. Financial Statement Fraud - intentional mis rep of fin or non fin info to mislead others relying on it for economic decisions
  2. Asset Misappropriation - theft or misuse of an organizations assets
  3. Corruption - unlawful or misuse of influence in a business transaction to procure a personal benefit
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10
Q

Essential Characteristics of FS Fraud

A
  1. The misstatement is material and intentional
  2. Users of the financial statement have been misled
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11
Q

How may Net Income overstatements and understatements occur?

A

Overstatements
- 1. Fictituous revenue, 2. Improper timing recognition, 3. Concealed liabilities and expenses, 4.Improper asset valuation - capitalizing expenses, 5. Improper disclosures
Understatements
- 1. Understated revenue, 2. Improper timing recognition, 3. Overstated liabs and exp, 4. Improper asset valuation - write offs, 5. Improper disclosures

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12
Q

What is Sarbanes Oxley Act?

A

In response to widespread FS fraud, passed in 2002

Aimed at audit firms, corp gov, exec mngmt, officers and directors

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13
Q

What are the 2 Primary Functions of Forensic Accnting?

A
  1. Litigation advisory services - role of FA as an expert or consultant
  2. Investigative services - Use of FA professional’s skills and may lead to courtroom testimony
  • Both interact with attorney’s throughout the engagement
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14
Q

What are some Non-Fraud Forensic Accounting and Litigation Advisory Engagements?

A
  • Damage claims made by P and in countersuits by D
  • Workplace issues
  • Assets and business valuations
  • Costs and lost profits assoc. w/ construction delays or business interruptions
  • Insurance claims
  • Divorce and matrimonial issues
  • Antitrust actions
  • IP infringement
  • Environmental issues
  • Tax Disputes
  • Employement issues resulting in lost wages
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15
Q

What is the skill set of a FA professional?

A
  1. Technical skills: accounting, audit, finance, quantative methods, and areas of law & research
  2. Investigative skills: used to collect, analyze, and evaluate evidential matter, and critical thinking to interpret findings
  3. Communication Skills: effectively and succintly communicate the results of their work
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16
Q

Diffs btw Audting, Fraud Examination, and Forensic Accounting

Timing, scope, objective, relationship, methodology and Presumption

A

Forensic Accounting: 1. Nonrecurring 2. Specific scope 3. Determine fin impact 3. Adversarial 4. Forensic Accounting Techniques 5. Presumption = proof

Fraud Examination: 1. Nonrecurring 2. Specific scope 3. Affix blame 3. Adversarial 4. Fraud Examination Skills 5. Presumption = proof

Auditing: 1.Recurring 2. General scope 3. Deliver Opinion 3. Nonadversarial but skeptical 4. Audit Techniques 5. Professional Skepticism

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17
Q

Frequency & Average Loss of Main types of Fraud

Three

A
  1. Asset Misappropriation: 86% $100,000
  2. Corruption: 50% $150,000
  3. Fin Reporting Fraud: 9% $593,000

Many frauds involve multiple schemes, intertwined

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18
Q

What happens to the median loss as the duration of the fraud scheme grows?

A

The longer the fraud scheme, the higher the median loss
However, majority of frauds tend to be a shorter duration.

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19
Q

What are the top methods Occupation Frauds are detected?

A
  1. Tip
  2. Internal Audit
  3. Mngmt Review
  4. By accident

Not very common for fraud to be caught by external audit or by confession

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20
Q

Typical Profile of Fraud Perpetrators

gender, education, age, job position, tenure, group/alone, criminal hist

A
  • 65% male, well deducated, middle age to retired 31-50 (2/3rds)
  • Accountant, upper management, or executive (4x men)
  • W/ company for 5 or more yrs
  • Acts alone (42%)
  • First time offender
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21
Q

Correlation btw Position of Perp & Median Loss

A

Higher the position, the higher the median loss

22
Q

Correlation btw # of Perps and Median Loss

A

Greater amount of perps, the higher the median loss

However, most frauds are committed by a singular person

23
Q

Top 5 Behavioral Red Flags

A
  1. Living Beyond Means
  2. Financial Difficulties
  3. Close Association w/ Vendor or Customer
  4. Wheeler Dealer Attitude - succeed by any means
  5. Unwiliingness to Share Duties - Control Issues
24
Q

Victim Org Trends

A

Larger frauds and larger % of fraud schemes occur at private companies

25
Most Effective Controls
1. Proactive Data Monitoring/Analysis 2. Management Review 3. Hotline 4. Management Certification 5. Job Rotation/ Mandatory Vacation
26
Primary Internal Control Weakness
1. Lack of Internal Controls (29.3%) 2. Override of Existing Internal Control (20.3%) 3. Lack of Management Review (19.4%) 4. Poor Tone at the Top (10.4%)
26
Reasons Why Cases Were Not Referred to Law Enforcement
1. Fear of Bad Publicity 2. Internal Discipline was Enough 3. Private Settlement 4. Too Costly
26
Results of Cases referred to Law Enforcement
57% Pleaded Guilty 20% Convicted at trial 13% Declined to Prosecute 2% Acquitted
26
3 Elements of Fraud
Act, Concealment, and Conversion
27
What is the Problem with Showing Intent in an Investigation?
Investigation aspects **must all be grounded on evidence** * Unless, the perpetrator or co-conspirator confesses, evidence of intent tends to be circumstantial
28
How to Prove Intent
By demonstrating **concealment**, intent can be proven
29
What is Circumstantial Evidence?
Indirect evidence that does not, on its face, prove a fact in issue | Helps rise logical inference that the fact exists
30
Examples of Circumstantial Evidence
* Concealment * Conversion * Altered documents * Hidden documents * Destroyed evidence * False statements * Patterns of suspicious activity * Breaks in patterns of expected activity
31
Methodologies Used in Fraud Examinations and Forensic Accounting Engagements
1. Must be skilled in examination of FS, books & records, and supporting docs 2. Interview - to obtain relevant info about the matter in question from those with knowledge 3. Observe behavior , search for display of wealth, and observe specific offense
32
Fraud Examination Evidence Gathering Order
1. Document Analysis 2. Neutral 3rd Party Witnesses 3. Corroborative Witness 4. Co-Conspirators 5. Target
33
Fraud Interview Methodologies
1. Interview key players 2. Documents 3. Neutral 3rd Parties 4. Corroborative Witnesses 5. Co-Conspirators 6. Target
34
How are Graphical Tools Utilized by Foreinsic Accountants?
Help figure out patterns and connections hard to spot - Can also be used as formal communication near conclusion of investigation - EX: flow charts, timelines, link charts
35
Important highlights of the Investigation
*Data analytics and big data techniques can highlight anomolies *Investigator must explain 5 Ws and think like a fraudster
36
What makes a successful team member in the investigation?
1. Each member must be professionally competant at his task 2. Teammates must be able to count on you
37
What is predication and why is it necessary for fraud examinations?
**Predication** - the totalility of circumstances that would lead a reasonable, professionally trained, and prudent indiv to believe a fraud has occurred, is occuring, or will occur * All fraud examination must be based on proper predication, if not a fraud examination should not be occurring
38
What is Fraud Prevention?
Creating and maintaining environment where the risk of a particular fraudulent activity is minimal and opportunity is eliminated, given cost benefit trade off * Avoid costs associated w/ detection and investigation
39
What is Fraud Deterrence?
Creating environment in which people are discouraged from committing fraud
40
What is Fraud Detection and how it is accomplished?
The process of discovering the presence or existence of fraud. **Accomplished** through well designed internal controls, supervision, monitoring, and active search for evidence of fraud.
41
When does a Fraud Investigation Occur?
Occurs when indicators of fraud suggest that a fradulent act occurred and requires investigation to determine extent of losses and the perpetrator
42
Remediation of Fraud | Recovery, litigation, and internal controls
1. **Recovery of losses** through insurance, or legal system 2. **Support for the legal process** as it tires to resolve the matter in the legal environment 3. **Modification of** operational processes, procedures, and internal controls to minimize the chances of similar fraud
43
Statistic on Prevalence of Fraud
On average, companys lose 5% of revenue to fraud | Stats differ bc most rely on reported wrongdoing, but many not reported
44
Root causes of business fraud?
1. Corporate performance 2. Financial pressures, access to financing 3. Competition to enter and dominate markets 4. Legal requirements and exposure **5. Personal needs and agendas**
45
First line of defense for serving the financial markets, lenders, and investors
A properly constructed system of corporate governance, risk management, and internal controls for which the board and executive management are responsible
46
Who oversees management on behalf of shareholders?
Board and audit committee
47
Responsibility for Combating Fraud (1st, 2nd, and 3rd line of defense)
**1. The Company** - Corporate management through int controls, risk mngmt, and fin controls **2. Auditors (external)** - Audit considers the risk of fraud and hope they catch it **3. Fraud Examiner** - Not brought in until fraud is suspected like a detective - not usually on audit team (maybe during brainstorming)
48
Fraud Deterrence Cycle
1. Corporate Governance 2. Transaction Level Controls - in place to prevent fraud 3. Retrospective Examination - detect fraud before it becomes large - like auditors 4. Investigation and Remediation - forensic accounting investigation of suspected fraud

Fraud Examination Midterm (8 decks)

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