Chapter 9

Question 1

Fraud Triangle and the Courts

What should an Audit Professional testify?

Answer 1

Must stick to the fact when you testify
- work grounded on evidence
- objective, reliable, relevant, and valid evidence

Who, what, when, where & how NOT why
- motives will not stand

Question 2

Fraud Examinations: What needs to be answered and how?

Answer 2

Answer: Who, What, Where, When, How, and why - with evidence

Needs to be woven into a coherent story
- storyline grounded in evidence is more convincing

Question 3

What is Predication? What is role within Fraud Examinations?

Answer 3

Totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe that fraud has occurred, is occurring, or is about to occur
- Need predication prior to an investigation
- Start of formal fraud inv
- Suspicion without evidence not enough
- Red flags not enough - require additional audit work

Question 3

Types of Evidence

6 - kinda like pressure/ red flags

Answer 3

1. Evidence of financial pressures
2. Evidence of vices or similar problems
3. Evidence of org pressure to achieve fin goals
4. Evidence of challenge getting int the way w/ fraud
5. Evidence of excessive ego
6. Evidence of family or pressure

Question 4

What is the Hypothesis-Evidence Matrix and its relevance to fraud examinations.

Answer 4

Very common to have incomplete evidence
- Alternative hypothesis help address evidentiary shortcoming

Hypothesis Evidence matrix
- Helps analyzing competing hypotheses
- alternative theories are best generated by opposing attorneys

Question 5

Motivation of Fraudster (MICE)

Answer 5

Money - most common
Ideology
Coercion
Ego Entitlement -most common

Ideology common when assoc w/ tax evasion schemes

Question 6

Hardest aspect to prove in fraud examination and why?

Answer 6

Hard to provide evidence of intent
- Seperating diff btw mistake and fraud
- Intent can be inferred by repetitive similar acts

Question 7

3 Elements of Fraud

Answer 7

1. Act
2. Concealment
3. Conversion

Question 8

What is Evidence Necessary for and what types of evidence exist?

Answer 8

Evidence is anything legally admitted at trial relevant to the case
- Evidence is necessary for both criminal or civil verdict

Three Types of Evidence
1. Testimony
2. Real
3. Demonstrative

Can also be direct or circumstantial

Question 9

What characteristics must evidence have?

Answer 9

Evidence must be
- Relevant
- Material
- Competent

To be entered into a trial, evidence must be authenticated
- then deemed unaltered

Question 10

How to Maintain the Integrity of Evidence

Answer 10

1. Unaltered from OG condition
2. Chain of Custody
3. Proper storage
4. Secured unathorized access prevented
5. Backed up copies, elec & hard copy should be maintained in sep locations
6. Inventories, easy to locate when needed

Question 11

What economies facilitate vs expose white collar crimes?

Answer 11

Good economy: easy to execute and conceal

Bad economy: Become unsustainable and crimes brough to the surface

Question 12

What does it mean for evidence to be Relevant, Reliable and Valid

Answer 12

Relevance: Info will make a difference to decision make
Reliability: Source providing the information
Validity: Underlying accuracy and integrity of info

Question 13

Rating of Reliability

Answer 13

Rated A-D: A being most reliable
- A Reliable: reliability unquestion
- B Usually reliable: most info reliable
- C Unreliable: Reliability sporadic
- D Uknown: Reliability unknown

Question 14

Measure of Validity

Answer 14

Rated 1-4: A being most Valid
- 1 Confimed: info has been corroborated
- 2 Probable: Info consistent w/ past accounts
- 3 Doubtful: Info inconsistent w/ past accounts
- 4 Cannot be judged: Info cant be evaluated

Question 15

Process of organizing evidence & Documenting Work Product - What assumptions should professional make?

Answer 15

Gather, document, organize, retain, & retrieve data, info, and evidence - important part

Assume
- Work, report, & conclusion will be presented & scruitinized in a court of law
- Careful attention to WP detail and the gathering, documenting, organizing, and retention of work product

Question 16

Relevance and Importance of Documentary Evidence

Evidence Sources of Act, Concealment, & Conversion

Answer 16

Backbone of most financial forensic investigation
- More reliable than eyewitnesses
- Potential for finger prints
- Provide evidence related to Act, Concealment, & Conversion

Items to be examined:
- Signatures, handwriting, alterations, erasures, eradications, creation date, counterfits, indents
- Paper exam, Ink exam, source of paper, fold, tears, cuts, restoration of damage, photocopy or OG, facsimiles
- Notary, seals, stams, envelope glye, type writer, sequence

Question 17

Bank, Credit Card, and Investment Statements - what can it reveal - what part of fraud does it support

Evidence Sources of Act, Concealment, & Conversion

Answer 17

May reveal:
- Check Acc Deposits from unknown sources - not employment
- Bank acc Disbursements made to unknown accounts
- Cred card statements: show money spent exceed source of income

Used to:
- Follow the $ & cscrutinize transaction
- Provide evidence of Act & Conversion

Source of info:
- bank statement, deposit tickets, canceled checks, accnt applics, signatures, credit card apps, mortgage apps, loan apps

Question 18

Invigiliation - what is it and what does it reveal

Evidence Sources of Act, Concealment, & Conversion

Answer 18

What: Consids pd before, during, and after suspected fraud
- consider changes in pattern of performance

Evidence of: Act and how much money missing

Question 19

Interview and Interrogation - form and what they reveal

Evidence Sources of Act, Concealment, & Conversion

Answer 19

Carried out in the form of depositions to find info and discover evidence

Evidence of: Act, concealment, & conversion

Question 20

Surveillance & Covert Operations - what it achieves

Evidence Sources of Act, Concealment, & Conversion

Answer 20

• Gather Evidence
• Identify those engage in illegal actic
• Identify co-consipirators
• Recover the money
• Determine how operations work
• Private investigators or law enforcement
• fixed point and mobile surveillance
• videography
• undercover ops

Question 21

Confidential Sources and Informants - what are they and caveats

Evidence Sources of Act, Concealment, & Conversion

Answer 21

Confidential Sources
- Have no criminal involvement in the case

Informants
- Typically have direct or indirect role in the criminal activ
- Sources and informants are usually confidential

Motives must be evaluate
- Reliability and validity must be checked

Question 22

CTRs, SARs, and FinCen 8300 - what are they and involvement

Answer 22

What: Currency transaction reports (CTRs), Suspicious activ reports, and Fincen form 8300 good sources of info for law enforcement officers

CTR filed when transac 10k or greater in a single day

SAR - used to report suspicous activs to fin crime enforcement netowrk (FinCen)

Form 8300 reqs bus receiving more than 10k in cash to report to Fin Cen

Question 23

Emails, Text Messages, Social Media - type of evidence

Evidence Sources of Act, Concealment, & Conversion

Answer 23

Smoking gun evidence of fin crimes, fraud, motication for activ, and other info
- Email within org is not private
- helps create links btw people and transactions
- Sophisticated criminals use anonymous re-mailers

Question 24

Big Data, Data Analytics, Tectual Analysis, Pattern Recog, and Other Digi tools - use and what it reveals | Evidence Sources of Act, Concealment, & Conversion

Answer 24

Data mining software to look for hidden patterns to predict future - Patterns provide evidence of who, what , when, where, how, and why

Question 25

Other Physical Evidence | Evidence Sources of Act, Concealment, & Conversion

Answer 25

- Finger prints on doc - Phony docs - Forged Signatures - Typewriter's unique identifies - Addresses and phone number - Dates and time - Medical condition to reveal financial pressur

Question 26

What 3 specific evidence sources are specific to Concealement?

Answer 26

1. Altered Documents 2. General ledger, JE, and reconciling items 3. Tax Returns

Question 27

Methods to Alter Documents

Answer 27

* Forged signatures * Forged handwriting * Restored Erasures * Erasures * Eradications * Recently created docs supposedly created yrs ago * Counterfiting docs w/ copy machines, typewriters, printer and matched paper

Question 28

Gen Ledg, JE, and Reconciling items - use in concealement

Answer 28

Disbursements pass through GL creating money trail - Scrutinize debits to rev - Ensure debits to liab on GL legit - Debits to assets and expense common concealement method - JE need to be scruitinized as to source, backup, and approval

Question 29

Tax Return in Concealement

Answer 29

Generally correlated with bank accounts and corp books: - Schedule M recon book inc and tax inc May: - Show evidence in involvement of business not disclosed - Amounts and typed of deduction may raise question

Question 30

How can Assets be Hidden | Evidence Sources Specific to Conversion - hidden assets & unknown inc

Answer 30

- Hidden bank accounts - Hidden Investment accounts - Purchasing asset through front orgs - Transfer assets or ownership to another pary

Question 31

What to examine | Evidence Sources Specific to Conversion - hidden assets & unknown inc

Answer 31

Examine tax returns and fin records for transfer activity - look at transfers between acount - look at children's trust, insirance policies, prepaid credit cards, traveler's checks, money orders - Insurance policies not on fin statements

Question 32

Concealed Offshore Fin Accounts, Transac, & loans and divorce: How and why | Evidence Sources Specific to Conversion - hidden assets & unknown inc

Answer 32

Concealed Offshore - used by sphisticated indivs w/ signif ill gotten fains - chosen for tax treatment and secrecy commitment Divorce - spouse may hide assets --> money disbursed to consultant using offshore address

Question 33

What is Indirect Income Reconstruction and what are the 3 methods?

Answer 33

Help develop indicators of concealed income & hidden assets - heavy legwork required to develope sources of info 1. Net Worth Method 2. Lifestyle Probe 3. Bank Record method

Question 34

Networth Method Describe how it works | Indirect Income Reconstruction Method

Answer 34

**Networth = Amount paid for assets - Obligations** - Examine change from year to year - provide evidence that amounts paid for assets and expend exceed known income **Calculation:** 1. Calculate net worth for base year and each subseq year 2. Determine income each year after base year 3. Calc change in net worth 4. Subtract known income 5. Remainder income is from unknown sources

Question 35

Life Style Prob method: how does it work? | Indirect Income Reconstruction Method

Answer 35

**Addresses the flow of funds for a given period** - Unknown income if expenditures > income **Advantages over networth method:** - easy to use and understand - can be used to calculate for short periods - run quick and dirty analysis - Can be used to contront a target **Calculation:** 1. info about amount spent for base yr and subseq yr 2. determine known income for each yr 3. Calculate amount of all known expend 4. Subtract all known income 5. = income from uknown sources

Question 36

Bank Records Method: How it works | Indirect Income Reconstruction Method

Answer 36

**Assumption:** when cash is received, it can be deposited into the bank or spent **Calculation:** 1. identify all deposits to known accounts 2. Add known cash expenditures not paid by bank account 3. Sum total spent from all sources 4. Subtract, Income from known sources 5. Difference = Unknown sources from unknown funds

Question 36

Cash T Account: Purpose

Answer 36

**Purpose:** - To determine if the $ spent by an indiv is more tha what is reasonable based on tax returns - Available cash

Question 37

Defenses and Rebuttals for Unknown Sources of Income

Answer 37

Investigator should have evidence trail that refutes the defenses **Possible Defenses:** * Uknown sources accumulated in priod pds * Uknown source was a gift or inheritance * Unknown sources were loan proceeds * Unknown sources were lottery or other gambling winning

Question 38

How to get data from local, county state, and fed fhovs?

Answer 38

Need a subpoena