Forensic Accounting
By Mary-Jo Kranacher, CPA/CFF, CFE
Chapter 1
Core Foundation Related to Fraud Examination
and Financial Forensics
LEARNING OBJECTIVES
1-1 Define fraud and identify a potentially fraudulent situation.
1-2 Differentiate between fraud and abuse.
1-3 Define financial forensics and identify an appropriate methodology for a given
financial forensic fact pattern.
1-4 Differentiate the roles of auditing, fraud examination, and financial forensics.
1-5 Explain the theory of the fraud triangle.
1-6 List the legal elements of fraud.
1-7 Identify common fraud schemes.
1-8 Give examples of nonfraud forensics and litigation advisory engagements.
1-9 Describe the fraud examiner/financial forensic professional’s approach to
investigations.
1-10 Explain fraud examination methodology.
True/False
1-T/F #1. Fraud or a fraudulent act is one that causes its victim to suffer an
economic loss only.
Answer: False
1-T/F #2. An immaterial false statement is a legal element of fraud.
Answer: F
1-T/F #3. The Sarbanes–Oxley Act (SOX) of 2002 is aimed at accounting staffs,
auditing firms, corporate governance, executive management (CEOs and
CFOs), officers, and directors.
Answer: F
1-T/F #4. All instances of misconduct in the workplace amount to fraud.
Answer: F
,1-T/F #5. The difference between abuse and fraud may be the difference in
consequences – being reprimanded or being fired by the company and
prosecuted by the justice system.
Answer: T
1-T/F #6. Financial forensics is the application of financial principles and theories to
facts or hypotheses at issue in a legal dispute and consists of two primary
functions.
Answer: T
1-T/F #7. Forensic and Litigation Advisory Services (FLAS) professionals may
either work to bolster (if hired by the defendant) or to undercut (if hired by
the plaintiff) a case.
Answer: F
1-T/F #8. Since forensic accounting works with fact as documented by legal records
the reports seldom add an adversarial nature to the engagements, and
professionals can expect that their work will be accepted by the opposing
side.
Answer: F
1-T/F #9. The fraud examiner or forensic accountant can easily identify the
assumptions that he/she has made while “thinking out of the box.”
Answer: F
1-T/F #10. Under generally accepted auditing standards (GAAS) auditors are not
currently responsible for planning and performing auditing procedures to
detect immaterial misstatements, regardless of whether they are caused by
error or fraud.
Answer: T
1-T/F #11. When fraudsters collude, the losses to the victim organization increase
more than fourfold.
Answer: T
1-T/F #12. Line employees are the principle perpetrators in approximately 39 percent
of schemes, yielding company losses of approximately $150,000.
Answer: F
1-T/F #13. The three legs of the fraud triangle are opportunity, perceived benefit, and
rationalization.
,Answer: F
, 1-T/F #14. Fraud pressures can arise from financial problems, such as living within
one’s means, greed, high debt, medical bills, investment losses, or
educational expenses.
Answer: F
1-T/F #15. Rationalization must occur before the act of abuse or fraud.
Answer: T
1-T/F #16. Money and ego are the two most commonly observed motivations for
fraud and abuse.
Answer: T
1-T/F #17. When discussing the costs of fraud and other litigations, by the time a
formal investigation is launched and the allegations are addressed within
the legal arena, the parties have already incurred substantial cost.
Answer: T
1-T/F #18. The dichotomy of fraud is it cannot occur without trust, but commerce can
occur without trust.
Answer: F
1-T/F #19. The issues addressed by a forensic accountant during litigation must be
central to the allegations made by the plaintiff’s or defense attorneys.
Answer: F
1-T/F #20. One of the best ways to ruin an investigation, fail to gain a conviction, or
lose a civil case is to base investigative conclusions on logic and
conjecture.
Answer: T
By Mary-Jo Kranacher, CPA/CFF, CFE
Chapter 1
Core Foundation Related to Fraud Examination
and Financial Forensics
LEARNING OBJECTIVES
1-1 Define fraud and identify a potentially fraudulent situation.
1-2 Differentiate between fraud and abuse.
1-3 Define financial forensics and identify an appropriate methodology for a given
financial forensic fact pattern.
1-4 Differentiate the roles of auditing, fraud examination, and financial forensics.
1-5 Explain the theory of the fraud triangle.
1-6 List the legal elements of fraud.
1-7 Identify common fraud schemes.
1-8 Give examples of nonfraud forensics and litigation advisory engagements.
1-9 Describe the fraud examiner/financial forensic professional’s approach to
investigations.
1-10 Explain fraud examination methodology.
True/False
1-T/F #1. Fraud or a fraudulent act is one that causes its victim to suffer an
economic loss only.
Answer: False
1-T/F #2. An immaterial false statement is a legal element of fraud.
Answer: F
1-T/F #3. The Sarbanes–Oxley Act (SOX) of 2002 is aimed at accounting staffs,
auditing firms, corporate governance, executive management (CEOs and
CFOs), officers, and directors.
Answer: F
1-T/F #4. All instances of misconduct in the workplace amount to fraud.
Answer: F
,1-T/F #5. The difference between abuse and fraud may be the difference in
consequences – being reprimanded or being fired by the company and
prosecuted by the justice system.
Answer: T
1-T/F #6. Financial forensics is the application of financial principles and theories to
facts or hypotheses at issue in a legal dispute and consists of two primary
functions.
Answer: T
1-T/F #7. Forensic and Litigation Advisory Services (FLAS) professionals may
either work to bolster (if hired by the defendant) or to undercut (if hired by
the plaintiff) a case.
Answer: F
1-T/F #8. Since forensic accounting works with fact as documented by legal records
the reports seldom add an adversarial nature to the engagements, and
professionals can expect that their work will be accepted by the opposing
side.
Answer: F
1-T/F #9. The fraud examiner or forensic accountant can easily identify the
assumptions that he/she has made while “thinking out of the box.”
Answer: F
1-T/F #10. Under generally accepted auditing standards (GAAS) auditors are not
currently responsible for planning and performing auditing procedures to
detect immaterial misstatements, regardless of whether they are caused by
error or fraud.
Answer: T
1-T/F #11. When fraudsters collude, the losses to the victim organization increase
more than fourfold.
Answer: T
1-T/F #12. Line employees are the principle perpetrators in approximately 39 percent
of schemes, yielding company losses of approximately $150,000.
Answer: F
1-T/F #13. The three legs of the fraud triangle are opportunity, perceived benefit, and
rationalization.
,Answer: F
, 1-T/F #14. Fraud pressures can arise from financial problems, such as living within
one’s means, greed, high debt, medical bills, investment losses, or
educational expenses.
Answer: F
1-T/F #15. Rationalization must occur before the act of abuse or fraud.
Answer: T
1-T/F #16. Money and ego are the two most commonly observed motivations for
fraud and abuse.
Answer: T
1-T/F #17. When discussing the costs of fraud and other litigations, by the time a
formal investigation is launched and the allegations are addressed within
the legal arena, the parties have already incurred substantial cost.
Answer: T
1-T/F #18. The dichotomy of fraud is it cannot occur without trust, but commerce can
occur without trust.
Answer: F
1-T/F #19. The issues addressed by a forensic accountant during litigation must be
central to the allegations made by the plaintiff’s or defense attorneys.
Answer: F
1-T/F #20. One of the best ways to ruin an investigation, fail to gain a conviction, or
lose a civil case is to base investigative conclusions on logic and
conjecture.
Answer: T
