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Forensic accounting questions and answers pdf

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# 149272 Cust: Pearson Au: Hahn Pg. No. i Title: Forensic Accounting/ 1e Server:


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Forensic Accounting


Robert J. Rufus Rufus & Rufus Accounting Corporation, Huntington, WV


University of Charleston, WV


Laura Savory Miller Rufus & Rufus Accounting Corporation, Huntington, WV


University of Charleston, WV


William Hahn Southeastern University, Lakeland, FL


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# 149272 Cust: Pearson Au: Hahn Pg. No. ii Title: Forensic Accounting/ 1e Server:


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ISBN 13: 978-0-13-305047-9 ISBN 10: 0-13-305047-5


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About the Authors Dr. Robert J. Rufus is the Managing Principal of Rufus & Rufus Accounting Corporation located in Huntington, West Virginia, a boutique CPA firm with a concentrated practice in foren- sic accounting, tax, and litigation support. Dr. Rufus has more than thirty years of field experi- ence as a forensic expert and investigative accountant in both civil and criminal matters. He started his professional career with the Treasury Department, where he worked as an IRS agent for five years. Dr. Rufus is currently the Program Director for the Master of Forensic Accounting program at the University of Charleston, West Virginia. He has also held instructor positions at Ohio University and Marshall University. Dr. Rufus has contributed to the science of forensic accounting through numerous journal publications and conference presentations. He received his B.S. from Concord College, his M.B.A. from Marshall University, and his D.B.A. from Nova Southeastern University, all with concentrations in Accounting. Dr. Rufus is a Certified Public Accountant, a Certified Valuation Analyst, Certified in Financial Forensics, and a licensed private investigator.


Laura Savory Miller is a forensic analyst at Rufus & Rufus Accounting Corporation in Huntington, West Virginia. Her areas of specialization include business valuations, quantita- tive methods, and calculations of economic damages. In her ten years with the firm, Ms. Miller has authored or coauthored hundreds of expert reports and has testified in several jurisdictions. Ms. Miller is also a lead instructor in the University of Charleston’s Master of Forensic Accounting program and provides investment advisory services through Advanced Investment Strategies, Inc. Ms. Miller is a doctoral candidate (D.B.A. in Finance) at Nova Southeastern University in Fort Lauderdale, Florida, with an anticipated graduation date of May 2014. She received her B.S. in Finance from Marshall University and her M.A. in Economics from Ohio University. Her professional designations include Chartered Financial Analyst and Certified Valuation Analyst.


Dr. William Hahn is a professor of accounting at Southeastern University in Lakeland, Florida. Dr. Hahn has published frequently in refereed and banking journals and has presented at both academic conferences and CPA continuing education programs. Before entering the education profession, Dr. Hahn spent twenty years in the banking industry as both a CFO and COO for NASDAQ-traded companies. In his banking career, he managed accounting, investments, loan and deposit operations, computer operations, legal, facilities, and human resources. Prior to his banking career, he spent four years as an auditor with what is now Ernst & Young, CPAs. Dr. Hahn received his B.S. in Accounting from Ball State University, his M.B.A. in Finance from the University of Toledo, and his D.B.A. in Management and Accounting from Nova Southeastern University. He is a Certified Public Accountant licensed in Ohio.


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Brief Contents Preface xi


Chapter 1 Introduction to the World of Forensic Accounting 1


Chapter 2 The Legal Environment of Forensic Accounting 21


Chapter 3 Screening and Staging Engagements 47


Chapter 4 Gathering Evidence—Interviews and Observations 69


Chapter 5 Financial Statements Analysis—Reading Between the Lines 95


Chapter 6 Fraud and White-Collar Crime 141


Chapter 7 Conducting a Fraud Investigation 175


Chapter 8 Transforming Data into Evidence (Part 1) 227


Chapter 9 Transforming Data into Evidence (Part 2) 259


Chapter 10 Professional Responsibilities 291


Chapter 11 Fundamentals of Business Valuation 313


Chapter 12 Special Topics 349


Glindex (combined Glossary and Index) 401 Credits 418


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Contents Preface xi


Chapter 1 Introduction to the World of Forensic Accounting 1


Introduction 1


What Is Forensic Accounting 3


Forensic Accounting Services 4


Forensic Accountants vs. Transactional Accountants and Auditors 8


Forensic Accounting Skills 8


Forensic Accounting Certifications and Supporting Organizations 13


Careers in Forensic Accounting 14


Summary 15


Chapter 2 The Legal Environment of Forensic Accounting 21


Introduction 21


United States v. Bonnie J. Bain 21


Understanding the Legal Environment 23


Procedure: The Anatomy of a Trial 26


Evidence and the Expert 30


Privileged Communication 34


Working with Attorneys 35


Epilogue: U.S. v. Bonnie Bain 36


Appendix 2-A 37


Appendix 2-B 38


Appendix 2-C 39


Chapter 3 Screening and Staging Engagements 47


Introduction 47


Screening Engagements 49


Staging an Engagement 53


Epilogue: Mattco Forge, Inc. v. Arthur Young & Company 60


Appendix 3-A 62


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Chapter 4 Gathering Evidence—Interviews and Observations 69


Introduction 69


The Interview: A Primary Evidence-Gathering Tool 71


Conducting Interviews 75


The Value of Observations 80


Epilogue: U.S. v. Ronda Nixon 82


Appendix 4-A 84


Chapter 5 Financial Statements Analysis—Reading Between the Lines 95


Case Study: ZZZZ Best Carpet Cleaning Service 95


Introduction 97


Context of Financial Reporting 97


Foundations of Financial Statements Analysis 105


Methods of Financial Statements Analysis 107


Cash Flow Analysis 112


Journal Entry Testing 114


Content Analysis 115


Personal Financial Statements 116


Summary 118


Appendix 5-A 118


Appendix 5-B 124


Appendix 5-C 126


Chapter 6 Fraud and White-Collar Crime 141


Introduction 141


Fraud and White-Collar Crime 144


Fraud Theory 148


Why Do People Commit Fraud? 151


Who Commits Fraud? 156


Victims of White-Collar Crime 156


The Government Is Not Always Right 157


Why You Need to Know 157


Appendix 6-A 157


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Chapter 7 Conducting a Fraud Investigation 175


Introduction 175


Suspicions of Fraud 176


Background Information 177


Significant Accounting Policies 179


The Engagement 180


The Investigation 181


Epilogue 225


Chapter 8 Transforming Data into Evidence (Part 1) 227


Introduction 227


The Role of Data Analysis 227


Framing the Data Analysis Task 230


Data Sources 231


Planning for Data Analysis 233


Data Collection 236


Data Preparation 237


Data Analysis Tools 239


Interview Transcription 244


Case Application 245


Summary 245


Appendix 8-A 246


Chapter 9 Transforming Data into Evidence (Part 2) 259


Introduction 259


Descriptive Statistics 261


Methods for Displaying Data 267


Data Mining 270


Data Analysis Software 274


Digital Analysis—Benford’s Law 276


Summary 280


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Chapter 10 Professional Responsibilities 291


Introduction 291


Professional Responsibility 292


AICPA Code of Professional Conduct 297


Statement on Standards for Consulting Services No. 1 300


ACFE Code of Professional Standards 301


NACVA Professional Standards 302


Six Essential Qualities 303


Revisiting the Rules of Evidence and Discovery 303


Other Standards and Regulatory Agencies 304


Professional Responsibilities and the Expert 304


Reconciling Conflicts 305


The Adversary-Advocacy Nature of Forensic Accounting 305


Making Good Decisions 306


Common Professional Responsibility Failures 308


Epilogue: Dock’s Creek Land Company, LLC v. T. R. Robertson, CPA 308


Chapter 11 Fundamentals of Business Valuation 313


Introduction 313


How Much Is the Business Worth? 314


Valuation Theory (The Time Value of Money) 320


Business Valuation Process 325


Other Valuation Issues 332


Professional Standards 333


Concluding Truths 334


Chapter 12 Special Topics 349 12.1 Methods of Proof (Direct vs. Indirect) 349


Introduction 349


Direct Method of Proof 349


Indirect Method of Proof 351


Method of Proof Selection 356


Indirect Methods and the Courts 357 12.2 Economic Damages 357


Introduction 357


What Are Economic Damages? 358


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Types of Compensatory Damages 360


Calculating Economic Damages 362


Concluding Comments 367 12.3 Computer Forensics 367


Introduction 367


Computer Forensics in Context 371


The Process of a Computer Forensics Investigation 372


Trends in Computer Forensics 375


A Final Caution 376 12.4 Reporting Results 376


Introduction 376


Judicial Mandate—Rule 26 377


Professional Guidelines 378


Tips for Effective Reports 381


Appendix 12-A 381


Glindex (combined Glossary and Index) 401 Credits 418


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Preface This text is the first to provide a comprehensive view of what forensic accountants actually do and how they do it. With experience as both practitioners and educators, we offer a unique perspec- tive that bridges the gap between theory and practice. Our objective is to introduce students to the knowledge and skills required in the practice of forensic accounting. As emphasized throughout the text, the scope of forensic accounting services extends far beyond the realm of fraud inves- tigation, which is commonly emphasized in academic settings. Despite the engagement-specific nature of the work, forensic accounting engagements share common elements such as gather- ing and analyzing evidence, interpreting and communicating findings, and applying specialized knowledge. The building-block structure of this text is designed to guide students through each component, in the context of real-world situations.

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