Planning and Conducting a Fraud Examination Flashcards
Which of the following is NOT correct with regard to fraud response plans?
A. A fraud response plan should be complex and extremely detailed to ensure its effectiveness.
B. A fraud response plan enables management to respond to suspected incidents of fraud in a consistent manner.
C. A fraud response plan should be flexible and allow appropriate responses based on the particular event.
D. A fraud response plan can send a message that management takes fraud seriously.
A. A fraud response plan should be complex and extremely detailed to ensure its effectiveness.
A response plan will allow management to respond to suspected and detected incidents of fraud in a consistent and comprehensive manner. By having a response plan in place, management will send a message that it takes fraud seriously.
A response plan should not be unduly complicated; for a response plan to work in high-pressure and time-sensitive situations, it must be simple to understand and administer.
While the appropriate response will vary based on the event, management should include a range of scenarios in the response plan.
Organizations without a fraud response plan might not be able to respond to issues properly, and will likely expend more resources and suffer greater harm than those that have such a plan in place. Having a response plan puts an organization in the best position to respond promptly and effectively.
To properly prepare an organization for a formal fraud investigation, all employees should be notified of the investigation’s existence and purpose. T/F
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 begin. 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, and who is involved.
Carter, a Certified Fraud Examiner for Universal Design, learns that Wallace, a salesperson with a wheeler-dealer 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. Alert management that Wallace might have committed fraud.
B. Look for evidence of misconduct in Wallace’s computer and desk area.
C. Directly accuse Wallace of having committed fraud.
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 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 a fraud examiner cannot articulate a factual basis or good reason for an investigative step, he should not do it. Therefore, a fraud examiner should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, the fraud examiner 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.
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. Declaration
B. Fraud theory
C. Suspicion
D. Predication
D. 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 he has a sufficient basis and legitimate reason to take each step in an examination.
Accordingly, fraud examiners should begin 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 a fraud examiner cannot articulate a factual basis or good reason for an investigative step, he should not do it. Therefore, a fraud examiner should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, the fraud examiner should continually reevaluate whether there is adequate predication to take each additional step in the examination.
If a fraud examiner acts without predication, he might expose himself, and his client or employer, to liability.
Each fraud examination should begin with the proposition that the case will end in litigation. T/F
True
Each fraud examination should begin with the proposition that the case will end in litigation. Thus, when a fraud examiner begins a fraud examination, he must assume that the case will end in litigation, and this assumption must be maintained and considered throughout the entire examination. If the fraud examiner assumes that litigation will occur, he will conduct the examination in accordance with the proper rules of evidence and remain well within the legal guidelines established by the legal systems.
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. T/F
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, most fraud examinations involve forensic accounting, but not all forensic accounting is fraud examination. For example, an individual hired to value 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 best describes predication?
A. The means by which individuals justify their unethical actions
B. The initial phase of an interview
C. The initial phase of the investigative process
D. The basis upon which a fraud examination is undertaken
D. 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 he has a sufficient basis and legitimate reason to take each step in an examination.
Accordingly, fraud examiners should begin 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 a fraud examiner cannot articulate a factual basis or good reason for an investigative step, he should not do it. Therefore, a fraud examiner should reevaluate the predication as the fraud examination proceeds. That is, as a fraud examination progresses and new information emerges, the fraud examiner should continually reevaluate whether there is adequate predication to take each additional step in the examination.
If a fraud examiner acts without predication, he might expose himself, and his client or employer, to liability.
When conducting fraud examinations, fraud examiners should adhere to the fraud theory approach. T/F
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 implement a blanket policy prohibiting employees from discussing employee investigations. T/F
False
In a 2012 decision by the U.S. National Labor Relations Board (NLRB), the entity that enforces the National Labor Relations Act (NLRA), the NLRB ruled that an employer’s routine policy or practice of asking employees not to discuss matters that are under investigation violates the NLRA, even where the employer did not threaten to take disciplinary action if employees breach confidentiality. Based on the NLRB’s 2012 decision, employers should not have a blanket policy prohibiting employees from discussing employee investigations. Instead, when conducting an investigation into employee misconduct, an employer must assess whether there is a need for confidentiality on a case-by-case basis.
Fraud examination is best described as which of the following?
A. A methodology for resolving fraud allegations from inception to disposition
B. A method for proving the culpability of a suspect
C. A method for finding evidence of guilt
D. The science of detecting fraud
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
