Chapter 6 Test for Forensic Accounting & Fraud Examination, 1 e Mary-Jo Kranacher ISBN-10; 047043774X Wiley 2010

Forensic AccountingBy Mary-Jo Kranacher, CPA/CFF, CFE Chapter 6 Legal, Regulatory, and Professional Environment LEARNING OBJECTIVES 6-1 6-2 6-3 6-4 6-5 6-6 6-7 6-8 6-9 6-10 Compare and contrast the remedies available in the civil and criminal justice systems. Identify the circumstances that require a Miranda warning. Explain what constitutes ‘‘good cause’’ in the discharge of an employee. Discuss the different approaches used by investigators to obtain documents. Describe what is meant by demonstrative evidence and give examples. Discuss the difference between probation and parole. Describe the factors that affect the decision to prosecute an entity. Explain the discovery process. Differentiate between the three major types of negotiated remedies. Discuss the primary purpose of the Sarbanes–Oxley Act of 2002. True/False 6-T/F #1. Answer: Fraud may only be prosecuted criminally. False Answer: 6-T/F #2. If the victims or others with a stake in the outcome of a fraud trial are not satisfied with the results of the criminal justice system, they may pursue their claim through the civil justice system. True Answer: 6-T/F #3. In addition to the criminal and civil justice systems, regulatory agencies also play an important role in monitoring illegal activities and pursuing those responsible. True Answer: 6-T/F #4. The First Amendment provides that a person cannot be compelled to provide incriminating information against himself in a criminal case. False 6-T/F #5. Answer: The Fourth Amendment prohibits unreasonable searches and seizures. True Page 1 of 12 True Answer: 6-T/F #12. True Answer: 6-T/F #8. The Sarbanes–Oxley Act of 2002 was signed into law on July 30. and investigating acts of noncompliance by auditors or audit firms. reliability. the auditing of public companies became the responsibility of the newly created American Institute of CPAs (AICPA). and it is trustworthy. an employee has limited Fifth Amendment rights. True Page 2 of 12 . The PCAOB is charged with overseeing public company audits. setting audit standards. and transparency of financial reports. Anyone in a public park. its probative value outweighs any prejudicial effects. True Answer: 6-T/F #11. In the criminal justice system. Generally. an employee does not have the right to have a lawyer present during the interview. individuals can be named as defendants. parking lot. evidence is admissible in court if it is relevant.Answer: 6-T/F #6. False Answer: 6-T/F #7. True Answer: 6-T/F #15. integrity. or obtain a warrant. The Twentieth Amendment entitles a person to due process of law and equal protections under the Law. False Answer: 6-T/F #9. True Answer: 6-T/F #10. Because employers do not have the right to place employees in a custodial setting. As long as a nonpublic entity is conducting the interview. False Answer: 6-T/F #14. conduct a personal or property search. False Answer: 6-T/F #13. Probable cause is the standard by which law enforcement may make an arrest. or mall may be videotaped without violating any laws as long as no audio of the target is recorded. Subsequent to the passage of the Sarbanes–Oxley Act of 2002. but businesses and other organizations may not be prosecuted. 2002 to address corporate governance and accountability as well as public accounting responsibilities in improving the quality. Sixth D. Fifth B. the company’s external auditors to attest to and issue a report on management’s assessment of internal control. Sixth D.Answer: 6-T/F #16. coerce. Fourth C. Fourth C. Fourteenth A Answer: 6-M/C #3. Section 404 of SOX recommends. The ______ Amendment provides that an individual has the right to an attorney to defend himself and the right to confront witnesses against him. Fifth B. The Sarbanes–Oxley Act mandates that each member of a company’s audit committee must be a member of its board of directors and must otherwise be independent. A. SOX also makes it unlawful for any officer or director of a public company to take any action to fraudulently influence. Fifth B. A. A. manipulate. D. or mislead an auditor in the performance of an audit of the company’s financial statements. The ________ Amendment entitles a person to due process of law and equal protections under the Law. Fourth C. Answer: B The ________ Amendment prohibits unreasonable searches and seizures. C. B. True Multiple Choice 6-M/C #1. but does not require. Fourteenth C 6-M/C #4. Fifth Fourth Sixth Fourteenth Answer: 6-M/C #2. False Answer: 6-T/F #17. The ______ Amendment provides that a person cannot be compelled to provide incriminating information against himself or herself in a criminal case. Sixth D. Fourteenth Page 3 of 12 . True Answer: 6-T/F #18. A. Answer: D Page 4 of 12 . Generally. If the interviewee cannot afford an attorney. The interviewee has a right to an attorney. a citizen’s arrest. The punishment fits the crime. The employee’s conduct was against written policy. a warrantless arrest by the police based upon probable cause. C. It is advisable that employers document good cause for any termination in the employee’s personnel file. Librarian-patron privilege C. Attorney work-product privilege D. A Answer: 6-M/C #9. C. The termination was discriminatory. B. Attorney–client privilege B. objective. meaning that the punishment is reasonable given the nature of the offense. and evidence suggested the elimination of alternative suspects. search warrant.6-M/C #5. voluntary consent. Legal privileges are protections against certain types of testimony. D Page 5 of 12 . The interviewee’s answers may NOT be used against him. subpoena. C Answer: 6-M/C #6. a grand jury proceeding that leads to an indictment and a subsequent arrest warrant issued by a judge. D Answer: 6-M/C #7. meaning that not all persons committing such an act were or would be terminated. The investigation was fair. A. Answer: The Miranda warnings consist of everything but the following: The interviewee has a right to remain silent. theft. B. B. A. investigators can obtain documentary evidence using all approaches EXCEPT: A. D. an investigation that leads to the filing of an Information. D. Which of the following is not a legal privilege? A. one will be provided at no cost. Physician–patient privilege B Answer: 6-M/C #8. Targets may enter the criminal justice system from all of the routes below except for: A. Good cause might include the following EXCEPT: A. C. D. B. C. 4. The normal order of discovery includes the following steps in what sequence? 1. 4. 4 B Answer: 6-M/C #11. 3. Answer: The purview of auditing of nonpublic companies falls under the guidelines of the: A. 3 C. 4. 1. 2. PCAOB C. FASB B. 1 D. 3. 3. 1. arbitration D. Post to general ledger 2. 4. 1 D. 1. 4. Which of the following statements is not a major financial statement? A. Balance Sheet C. Attorneys take depositions 3. out-of-court settlements B. Statement of Cash Flows D. 2. Journal entries are recorded A. 2. The basic accounting flow consists of the following events in what sequence? 1. 2. Sales Budget D 6-M/C #14. 1. 3. AICPA D. 3 B. 4 B. 3. majority jury vote C. 2. 1 C. 2 A Answer: 6-M/C #13. 4.Answer: 6-M/C #10. Business transactions occur 3. Request to produce documents 4. Interrogatories 2. 3. 1. GAO C Page 6 of 12 . 2. Requests for admission A. Which of the following is not a major form of negotiated settlements in a civil trial? A. Financial statements are prepared 4. Income Statement B. mediation B Answer: 6-M/C #12. 2. Page 7 of 12 . A. Enforcing compliance with the Sarbanes–Oxley Act. XBRL D. C Answer: 6-M/C #18. Inspecting registered public accounting firms. Which of the following is not a responsibility of the PCAOB? A. Registering public accounting firms that audit publicly traded companies. The AICPA has the authority to set standards and make rules in all the following areas EXCEPT: A. A. B Answer: 6-M/C #16. Audit Documentation. In September 2004. SEC C. PCAOB Auditing Standard No. C. B. Members of the PCAOB are appointed by the: A. D. requires that audit engagement documentation should include a list of all EXCEPT: A. Converging GAAP standards with IFRS standards. the results of the auditor’s related procedures. the auditor’s response. Auditing standards (for public companies). Creating an independent regulatory framework for the accounting profession. List of the internal controls. Revising the process of establishing new financial accounting standards. C. D 6-M/C #20. C. Enhancing the quality and transparency of financial reports. ERM B. recognized by the SEC as the critical methodology for Sarbanes–Oxley. D. C Answer: 6-M/C #17. significant fraud risk factors. Establishing new protections for corporate whistleblowers. IFRS C.Answer: 6-M/C #15. Which of the following is not a major provision in the SarbanesOxley Act of 2002? A. the Committee of Sponsoring Organizations (COSO) of the Treadway Commission released their _______ framework. C. XML A Answer: 6-M/C #19. AICPA B. Auditing standards (for nonpublic companies). Compilation and review standards. B. Code of professional conduct. B. D. B. 3 (AS3). FASB Page 8 of 12 . Ten C. Now you have 1 gallon of water held in the 5 gallon jug. Now dump out the 4 gallon jug. 2. By using nothing but the buckets and water. Original documents are preferable. The lead audit or coordinating partner and reviewing partner of the registered accounting firm must rotate off of the audit every ________ years. Pour the 1 gallon into the 4 gallon jug. When the PCAOB mandates it. What common law protections do individuals have during interviews? Answer: These include:  Minimization of invasion of the employee’s privacy  Limitations on interview content to employee job duties and responsibilities  Limitations on public disclosure of the employee’s private facts  Limitations on intentional infliction of emotional distress on the employee  Limitations on defamation . Critical Thinking Exercise A scientist has two buckets. The document must be reliable. The document needs to be authenticated. A. The document must not have been forged. Dump out the 4 gallons. Answer: Discuss the considerations that must be given in respect to documentary evidence. Second you dump some of the 5 gallon jug's water into the 4 gallon jug so the 4 gallon jug is completely full. A Short Answer Essay 6-SAE #1. In addition. 5. 3. 4. Two D. the scientist also has an unlimited water supply. Five B. one holds four gallons and the other holds five gallons. Fill up the 5 gallon jug and pour some of the water of the 5 gallons into the 4 gallon container. how can the scientist accurately measure three gallons of water? Answer: First you dump out the 4 gallon jug.Answer: Answer: D.unfounded facts and accusations made by the interviewer  A duty to deal fairly and in good faith  No false imprisonment 6-SAE #2. You now have 3 gallons held in the 5 gallon jug! Page 9 of 12 . The document must not be hearsay or objectionable. B IASB 6-M/C #21. Five considerations must be given to any piece of documentary evidence: 1. pictures. however. Demonstrative evidence is any evidence that purports to educate. objective. Page 10 of 12 . Answer: What approaches are used by investigators to obtain documents? Generally. and in those settings where the suspected perpetrator has been taken into custody and denied freedom presumably against their will. incarceration. meaning that the punishment is reasonable given the nature of the offense. summarize. 6-TRQ #4. meaning that all persons committing such an act were or would be terminated. • The company completed a reasonable investigation to ensure that any such questionable act was committed by the employee and has evidence to support such a claim. drawings. • The investigation was fair. 6-TRQ #2. • The punishment fits the crime. The criminal justice system may result in fines. community service. and mediation. Some examples of demonstrative evidence include the following: • Photographs and videotapes. reenactments.Text Review Questions 6-TRQ #1. • Maps. Answer: Under what circumstances would a Miranda warning be required? In custodial settings by law enforcement. charts. PowerPoint slides. • The termination was nondiscriminatory. • The employee’s conduct made for unsafe or inefficient business operations. summary schedules. and evidence suggested the elimination of alternative suspects. investigators can obtain documents using three approaches: • Voluntary consent • Subpoena • Search warrant 6-TRQ #5. What remedies are available through the civil and criminal justice systems? Answer: There are three major forms of negotiated remedies in civil procedures: out-ofcourt settlements. In the United States. etc. • Scale models. diagrams. arbitration. or amplify real evidence. Answer: What is meant by demonstrative evidence? Give examples. there are no fraud crimes that carry the death penalty. federal law may require that a Miranda warning be read to the suspect. censure. Answer: What constitutes “good cause” in the discharge of an employee? Good cause might include the following: • The employee’s conduct was against written policy. and even capital punishment. 6-TRQ #3. Demonstrative evidence tends to tell a story and complements other forms of evidence such as real and testimonial evidence. probation. are all forms of demonstrative evidence. graphics. • Computer reconstructions or animations. models. • Scientific tests or experiments. and adequacy of nonprosecutorial remediation options. and the individual was acting as an agent for the entity. the agent’s action was intended to benefit the entity. 6-TRQ #7. arbitration. During the parole period. The fourth and last stage of discovery is an attempt by counsel to get the other side to agree to certain basic aspects and facts of the case through “requests for admission. Answer: What are the three major types of negotiated remedies and how do they differ? There are three major forms of negotiated remedies: out-of-court settlements. Factors that affect the decision to prosecute an entity are similar to those for individual prosecution and include the sufficiency of evidence. Third. Answer: What is the discovery process and how does it work? Discovery is the process by which each side may explore the merits of the other side’s arguments by obtaining documentary and testimonial evidence. assuming that the scope of the infraction was within the duties of the individual who committed the crime. how is probation different from parole? Probation is a penalty and is used as an alternative to prison. 6-TRQ #6. In mediation. the qualities of their fact witnesses. probability of deterrence and rehabilitation. Out-of-court settlements occur when both sides come to a settlement position after examination of their own clients. likelihood of success at trial. attorneys start to take sworn testimony from opposing parties in the form of depositions. businesses may be held liable. and other important aspects of the case. Parole is often used as a reward for good behavior during time served.” 6-TRQ #9. a parole officer is assigned. whereas parole is used to describe the corrections process subsequent to having served time in prison. 6-TRQ #8. In addition. an independent. Answer: What are the factors that affect the decision to prosecute an entity? Generally. interrogatories are passed to the opposing council. Any matter or material relevant to the civil action that is not privileged is subject to discovery. Page 11 of 12 . opposing parties submit “requests to produce documents” to one another. Subsequent to interrogatories. the strength of their expert opinions. Answer: In the criminal justice system. Initially. and mediation. objective mediator will work with both sets of opposing counsel to help reach a settlement between the two (and their clients). the evidence. How did the Sarbanes–Oxley Act address corporate governance and public accounting responsibilities? The Act provides sweeping measures aimed at: • Establishing higher standards for corporate governance and accountability. Thus. the arbitrator acts like the judge and jury.An arbitrator is an independent third party who has the authority to determine the outcome of the case. listening to the primary aspects of each side’s case and deciding what he or she believes to be the most appropriate outcome based on the merits of the cases presented. • Developing severe civil and criminal penalties for corporate wrongdoers. • Creating an independent regulatory framework for the accounting profession. • Establishing new protections for corporate whistleblowers. Page 12 of 12 . • Enhancing the quality and transparency of financial reports. Answer: 6-TRQ #10.