Chapter 1

Question 1

Forensic Accounting

Answer 1

• Forensic accounting is generally described as accounting that is used for legal and investigative purposes.

1. Financial forensics is the intersection of financial principles and the law and, therefore, applies the (1) technical skills of accounting, auditing, finance, quantitative methods, and certain areas of the law and research;(2) investigative skills for the collection, analysis, and evaluation of evidentiary matter; and (3) critical thinking to interpret and communicate the results of an investigation.
2. Forensic accounting is the action of identifying, recording, settling, extracting, sorting, reporting, and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes.

Question 2

5 Fundamental elements

Answer 2

 Laws, Courts, and Dispute Resolution
 Planning and Preparation
 Information Gathering and Preserving
 Discovery
 Reporting, Experts, and Testimony

Question 3

5 Specialised forensic areas

Answer 3

Bankruptcy, Insolvency, and Reorganization:

Economic Damages Calculations

Financial Statement Misrepresentation

Fraud Prevention, Detection, and Response

Business Valuation

Question 4

Bankruptcy, Insolvency, and Reorganization:

Answer 4

• Forensic accountants can be retained on behalf of the debtor, the individual or organization contemplating or already in bankruptcy, or for the creditors, those individuals or entities that remain to be paid.
• searching for hidden assets, identifying pre-bankruptcy transfers, recovering funds and assets to be used to satisfy creditors, or performing business valuations to be used in resolving the bankruptcy filing

Question 5

Economic Damages Calculations

Answer 5

• Two key terms for this area of litigation are causation and damages.
• Causation simply means the actions or inactions of one party caused the injury or loss of the other party.
• Damages refer to the calculated loss suffered as a result of causation.
• Forensic accountants are called upon to calculate losses in many contexts, including lost earnings, lost profits, lost business, and the physical loss of property (e.g., fire, flood, theft). The forensic accountant often will rely upon historical information, conduct interviews, physically inspect property, and perform trending in order to complete the damage calculation.
• Insurance claims work very similarly, where a party believes it suffered some type of loss and, depending on the insurance coverage it maintains, files an insurance claim to recover the loss.
• It is not uncommon for parties to include items, costs, and calculations within their damages claim that either have no bearing on the loss at hand or are unsubstantiated.

Question 6

Financial Statement Misrepresentation

Answer 6

• This area would entail the forensic accountant being retained to examine the financial statements and disclosures of publicly traded and privately held entities and organizations, to determine whether the financial statements properly reported the balances, results, and required disclosures

Question 7

Fraud Prevention, Detection, and Response

Answer 7

• Controls, financial policies, and accounting procedures before any thefts are identified, as well as to seek indications of fraud within specific areas even when no “red flags” or indications of fraud exist.
• Invaluable in investigating and determining what happened, who was involved, how the scheme was committed, how long the scheme went on, and other important aspects required in order to resolve the matter.

Question 8

Business Valuation

Answer 8

• The valuation may be required for purposes of dividing assets in a divorce, as discussed earlier, or may be part of some other type of litigation, such as a shareholder dispute.
• Federal and state tax regulations for estates and gifts revolve around the value of each transaction. In the case of estate and gift taxes, values below a certain amount have no tax effect, but once the value exceeds the amount, taxes are due, often significant in amount. Planning for such transactions before they occur can minimize the taxes due.