Fraud Auditing

and Forensic Accounting

4th Edition

Tommie W. Singleton
Aaron J. Singleton
Table of Contents
Preface............................................................................................................................................................... vii
Chapter 1 – Background of Fraud Auditing and Forensic Accounting ................................................... 1
Learning Objectives ........................................................................................................................................... 1
Introduction ....................................................................................................................................................... 1
Brief History of Fraud and the Antifraud Profession............................................................................................ 2
The Fraud Cycle ................................................................................................................................................. 4
Review of Technical Literature........................................................................................................................... 5
Forensic Accountant and Audits ......................................................................................................................... 7
Forensic Accountants ....................................................................................................................................... 12
Fraud Auditors ................................................................................................................................................. 15
Keys to Effective Fraud Investigation ............................................................................................................... 19
The Antifraud Professional’s Career ................................................................................................................. 20
Summary ......................................................................................................................................................... 22
Review Questions ............................................................................................................................................ 23
Review Answers .............................................................................................................................................. 26

Chapter 2 – Fraud Principles ......................................................................................................................... 29

Learning Objectives ......................................................................................................................................... 29
Introduction ..................................................................................................................................................... 29
Definition: What Is Fraud? ............................................................................................................................... 29
Synonyms: Fraud, Theft, and Embezzlement .................................................................................................... 31
Classic Fraud Research..................................................................................................................................... 31
Fraud Triangle ................................................................................................................................................. 32
Scope of Fraud ................................................................................................................................................. 34
Profile of Fraudsters ......................................................................................................................................... 35
Who Is Victimized By Fraud Most Often? ........................................................................................................ 38
Fraud Taxonomies............................................................................................................................................ 39
Fraud Tree ....................................................................................................................................................... 44
Evolution of a Typical Fraud ............................................................................................................................ 47
Summary ......................................................................................................................................................... 48
Review Questions ............................................................................................................................................ 49
Review Answers .............................................................................................................................................. 51

Chapter 3 – Fraud Schemes .......................................................................................................................... 53

Learning Objectives ......................................................................................................................................... 53
Introduction ..................................................................................................................................................... 53
ACFE Fraud Tree ............................................................................................................................................. 53
Financial Statement Schemes ........................................................................................................................... 58
Corruption Schemes ......................................................................................................................................... 60
Asset Misappropriation Schemes ...................................................................................................................... 61
Summary ......................................................................................................................................................... 67
Review Questions ............................................................................................................................................ 68
Review Answers .............................................................................................................................................. 70

Chapter 4 – Red Flags .................................................................................................................................... 72

Learning Objectives ......................................................................................................................................... 72
Introduction ..................................................................................................................................................... 72
Professional Standards ..................................................................................................................................... 73
Common Red Flags .......................................................................................................................................... 74
Specific Red Flags ........................................................................................................................................... 76

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 Fraud Detection Model ..................................................................................................................................... 82
Summary ......................................................................................................................................................... 82
Review Questions ............................................................................................................................................ 83
Review Answers .............................................................................................................................................. 84

Chapter 5 – Fraud Risk Assessment ............................................................................................................ 85

Learning Objectives ......................................................................................................................................... 85
Introduction ..................................................................................................................................................... 85
Technical Literature and Risk Assessment ........................................................................................................ 85
Risk Assessment Factors .................................................................................................................................. 86
Risk Assessment Best Practices ........................................................................................................................ 89
Risk Management Checklists and Documentation ............................................................................................. 93
Summary ......................................................................................................................................................... 95
Review Questions ............................................................................................................................................ 96
Review Answers .............................................................................................................................................. 97

Chapter 6 – Fraud Prevention ....................................................................................................................... 98

Learning Objectives ......................................................................................................................................... 98
Introduction ..................................................................................................................................................... 98
Prevention Environment ................................................................................................................................... 98
Perception of Detection .................................................................................................................................. 100
Classic Approaches ........................................................................................................................................ 102
Other Prevention Measures............................................................................................................................. 103
Accounting Cycles ......................................................................................................................................... 104
Summary ....................................................................................................................................................... 105
Review Questions .......................................................................................................................................... 107
Review Answers ............................................................................................................................................ 108

Chapter 7 – Fraud Detection ........................................................................................................................ 109

Learning Objectives ....................................................................................................................................... 109
Introduction ................................................................................................................................................... 109
Fraud Detection Axioms................................................................................................................................. 109
Common Detection Methods .......................................................................................................................... 109
Specific Detection Methods ............................................................................................................................ 111
Summary ....................................................................................................................................................... 115
Appendix 7a: Beneish’s Ratios ....................................................................................................................... 116
Review Questions .......................................................................................................................................... 117
Review Answers ............................................................................................................................................ 118

Chapter 8 – Fraud Response ....................................................................................................................... 119

Learning Objectives ....................................................................................................................................... 119
Introduction ................................................................................................................................................... 119
Fraud Policy................................................................................................................................................... 119
Fraud Response Team .................................................................................................................................... 121
Recovery........................................................................................................................................................ 123
Summary ....................................................................................................................................................... 124
Appendix 8A: ACFE Sample Fraud Policy ..................................................................................................... 125
Appendix 8B: Sample Fraud Policy Decision Matrix ...................................................................................... 127
Review Questions .......................................................................................................................................... 128
Review Answers ............................................................................................................................................ 129

Chapter 9 – Computer Crime ....................................................................................................................... 130

Learning Objectives ....................................................................................................................................... 130

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 Introduction ................................................................................................................................................... 130
History and Evolution of Computer Crimes .................................................................................................... 130
Computer Crime Theories and Categorizations ............................................................................................... 133
Characteristics of the Computer Environment ................................................................................................. 135
Information Security (InfoSec) ....................................................................................................................... 136
Profiling Internet Fraudsters ........................................................................................................................... 137
Summary ....................................................................................................................................................... 141
Review Questions .......................................................................................................................................... 143
Review Answers ............................................................................................................................................ 144

Chapter 10 – Fraud and the Accounting Information System ............................................................... 146

Learning Objectives ....................................................................................................................................... 146
Introduction ................................................................................................................................................... 146
Accounting Concepts ..................................................................................................................................... 146
Segregation of Duties ..................................................................................................................................... 151
Accounting Information Systems .................................................................................................................... 151
Key Personnel ................................................................................................................................................ 152
Computer Hardware ....................................................................................................................................... 154
Computer Software ........................................................................................................................................ 155
New Forms of Media...................................................................................................................................... 156
Audit Trail Concept........................................................................................................................................ 156
Summary ....................................................................................................................................................... 157
Review Questions .......................................................................................................................................... 158
Review Answers ............................................................................................................................................ 159

Chapter 11 – Gathering Evidence ............................................................................................................... 160

Learning Objectives ....................................................................................................................................... 160
Introduction ................................................................................................................................................... 160
Rules of Evidence .......................................................................................................................................... 160
Hearsay Exceptions ........................................................................................................................................ 162
Other Rules of Evidence ................................................................................................................................. 163
Summary ....................................................................................................................................................... 166
Review Questions .......................................................................................................................................... 167
Review Answers ............................................................................................................................................ 168

Chapter 12 – Cyber Forensics ..................................................................................................................... 169

Learning Objectives ....................................................................................................................................... 169
Introduction ................................................................................................................................................... 169
Expectation of Privacy ................................................................................................................................... 169
Types of Investigations................................................................................................................................... 170
Sources of Digital Data .................................................................................................................................. 172
Types of Cyber Data ...................................................................................................................................... 173
Cyber Forensics Investigation Process ............................................................................................................ 174
Variety of Specialists In Cyber Forensics ........................................................................................................ 176
Summary ....................................................................................................................................................... 177
Review Questions .......................................................................................................................................... 178
Review Answers ............................................................................................................................................ 179

Chapter 13 – Obtaining and Evaluating Nonfinancial Evidence in a Fraud Investigation ................ 180
Learning Objectives ....................................................................................................................................... 180
Introduction ................................................................................................................................................... 180
Interviews ...................................................................................................................................................... 180
Body Language .............................................................................................................................................. 182
Deception Cues .............................................................................................................................................. 182

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 Eye Language ................................................................................................................................................ 183
Statement Analysis ......................................................................................................................................... 184
SCAN ............................................................................................................................................................ 184
Summary ....................................................................................................................................................... 185
Review Questions .......................................................................................................................................... 186
Review Answers ............................................................................................................................................ 187

Chapter 14 – General Criteria and Standards for Establishing an Expert Witness’s Qualifications
.......................................................................................................................................................................... 188
Learning Objectives ....................................................................................................................................... 188
Introduction ................................................................................................................................................... 188
Credentials ..................................................................................................................................................... 188
Personal Qualities of The Expert .................................................................................................................... 192
Sources for Locating Expert Witnesses ........................................................................................................... 194
Distinguishing the Actual Area of Competence ............................................................................................... 195
Summary ....................................................................................................................................................... 196
Review Questions .......................................................................................................................................... 197
Review Answers ............................................................................................................................................ 198

Chapter 15 – The Legal Role and Qualifications of an Expert Witness ............................................... 199
Learning Objectives ....................................................................................................................................... 199
Introduction ................................................................................................................................................... 199
Role of a Forensic Accountant As a Witness In Court ..................................................................................... 199
Legal Qualifications for a Forensic Accountant as an Expert Witness .............................................................. 203
Qualification and Admissibility of Accounting Evidence ................................................................................ 204
Expert’s Role in the Litigation Team .............................................................................................................. 205
Pretestimony Activities .................................................................................................................................. 205
Summary ....................................................................................................................................................... 206
Appendix 15A: Transcript of Typical Court Testimony of Expert Witness....................................................... 207
Review Questions .......................................................................................................................................... 209
Review Answers ............................................................................................................................................ 210

Chapter 16 – Effective Tactics and Procedures for the Expert Witness in Court .............................. 211
Learning Objectives ....................................................................................................................................... 211
Introduction ................................................................................................................................................... 211
Effective Profile ............................................................................................................................................. 211
Being a Credible Expert Witness .................................................................................................................... 211
Expert’s Role in the Litigation Team .............................................................................................................. 212
Pretestimony Activities .................................................................................................................................. 213
Trial and Testimony ....................................................................................................................................... 213
Survival Techniques ....................................................................................................................................... 218
Summary ....................................................................................................................................................... 219
Review Questions .......................................................................................................................................... 220
Review Answers ............................................................................................................................................ 221

Chapter 17 – Fraud and the Public Accounting Profession................................................................... 222

Learning Objectives ....................................................................................................................................... 222
Introduction ................................................................................................................................................... 222
History of Fraud and the Auditor: A Summary................................................................................................ 222
Fraud and the Auditor’s Liability .................................................................................................................... 228
Fraud and the Auditor’s Responsibility ........................................................................................................... 229
Fraud and the Auditor’s Role .......................................................................................................................... 231
Summary ....................................................................................................................................................... 233

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 Review Questions .......................................................................................................................................... 234
Review Answers ............................................................................................................................................ 235

About the Authors ......................................................................................................................................... 236

Glossary .......................................................................................................................................................... 237
Index ................................................................................................................................................................ 240