1) Which of the following best describes the term forensic accounting?
A) It is a discipline that deals with the preparation and analysis of financial statements of companies.
B) It is the use of accounting principles to consolidate financial statements of foreign corporations.
C) It is a discipline that primarily deals with methods of preparation of financial budgets of a company.
D) It is the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony.
Answer: D
Explanation: D) Forensic accounting can be defined as the use of accounting theories, principles, or analyses in a legal action, often through expert witness testimony. In other words, it is the application of financial facts to legal situations.
Diff: 2
LO: 1-1
AACSB: Analytical Thinking
2) Which of the following is recognized as the first forensic accountant?
A) Frank J. Wilson
B) Maurice Peloubet
C) Alphonse Capone
D) Leslie A. Shuway
Answer: A
Explanation: A) The term forensic accountant was first used by Maurice Peloubet in 1946 in the Journal of Accountancy to recognize and celebrate IRS Special Agent Frank J. Wilson as the man who brought down Capone.
Diff: 1
LO: 1-1
AACSB: Analytical Thinking
3) Which of the following statement is true of forensic accountants?
A) They should have a reactive mindset.
B) They should focus their investigations on numbers rather than looking beyond them.
C) They should embrace systematic thinking.
D) They must trust their preexisting judgments.
Answer: C
Explanation: C) Forensic accountants need to be intellectually curious. In addition to this, they must embrace systematic thinking and exercise a healthy dose of professional skepticism.
Diff: 1
LO: 1-1
AACSB: Analytical Thinking
4) Which of the following shows Paul, a forensic accountant, indicating an intellectually curious mindset?
A) He relies on the reports given by the management to form an opinion on the financial viability of the business.
B) He bases his judgments on the existing industry standards and not on the environment in which the organization operates.
C) He gives room for the possibility that mistakes maybe attributable to negligence.
D) He questions his understanding of an issue, in spite of being an expert in the field.
Answer: D
Explanation: D) An intellectually curious individual possesses a restless mind-one that is never satisfied with his or her understanding of an issue, regardless of experience and expertise. Moreover, forensic accountants must have the instinct to explore problems that challenge conventional wisdom.
Diff: 2
LO: 1-1
AACSB: Reflective Thinking
5) Which of the following situations shows Kelcie, a forensic accountant, exercising professional skepticism?
A) Kelcie argues that the immediate previous year's records serve as a better basis for the investigation than the earlier years.
B) Kelcie believes that the reputation of the external auditor is an indicator of the reliability of the audit report.
C) Kelcie believes in the phrase "guilty, until proved otherwise" and does not presume innocence until she has reasonable doubt.
D) Kelcie verifies the reports given by the internal auditor against available evidence before using it in her reports.
Answer: D
Explanation: D) Forensic accountants must exercise a healthy dose of professional skepticism. This reflects a proactive, questioning mindset, where nothing is as it seems and "trust, but verify" is the general rule. Kelcie follows this general rule, which indicates professional skepticism.
Diff: 2
LO: 1-1