Report on Collecting Forensic Evidence

The following are some irregularities found in the Apollo Shoes Case that shows there are possible frauds exist: 1.Apollo’s minutes of October 18, 2007 shows that Mr. Unum, the VP of finance at Apollo Shoes refused the new auditing firm’s request to contact the old auditors. This may lead us to think that something might have happened during the previous audits. 2.Apollo’s minutes of June 30, 2007 shows that Apollo approved an advance of $1,000,000 to Mr. Lancaster (CEO of Apollo Shoes) as a personal loan to cover personal legal expenses.

Mr. Unum later reclassified the loan as other receivable. This information gives us a “red flag” for possible misclassification. Further investigation is needed to determine if possible fraud exists. 3.Account receivable shows that the bad debt expense for the year ended December 31, 2006 was $1,622,000, which equals to the write-offs for the year.

We need to pay more attentions to the write-offs to determine if the write-offs are legitimate. 4.Apollo’s 10-K shows a related-party transaction. In 2006 the company purchased its operating facility and equipment from a company controlled by two previous directors and shareholders of Apollo Shoes. What procedures will be used to collect accounting evidence? The procedures of collecting accounting evidence should start with developing an investigative plan.

The planning includes financial planning, personnel planning and technology planning. Financial planning helps to allocate the investigative resources and to make sure that investigation work get done within the budget. Personnel planning predict the staffing needs and to assemble an investigative team designed to proceed efficiently with the investigation. Technology planning is to identify the technical equipments needed during the investigation.

After establishing a solid plan, the investigator can start the investigation. An investigation includes three steps: intelligence gathering, interviewing witnesses and collecting documentary evidence. Intelligence gathering gathers information through three different channels: surveillance, database searches and trash collection. Intelligence gathering provides the investigator with as much information as possible about the victim, the business, the suspect, and the alleged crime. All of that information will help the investigator to proceed to the next step of the investigation process.

The interview process is essential to an investigation. Before interviewing people, the investigator should have a thorough plan for whom he should interview, what kind of questions he should ask for each interviewee and when and where should the interviews take place. Investigators use a variety of interview techniques such as NeuroLinguistic Programming and Kinesic Mirroring. A successful interview can increase the chances for the investigator to build a better rapport. Documenting evidences is the last step in the investigation process. Documentary evidences such as receipts and copies of checks are gathered to support the case.

The original document is considered the best evidence although copies of the original documents are also acceptable in the court. The common documentary evidences include signed statements, transactional paperwork intranet sources and e-mails. Documentary evidences can be gathered from the suspect or from a third party such as the financial contacts or professional contacts of the suspect. The best approach to gather documentary evidences is to start with those individuals who are the furthest removed from the suspected fraud and work its way to the main suspect. What sampling tools and techniques will be used for the examination?

Investigators and auditors use a variety of sampling tools and techniques for examinations. One of the sampling techniques that the auditor uses to select a sample is Systematic Random Selection. When using Systematic Random Selection, the auditor selects a starting point from within the population and examines every nth item thereafter, where n is determined based on the number of items in the population and the necessary sample size. The reason to use systematic random selection method over others is its simplicity and the assurance that the population will be evenly sampled.

The auditor also use attribute sampling to test the effectiveness of internal control. When using attribute sampling, the auditor examines a subset of items within a population to determine the extent to which a particular attribute exists within that population. Another sampling tool used by the auditor is variables sampling. Auditors use variables sampling to perform substantive procedures to evaluate the fairness of an account balance or class of transactions. The variables under audit are typically the total population or the arithmetic mean. How will you use analytical and inferential tools to evaluate accounting evidence?

There are two types of analytical tools: the associational tools and the temporal analysis tools. The associational tools are helpful to identify relationships among people, places, and organizations through diagrams and matrices. An example of the associational tools is link diagram. A link diagram uses dots to represent people and uses lines between dots to represent the relationship among those people. It helps the investigator to visualize relationships among the people involved in the crime. The temporal analysis tools help organize the flow of events or data over time.

The most common temporal analysis tool is the time-event chart (TEC). The TEC represents individual or group actions in chronological form. It uses symbols such as triangles, rectangles, and lines to represent events, dates, and the flow of time. It gives the investigator the visual clarity of the collected evidences or data related to the crime. Inferential analysis takes three steps to help the investigator to deconstruct the legal theory behind the case and draw the conclusion of the investigation. The first step is to deconstruct the legal theory of the case into the final proposition and all the intermediate propositions.

The second step is to establish the lines of argument leading up to the final proposition. The final step is to create an inference network. An inference network is a graphic representation of an inferential relationship. The inference network uses graphs to separate the significant evidence from masses of less relevant facts. It helps the investigator to clearly lay out strategies, sequence, and important evidences, which ultimately lead to a successful case. Wigmorean Chart is an example of the inferential tools.

References 1.Sheetz, Michael, Silverstone, Howard (2007). Forensic Accounting and Fraud Investigation for Non-Experts (2nd Edition). Hoboken, NJ: John Wiley & Sons, Inc. Chapter # 8, 9, 10, 11 &12. 2.Louwers, Timothy J., Ramsay, Robert J., Sinason, David H., Strawser, Jerry R. (2007). Auditing and Assurance Services (2nd Edition). New York, NY: The McGraw-Hill Companies. Module E, F&G.