Hit detection is client side not server side. We have done test in crysis wars where we had a system log client side hits and what the server received. The basic catch is that the server compensates for the ping the person being hit is getting. So some hits are then ignored if i recall correctly. But the main Hit detection is done client side.

This is why there is a discrepancy in the kill cam. Your client doesnt know the recoil of the person shooting at you but it knows where it got hit. This is also why the kill cam looks like the gun isnt even pointed at the person when they die is your not sited in but it does that when you are sited in too. The system works and where you see the person on your screen is where you should shoot. The crysis series is one of the only series I have seen that uses this system. The shear fact is that the server does very little. The game on your hard drive handles most everything. This is also why the Crysis games benefit from being on an SSD.