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Forensic Audit
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On this earththere is enough foreveryones need,
not enough for theirgreed.- Mahatma Gandhi
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WHAT ??
Ask Enron , WorldCom ,Satyam ,laymanBrothers and Citi Banketc !!
Legally accurate Audit.
Audit that is sustainable in some adversariallegal proceeding, or within some judicial or
administrative review.
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WHAT ??
Focus is: The evidence ofeconomic transactions and
reporting
the legal framework which allows such evidenceto be suitable to the purpose(s) of establishingaccountability and/or valuation
In other words: the identification, interpretation, and
communication of the evidence of economictransaction and reporting events
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WHAT ??
The Forensic Audit is unique. It is initiated toconfirmation of wrong-doing. The term"forensic" refers to information or evidencethat is suitable for presentation in a courtof law
To obtain evidence to support criminalcharges related to white-collar crimes suchas bribery, fraud, theft, breach of trust,extortion and forgery
The reports are usually very lengthy andfully-documented and well supportedchronology of the investigation and findings.
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WHAT ?? Negative or Positive
Often mistakenly assumed to beexclusively associated with "negative"applications, such as bankruptcy, fraud,business disputes, or matrimonial divorce.
May also be applied in "positive" assuranceengagements such as due diligence
reviews, business valuations, Auditcommittee advisory services and enterpriserisk management.
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WHAT ??
Forensic audit is applied to the evidence offirst order activities, not secondary systemsof controls.
Analysis includes the crucial aspect ofrecognizing the implications of evidencethat has been obtained.
Additional techniques are employed toforecast or predict future conditionsbased on known past transactions or events.
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Why??
Human nature:Hide failures; not admit them. Conceal problems; not discuss them.
Defend wrong decisions; not admit them. Cover up mistakes; not own up.
Forensic Audit has been the buzzword, world
over since numerous years.But after the Harsad Mehta ,Khaten Parakh andrecent Satyam fiasco, the same has gainedproposition in Indian context also.
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Satyam Fraud Case
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When??
Adverse findings during Normal / Final Audit
Questions raised about the validity of aprocurement procedure / award of
contracts Under-performance / non-delivery of goods
or services
Where information received fromwhistleblower
On request of management
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How??
Stage to start Forensic Audit Planning and Execution stage
Process
1.Preparation (of the investigator, not the data)2.Collection (the data)3.Examination
4.Analysis
5.Reporting
6.Comparison of Physical Forensic
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Planning Stage
Meet with the Client
Obtain an understanding of issues at
hand Perform preliminary assessment of work
to be done and prepare tentative schedule
Perform a Conflict Check
Ensure that the firm does not haveconflicts of interest
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Panning Cont Perform an Initial Investigation
Preliminary investigations examination ofavailable information
Allows auditors to identify likely troubleareas and assess the work to be done
Plan the Audit
Should identify objectives to be achieved andplan audit methodology to be used
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Execution Stage
Collect the Relevant Information In depth interviews with clients staff
Examination ofhard-copy & electronic info
Electronic info is often best source forforensic auditors
Specialized computer forensic auditors are
sometimes called in, depending on the audit Off-site computers & servers, hard-copy info,
etc. are also examined
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Execution Cont
Perform the Analysis Highly dependent on specifics of the engagement Often involves: calculating economic damages and
sensitivity analysis, tracing of assets
Prepare the report Should contain the details of the engagement, the scope,
any limitations and a detailed summary of the findings Reports are generally confidential and often used in court
proceedings Period in which evidence gathered Review Process & report to the client. Identify those involved and quantify amount of fraud. Present findings to the client and court
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Investigation Objectives
How much was lost? (stolen)
Where are the assets?
How much can be recovered?
How much can be proven?
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Branches Of Forensic Audit
Investigative accounting-it deals with
investigation of criminal matters relating to employeetheft, securities fraud, insurance fraud etc. it does not
endwith investigation but also includes provisions ofsuggestions regarding possible courses of action
Litigation Support- it involves providing
accounting assistance in litigation matters. It primarily
deals with quantification of economic damage
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Forensic AuditV/s Statutory Audit
Statutory Audit ForensicAudit
Objective Express opinion as to the
True & Fair presentation.
Determine
correctness of theaccounts or
whether any fraudhas actually taken
place
Techniques Substantive andCompliance procedures
Analysis ofpasttrend and
substantive orindepth checking of
selected
transactions.CA SUDHIR BHANSALI
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Forensic Audit V/s Statutory Audit
Statutory Audit Forensic
Audit
Period For theAccountingPeriod
No suchlimitation
Verification ofstock, estimation of
realisable value ofcurrent assets,
provisions or liability
estimation etc.
Reliance onmanagement
representation
Independentverification of
suspected items
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Forensic Audit V/s Statutory Audit
Statutory Audit Forensic
Audit
Off Balance sheetitems(like contractsetc.)
Vouching ofarithmeticalaccuracy and
complianceprocedures
Regularity andAuthencity ofthese transactions
are examined.
Adverse findings Qualified opinionwith or withoutquantification
Determination offraud and namingpersons behind it.
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History or Background
Number of Forensic Auditors began to enhance inthe early 1980s
Association ofCertified Fraud Examinersestablished in 1988
American College of Forensic Examiners foundedin 1992
Forensic and Investigative Accounting programsin Canada
- Rotmans School of Management- Ecoles des Hautes EtudesCommerciales
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Demand for Forensic Auditors
1/8(One of the eight )most secure career tracks inAmerica (U.S. News & World Report, February 8,
2002)
One of the Ten hottest jobs for the next decadewith annual salary potential of over$100000 (SmartMoney Magazine, May 16, 2002)
1/7 (One of the seven) hot new sizzling career
areas in accounting, according to the AICPA
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How can you prepare for theopportunities in this area?
Self Study (e.g., ICAI Certificate course started in2008-09)
On-the-job training
Formal education
Obviously, a combination ofat least two of
these approaches will lead to optimalpreparation.
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Facts
45% of companies reported falling victim tofraud in the past two years in U.S.
Since 2003 there has been:
71% increase in the number of companiesreporting cases of corruption & bribery
133% increase in the numberreporting money
laundering; and 140% increase in the number reporting financial
misrepresentation
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Facts
Fraud that led to a loss of assets costcompanieson averageover US$ 1.7million: a 50% increase over 2003
40% of companies suffered significant lossof reputation, decreased staff motivation,and damaged business relations
Over33.33% (one third) of these frauds werediscovered by accident, making "chance"the most common fraud detection tool
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Forensic Services
Business valuations
Divorce proceedings and matrimonial disputes
Personal injury and fatal accident claims
Professional negligence
Insurance claims evaluations Arbitration
Partnership and corporation disputes
Shareholder disputes (minority shareholders claiming
(oppression)
Civil and criminal actions concerning fraud and financialirregularities cross examination, formulate questions
Fraud and white-collar crime investigations
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Work Opportunity :AgencyInvolved in India
Central Bureau of Investigation (CBI)
Insurance Sector (TRAI)
Securities Exchange Board of India (SEBI) Big Corporations and Companies ( Proactive
and Reactive Action)
Military and Police Department
State And Central Government.
Banks and Financial Institutes.
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CorruptionConflicts of Interest & achieve personal gainsBriberyExtortion
Assets MisappropriationCash TheftFraudulent DisbursementInventory FraudMisuse of Assets
Financial Statement FraudDeliberate falsificationOmission of TransactionsMisapplication of Financial Reporting standards
Types of Fraud
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Motives of FraudulentFinancial Reporting
> Under-pressure to achieve target
To Increase stock price
Tax motivated Reasons
Non- achievable Forecasts
To issue shares at Premium
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Fraud Detection
An appropriate combination of audit techniques
under the given set of circumstances.
Usually not discovered in the course of auditing
by using standard audit procedures
Awareness of the risk factors that increase thepossibility of fraud
Normal assumption may no longer be valid. For
example, documentary evidence may not bereliable
Modify his audit program or perform additional
procedures to confirm or dispel his suspicion of
fraud or error.
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Techniques
Critical Point Auditing
>Unusual debit/credit in closing
>Trend Analysis of Significant Financial Transactions
>Discrepancies in Receivable /Payable>False credit to boost Sales
>Cross debit and Credit and Inter A/C Transfer
>Weakness in internal Control System
Propriety Audit (Public Finance)>Conducting by Supreme Audit Institutions (SAI) ofGovernment Audit to aim at Value for money audit.
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Indicators of Fraud
Large unexpected losses
Non-compliance with corporate policy or internalcontrols
Employees apparently living beyond their means Inventory shortages remain unexplained and poorly
investigated
Copies rather than original invoices are being paid
Missing and/or altered documentation
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Indicators of Fraud..
Unusually large number of accounts inrelation to the size of the company
Shortages and overages in cash drawers
Adjustments to receivables High level of journal entries adjusting account
balances
Access to computers at unusual hours Numerous NSF or other returned items on
bank statements which are written off
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Tracing Cash Flows
Process of analyzing cash transactions of anindividual or company over a specific periodof time
Purpose is to analyze the source of the fundsand where the money went when it was
withdrawn from the particular account
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Tracing Cash Flows
Proceeds of crime and money launderinginvestigations
Investigations conducted to determine appropriateuse of grant/loan monies
Money laundering (i.e. Real estate transactions: toidentify the source of the funds for a purchase or theuse of the proceeds from a sale)
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SA 240- Auditors responsibilityRelating to fraud in an Audit
Primary responsibility of management
Inherent limitations of audit
Test nature of audit function
Fraud arises out of collusion (internal)
difficult to detect
Risk of failure of internal controls
weakness of internal controls Unusual transactions
Problems in obtaining sufficient audit evidence
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SA 240 cont Assess types of fraud or error likely to occur Likelihood of material effect on accounts
Additional Procedures
External evidence, auditing in depth, tracing
Reporting Responsibilities
Immediately to top management/board/audit
committee
If significant disclosure in accounts If significant and not disclosed accounts,
Disclosure in audit report
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Audit Evidence (SA-500)(w.e.f. 1st April 2009
Sufficient Appropriate Audit Evidence
Degree of risk of misstatement
Materiality of the item Experience gained during previous audits
Results of procedures
Types of info. Available and trend of ratio Analysis
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A Forensic Audit Engagement
Steps are similar to a typical auditengagement
Each forensic audit is unique
Steps are a guideline for auditors to start withbut rarely followed exactly
Auditors must assess specific risks and
issues and perform audit accordingly
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Sample Documentation
Fraud Examination Checklist
Fraud Examination Proposal
Fraud Policy Review Opinion Forensic Audit Report
CA SUDHIR BHANSALI
F d A diti A
http://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_examination_checklist_sample.pdfhttp://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_examination_proposal_sample.pdfhttp://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_policy_review_opinion_sample.pdfhttp://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_policy_review_opinion_sample.pdfhttp://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_examination_proposal_sample.pdfhttp://localhost/var/www/apps/conversion/current/tmp/Local%20Settings/Temporary%20Internet%20Files/OLKF7/fraud_examination_checklist_sample.pdf7/31/2019 Forensic Audit 08012011
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Fraud Auditing AnAwareness
Fraud auditing can not be reduced to a
simple checklist. It is an awareness in
the broadest sense of manycomponents
Human element (Behaviour),
organizations behavior ,knowledge of fraud and evidence
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Forensic Auditing Applicationsand Consequences
Satyam Computers Ltd.
Founder Chief Executive Raju charged withfraud, false corporate reporting and makingfalse statements to regulators.
First CEO charged under Criminal offence forfalse reporting.
Satyam Computers case is the first of ItsType in India.
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Forensic Auditing Applicationsand Consequences
Satyam Computers Ltd, continued
Consequences? Accounting scheme resulted in Rs. 9000 Crore
overstatement in Statements and earningsthereon The Company was near bankruptcy.
Since 2002-03, the Companies executives haveoverstated turnover.
Chief persons were blamed for massiveaccounting fraud.
CEO Raju, CFO and Auditors are under trail.
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Future Outlook
It is only through the practice of preventive ratherthan reactive auditing that forensic auditing willbecome visibly effective and make auditing
credible, once more.
Awareness of human element, organizations
behavior, knowledge of the system, the
technology in use and expected to be used,knowledge of fraud, evidence are so called redflags are key issues
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Forensic Accounting
Questions?
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THANK YOU
Contact details:
CA Sudhir Bhansali
52,Sangram Colony, C-SchemeJaipur-302004
0141-2372228,2372229
[email protected]@gmail.com
94138-01080CA SUDHIR BHANSALI
mailto:[email protected]:[email protected]