2 nd May, 2014 For MIPA FORENSIC AUDIT DR. MITIL CHOKSHI CHOKSHI & CHOKSHI CHARTERED ACCOUNTANTS
Jan 01, 2016
2nd May, 2014For MIPA
FORENSIC AUDITDR. MITIL CHOKSHI
CHOKSHI & CHOKSHICHARTERED ACCOUNTANTS
2nd May, 2014For MIPA
Contents What is Forensic Audit?
Forensic Audit vs.
External Audit
Statistics
Recent Frauds
What is Fraud?
Difference between
Fraud & Error
Categories of frauds
Detection Techniques
Fraud Detection Methodology
Controls to avoid Fraud
Preventive Measures
Emerging Frauds
Response to Frauds
Synopsis
2nd May, 2014For MIPA
What is Forensic Audit The term “Forensic Audit” has not been defined anywhere
Forensic Audit involves examination of legalities by blending the techniques of propriety, regularity and investigative and financial audits
“Forensic Audit” refers to specific procedures carried out in order to produce evidence for investigation and prosecution of criminal acts such as embezzlement or fraud
Findings of a forensic audit could be used in the court of law as expert opinion on financial matters
The forensic auditor should have a biased mind and negative approach and should see everything with suspicion.
2nd May, 2014For MIPA
References Standard Practices for IFA
Engagements
Managing the Business Risk of Fraud : A Practical Guide
Uniform Guidelines for Investigations endorsed by 10th Conference of International Investigators
Guidelines issued by International Financial Institutions- Anti-Corruption Task Force
2nd May, 2014For MIPA
Skills-SetProfessional Accounting Skills require the following:
an understanding of how business activity is documented, recorded, reported, managed and controlled;
the ability to identify, obtain, examine and evaluate relevant information;
the ability to quantify the financial impact of actual or expected transactions or events;
the ability to perform and interpret relevant analyses of information;
the ability to document and explain business information and the results of the financial analyses for decision-making purposes; and
the ability to render relevant and appropriate opinions and conclusions based on the findings and results of the work performed.
2nd May, 2014For MIPA
Skills-SetInvestigative Skills require the following:
an understanding of the context within which the engagement is to be conducted ;
the ability to identify, obtain, examine and assess information relevant to the engagement;
the ability to analyze and compare various types and sources of information;
an understanding of the types of information that would assist in establishing motivation, intent and bias;
an understanding of the ways in which information could be fabricated or concealed;
an understanding that information collected and the work performed, including the work and information of others, may become subject to disclosure and be tendered as evidence; and
the ability to document and present investigative findings and conclusions for decision making purposes.
2nd May, 2014For MIPA
External Audit vs. Forensic AuditPARTICULARS EXTERNAL AUDIT FORENSIC AUDIT
Objective Express opinion as to ‘true & fair’ presentation
Determine correctness of the accounts or whether any fraud has actually taken place
Techniques ‘Substantive’ and ‘compliance’procedures.
Analysis of past trends and substantive or “in depth” checking of selected transactions.
Period Normally all transactions for theparticular accounting period.
No such limitations
Adverse findings, if any Negative opinion or qualifiedopinion expressed, with/withoutquantification
Legal determination of fraud and naming persons behind such frauds
Off Balance Sheet Items Used to vouch the arithmetic accuracy & compliance with procedures
Regularity and propriety of these transactions/contracts are examined
2nd May, 2014For MIPA
2nd May, 2014For MIPA
Source : 2013/2014 Global Fraud Report - Kroll
StatisticsPercentage of companies affected by listed types of fraud
2nd May, 2014For MIPA
Source : 2013/2014 Global Fraud Report - Kroll
StatisticsPercentage dissuaded from investing in:
2nd May, 2014For MIPA
Frauds Sector wise
Financial Services
Information & Entertainment
Industrial Markets
Real Estate & Infrastructure
Telecom
Consumer Markets
Others (Health Care & Social Sector)
0% 5% 10% 15% 20% 25% 30% 35%
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Frauds Process wise
PROCUREMENT 01
SALES & DISTRIBUTION 02
INVENTORY 03
FINANCE/PAYMENTS 04
ADMINISTRATION 05
TREASURY 06
HR 07
Process perceived as most vulnerable to fraud risks(Ranks are based on total score. Rank “1” indicates most vulnerable process)
2nd May, 2014For MIPA
Statistics
NIL Recovery
Less than 25%
Between 26 to 50%
More than 50%
Full 100%
0% 5% 10% 15% 20% 25% 30% 35%
Percentage Recovery to Fraud Amount
2nd May, 2014For MIPA
2nd May, 2014For MIPA
Recent Frauds Rajat Gupta - Insider Trading
LIBOR manipulation
CWG - Embezzlement of Funds
Adidas – Reebok - Siphoning off Funds
NSEL - Non-availability of underlying commodities
Satyam - Fudging of Financial Statements
2nd May, 2014For MIPA
Recent Frauds Bernard Madoff - Securities Trading
Viruses and malwares - Rampant IP Fraud
Counterfeit - Counterfeiting and Piracy
Enron & AA – Payment for better accounting consequences
2nd May, 2014For MIPA
2nd May, 2014For MIPA
What Is Fraud ? From an auditor’s point of view, fraud is
any act :
- Which results in a financial loss / reputational damage
- With a malafide intention
- Usually it is suppressed or camouflaged.
2nd May, 2014For MIPA
Difference Between Fraud & Error
FRAUD ERROR
Stems from intelligence. Stems from inefficiency.
Usually camouflaged. Generally open.
Intentional. Unintentional.
Deliberate concealment of the facts.
Omission of amount or disclosure
2nd May, 2014For MIPA
Categories Of FraudFinancial
Statement Fraud
Diversion of Funds
Bid rigging
Insider Trading/Misuse of Information
Fraudulent encashment
through forgery
Fictitious accounts and conversion to
property
Kickback/ secret
commissions
Irregularity in Forex
transactions
Cheque kiting
Unauthorized credit facilities granted for reward or for illegal
gratification
Negligence and False
information
Purchase for personal use
Manipulation of payment instruments
Grant of loan against non-
existent security
No proper KYC of Client
Unauthorized relaxation in standard
terms & conditions for grant of loan
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Typical Business Frauds
Piggyback Fraud
Red Herring Frauds
Disaster Frauds
Duplicate
Purchases/
Expenses
Trojan Horse Frauds
Achilles Heel
Frauds
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Fraud Triangle
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General Susceptibility
VENDORS/AGENTS 01
MANAGEMENT EMPLOYEES 02
NON MANAGEMENT EMPLOYEES 03
BUSINESS ASSOCIATE 04
CUSTOMER 05
People most susceptible to commit fraud(Ranks are based on total score. Rank “1” indicates most vulnerable process)
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VIDEO CLIP
2nd May, 2014For MIPA
Detection Techniques
FORENSIC AUDIT
CRITICAL POINT AUDITING
PROPRIETY AUDIT
Aims at filtering out the symptoms of fraud from regular and normal transactions in which they are mixed or concealed
Aims at lending assurance that economy, efficiency and efficacy have been achieved in the transactions for which expenditure has been incurred or revenue collected is usually applied
2nd May, 2014For MIPA
2nd May, 2014For MIPA
Fraud Detection Methodology
Management Interviews:
• Interview of current as well as ex employees
• Minutes of the organization to be critically reviewed
• Preparation of a detailed questionnaire to extract constitutive information
• Questions so intended that they draw out the best possible information from the interviewee
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Verification of Applications:
• Confirming data not recreated/ modified
• Checking the control structure
• Checking Integrity and Reliability of data.
• Verifying size and version of data.
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Preliminary steps for Review :
Identifying weaknesses in internal controls
Inference Trends, Ratios
Checking bank reconciliation statements
Review Minutes, Statutory Registers, contracts, Audit/other Reports, etc.
Review of Standard Operating Procedures
Modification in the processes and reasons thereof
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Verification of authenticity of Legal Documents like minutes, statutory registers, contracts:
Examples –
• Signature Analysis – Consistency and genuineness of signatures on all documents.
• Testing the senility of the papers to verify if the documents have been created in order to make justifications available to the auditors.
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Theory of Inverse Logic:
• Process of proving the truth in the reverse order
• Determining what is fallacious and eliminating it
Two useful methods of determining the truth:
• The Mathematical or axiomatic approach
• Clues don’t fit or the reductio ad absurdum approach
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Axioms/ Theories / Mathematical tools/ etc.
• Benford’s Law of appearance of digits
Transactions of cheque payments
First Digit
125,000 1
76,000 7
456 4
98,765 9
8745 8
12 1
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Digit
1 30.10%
2 17.60%
3 12.50%
4 9.70%
5 7.90%
6 6.70%
7 5.80%
8 5.10%
9 4.60%
• Relative Size Factor
• Statistical measures such as regression which indicate the dependence of one variable upon another
Fraud Detection MethodologyPattern of naturally occurring numbers – Benford’s Law
Fraud Detection Methodology
2nd May, 2014For MIPA
Related Parties:
• Identifying Related Parties and transactions
• Investigating favors given for any hidden considerations
Verification Of Movement Of Funds:
• Tracing the movement of funds to identify the ultimate source of funds and the ultimate beneficiary
• Checking if there exists funneling of cash or other funds from illegal activities through legitimate financial institutions and businesses to conceal the source of the funds
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
Exit Interviews:
• Evaluation of the Exit interviews that were conducted with departing employees
• The primary aim of the exit interview is to understand the rationale behind the person's departure
Verification of the Internal and External communications through all modes
Fraud Detection Methodology Fraud Detection Methodology
2nd May, 2014For MIPA
2nd May, 2014For MIPA
The following documents or summaries should be retained on file:
Research;
Accounting, banking and other business records, and agreements;
Pleadings, criminal or regulatory charges, and other legal claims;
Affidavits and discovery transcripts;
Engagement letters and other correspondence;
Reports issued;
Schedules and calculations, including all necessary explanations;
Documentation
2nd May, 2014For MIPA
The following documents or summaries should be retained on file:
Notes and other recordings of interviews, meetings and discussions;
Documentation of key issues considered and key assumptions made;
The approach(es) taken and specific techniques used;
A record of the nature, extent and timing of procedures performed and the results of such procedures;
A record of the identities of the individual(s) performing the IFA engagement and a record that the work performed by assistants was supervised and reviewed;
Where the work of others is relied upon, their findings and conclusions.
Documentation
2nd May, 2014For MIPA
Auditors may communicate their findings and conclusions in a number of different forms:
written, oral or visual;
draft, interim or final;
point-form or narrative; and
formal, affidavit or letter form.
Reporting
2nd May, 2014For MIPA
2nd May, 2014For MIPA
Fraud: Red Flags Large amount of cash in hand
Lack of segregation of duties
Lack of mandatory time off for employees performing key control functions
Resource Constraints
External pressure on employees
Changes in employees behavior
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Fraud: Preventive Measures
Ethics Statement/ Employees Code of Conduct
Training & Communication Written Policies & Procedures Segregation of Duties
Access Controls
Monitoring lifestyle of Employees Employee Background Screening
2nd May, 2014For MIPA
Controls to avoid Frauds
Detection & Deterrence
Whistleblower Hotline
Risk Management
System
Data Analytics
Internal Audit
2nd May, 2014For MIPA
2nd May, 2014For MIPA
Emerging Frauds
2nd May, 2014For MIPA
Response to Fraud
38%
32%
31%
Internal Investigation Modification of Controls Disciplinary Action
2nd May, 2014For MIPA
To sum up….
Forensic Audit is an exception to the clause:
‘Auditors can be watchdogs and not blood- hounds’.
2nd May, 2014For MIPA
2nd May, 2014For MIPA