data mining and forensic audit
TRANSCRIPT
CONTENT• Data Mining
• Methods of doing
• Difference with standard auditing
• Benefits and Risks
• Patterns in data
• Utilisation in different audits
• Forensic Audit• What is a fraud
• Profile of a fraudster
• Tools available in excel
• Theorems
A PROBLEM…
•A large retail chain doing substantially well
had
•Dismal diaper sale ; Excellent Beer sale
SOLUTION
Place them together !
WHICH IS SUSPICIOUS ?
• User 1: Login → Click on Product #8473 → Click
on Product #157 → Click on Product #102 →
Complete Purchase
• User 2: Failed Login → Request Password →
Direct Link to Product #821 → Change Shipping
Address →Complete Purchase
Data Mining
Computer Expertise
≠
WHAT IS DATA MINING
Data
Information
IDENTIFYING SUSPICIOUS TRANSACTIONS
Computer Behavioral Smartphone Analytics
Mouse Dynamics Screen Pressure
Typing Speed Angle of usage of phone
Previous Navigation Habits
Movement across screen
Entry & Exit points on website
Heart Rate
DATA MINING - VALUE ADDITION
What was my total revenue in the last five years?
TO
What were sales in UP last March? Drill down to Kanpur
TO
What’s likely to happen to Kanpur sales next month? Why?
DATA MINING - METHODS
•Association
•Sequence or path analysis
•Classification
•Clustering
•Prediction
DATA MINING - TECHNIQUES
•Artificial neural networks
•Decision trees
•The nearest neighbour method
DATA MINING V. REGULAR AUDIT
Labor Verification
Regular Audit Data Mining
1. Contracted rate = Billing rate
1. Contracted rate = Billing rate
2. The billing is relevant tothe audit period.
2. Employee Pay grade wise payment
3. Statutory Compliances 3. Mapping resignation to Last Pay
4. Mapping computer / biometric logins after resignation / termination
5. Overtime Analysis to determinea.) Regular Overtimeb.) Employees who worked 100 hrs
6. Those not availing leaves
DATA MINING - STEPS•Business Understanding
•Data Understanding
•Data Preparation
•Data Modelling
•Evaluation
•Deployment
DATA MINING – WHY INTEGRATE
•Transaction Volume
•Mitigate Inherent Risk
•Value addition to the client
•Cost Effective
DATA MINING – BENEFITS
•Remove Sampling risk – 100% coverage
•Decrease in Audit costs
•Provide Real time audit opinions
•Establish Completeness and accuracy
DATA MINING – SOFTWARE TYPES
•Generalized Software
•Specialized Software
DATA MINING – SOFTWARE TYPESCharacteristics Generalised Specialised
Batch Processing No Yes
Support entire audit procedures No Yes
User friendly Yes No
Require technical skill No Yes
Automated No Yes
Capable of learning No Yes
Cost Lower Higher
DATA MINING – RISKS
•First year costs might be higher
•Strong understanding of operations
•Availability of data in desired format
•Risk of Control totals
DATA MINING – PATTERNS
•Numeric Patterns
•Time Patterns
•Name Patterns
•Geographical Patterns
•Relationship Patterns
•Textual Patterns
• Purchases
• Vendors and accounts payable
• Employees and payroll
• Expense reimbursement
• Credit Card utilisation
• Sales & Debtors
• Inventory
• Commission Payouts
DATA MINING – INTERNAL AUDITS
PURCHASES
•Round number transactions
•Duplicate transactions
• Same, Same, Different Test
•Above average payments
•Transactions exceeding PO quantity
• Sequential Invoice numbers
•Too many invoices beginning with “9”
DATA MINING – INTERNAL AUDITS
CREDITORS
•Those with high percentage of returns
•Those with rapid increasing purchases
• Small denomination but quick frequency
• SOD for vendor approver and purchaser
DATA MINING – INTERNAL AUDITS
PAYMENT TREND ANALYSIS
By the day of week
By the day of Month
DATA MINING – INTERNAL AUDITS
DATA MINING – EXPENSES
VENDORS MASTER
• Analysis of Vendors master for creation date
• Identifying regular prompt vendor payment
• Cross reference vendors to employees
• Same, Same and Different test
DATA MINING – INTERNAL AUDITS
EMPLOYEES AND PAYROLL
• Regularly working overtime
• Not taking leaves
• Satisfied with unjustified salary deduction
• Segregating employees with salary in cash
• Biometric analysis – First to enter / last to leave
DATA MINING – INTERNAL AUDITS
TRAVEL EXPENSES
• Identify weekend or holiday travel
• Search for same or similar claims
• Identify costs outside of policy or costly late bookings
• Identify conveyance claim made for the same time periodas car rental or other transportation
• Compare mileage claims to distances reported
• Instances where employee has refunded a first classticket for an economy, but not reimbursed the balanceback to the company.
DATA MINING – INTERNAL AUDITS
SALES & DEBTORS
• Comparing Invoice to Shipping
• Conversely comparing Shipping to Invoice
• Preference in sale to a particular customer
• Same, Same, Different test to sale price
• Debtors
• Lapping
• Old outstanding invoices
DATA MINING – INTERNAL AUDITS
INVENTORY
• Determining slow moving inventory
• Determining quick moving inventory
• Purchasing frequency of a particular product
• Mapping stock valuation to last sale price
DATA MINING – INTERNAL AUDITS
• Transactions a customer does before shifting? (toprevent attrition)
• Profile of an ATM customer and what type ofproducts is he likely to buy? (to cross sell)
• Patterns in credit transactions lead to fraud? (todetect and deter fraud)
• Traits of a high-risk borrower? (to preventdefaults, bad loans, and improve screening)
DATA MINING – BANKS
• Duplicate Customer id
• DP Limit = Limit = Outstanding
• Comparing Unsecured and secured within scheme
• Rate of Interest being applied
• Last Credit amount and Date
• Same PAN – Different Customer id
• Last Stock statement summary
DATA MINING – BANKS
•Rubbing Nose
•Frequent blinking
•Moving or Tapping feet
•Crossing Arms
•Clearing throat
•Pinched eyebrows
•Smirk
DATA MINING – BEHAVIOR
FORENSIC AUDIT
REPORT TO THE NATION
• Each organization loses 5% of their REVENUE to fraud
• Asset Misappropriation is the biggest factor
• Fraud are generally NOT discovered for 18 months
• Higher the fraud perpetrator BIGGER the fraud
• 58% organizations NEVER recovered anything
FRAUD DETECTION
BANK FRAUDS – 9 MONTHS FY 2014-15
Name Number of Cases Amount
PNB 123 2036,00,00,000
CBI 174 1736,00,00,000
SBI 474 1327,00,00,000
Syndicate 114 749,00,00,000
OBC 86 719,00,00,000
BOB --- 597,00,00,000
IDBI --- 507,00,00,000
UCO --- 424,00,00,000
United Bank --- 376,00,00,000
TOTAL 7542,00,00,000
• A false representation of a matter of fact
• whether by words or by conduct,
• by false or misleading allegations, or
• By concealment of what should have beendisclosed
• that deceives and is intended to deceive another
• so that the individual will act upon it to her or hislegal injury.
WHAT IS FRAUD ?
FRAUD TRIANGLE
WHAT IS FORENSIC AUDIT
•The use of accounting skills;
•To investigate frauds / embezzlement and
•To analyze financial information
•For use in legal proceedings
FORENSIC VIS-À-VIS STATUTORY
Forensic StatutoryVery focused and micro approach Macro approach with wide coverage
Examines Reliability of documentation Relies on Documentary evidences
Not compulsory Regulatory compliance
Establishing existence of fraud Ensuring True and fair view
Determining the quantum of loss Verifying correct representations
Gathering evidences Evaluating Internal Controls
GHOST EMPLOYEES
NEED FOR LEARNING THE TRAITS
Why frauds go unnoticed during stat audit -
• extremely intelligent
• Conversant with internal systems
• Technology savvy
• Aware of stale audit procedures
FRAUDSTERS PROFILE
• Flamboyant lifestyle
• Very aggressive in his approach / targets
• Over protectiveness of data / documents
• Being the first one in and last one out
• Unusual close association with vendor / customers
FRAUDSTERS PROFILE
FRAUDSTERS PROFILE
FORENSIC AUDITOR
Forensic
Accountant
Law
Accounting
Criminology
Investigative
Auditing
Computer
Science
TRAITS OF A FORENSIC AUDITOR
•Think out of the box
•Distrust the obvious
•Develop cognitive dissonance
•Test of absurdity
TEST OF ABSURDITY
Think of events which may be possible but
not probable.
TOOLS AVAILABLE IN EXCEL
•Analyze round number transactions
•Duplicate detection
• Same, Same and different tests
•Above average payments to vendors
TOOLS AVAILABLE IN EXCEL
•Gap detection
•Automated sampling
•MATCH function
•Employee – Vendor match
SPECIAL MENTION – TIME & SPACE
•Establish transactions in quick successions
which take a substantial time in happening
• Storage in excess of the possible space
SPECIAL MENTION – RSF
•Ratio of Largest number to the second
largest number in the set
RSF = Largest Number / 2nd Largest
•RSF greater than 10 highlights probability of
fraud / error
SPECIAL MENTION – RSF
•Types of errors / frauds it can unearth
• Data Entry mistakes
• Fat Finger errors
• Wrong coding with masters
• Capital Asset written off in expense
• Excess payments in payroll
SPECIAL MENTION – BENFORD’SLAW
•Formulated by Simon Newcomb in 1881 ;
further researched by Frank Benford in 1938
•U.S. accepts Benford’s law as an evidence
• Statistical tool which can be applied to
normal audits also to automate samples
SPECIAL MENTION – BENFORD’SLAW
SPECIAL MENTION – M-SCORE
•Theory propounded by Prof. Beneish
• Stipulates the accuracy of financialstatements based on certain ratios
•Ratios such as
• Sales to receivables and Sales Growth Index
• Gross margin Index
• Asset Quality Index
• Depreciation Index
SPECIAL MENTION – M-SCORE
•Financial statements score >-2.22 is
considered as fudging
• Statistically proven to have 76% accuracy
•Model being adopted by Income Tax
Department for CASS
EXCEL LIMITATIONS
•Absence of Log
•Not admissible in court
• Involves slight complexity in applying
•Data size limitation / Instability
•Risk of Hidden data