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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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http://www.rtedwards.com/journals/JFA/evidentiary.htmlhttp://www.rtedwards.com/journals/JFA/evidentiary.html

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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.pdf

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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

sbhansalico@yahoo.comsbhansalico@gmail.com

94138-01080CA SUDHIR BHANSALI

mailto:sbhansalico@yahoo.commailto:sbhansalico@yahoo.com