This PPT gives general understanding and clarifies the basics of Forensic auditing

1. Forensic Auditing Prepared by: VikasKalyanshetty ACA, B Com Associate Finance Team: Systems & Process Improvement Corporate Accounting Group Infosys Technologies Ltd, Bangalore 1

2. Contents Meaning of Forensic Forensic Auditing/Accounting Qualities of a forensic accountant Purpose Broad Categories of Frauds Broad Stages of Investigations Fraud Symptoms Specialized Forensic Audit Techniques General Questions that are answered Statutory Vs Forensic Audit Conclusion 2

3. Forensic Meaning Dictionary: Relating to, used in, or appropriate for courts of law or for public discussion Having Legal identity Forensic reports can be presented as an evidence in the court of law E.g. Forensic Science 3

4. Forensic Auditing/Accounting Often associated with fraudulent activities Also performed in non fraudulent cases Forensic auditing aims at legal determination of whether fraud has actually occurred Investigating into Financial Records Forensic Auditing and Accounting are same 4

5. Required Skills of a Forensic Accountant – A Pizza! Base of Pizza: Accounting Knowledge Middle Layer: Dispersed knowledge of Auditing, internal controls, risk assessment and fraud detection Toppings: Basic understanding of the legal environment The Cherry on the toppings: A strong set of communication skills, both written and oral 5

6. Purpose – In Case of Alleged Fraud Discover if there is a fraud (Focus – White Collar Crime) Identify those involved Quantify the monetary amount of fraud Present Findings to the client/court 6

7. Three Broad Categories of Frauds Corruption Asset Misappropriation Financial Statement Fraud 7

8. 1. Corruption Conflicts of Interests Bribery Extortion 8

9. 2. Asset Misappropriation Cash Theft Fraudulent Disbursement Inventory Frauds Misuse of Assets 9

10. 3. Financial Statement Fraud Material misstatement in Financial Statement: Deliberate Falsification of Accounting Records Omission of Transactions/Balances/Disclosures etc. Misappropriation of Financial Reporting Standards. 10

11. Satyam Modus Operandi 7,561 Fake Invoices Inflated receivables Fake Fixed Deposit Receipts were printed. Bank Guarantees were manipulated Fake Bank balance statements of ICICI, Citibank, HSBC and BNP Paribas 11

12. Facts and Figures of SATYAM Fiasco! 12

13. Broad Stages of Forensic Audit 13

14. 1) Accepting the investigation 1) Forensic accountant must ensure whether their firm has Necessary skills and Experience to accept the work 2) Ideally Statutory Auditors should not accept Forensic auditing assignments 14

15. 2) Planning the Investigation Objectives of the investigation includes: Identify type of fraud Identify Fraudsters Quantify the loss Gather Evidence Provide advice to prevent the reoccurrence 15

16. 3) Gathering Evidence (Techniques) Testing internal controls Use analytical Procedures Apply CAAT Discussion and Interviews with the employees Substantive techniques such as Reconciliation, cash counts and review of stocks 16

17. 4) Reporting Report contains: Findings/Observations Summary of Evidences Amount of loss How fraudsters set up fraud scheme and which controls were circumvented Recommend improvements of controls 17

18. 5) Court Proceedings Members of investigation team are involved Evidence gathering is presented Simplify technical terms Forensic Accountants do not testify that fraud has occurred but only present evidence 18

19. Fraud Symptoms Unusual and unexpected changes Two types: Financial Record Related: Document analysis e.g. Handwriting/ Ink Analysis/ Trend analysis Person Related: Personality/Life style changes/ Behavioral Changes 19

20. Specialized Forensic Audit Techniques Supervising Comparing actual with expected Search warrants Surveillance Anonymous complaints/tips (most popular) Interview & interrogation Verbal Cues Non Verbal Cues 20

21. General Questions that are answered: How long fraud was carried? How was it conducted and carried? What was the suspects motive & opportunity to commit fraud? Whether it involved collusion? Are there any physical evidence at the scene of crime or in the documents? What comments are made by the suspects during interrogations? Were there any attempts to destroy evidence? 21

22. Statutory Vs Forensic Audit 22

23. Conclusion Forensic Audit is a specialist type of engagement: Auditor Cum Investigator Requires skilled and experienced team Team should be comfortable with appearing in court proceedings Management of IT companies must carry out Employees should be made aware before such audit to co operate with the team Exception to the clause: ‘auditors can be watchdogs and not blood-hounds’ 23

24. References:1) Google2) American Journal of Business Education3) Article Published in The Chartered Accountant by S Vasudevan 24