CA. B.

ARUNKUMAR FORENSIC AUDIT

https://www.nytimes.com/video/movies/100000004719216/anatomy-of-a-scene-the-accountant.html
 Need is the mother of all inventions

• CAs’ has to adhere any Standards issued by ICAI

• ICAI has issued Standard on Auditing (SA) 240 Revised:
– “The Auditor’s responsibility to consider Fraud and Error in an Audit of
Financial Statement”

Standard Mandates Auditors responsibility has been laid down with respect to
Fraud and Error in Financial Statements.
 Error vs Fraud
Error Unintentional Misstatement

Includes Omission from Oversight

Mistake in application of accounting principles.

Fraud An Intentional Act

Factor Underlying Action as Intentional or

unintentional resulting in Misstatement of
between the Financial Statements
Fraud and
Error
Book keeping Vs Accounting Vs Auditing
Book keeping Is essentially maintaining accurate records of every account

Official Name “Ledger”, Luca Pacioli called it as “Quaderno”

with clear organised records of how the money flows into and
out of a business with proper ledgers- work of accounting can
be done
Is a in house function

Accounting Is the practice of analysing, interpreting and summarizing a

business financial data.

Taking Ledgers and turning them into meaningful business

information.

Mainly concerned with recording of the transactions in any

one of the two methodologies: Ind As or AS and GAAP

Financial Statements that serve outside the business too. So

accounting like any other Calculation or measurement, must
be standardized in order to be reliable.
Auditing Is analytical in Nature

It is said that Auditing begins

where accounting Ends

Is a systematic and independent

examination of the records, datas
and supporting documents.
Specific purpose
Financial Audit Conducted to ascertain whether the financial statement present is True and Fair View

Internal Audit evaluate a company's internal controls, including its corporate governance and
accounting processes

Management Audit is an assessment of how well an organization's management team is applying its

strategies and resources.

Cost Audit represents the verification of cost accounts and checking on the adherence to cost
accounting plan.

Secretarial Audit To check compliance with the provisions of various laws and rules/
regulations/procedures, maintenance of books, records etc.,

Statutory Audit is a legally required review of the accuracy of a company's or government's financial
statements and records

EDP Audit An analysis of an organization's computer and information systems in order to evaluate
the integrity of its production systems as well as potential security cracks

Forensic Audit Comprehensive scientific approach of reviewing an entity’s financial transactions

to determine if they are accurate, free from misstatement and rightly present
 Financial Audit Forensic Audit
Examination of evidences of accounting in
Investigation into Accounts and records
accordance with GAAP

To find out Misstatement / diversion of

To ascertain True and Fair View
Funds / also any wrong doing

Evaluation of accounting records

Definite and substantial evidence on the
predominantly based on persuasive
basis of conclusion can be drawn
Evidences

Skeptical and not suspicious Starts with Suspicion

Based on extended Audit Procedure with

Based on GAAP
Investigation & Critical Examination

Restricted for Year to find our True and Fair Extend till the end of event of Transaction
Presentation and not restricted to period itself

Beyond the FS looks into Contracts, and

Audit Restricted to Financial Statements
underlying Documents of the Transaction
Professional Skepticism
Is an attitude that includes a questioning mind
and critical assessment of audit evidence

FA should conduct the engagement due to

fraud could be present

Examples :

• Making Oral inquiries of Major Customers or Suppliers in

additional written Confirmations
• Comparing GP with operating Margins by location / Line of
Business / Period
• Interviewing personnel to obtain their insights are possible
methods of Fraud
• Discussing with Financial Auditors to understand extent of
work that needs to be performed
Bridging the Gap between Reality & Perception
Importance of Forensic Audits
Bankers & Lenders

Insurance Companies

Regulators (RBI / SEBI / ROC)

Investigation of Foreign Company

Investors (PE / Bond / Debenture Holders)

Law Enforcing Agencies (Courts / Lawyers)

Investigating Agency (SFIO / EOW / CBI)

Promoters / Management of the Company

Revenue Collecting Authorities (GST / Income Tax)

IBC for Identifying preferential and Undervalued Transaction

Investigating under the Companies (Inspection, Investigation, Enquiry) Rules 2014

Concepts & Principles of Forensic Audit
Beauty of Forensic Audit
• No Fixed Concepts or Principles
• Depends upon Object and Purpose
• Auditor needs great deal of knowledge of all relevant and
applicable laws
• Experience and aptitude is of utmost importance

Some Concepts Used in Forensic Audit

• The theory of Inverse Logic (https://www.youtube.com/watch?v=5tYrY0sm3yQ)

• Concept of “Distrust the Obvious”
• Birbal / Tenali Tips & Tricks
• 3 Dimension Approach
• Principle of Mirror Imaging object which is identical in form to another, but with
the structure reversed
• Benford’s Law
• Beneish M Score
Origin of Forensic Audit

@1934
Defining
“Fraud
Triangle”
Laws has be established
Sarbanes Oxley Act (SO) in USA

SAS 99,
• Consideration of Fraud in a Financial Statement

Creation of Serious Fraud Investigation Office (SFIO)

National Financial Reporting Authority (NFRA)

“Death by a thousand Cuts”

• Raising Frauds in Banks

Failure in Public Companies

• Satyam impetus new Companies Act 2013 with increased Auditing
Requirements

Ultimately Contributed to Chartered Accountants as

Leaders in
Understanding and
Anti Fraud Specialists Licensed Profession
Implementing Internal
Controls
Objectives of Forensic Audits
To use the forensic auditor’s conclusions to facilitate a settlement, claim, or
jury award by reducing the financial component as an area of continuing
debate.

To avoid fraud and theft.

To restore the downgraded public confidence

To formulate and establish a comprehensive Corporate Governance

policy.

To create a positive work environment.

Forensic Audit Typically Includes:
Analysis of Financial Statement

Computer Forensic & Electronic Discovery

Bankruptcies, Insolvencies and reorganizations

Workplace fraud investigations

Calculation of economic losses

Business valuations

Identifying Professional negligence

Forensic Audit Methodology
Assume litigation will follow.

Act on prediction.

Approach cases from two perspectives.

Move from the general to the specific.

Use the fraud theory approach. 

Forensic Audit Procedures

Analytical
Data Analysis Inspection
Procedures

External
Recalculation Confirmation Observation

Re-
Inquiry Interviews
Performance
Procedure for Forensic Audit – Situation Based

Meeting with the Analysis of

client and evidences and Preparation of
accepting the other supporting Report
engagement information

Performing conflict Gathering relevant

Court Proceedings
check evidence

Planning the audit

Performing initial
or formation of
investigation
robust action plan
Skill Sets for a career in Fraud Detection

Computer
Criminology
Science
Litigation
Information
Process &
Technology
Procedures

Accounting
Investigativ
& Business
e
reporting
Techniques
Systems

Auditing
Standard &
Forensic Evidence
Procedures Auditor Gathering
Fraud Defined
Sec 17 of ‘Fraud’ means and includes any of the following acts committed by a party to a contract, or
Indian with his connivance, or by his agent, with intent to deceive another party thereto or his
agent, or to induce him to enter into the contract\:—
Contract Act
1872 "(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Sec 447 of the (i) “fraud” in relation to affairs of a company or any body corporate, includes any act,
Companies omission, concealment of any fact or abuse of position committed by any person or any
other person with the connivance in any manner, with intent to deceive, to gain undue
Act 2013 advantage from, or to injure the interests of, the company or its shareholders or its creditors
or any other person, whether or not there is any wrongful gain or wrongful loss;

(ii) “wrongful gain” means the gain by unlawful means of property to which the person
gaining is not legally entitled;

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing
is legally entitled.
Fraudster’s Generic Profile
Living beyond one's means.
Experiencing financial difficulties.
Unusually close association with vendors/customers.
Excessive work pressure.
Control issues; unwillingness to share duties.
Complaints about pay.
Divorce/family problems.
Irritability, suspiciousness or defensive.
Addiction problems.
Refusal to take vacations.
Enjoy superior's trust.
Prefer to work alone.
Unusually normal person.
Fraud Triangle
Pressure Factor
•Force which makes some one to do some act. Pressure is what causes a
person to commit fraud. Desperate people do Desperate things.
Pressures comes from many forms as Financial or Non Financial. For
instances:
• Repayment of Debt;
• Falling Stock Prices;
• To maintain reputation etc.
•Pressure with Financial contents: Such pressures may be long term and
short term. These arise when people are in need of cash. These can again
be classified as follows:
• Itching palm and greediness;
• Desire to live well;
• High amount of personal debts and health expenditures;
• Unexpected financial needs;
Pressure Factor

•Pressure stemming from bad habits:- Such pressures are accepted

as the worst kind of factors motivating frauds. The main reasons for
such pressures are some attributes related with human qualities.
Such attributes are:
• Gambling, Drug or alcohol addict;
• Night Life habit;
•Pressures related with jobs: Such pressures stem from the
following:
• Being Dissatisfied with the job;
• The idea of an unfair attitude;
• Not getting promotion when expected;
• Lower wages structures;
• Not admired by Supervisors.
Opportunity Factor
•These factors directly involve top management and owners of the
business in particular. The control structure of a business and fraud has
inverse correlation i.e. Better the control structure; lower the scope of
committing fraud and vice versa. The following factors are responsible
for providing opportunity to commit frauds.
• Weak moral policies;
• Undisclosed contracts made with third parties and partners;
• In capabilities to assess the quality of job performed by the
employees;
• Absence of well disciplined environment in which fraudsters will be
published;
• Ignorance, indifference and inabilities of top management;
• Lack of healthy audit work.
Justify Fraud Factor
•It is the defence mechanism of fraudsters in order to justify his/her
action. The examples include:
• I had borrowed the money, I would pay back;
• This is in return for my efforts for the business;
• Nobody has suffered as a result of this;
• I have taken the money for the good purpose;
• I didn’t know that this was a crime;
• Business has deserved this;
• Since business evades tax, I have taken something which
was already mine.
•In order to prevent all these factors, business should establish
moral code and provide employee training.
Types of Fraud
Corruption
• conflicts of interest,
• bribery,
• extortion.

Asset Misappropriation
• Cash theft
• Inventory theft
• Fraudulent Disbursement
• Misuse of Assets
Financial Misstatement
• Falsification of Accounting Records
• Omission of Transactions
• Non disclosure of Relevant information
Systems of Fraud & Indicator
Delayed submission of returns information etc;
Delayed remittances into Bank;
Delay or non preparation of Bank reconciliation statements;
Lifestyle of promoters/ directors and key employees;
Continued internal control lapses and not following norms of corporate governance.
Delay in finalisation of accounts;
Frequent changes in accounting policies;
Continuing losses;
Over drawl of loans and advances;
Higher cost per unit of production
High amount of losses or wastage shown in books vs. norms;
High investment in group companies;
Profit not supported by increased cash availability.
Modus Operandi - Fraud
Fake CA Certificates/ Financial Statements;
Bogus Invoices/quotations/ bills;
Fraudulent removal of stocks charged;
Inflated valuations of securities;
Fake forged property documents;
Fake/Wrong search Reports;
Diversion of funds through bogus sisters concerns;
Deposits / miscellaneous areas;
Un-authorised loans against deposits/ NRI deposits;
ATM Frauds by stealing PINs/interception of cards;
Encashment of stolen/forged financial instruments through fictious accounts;
Misuse of other’s passwords for misappropriation of funds
Digital Forensics

# Forensic means
“Preparing suitable Evidence which is admissible in court of law"

# Digital Forensic is a series of steps to uncover and analyse electronic data

through scientific method. The major goal of the process is to duplicate original
data and preserve original evidence and then performing the series of
investigation by collecting, identifying and validating the digital information
for the purpose of reconstructing past events.
Stages of Digital Forensics

ASSESSING COLLECTIO
PHASE N PHASE ANALYSIS REPORTING
Data Mining & Fraud Detection
Data Mining

• Every method that assists in finding patterns in large data sets

Clustering - Is like classification

Classification - Arranges the but the groups are not
data into predefined groups with predefined, so the algorithm will
the help of algorithms try to group similar items
together.

Technical Task

Regression - Attempts to find a

function which models the data Association rule learning -
with the least error. A common Searches for relationships
method is to use Genetic between variables.
Programming.
Matching Data

How do Use the VLOOKUP() function in Excel or Join Databases

feature in IDEA to match data from different sources
I do it?
Such data must have a common field, usually called as ‘Key
field’ on which the data is joined.

Case Match the payroll data with the card swipe data / server log
on data on the employee ID to detect ghost employees
studies:
Match the transaction file received from the stock exchange
with the transaction data from the broker’s application on
client ID to detect possible money laundering
“Same Same Same” & “Same Same Different” test:

How do Use the Sort, IF() & AND() functions in Excel or

Duplicates / Duplicates exclusion feature in IDEA to do
I do it? these tests

Case Use these tests to detect customers having same

email address, Pin Code but different Names
studies:
Use these tests to detect customers having same
address, PinCode but diffèrent FD Nos

Use these tests to detect double payments i.e.

payment made to the same vendor against the same
invoice no. and same date
Benford’s Law

How do Use the LEFT() and COUNTIF()

I do it? functions along with other
mathematical functions in Excel or
Digital Analysis feature in IDEA to do
these tests
Case Use these tests to detect unusual
studies: duplications of digits; think hard to
find the reasons thereof
Relative Size Factor Theory

RSF is the ratio of First Largest with Second

Largest of a relevant set
If RSF is > 10, possibility of Risk is more
How do Use the Sort, IF() & other mathematical
I do it? functions in Excel to do these tests

Case Use these tests to detect “Out of Place”

studies: transactions in PO to vendors, vendor
payments, credits in vendor accounts,
etc.
Implement 80-20 principle to identify high value
transactions

How do Use the Pivot table feature in Excel,

I do it? drop the amount field in the row and in
the data area and group the amount in
the row fields into appropriate strata.

Case Use this test to identify high value (and

studies: may be high risk) transactions in
purchases, sales, vendor payments
etc.
Top 10 locations of Evidences
Internet History Files

Temporary Internet Files – (refer the

content -
http://www.thewindowsclub.com/tempor
ary-internet-files-folder-location)
Slack/Unallocated Space

Buddy list, personal chat room

records, P2P, others saved areas

News groups/club lists/posting

Settings, folder structure, file names
File storage Dates
Software/Hardware added
File sharing ability
E-mails
Forensic Audit Report
1. TITLE OF THE REPORT
2. EXECUTIVE SUMMARY
3. BACKGROUND OF ENGAGEMENT
•3.1. Origin
•3.2. Objectives of Engagement
•3.3. Proposed outputs of the Assignments
•3.4. Implementation Approaches
•4. ANALYSIS OF THE RISKS INVOLVED
•4.1. Internal Environment Risks
•4.2. External Environment Risks
•4.3. Political and Legal Scenario
•4.4. Risks from Customers, Suppliers and Competitors etc.
•4.5 Business Process and Human Resources Management
•4.6. Market, Operational and Technological Risks
•4.7. Others
Forensic Audit Report
5. EVIDENCE OF RISK EVENTS
6. ANALYSIS and FINDINGS
7. AUDIT RECOMMENDATIONS
•7.1. Logical Framework Approach
•7.2. Preconditions and Risks
8. IMPLEMENTATION OF RECOMMENDATIONS
•8.1. Budget Considerations
•8.2. Stakeholders to be Engaged
9. LIST OF ANNEXURES
How to reduce Liability & Instances of Fraud

It is highly recommended that companies harbour a “stop before it starts policy” by creating a
transparent working environment.

Employ teams to conduct a frequent analysis of the fraud triangle keeping in view the working
atmosphere in the company.

Come up with policies to work on the ‘rationalisation’ aspect of the fraud triangle to strike
at the root of the problem.

Follow a dynamic approach while defining fraud in the company transactions keeping in
mind the ongoing scenario of white collar crimes.

The institution of strong internal controls and anti-fraud technologies in the electronic
platform.

Thorough and frequent evaluation of the company’s code of conduct.

Bhushan Steel – Invt. In Fixed Assets
Additions to Gross
Total Increase in
Block of Fixed
Borrowing Rs
Assets of
17010
Rs.26478

Increase in
Railway Sliding Rs. Working Capital
Plant Rs. 20794 Secured Loan Rs.
5536 Rs.8550
10999

Resulted in
Increase of Sales
Rs.3227

# Linking of Invt. P & M to Revenue

# Also looking into Borrowings taken against security
#Economic Value of FA and Capable of Converting
Resources
# Hair cut to Financial Creditor 37% in IBC
Jio- Depreciation Policy
Jio- Depreciation Policy