Year: 2018

Introduction  

• Fraud is intentional deception made for personal gain or to damage another individual. Defrauding people or entities of money or valuables is a common purpose of fraud.

 

• The term ‘forensic ‘has usually attracted an unfortunate connotation with the morbid world of forensic medicine. Forensic accounting shares only one thread common with forensic pathology. That common denominator is the pursuit of evidence that will stand the rigorous scrutiny that the rules of evidence and procedure demand for its admission as evidence before the courts.

               The integration of accounting, auditing and investigative skills yields the specialty known as Forensic Accounting.  It is the application of accounting methods to the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud. Forensic Accounting can sometimes be referred to as Forensic Auditing.  

• Forensic Audit can be broadly classified into two categories:-
• Encompassing litigation support &
• Investigative accounting.

 

• Other support services that traditionally come within the sphere of investigative services revolve – including corporate intelligence and fraud investigation services.

    Difference between Forensic Audit and other Audits The procedures for financial audits are designed to detect material misstatements, not immaterial frauds. The vast majority of frauds could not be detected with the use of financial audits. Reasons include the dependence of financial auditors on a sample & the auditor’s reliance on examining the audit trail versus examining the events and the activities behind the documents. The latter is simply resource prohibitive in terms of costs and time. Advantages of Forensic Audit Forensic audit involves examination of legalities by blending the techniques of propriety (Value for Money audit), regularity and investigative and financial audits.  

Use of Forensic Auditing:

The services rendered by the forensic auditors are in great demand in the following areas:

1. Fraud detection where employees commit Fraud
2. Criminal Investigation: Matters relating to financial implications the services of the forensic accountants are availed of.
3. Cases relating to professional negligence
4. Arbitration Service
5. Settlement of Insurance Claims
6. Dispute Settlements

engage a Forensic Auditor? Engaging an external party other than internal auditor & management team can have distinct advantages from conducting an internal investigation.

• Objectivity & Credibility: An external party would be far more independent and objective than an internal auditor or company accountant as well as an established firm of forensic accountants would also have credibility stemming from the firm’s reputation, network and track record.
• Accounting expertise and industry knowledge
• Provision of valuable manpower resources

 Enhanced effectiveness and efficiency Forensic Accounting Concepts Fraud Triangle The fraud triangle developed by Donald Cressey, is a model for explaining the factors that cause someone to commit occupational fraud. It consists of 3 components which, together, lead to fraudulent behavior:  

• Perceived pressure
• Perceived opportunity
• Rationalization

        Incentive/Pressure Certain risk factors are usefully considered in the evaluation of whether or not the organization is at a greater or lesser degree of risk, owing to incentives or pressures that could potentially lead to material misstatements.

• Financial stability is threatened by economic, industry, or entity operating conditions.
• Excessive pressure exists for management to meet debt requirements
• Personal net worth is materially threatened

  Attitudes/ rationalization Fundamentally, rationalization and attitude are functions of the culture of an organization, the psychology of those who work in it, and the interaction between the two. Hard times in an industry or in overall economy may make it easier for some individuals to rationalize fraud.

• A history of violations of laws is known
• Little communication and support of the entity’s core values is evident.
• Management has a practice of making overly aggressive or unrealistic forecasts.
• Personal financial obligations create pressure to misappropriate assets.
• Adverse relationship between management and employees motivate employees to misappropriate assets.
• Disregard for the need to monitor or reduce risk of misappropriating assets exists.
• There is a disregard for internal controls.

Opportunities An opportunity must exist to commit fraud. Opportunities may also be inherent in the nature, size, or structure of the business. Certain types of transactions lead themselves more than other to falsification or manipulation, as do certain kinds of balances or accounts.

• There is presence of large amounts of cash on hand or inventory items.
• There is an inadequate internal control over assets.

Fraud Tree Occupational Fraud has been defined under 3 branches:

1. Fraudulent Statements
2. Corruption
3. Asset Misappropriation

Occupational frauds are:

• Frauds that are done quickly and easily within the company
• Are internal in nature, which means that they are perpetuated by employees
• Include things like check fraud , revenue skimming , and false invoicing

Digital forensics Digital forensics has been defined as the use of scientifically derived and proven methods towards the preservation, collection, validation, identification, analysis, interpretation and presentation of digital evidence derived from digital sources for the purpose of facilitating or furthering the reconstruction of events found to be criminal or helping to anticipate the unauthorized actions shown to be disruptive to planned operations. It is the application of proven scientific methods and techniques in order to recover data from electronic/ digital media. Red Flags A red flag is a set of circumstances that are unusual in nature or vary from the normal activity. It is a signal that something is out of the ordinary and may need to be investigated further. Forensic Audit Process Broad stages of Forensic Audit:

1. Accepting the investigation:

• Forensic Auditors must ensure whether their firm has necessary skills and experience to accept the work.
• Ideally statutory Auditors should not accept forensic auditing assignments of the same concern.

2. Planning or Objectives of the investigation:

• Identity type of fraud & Fraudsters
• Quantify the loss
• Gather Evidence
• Provide advice to prevent the reoccurrence

3. Gathering Evidence or Technique :

• Testing internal controls
• Use analytical procedures
• Apply CAAT
• Discussion and interviews with employees
• Substantive techniques such as Reconciliation, Cash counts and Review of stocks.

4. Reporting: Report contains-

• Findings/ observation
• Summary of evidences
• Amount of loss
• How fraudsters set up fraud scheme and which controls were circumvented
• Recommend improvements of control

5. Court Proceedings:

• Members of investigation team are involved
• Evidence gathering is presented
• Simplify technical teams

Forensic Accountants do not testify that fraud has occurred but only present evidence. Forensic Audit tools & Techniques The seven recognized Investigative Tools and Techniques used by Forensic Specialist/ Fraud Examiners

• Public Document Reviews and Background investigations – Public Databases, MCA Website, Corporate Records, internet etc.
• Interviews of Knowledgeable Persons
• Confidential Sources- Hotlines, E-mail, Letters, Current & Former Vendor, Customers & Employees.
• Laboratory analysis of Physical and Electronic Evidence- physical examination, fingerprint analysis, forgeries, ink sampling , document dating, Computer Forensics
• Hard disk Imaging
• E-mail analysis
• Search for erased files
• Analyze use & possible misuse
• Computer software to analyze data
• Physical and Electronic Surveillance
• Undercover operations
• Analysis of Financial Transactions

Some of the Techniques that a Forensic Auditor may use are listed below:

• General Audit Techniques

1. Testing Defenses

Most businesses and other organizations have procedures and defenses set up to prevent the occurrence of fraud. A good initial forensic audit technique is to attempt to circumvent these defenses yourself.

• Statistical & Mathematical Techniques

1. Trend Analysis
2. Ratio Analysis

• Technology Based / Digital Forensics Techniques:

1. Cross- drive analysis
2. Live analysis
3. Deleted files
4. Stochastic forensics
5. Steganography
6. EnCase
7. MD5
8. Tracking Log Files
9. PC System Log
10. Free Log Tools

• Computer Assisted Auditing Techniques (CAATs) / Computer Assisted Audit Techniques & Tools(CAATT)

Computer- assisted audit techniques (CAATs) or computer-assisted audit tools & techniques (CAATTs) are computer programs that the auditors use as part of audit procedures to process data of audit significance contained in a client’s information systems, without depending on him. CAAT help auditors to perform various auditing procedure such as:

1. Testing details of transactions and balances
2. Identifying inconsistencies or significant fluctuations
3. Testing general as well as application control of computer systems
4. Sampling programs to extract data for audit testing, and
5. Redoing calculations performed by accounting systems.

Computer Aided Audit Tools or CAATs cab be broadly divided into

• Generalized Audit Software’s (GAS) or
• Common Software Tools (CST)

As a part of computer- aided audit, an auditor needs to do one or more of the following.

1. Check Missings
2. Check Duplicates
3. Round numbers
4. Repetitive Odd-Numbers
5. Classification
6. Stratification
7. Single Transactions
8. Isolated Outliers

• Data Mining Techniques

It is a set of assisted technique designed to automatically mine large volumes of data for new, hidden or unexpected information or patterns. Data mining commonly involves four classes of task:

• Classification- Arranges the data into predefined groups with the help of algorithms.
• Clustering- Is like classification but the groups are not predefined, so the algorithm will try to group similar items together
• Regression- Attempts to find a function which models the data with the least error. A common method is to use Genetic programming

Association rule learning- Searches for relationships between variables.

It is a process of setting and developing the application, the computer system, built on the basis on business requirement. As an IS Auditor, the following could be reviewed:

1. System Planning & Feasibility Audit: Every application is designed after considering the various areas of feasibility and the factors ranging from Economic, Cost Benefit Analysis, Technical analysis Critical success factor methods, business system planning, etc.
2. Development & Design Audit: Development is verified and policies are establishment and various controls are placed. Adherence to benchmark standards and Quality of output is to be ensured.

• System Acceptance Audit: A comprehensive test should be conducted to achieve system planning

1. System Maintenance Audit: This is to ensure that the systems are kept abreast and changing needs are considered.

Hardware & Software &Application Audit: Every system requires varied combinations of hardware and software configuration. Software could be customized or could be off the shelf. Care should be taken to verify the inputs, processing and the output controls governing the applications in addition to its security, network and infrastructure.   Security Audit

1. Network data security audit

Network data security audit consists of audit of the network data security infrastructure and its safety management. Amongst the various aspects, the following would be covered:

• Network Architecture
• Client to Server, Peer to Peer
• Network anti-virus technology and safety
• Firewall technology,
• Data encryption technology,
• Authentication technology ranging from use of digital signature,   message digests digital certificate, etc
• Authorization and the implementation of those technologies;
• Review and analysis of the security log;
• LAN / Wifi  Analysis / VPN Infrastructure
• Review the implementation of relevant laws and regulations, such as “the safety protection regulations of computer information system”.

1. Network Access Control Audit

The network access control audit majorly focuses on the access relating to network, the authority control and user authentication. This focuses more on the Authority control audit check mainly on whether there is authority when customer access resources nodes and user nodes. Resource nodes provide service or data, user nodes access resources services provided by the resource nodes. System Management Audit The goal is to guarantee the performance of the system and its usability; guarantee the integrity of data and other information resources; system security. The electronic commerce system management can be divided into three aspects:

1. The system monitoring, system configuration and system operation management; whether to register and update the hardware and software; whether to schedule and apply job sequencing and job plan, etc.
2. The event correlation and automation processing: overall analysis different reasons leading to error report, these reasons may be from network, server system, database or application logic; find the root causes and do corresponding disposal, such as giving a alarm or starting a engine procedures, etc.

• Business impact management is a system management, which can guarantee the business service at a high level, and will connect the business system performance with all the possible influencing factors, which will help the user, find the change of the performance and the reason of these changes.

Internal Controls Audit Internal control auditing includes two aspects: the audit of general control and the audit of Application control. The auditor should check the risk of data processing in internal control activities. Namely, check the accuracy, integrity and security of the data, and goes as follows:

1. The system and program can’t correctly deal with data, process the incorrect data or two circumstances coexist;
2. Whether there is unauthorized access to data, it may lead to modifying or even damaging the data.

• Whether there is unauthorized access phenomenon, which may damage original labor division in the e-commerce system.

1. Without authorization, change the main document data.
2. Without authorization, the adaption of system or program.
3. Cannot do the necessary configuration or modify to programs.

• Inappropriate human intervention.
• May loss data or unable to access data.

  DRP & BCP Audit Disaster recovery and business continuity plan is a plan, which can prevent business behavior from interruption in the case of natural or man-made disasters. The main content of the audit test is: whether this plan has feasibility and validity or not. Confirm the related resources (hardware and software) would have been backup and evaluate its safety; whether the test results meet the expected requirements or not.  

Concurrent Audit – on the spot examination of transactions & activities at very frequent intervals to assure substantive checking in key areas rather than test checking. In the present scenario, risk-prone area to be covered under concurrent audit. After the recent Nirav Modi PNB Fraud and Vijay Mallya Case, a question has been put on the auditors, “Who will audit the auditors?” To nullify this requirement, determining the scope of Audit becomes a necessity. In this Article, we have briefed the scope of a concurrent audit, which will be elaborated in the next articles.

• The scope of Concurrent Audit
• Generally, an auditor should cover all the areas of operations of the bank under Concurrent Audit.
• Following are the areas, which are commonly found in the scope/guidelines issued by almost all the banks:
  • Surprise verification/ count of cash
  • Checking Cash retention limit and reporting the cases where cash has been exceeded such limits and branch dispose of the surplus cash.
  • The procedure of exchanging and disposing of mutilated notes should be followed as per RBI norms.
  • Whether registers relating to cash should be properly maintained.
  • Physical verification and safe custody verification of Postage Stamps and stamped documents/Adhesive Stamps.
  • Unusable or under stamped/torn stamps.
  • Physical verification of DD stock, pay order, chequebook stock, F.D. receipt, etc & Checking whether they are kept in lock & key or not. Reporting of Non Usable Stock.
  • Verify whether Security Alarm is properly working or not.
  • Opening & Operations of Deposits Accounts: -
    • 100% Checking of Account Opening forms & Compliance of KYC Norms as per RBI.
    • Operation in newly opened accounts to be verified for large deposits and withdrawals.
    • Debit balances in savings and current accounts.
    • The issue of Cheque Books.
    • Stop Payment Instructions.
    • Nomination for Deposits/Lockers to be verified.
    • Cheque Return Register Checking.

 

• Voucher Verification
  • Vouchers to be properly prepared and authorised and summary sheets to be verified with vouchers & are signed by the officer verifying the same.
  • Vouchers are stitched, bundled, and properly stored.

 

• Safe Deposit Lockers
  • Locker application is properly obtained and stamped as required.
  • Branch maintains access visit register.
  • Letters for the surrender of the locker are properly verified & changing of locks when lockers are surrendered and reissued.
  • Locker rent register for rent dues is properly maintained.
  • Deposit amounts are obtained as per Head Office circulars.
  • Notices are affixed on lockers and hirer should not be given access to locker if the locker rents are in arrears.

 

• Advances
  • All pre Sanction and post sanction formalities issued by HO are to be checked for verification of Advances.
  • Sanctioning is on records and contains all factual information and Disbursement checking
  • All Prescribed documents are obtained and are properly filled up.
  • Creation of security
  • Registration of Banks charge - Banks charge is registered with ROC within 30 days from the date of disbursement.

 

• Bank Guarantee
  • Two types: Performance and Financial.
  • Proper sanction, Proper commission charged adequate security margin & Proper procedure for issue / renewal.
  • Liability register is maintained.
  • Margin by way of Term Deposit is discharged and lien marked.
  • Proper follow up in case of expired guarantees.

In this Article, we Have Discussed some of the aspects of the scope of Internal/concurrent audit of banks which will be further discussed later on.

1.Business Analytics          Analytics is the study of analyzing data to derive business insights and tangible action steps.Business Analytics makes a distinction between relevant and irrelevant knowledge. Business Analytics is thus all about business relevancy, actionable insight, performance measurement and value measurement. 2.Types of Business Analytics Descriptive Analytics answers the questions: What has happened in my business? Why has it happened? What do I know about my customers, competitors, suppliers, etc.? Examples of this are Business Intelligence, Reporting etc. Predictive Analytics answers the questions: What is likely to happen? What is likely to be true about my customers, competitors, suppliers, etc.? Examples of this are forecasting, regressions, data mining etc. Prescriptive Analytics answers the questions: What should I do? What is the best course of action given what I know and what I think will happen? Examples of this are optimization, mathematical programming, heuristic algorithms etc. 3.Basic Domains Within Analytics

• Behavioral Analytics

  Behavioral analytics is a subset of business analytics that focuses on how and why users of ecommerce platforms, online games, & web applications behave. Behavioral analysis allows future actions and trends to be predicted based on all the data collected.       Types of Behavioral Analytics:  

• Ecommerce & Retail
• Online Gaming
• Application Development
• Cohort Analysis
• Security

 

• Collections Analytics

  Credit cards and consumer and business loans have been experiencing vacillating delinquencies and losses over the last few years, resulting in an overall increasing trend in delinquency and write off rates. Losses will be mitigating by understanding customer behavior, customer communication preferences, and the effectiveness of various channels in increasing response rate and maximizing recovery.  

• Financial Services Analytics

The opportunity for the sector is to unlock the potential in the data through analytics and shape the strategy for the business through reliable factual insight rather than intuition. Many Financial institutions are seeing improved data quality and the use of analytics as an opportunity to fundamentally change the way decisions are made and to use the data for commercial gain. Financial services analytics includes Risk management, Treasury Analytics and multi-Channel customer Management.

• Fraud Analytics

Data analytics technique have a significant role to play in the early-warning, detection and monitoring of fraud. These techniques can allow your organization to extract, analyze, interpret and transform your business data to help detect potential instances of fraud and implement effective fraud monitoring programs.

• Marketing Analytics

Marketing analytics is the practice of measuring, managing and analyzing marketing performance to maximize its effectiveness and optimize return on investment (ROI).  It can offer profound insights into customer preferences and trends. Marketing Analytics, considers all marketing efforts across all channels over a span of time- which is essential for sound decision making and effective, efficient program execution.  

• Pricing Analytics

Pricing decisions have a major impact on the profitability index of an organization. Prizing Analytics enables proactive management of pricing  policies and strategies, and guides you to arrive at the right pricing that is     in-line with your market positioning and business strategy.

• Retail Sales Analytics

Retail Analytics help retailers to effectively collect, analyze and act on both customer                  and organization data in near real time, across all the channels they function in. Retailers   view retail analytics as an effective tool to increase customer wallet share, gain higher margins, increase complimentary store sales and reduce wasted marketing budget. Risk & Credit Analytics   A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. Many financial institutions seek assistance from external parties due to internal limitations in required expertise, presence of resources, analytical capabilities, and availability of data. They also view the application of risk management analytics and methodologies as “best practice” in their daily operations.  

•  Supply Chain Analytics

  All businesses with a supply chain devote a fair amount of time to making sure it adds value, the new advanced analytic tools and disciplines make it possible to dig deeper into supply chain data in search of savings and efficiencies.  

•  Talent Analytics

                Human resources analytics, also called talent analytics, is the application of sophisticated data mining and business analytics (BA) techniques to human (HR) data. Talent Analytics provide tangible and quantifiable insights needed to understand and help you direct workforce and organizational performance to achieve your business strategy and build a strong value-centered organizational ethos.  

•  Telecom  Analytics

  Telecom analytics encompass sophisticated business intelligence (BI) technologies that are packages to satisfy the complex requirements of telecom organizations. The adoption of analytics in telecommunications is intended to improve visibility into core operations, internal processes and market conditions, discern trends and establish forecasts.  

• Transportation Analytics
• Driving efficiency ,reducing congestion, getting people where they need to go faster
• Understanding the Trends

Transportation analytics aims at covering diverse data ecosystem in order to release the potential of multimodal transportation systems. Benefits of Business Analytics

1. Improving the decision making process (quality & relevance)
2. Speeding up of decision making process
3. Better alignment with strategy
4. Realizing cost efficiency
5. Responding to user needs for availability of data on timely basis
6. Producing a single, unified view of enterprise information
7. Synchronizing financial and operational strategy
8. Increase revenues
9. Sharing information with a wider audience

Skills required to succeed in a Business Analytics Career Popular Tools for Business Analytics “Analytics and Big data” is increasingly becoming a key skill-set in manager’s arsenal. CEOs and business leaders want to understand what they can do with data, organizations want to know how they can train and recruit people with relevant analytical skill-sets. Analytics is not just about generating insights and getting those to the right people. To sustain the long-term success of data-driven innovation, it is necessary to continually revise one’s analytical approach in order to generate insights that lead to new innovation and competitive advantage.  

Internal Audit improves internal business processes of the company by reviewing risk management plans and business procedures to identify flaws among these. It is an independent management function for appraisal of functioning of an entity with a view to suggest Improvements, add value and strengthen the overall governance mechanism of the entity. It is based on analyses and assessments of data and business processes, providing insight & recommendations & values to governing bodies & senior management. Internal Auditors are not responsible for execution of policy. They guide/advise Management/BOD regarding how to better execute their responsibilities.

• Develop Internal Audit Plan on the Basis of the Following:
  • Previous years internal audit plan, Observations & key findings.
  • Considering key business processes,
  • Analysing requirements of internal Audits
  • Based on assessments and findings during risk assessment procedure
  • Requirement of the management, and identification of risk prone areas
• Accounts Payable – processing payments for invoices and Contracts – Internal Audit

In this article, we will discuss in detail, analyse and assesses the internal control procedures, financial process and action of the personnel who are involved with the Accounts Payable financial activities. Accounts payable refers to amount that an organisation is required to pay to its creditors for goods and expenditure for services rendered. These are generally short term obligations but does not include amount payable to staff, that are paid through Departments shall devise techniques and procedures for the proper approval and payment of expenditures for goods and services incurred to support its programs. Proper internal controls effectively and efficiently minimize the risks associated with accounts payable and purchasing activities, reduce the risks of fraud and costly errors, and protect the assets of the entity.

• Risk Associated With Internal Audit
• Unauthorised/fraudulent purchase/payments.
• Duplicate Payments to vendors
• Inefficient/Late processing of payments resulting in late fees and loss of goodwill
• No segregation of duties of the officers requisitioning, ordering, receiving goods and authorising payments.
• Payments are not correctly accounted for impacting on the customers’ ability to prepare statutory accounts.
• Best Practices for Audit of Accounts Payable
• Policy and standards for operation procedures for initiation, review and approval of all accounts payables expenditures to be placed and especially informed to accounts payable and other organisational staff.
• Roles and responsibilities to be clearly defined with adequate segregation of duties and approved ordering and payment authorisation limits.
• Require date stamping of invoices indicating actual time of receipt. This can help to identify process weaknesses.
• There is adequate control over the creation and amendment of creditor master-file data, particularly bank account details.  This is an area of increasing fraud where organizations are mislead into changing supplier payment data and then make payments to fraudsters.
• To periodically review all debit balances and take any necessary action.
• Payment are authorised in accordance with procedures and invoice presented for payment which are incorrect, notify the party and intimate that it is corrected and resubmitted.
• The custody and handling of cheques and/or other negotiable instruments is secure and properly controlled.
• Reconciliations are timely and accurate, with any queries followed-up.
• Expense is handed over to the correct budget holder, area and expense type.
• Input to and output from electronic payment systems is adequately controlled.
• Mechanisms are in place to ensure that duplicate payments are avoided and/or detected.
• Ensure that invoice values paid are in accordance with contract prices.
• Ensure that credit notes are controlled and actioned.
• Availability of system generated reports that provide such statistics as average time to pay a supplier, trends, etc.