City Group of College

Lecture Plan (UNIT-1)

Course: M.com Semester: 4
Paper: Subject: Forensic Accounting and
Fraud Examination
Syllabus: - Forensic Accounting & Fraud Fundamentals Meaning, nature and
scope, auditor’s liability for undetected frauds, fraud auditing (forensic
audit) phases: Recognition and planning, Evidence collection and
evaluation, Communication of results.

Lecture-1 Forensic Accounting & Fraud Examination

Meaning
Concept
Lecture-2 Forensic Accounting & Fraud Examination
Relationship
Nature
Lecture-3 Forensic Accounting & Fraud Examination
Scope
Auditor’s Liability
Lecture-4 Forensic Audit
Meaning & Concept
Phases
 UNIT - 01
LECTURE - 01

What is Forensic Accounting?

Accounting is the systematic process of recording and interpreting financial information to help in making
decisions. Hence, Forensic Accounting is a litigation support involving application of accounting principles and
theories to facts or hypotheses at issue in a legal dispute.
Auditor should be watchdog and not be the bloodhound”. It’s a good quote that every auditor should know.
This quote makes the definition of Forensic accountants even more simple. The forensic Accountant is a
bloodhound of Bookkeeping. These bloodhounds sniff out fraud and criminal transactions in bank, corporate
entity or from any other organization’s financial records.

They hound for the conclusive evidences. External Auditors find out the deliberate misstatements only but the
Forensic Accountants find out the misstatements deliberately. External auditors look at the numbers but the
forensic auditors look beyond the numbers.

Forensic accountant takes a more proactive, skeptical approach in examining the books of Accounting. They
make no assumption of management integrity (if they can assume so then there is no need for their
appointment) show less concerns for the arithmetical accuracy have nothing to do with the Accounting or
Assurance standards but are keen in exposing any possibility of fraud.

It consists of two primary functions:

1. Litigation advisory services, which recognizes the role of the forensic professional as an expert or
consultant
2. Investigative services, which uses the forensic professional’s skills and may or may not lead to testifying
in courtroom.
3. Forensic accountants measure economic damages, business or asset valuations by combining their
accounting knowledge with investigative skills, and offer varying levels of support ranging from technical
analysis and data mining, to a broader approach that may include creating litigation strategies,
arguments, and testimony in civil and criminal cases.

What is Fraud Examination?

Fraud examination is the field of resolving fraud allegations from tips, complaints, or accounting clues. It involves
getting documentary evidence, interviewing eye witnesses and potential suspects, writing investigative reports
on fraud cases, testifying to findings during investigation, and helping in the general detection and fraud
prevention. Sometimes Fraud is referred to as the fraudulent act; fraud is an act of intentional deception, either
by omission or commission that causes its victim to suffer an economic loss and/or the offender to realize a
gain. It can simply be defined as “theft by deception”.
There are three major categories of fraud,

1. Asset misappropriations

These involve the theft or mismanagement of an company’s assets. (Common examples of assets
misappropriation include skimming revenues, stealing inventory, and payroll fraud.)

2. Corruption

This implies the unlawful or wrongful abuse of influence in a business transaction to get personal benefit,
contradicting an individual’s duty to his or her employer or the rights of another. (Common examples of
corruption include accepting clandestine payment in return for a favor and engaging in conflicts of interest.)

3. Financial statement fraud

Financial statement fraud and other fraudulent statements involve the intentional misinterpretation of financial
or non-financial information to misguide people who are relying on it to make financial decisions.

LECTURE - 02
RELATIONSHIP BETWEEN FORENSIC ACCOUNTING AND FRAUD EXAMINATION

Forensic accounting and fraud examination are different but they are related. Forensic accounting is done by
accountants in anticipation of litigation. They include investigation, valuation, bankruptcy, and a host of other
professional services. On the other hand, fraud examinations can be done by either accountants or non-
accountants and refer only to anti-fraud matters and often help in fraud prevention and deterrence efforts.

Fraud examinations generally fall under forensic accounting category because the majority of examinations,
investigations, and reports on fraud are done with the aim of litigation. In other words, fraud examiners are
taught to oversee their examination with the assumption that the case may end in litigation.

NATURES OF FORENSIC ACCOUNTANTS

1. Attention to Detail

Forensic accountants must have an extremely strong attention to detail. They must be able to analyze
significant amounts of financial data and notice subtle patterns or other abnormalities in that data. They
cannot afford to overlook details because any one small detail may determine the outcome of a case

2. Tech Savvy

It should go without saying that forensic accountants need to have vast knowledge of technology and software
products. This includes most accounting programs commonly used by businesses, such as QuickBooks, as well
as technology and software tools that forensic accountants use to uncover fraud.

3. Integrity

Forensic Accountants often must pass background checks and be eligible for certain levels of security
clearance, according to Pay Scale. They have to be honest and dependable because of the sensitive nature of
their work. Some forensic accountants work as private consultants and constant and consistent honesty and
integrity is one of the best ways to gain clients.

4. Patience

Financial crimes are not always readily apparent, making one of the biggest forensic accountant characteristics
a great deal of patience. Traces of fraud are often very well-hidden and forensic accounting investigations can
move incredibly slowly. This requires patience to avoid getting frustrated and attempting to usher the
investigation along.

5. Problem-Solving Skills

Because they investigate potential crimes, forensic accountants must have impeccable problem-solving skills
in order to determine how a crime was committed. They are often involved in a case after fraud has already
occurred and thus must puzzle out all the different aspects of the crime.

LECTURE - 03

SCOPE OF FORENSIC ACCOUNTING

Insolvency Cases: As we know, nowadays, banks are in favour of the National Company Law Tribunal to take
actions against the borrowers who are not paying the dues. Under insolvency laws, many of the cases were
filed.

Bank Forensic Audits: In recent times, the banking sector provides a vast opportunity for forensic auditors.
The forensic auditing is required for all the public sector banks to identify the loss or willful default. That’s why
there is a massive demand for forensic audit services.

Economic Offenses Wings: The Ponzi scheme, pyramid scheme, and money scheme come under many
statutes with economic offences wings, local law enforcement agencies to work in assessment of the money
loss.

Securities Exchange Board of India: In some of the companies, insider trading and fraudulent prospectus
application play a potent regulator of the capital market. That’s why they need the help of forensic auditors.

Serious Fraud Investigation Office:

To investigate several facets of the corporate frauds, the fraud investigation office seeks the help of forensic
auditors because they are experts in such investigations.

Auditor’s Responsibilities

1. Obtain reasonable assurance that the financial statements are free from material misstatements
 2. Maintain professional skepticism throughout the audit

3. Should know that Risk of non-detection of management fraud is greater than of employee fraud

4. Must be aware Risk of non-detection of fraudulent material misstatement is higher than the

misstatement due to error.

IS AUDITOR RESPONSIBLE FOR THE PREVENTION AND DETECTION OF FRAUD?

No, Management has the Primary responsibility for the prevention and detection of fraud and not the auditor.

Management should take all necessary steps for fraud prevention and deterrence through implementing

policies and controls.

LECTURE - 04

WHAT IS A FORENSIC AUDIT?

Forensic auditing’ refers to the specific procedures carried out in order to produce evidence. Audit techniques
are used to identify and to gather evidence to prove, for example, how long the fraud has been carried out,
and how it was conducted and concealed by the perpetrators. Evidence may also be gathered to support other
issues which would be relevant in the event of a court case. Such issues could include:

• the suspect’s motive and opportunity to commit fraud

• whether the fraud involved collusion between several suspects

any physical evidence at the scene of the crime or contained in documents

• comments made by the suspect during interviews and/or at the time of arrest

• Attempts to destroy evidence.

A forensic audit examines and evaluates a firm's or individual's financial records to derive evidence used in a
court of law or legal proceeding. Forensic auditing is a specialization within accounting, and most large
accounting firms have a forensic auditing department. Forensic audits require accounting and auditing
procedures and expert knowledge about the legal framework of such an audit.

Forensic audits cover a wide range of investigative activities. A forensic audit is often conducted to prosecute
a party for fraud, embezzlement, or other financial crimes. In the process of a forensic audit, the auditor may
be called to serve as an expert witness during trial proceedings. Forensic audits could also involve situations
that do not include financial fraud, such as disputes related to bankruptcy filings, business closures, and
divorces. Forensic audit investigations can uncover or confirm various types of illegal activities. Usually, a
forensic audit is chosen instead of a regular audit if there's a chance that the evidence collected would be
used in court.

PHASES OF FORENSIC AUDITING

Planning the Investigation

During the planning stage, the forensic auditor and team will plan their investigation to achieve objectives,
such as

• Identifying what fraud, if any, is being carried out

• Determining the period during which the fraud occurred
• Discovering how the fraud was concealed
• Naming the perpetrators of the fraud
• Quantifying the loss suffered as a result of the fraud
• Gathering relevant evidence that is admissible in court
• Suggesting measures to prevent such frauds from occurring in the future

Collecting Evidence
The evidence collected should be adequate to prove the fraudster's identity (s) in court, reveal the fraud
scheme's details, and document the financial loss suffered and the parties affected by the fraud.

A logical flow of evidence will help the court in understanding the fraud and the evidence presented. Forensic
auditors are required to take precautions to ensure that documents and other evidence collected are not
damaged or altered by anyone.

Reporting
A forensic audit requires a written report about the fraud to be presented to the client to proceed to file a
legal case if they so desire. At a minimum, the report should include

• The findings of the investigation

• A summary of the evidence collected
• An explanation of how the fraud was perpetrated
• Suggestions for preventing similar frauds in the future—such as improving internal controls

Court Proceedings
The forensic auditor must be present during court proceedings to explain the evidence collected and how the
team identified the suspect(s). They should simplify any complex accounting issues and explain the case in a
layperson’s language so that people who have no understanding of legal or accounting terms can understand
the fraud clearly.