FORENSIC AUDIT

1.Definitions (incl red flags)

RED FLAGS Red flags are sign or warning of any impending danger or inappropriate behaviour.
Red flag does not necessarily indicate the existence of fraud
But are indicators that caution needs to be exercised while investigating the situations.
Red flags are classified in categories such as 1. Operational red flags,
(Trick-Operational Account on FB) 2. Accounting system red flags,
3. Financial performance red flag,
4. Behavioural red flags.

2.Diff audit vs forensic audit/accounting (TYK)

SR. BASIS OF DIFF
1 Objectives
2 Techniques
3 Period
4 Verification of stock,
Estimation realizable
value of assets,
provisions, liability etc.
5 Off balance sheet items Used to vouch arithmetic accuracy &
(like contracts etc.)
6 Adverse findings
if any
OTHER AUDITS
Express an opinion as to ‘True &
Fair’ Presentation
Substantive & Compliance.
Sample based
Normally for a particular Accounting
period (Quarterly, periodically)
Relies on Mgt. Representation
compliance with procedures
Negative opinion or qualified
opinion expressed with/without
quantification.
FORENSIC AUDIT
fraud Detection
Whether fraud has taken place in books.
Investigative,
Substantive/ in-depth checking
No limitations as such.
Independent/verification of suspected /
selected items where misappropriation in
Suspected.
Regulatory & propriety of these
transactions / contracts are examined.
Legal determination of fraud impact &
identification of perpetrators depending
on scope.

3. Why the need for Forensic audit arises (TYK) / A Forensic auditor is involved in
–Fraud detection, Fraud prevention, computer forensics, Providing expert testimony.
4.Who retains forensic auditors? Police forces/Courts/ Lawyers/Banks/Insurance co.s/Business community/Govt.
regulatory bodies & Agencies.
5. IMPORTANCE OF FORENSIC AUDITORS
Forensic Auditors resolve matters by combining accounting knowledge & experience w.r.t-
 Fraud Prevention & Detection
 Risk Mgt.
 Investigative Methodologies
 Internal Control Implementation & Review
 Compliance & Regulatory Functions
 Evidence Collection & Analysis
 Assignments with Regulatory Agencies like SEBI, RBI etc.
6. SERVICES RENDERED BY FORENSIC AUDITORS (TYK)(Nov22 RTP)
a. Identifying (sub points are separate points) b. w.r.t Questions
1. Documents to be requested 5. Crafting questions to be posed
2. Individuals to be most knowledgeable of facts 6. Responding to questions posed
3. & preserving key evidence
4. Alternative means to obtain key facts & information
 7. AREAS where SERVICES RENDERED BY FORENSIC ACCOUNTANTS ARE IN GREAT DEMAND (TYK)
1. CRIMINAL INVESTIGATION 4. DISPUTE SETTLEMENT
2. FRAUD INVESTIGATION & RISK/CONTROL REVIEWS 5. ARBITRATION SERVICE
3. INSURANCE CLAIMS SETTLEMENT 6. PROFESSIONAL NEGLIGENCE CASES
(Forensic accountant handles claims relating to-
Consequential loss policy, property loss, fidelity insurance &
other types of insurance claims.)

8. POINTS TO BE KEPT IN MIND WHILE APPOINTING A FORENSIC AUDITOR (TYK)

(A FORENSIC AUDITOR shall possess following Characteristics & skills)
CHARACTERISTICS OF FORENSIC AUDITOR SKILLS THAT FORENSIC AUDITOR SHOULD POSSESS(note down)
C- Confidence/Creativity/Curiosity Auditing standards, Legal Framework, Info. Technology,
S- Sound professional judgement/ Skepticism/ Data Analytics criminology, Investigative Techniques,
Strong Visualization & Imagination Litigation processes & procedures, Evidence gathering
O- Out of the Box Thinking/Objectivity Network of professional contacts in related field.

10. PROCESS OF FORENSIC ACCOUNTING /6 Steps to be undertaken in case of Forensic audit process (TYK)
OBTAIN
PERFORM THE COURT
INITIALIZATION DEVELOP PLAN RELEVANT REPORTING
ANALYSIS PROCEEDINGS
EVIDENCE

Depending upon nature of assignment analysis may include (Step-4)

 Calculating ECONOMIC DAMAGES
 Summarizing LARGE NUMBER OF TRANSACTIONS
 Performing TRACING OF ASSETS / PRESENT VALUE (PV) CALCULATIONS / SENSITIVITY ANALYSIS
 Utilizing -COMPUTERIZED APPLICATION like spread sheet
 Utilizing CHARTS & GRAPHICS to explain analysis

11. FORENSIC AUDIT TECHNIQUES (TYK)(May22)

1 GENERAL AUDIT TECHNIQUES TESTING DEFENCE
2 STATISTICAL & MATHEMATICAL TECHNIQUES TREND ANALYSIS & RATIO ANALYSIS
3 TECHNOLOGY BASED / Open-source digital forensics tools to investigation-cross
DIGITAL FORENSICS TECHNIQUES drive analysis, live analysis, deleted files, stochastic
forensics, Steganography, EnCase, MD5, Tracking Log
Files, PC System, Log, Free Log Tools.
4 COMPUTER ASSISTED AUDITING TECHNIQUES (CAATS)
5 GENERALISED AUDIT SOFTWARE (GAS) (Class of CAATS)( Latest versions of GAS-Audit Command
Language (ACL), Interactive Data Extraction & Analysis
(IDEA) & Panaudit.)
6 COMMON SOFTWARE TOOL (CST) Examples-
Spreadsheets-like MS Excel, Lotus, etc.,
RDBMS-like MS Access, etc. &
Report writers-like Crystal reports, etc
7 DATA MINING TECHNIQUES Data mining techniques-categorized in 3 ways
a) Discovery
b) Predictive modelling &
c) Deviation & link analysis.
8 LABORATORY ANALYSIS OF PHYSICAL & ELECTRONIC EVIDENCES:
->Computer Forensics: Hard disk imaging, E-mail analysis, Search for erased files
 ->Protection/Validation of Evidence: Document dating, Altered documents, Physical examination,
Fingerprint analysis, Forgeries.

FORENSIC AUDIT REPORT

12. POINTS TO KEEP IN MIND WHILE REPORTING 13.FACTORS TO BE CONSIDERED FOR THE VARIOUS
WAYS OF PRESENTATIONS OF WRITTEN REPORTS
-Clear thinking >Nature of
-Keep the reader uppermost in mind -Business of the organization
-Unbiased approach -SUBJECT OR ASPECT appraised
-Impact of Report >For whom the report is intended
-Facts & figures to be in proper sequences >Purpose for which the report is prepared
>Mgt. attitude, directives & needs
>Forensic auditor's approach & calibre
>Extent of details required by auditee & mgt.
14. SAMPLE TABLE OF CONTENTS OF A FORENSIC AUDIT MAY INCLUDE THE FOLLOWING
-Executive Summary
-Risk Analysis (Internal/External)
-Audit Process
-Evidence of Risk Events (Bribery/Theft/Fraudulent transactions/Assets misuse)
-Audit recommendations
-Governance on recommendation implementation (Stakeholders/ Budget considerations)
-List of 5 Annexures
Annexure 1- Members of the Interviews
Annexure 2- Organization Chart of Auditee organization
Annexure 3- Financial Performance (YYYY to YYYY)
Annexure 4- Audit Recommendation Logical Framework
Annexure 5- Analysis of Key Risk Events

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