Forensic Accounting Data Mining using CAATTs

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Lydia Montgomery
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1 Forensic Accounting Data Mining using CAATTs Nikunj S. Shah B.Com.,LL.B.,F.C.A.,DISA(ICA),CIA(USA), ACFE

2 Session Contents Forensic Accounting What is?, Areas, Skills required The need for CAATTs Types of CAAT tools The process of Fraud Examination using CAATTs An Introduction to Excel and IDEA Important Functions in Excel to detect Red Flags Advance Features in Excel for data analysis

3 What is Forensic Accounting? Forensic means Relating to, used in, or appropriate for courts of law or for public discussion or argumentation (Am. Heritage Dictionary, 4th ed.) Accounting means, a system that provides quantitative information about finances (WordNet 2.0) Forensic accounting is the application of accounting skills to provide quantitative financial info. about matters before the courts

4 Areas of Forensic Accounting Investigative Auditing Litigation Support

5 Skill sets required Auditing standards & procedures Accounting & Business reporting systems Evidence gathering Investigative techniques Forensic Accountant Information Technology Computer Science Litigation processes & procedures Criminology

6 The need for CAATTs The current business scenario: High Volumes Complexities Increased reliance on automated systems Compliance requirements

7 The need for CAATTs The onus of detecting frauds on: Board of Directors: The prime responsibility for the prevention and detection of fraud (and other illegal acts) is that of the board, as part of its fiduciary responsibility for protecting the assets of the company. -Para 5.23 The Cadbury Report on Corporate Governance, Audit Committee shall review the findings of any internal investigations made by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and report the matter to the board. -Clause 49 of the listing agreement, SEBI

8 The need for CAATTs The onus of detecting frauds on: CEOs / CFOs: -Certify that Cash flow does not contain any materially untrue statement or omit any material fact or contain statements that might be misleading -No transactions entered into by the company during the year which are fraudulent, illegal or violative of the company's code of conduct -that they have evaluated the effectiveness of the internal control systems of the company Clause 49 of the listing agreement, SEBI

9 The need for CAATTs The onus of detecting frauds on: Internal Auditors: Internal auditors should have sufficient knowledge of fraud to be able to identify indications that fraud might have been committed. Statement on Internal Auditing Standards No. 3, IIA

10 The need for CAATTs CAATTs Only practical means for establishing what the facts really are as they: Help apply intuition, knowledge and skill with far greater impact Identify indicators of fraud or red flags Document findings Note: results of Data Analysis may not constitute a proof for fraud.

11 Types of CAAT tools Spreadsheet software, Database management systems, Word processors (mobile phones?) Generalized Audit Software (GAS): ACL, IDEA, SoftCAAT Concurrent Audit techniques Integrated Test Facility (ITF) Systems Control Audit Review File (SCRAF) Continuous and Intermittent Simulation (CIS)

12 The process of Fraud Examination using CAATTs Categories of Fraud Investigation Specific Allegation Exception Reporting

13 The process of Fraud Examination using CAATTs The knowledge of a possible fraud Verify how convincing allegation is Phase I Pre Investigation Phase II Plan & Design Phase III Execution Arrive at its possible monetary impact Assign to An investigator

14 The process of Fraud Examination using CAATTs Understand Business, Operations and Controls (both manual and automated) Consider appropriateness of using Data Analysis for conducting examination Phase I Pre Investigation Phase II Plan & Design Phase III Execution Determine precise objectives to be achieved from data analysis. Determine data required

15 The process of Fraud Examination using CAATTs Request data Store files and MD5s Import data Phase I Pre Investigation Phase II Plan & Design Phase III Execution Perform tests Evaluate results Conclude & determine further course of action

16 An Introduction to Excel and IDEA A comparison of popular tools used for data analysis: GAS & Excel Feature GAS Excel Row Limitation No Yes ( ) Features specific to Investigation and Audit Yes No Automatic Documentation Yes No Allows data to be changed No Yes

17 An Introduction to Excel and IDEA Tests and Excel Functions and Features for data analytics: Test Verify that values in transaction files match with master files Identify Duplicate vendor payments Select Samples Extract transactions matching multiple criteria Stratify Payments, Summarise discounts by sales person, etc. Function/Feature VLOOKUP IF, AND, OR RAND Auto Filters, Advance Filters Pivot Tables

18 An Introduction to Excel and IDEA Relative application of Excel functions and features in Fraud Investigation Lookups If, CountIf, SumIf 15% 11% Paste Special, Go To, Conditional Format 8% Sub Totals 3% Pivots 18% Other 13% Statistical Functions 5% Macros 5% Filter 15% Sort 20%

19 Important Functions in Excel to detect Red Flags =IF() function to Detect Gaps =IF & =AND() function to implement Same Same Same and Same Same Different Audit test Detect sales made at other than authorized rates Advance Features in Excel for Analysis (Advance Filters and Pivots) Implement the principal to detect high value (maybe high risk) items

20 Detecting Gaps: Finding: Cheques not recorded in the Books

21 Same Same Same test: Finding: Duplicate Vendor Payments

22 Same Same Different test: Finding: Duplicate Vendor Payments?

23 Sales made at other than authorized rates: Finding: Was the sale of Product Code A003 to Venus Rs. 15/- justifiable?

24 Ideas?? Queries?? Suggestions?? Thank You

INTEGRATING FORENSIC INVESTIGATION TECHNIQUES INTO INTERNAL AUDITING

INTEGRATING FORENSIC INVESTIGATION TECHNIQUES INTO INTERNAL AUDITING The internal auditors roles in combating fraud are becoming more profound within an organization. Internal auditors may assume a variety