Proactive forensic audit techniques - ICPAK

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Proactive Fraud Audit Techniques for Auditors and Investigators. PRESENTATION. BY. CPA REUBEN BORO GITAHI. 11/18/2015. ...

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Proactive Fraud Audit Techniques for Auditors and Investigators PRESENTATION BY C PA REU B EN B ORO G ITAHI “ Your unclaimed assets solutions and compliance provider” 11/18/2015

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Why should we proactively detect fraud TO AVOID

11/18/2015

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Introduction 11/18/2015

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Current news https://www.standardmedia.co.ke/article/2000179366/smoke-out-powerful-people-behind-nys-scam http://www.standardmedia.co.ke/article/2000166250/i-stopped-sh826-fraud-at-nys-says-devolution-cs-anne-waiguru

http://www.nation.co.ke/news/21-government-officials-named-NYS-scam-report/-/1056/2866948/-/stxpgq/-/index.html Ndathi Speaks-out over Ksh 2 Million Facebook Allegations Kirinyaga County spends Ksh 2 Milion on Facebook accounthttp://www.standardmedia.co.ke/article/2000175707/protests-rock-bungoma-over-most-expensive-wheelbarrow http://citizentv.co.ke/news/bungoma-residents-protest-ksh-100000-wheelbarrows-100195/

http://www.politics.co.ke/news/see-the-nyamira-hospital-gate-that-cost-the-county-just-8m-shillings-only-to-construct/ http://mobile.nation.co.ke/news/JSC-sends-Gladys-Shollei-packing/-/1950946/2038778/-/format/xhtml/-/de2qwpz/-/index.html http://mobile.nation.co.ke/news/Why-CJ-is-yet-to-occupy-Sh300m-house/-/1950946/2294676/-/format/xhtml/-/6gt8ts/-/index.html Kenya: Many Contracts At the Judiciary Are Shoddy – Registrar Governor Kidero sacks Leah Oyake over a corruption scandal whose architects are Ndegwa and Kiamba http://en.africatime.com/kenya/articles/governor-kidero-sacks-leah-oyake-over-corruption-scandal-whose-architects-are-ndegwa-and

11/18/2015

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http://mobile.nation.co.ke/news/Why-CJ-is-yet-to-occupy-Sh300m-house/-/1950946/2294676/-/format/xhtml//6gt8ts/-/index.html

11/18/2015

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http://www.politics.co.ke/news/see-the-nyamira-hospital-gate-that-cost-the-county-just-8m-shillings-only-to-construct/

11/18/2015

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Bungoma County Assembly leader of majority Majimbo Okumu and residents looking at the special Wheelbarrow that costs Sh109,320 at Bungoma town slaughter house. Local leaders and residents want officers involved in the procurement of the 10 Wheelbarrows. PHOTO: TITUS OTEBA/STANDARD Read more at: http://www.standardmedia.co.ke/article/2000175707/pro tests-rock-bungoma-over-most-expensive-wheelbarrow

11/18/2015

http://citizentv.co.ke/news/bungoma-residents-protest-ksh100000-wheelbarrows-100195/

“ Your unclaimed assets solutions and compliance provider” w w w . o n e - s o u r c e . i n f o

11/18/2015

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Introduction 11/18/2015

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Introduction Financial Audit: An examination by an independent third party of the financial statements of a company resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete and fairly presented. Forensic Audit: A specialized financial audit performed specifically for the purpose of determining evidence of fraudulent activity and the damages perpetrated by that activity. 11/18/2015

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Background The traditional ‘passive philosophy’ towards auditor responsibility for fraud detection is well summarised by the Lord Justice Lopes’ ruling, in the UK, given in the 1896 Kingston Cotton Mill case (re Kingston Cotton Mill Company (No.2)):‘An auditor is not bound to be a detective, or… to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watchdog, not a bloodhound.’ 11/18/2015

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ISA 240 Paragraph Details 2.

Misstatements in the financial statements can arise from either fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.

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The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating a culture of honesty and ethical behavior which can be reinforced by an active oversight by those charged with governance. Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.

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ISA 240 Paragraph Details 5.

An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs.

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The objectives of the auditor are: (a) To identify and assess the risks of material misstatement of the financial statements due to fraud; (b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and (c) To respond appropriately to fraud or suspected fraud identified during the audit.

11/18/2015

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Forensic Tools and Techniques for Auditors & Investigators

Recognized Investigative Tools and Techniques Used by

Forensic Specialists/Fraud Examiners

Forensic Tools and Techniques for Internal Auditors

1. Public Document Reviews and Background Investigations 2. Interviews of Knowledgeable Persons 3. Confidential Sources 4. Laboratory Analysis of Physical and Electronic Evidence

Forensic Tools and Techniques for Internal Auditors

(cont’d)

5.Physical and Electronic Surveillance 6.Undercover Operations 7.Analysis of Financial Transactions

Forensic Tools and Techniques for Internal Auditors

Public Document Reviews and Background Investigations

◦Public Databases ◦Government Websites ◦County Seat ◦Corporate Records ◦Internet

Forensic Tools and Techniques for Internal Auditors

Public Databases ◦Increasing number of vendors ◦Reliability of data

◦What type of data is available?

Forensic Tools and Techniques for Internal Auditors Government records ◦Real Estate records; business registrations

Corporate Records ◦Stock Transfer records; Accounting data; vendors; competitors; customers

Forensic Tools and Techniques for Internal Auditors

Internet

◦Search Engines ◦News Sources/Newspapers ◦Telephone Numbers and Addresses ◦Maps ◦Legal Resources ◦Government Sites

Forensic Tools and Techniques for Internal Auditors

Interviews of Knowledgeable Persons ◦ Interview vs. Interrogation ◦ Continuous process throughout an investigation ◦ Gain additional information with each interview ◦ Evidence from witnesses provides additional leads ◦ May identify additional witnesses ◦ Interview the target only after completing the interviews of the peripheral witnesses

Forensic Tools and Techniques for Internal Auditors

Confidential Sources ◦ Hotlines ◦ E-mail ◦ Letters ◦ Current Employees ◦ Former Employees ◦ Vendors & former vendors ◦ Customers & former customers

Forensic Tools and Techniques for Internal Auditors

Confidential Sources (cont’d)

Cautions

◦Use professional skepticism in assessing information ◦Information supplied to discredit or embarrass the target ◦Weigh the value of the evidence provided against the possibility that it may be false or cannot be proven ◦Validate all evidentiary matter provided ◦Do not assure absolute confidentiality

Forensic Tools and Techniques for Internal Auditors

Laboratory Analysis of Physical and Electronic Evidence (cont’d) ◦Altered & Fictitious Documents

◦physical examination ◦fingerprint analysis ◦forgeries ◦ink sampling ◦document dating

Forensic Tools and Techniques for Internal Auditors

Laboratory Analysis of Physical and Electronic Evidence (cont’d) Computer Forensics ◦ hard disk imaging ◦ E-mail analysis ◦ search for erased files ◦ analyze use & possible misuse ◦ computer software to analyze data

Forensic Tools and Techniques for Internal Auditors

Physical and Electronic Surveillance Physical ◦ usually done by law enforcement or PI’s ◦ surveillance cameras ◦ can also be used to verify addresses for vendors, employees, etc.

Electronic ◦ Internet surveillance ◦ E-mail

Forensic Tools and Techniques for Internal Auditors

Undercover Operations

◦usually a recommendation to use ◦can be done ◦best left to professionals

Forensic Tools and Techniques for Internal Auditors

Analysis of Financial Transactions ◦ Horizontal/vertical analysis ◦ Authorization of new vendors & employees ◦ Comparison of employee & vendor addresses ◦ Detailed matching of persons approving transactions in finance and procurement. ◦ Analysis of sales returns & allowance account ◦ Management override of controls ◦ Different reviews based on known industry fraud schemes

Forensic Tools and Techniques for Internal Auditors

Analysis of Financial Transactions ◦Purchase prices and Market price comparisons ◦Expiry date checks from Manufacturers websites

Procurement Fraud Symptoms 11/18/2015

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Supplier Checks Conduct supplier-to-employee matching. Compare vendor addresses to a clean list of companies, starting with the postal code. “You can use social media to identify undisclosed relationships,” “Also, look for a vendor who is now an employee or someone who is in the system as both a vendor and an employee. Check emergency contact addresses for employees against supplier addresses.”

Look for related party transactions. Research high-risk vendors by obtaining Government records and using the registered agent information to compare those details against employee records. 11/18/2015

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Supplier Checks Find suppliers with residential addresses. The suppliers you pay the most money to generally have a physical office. He suggests using a forensic investigator to assist with address verification and cleansing. “By utilizing an address cleansing service you will learn the type of address, whether it’s vacant, seasonal, a commercial mail service, etc.

Review early payment exceptions. “Some fraudulent vendors will request accelerated or expedited payments,”. “Run a report of payments and look for those who are getting quick payments.” Use third party data sources, such as PIN and VAT matching. “Use 3rd party data to find bad or black listed vendors,”. 11/18/2015

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Invoice Red Flags Invoice Red Flags There are other areas of the disbursement cycle that can be monitored for suspicious characteristics. Invoices, for instance, are a valuable source of data. “Pull physical invoices and check for red flags,”

Some red flags to look for are: ◦ Consecutive invoice numbers ◦ Even Kenya Shilling amounts on invoices ◦ Outliers, such as very large or unusual amounts ◦ Amounts that fall outside the pattern predicted by Benford’s Law 11/18/2015

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Supplier and Staff relationships

Decreasing purchases from other vendors

Increasing Purchases from specific vendors

Poor Quality

Increasing Prices

Documents and records Large Order Quantities

All transactions approved by same staff for same suppliers

Analytical Symptoms

Ghost Supplies

Poor staff relationships with suppliers

kickbacks

Behavioral Symptoms

Use of unapproved suppliers

Internal Controls

Unexpected change in employee habits

Owning expensive homes

Lifestyle Symptoms Products quality complaints

Unsuccessful Vendor Complaints

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Tips and Complaints

Anonymous tips about suppliers and staff

Staff leaving beyond means

Staff owning expensive Vehicles

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Numerous parties and holidays

Digital Analysis using Benford’s Law Benford’s Law works because nature produces more small things than large things. There are more insects than large mammals, more small houses than large ones, and more small lakes than large bodies of water.

Similarly, businesses produce more transactions with small amounts than with large amounts. Benford’s Law predicts that amounts will start with the digit 1 more often than the digit 9, and it even provides a mathematical formula describing the law and percentages. The digit 1 should show up about 30 percent of the time, while the digit 9 should occur less than 5 percent of the time. 11/18/2015

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Outlier Detection One of the primary methods of detecting fraud is discovering data values that are outside the normal course of business. For example, a kickback scheme might be the reason purchases from one supplier are twice as high as similar purchases from another Supplier. 11/18/2015

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Trending In addition to comparing same period numbers from different vendors, employees, or customers, fraud can be discovered by comparing numbers over time. Because almost all perpetrators are greedy, fraud increases exponentially over time. Auditors can easily spot an increasing trend on a line chart— computers are not needed if only one item is being audited (one employee, one vendor, etc.). The need for automation is during the initial phase of a fraud investigation. If auditors do not know which item is increasing, they must look through thousands of graphs to determine which item requires additional investigation.

Trending methods allow the computer to determine which trends are increasing so the auditor can focus on those items. One of the most basic methods of determining an increasing trend is linear regression. Once the computer fits a line to the data, the slope and goodness of fit provide a simple measure of trend. 11/18/2015

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Fraud Detection Methods Chance detection

Non-Technology Based

Tip / Hotline received Discovery Sampling

Computerized (Traditional Methods

)

Financial Statement Analysis Bad Guy, Lists

Audit for Fraud Detection People Focused

Behavioral Analysis

Data Mining Software

Technology Based Inductive Analysis Reengineered (new) Methods

Transaction Focused

Deductive Analysis

11/18/2015

Digital Analysis (Benford’s Law

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Strategic Fraud Detection

Tools CCTV Spread sheets ◦Ms-Excel

Audit software's ◦IDEA ◦ACL

Disk Imaging software ◦ ◦

Encase Forensic Tool Kit-(FTK) 11/18/2015

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Data Analysis & Search Tools Data Analysis ACL -http://www.acl.com/products/ ◦ Desktop -"traditional" data analysis tool with various file interoperability, built-in analysis functions, and custom-language scripting / automation abilities ◦ Exchange -data feeds, functions with custom parameters, documentation acquisition and storage, Microsoft Office integration, and data exception identification and workflow ◦ Acerno-Excel Add-In for results analysis

IDEA -http://www.caseware.com/products/idea: Data analysis tool with various file interoperability, built-in functions, and custom-language scripting / automation Active Data/ Active Audit-Excel Add-Ins for data analysis similar to IDEA and ACL Search Websites

http://www.searchtempest.com/ Person or Company profiling: http://www.zoominfo.com/ Address or Phone search: http://www.zabasearch.com/ Social Media search: http://www.kurrently.com/ Blog Search: http://technorati.com/

◦ Craigslist / EBay search: ◦ ◦ ◦ ◦

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Open Discussion 11/18/2015

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Questions ? Thankyou

Services Offered Internal audit Fraud Risk Assessment

Forensic Investigations Fraud Training & Awareness Programs

Anti-money Laundering Pre-employment Integrity interviews Loss Prevention Consulting Dispute Advisory Due Diligence Investigations

Contact Details

Reuben Boro Gitahi Director Forensic Risk and Compliance Services

OneSource Financial Services Limited +254-722-372677

[email protected] [email protected] www.one-source.info

Background Screenings Unclaimed Financial Assets compliance and reporting audits

18 November 2015

Internal Audit and Business Ethics

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