1. FORENSIC ACCOUNTING

2. Learning Objectives
1. Describe forensic accounting and contrast it with ICFR and
financial statement audits.
2. Understand internal audit activities and the role of the internal
audit function within organizations.
3. Learn the extension of typical audit activities required when
auditing state and local government entities.
4. Explain the purposes and activities of compilation and review
engagements, applicable standards, and accountants’ reports.
5. Discuss the types of information for which accountants can issue
attest reports, list the requirements for an attest service to be
possible, and distinguish attest engagements fromotherservices.
6. Identify other auditors’ services provided for public companies,
explain the auditors’ work activities, and describe the resulting
report.

3. FORENSIC ACCOUNTING
 The term forensic accounting most commonly refers to
fraud investigations and accounting work to support
legal actions.
 The Association of Certified Fraud Examiners (ACFE) is
one of the premier organizations for forensic
accountants.
 Forensic accounting encompasses two major
components: investigative forensic services and
litigation support.

4. FORENSIC ACCOUNTING
 Forensic accountants investigate many situations and
suspected illegal acts including:
 Employee theft
 Vendorfraud
 Customerfraud
 Tax evasion
 Conflicts in divorce and bankruptcy proceedings
 Insurance claimfilings
 Identity theft
 Organized crime

5. What is Forensic Accounting?
 An orderly analysis, investigation, inquiry, test, inspection, or
examination along a “paper trail” in the search for fraud,
embezzlement, orhidden assets
 Two parts:
 Investigative accounting
 Litigation support
 Treats all figures as suspect until proven otherwise

6. The History of Forensic Accounting
 1931
 World WarII
 1980s: Real estate bankruptcies, junk bond schemes, and
lawsuits
 1988 ACFE was formed in Austin, Texas
 Initially called “investigative accounting”
 Increase in regulatory, tax and criminal statutes became law

7. The Need forForensic Accountants
 A 2001 survey found the following:
 37% of the country’s top 100 accounting firms are
increasing theirforensic and fraud services
 The average organization loses 6% of revenue to
employee fraud and abuse
 The typical perpetrator:
 Colleges and universities are responding
 Many frauds are not reported
 There are 13,000 CFEs in the ACFE, compared to 2,300 just
10 years ago
 Wells Report

8. What Does a Forensic Accountant Do?
 Attempt to obtain the truth and develop an
expert opinion
 Sniff out corruption
 Pore over financial documents, reconstruct
records, interview people, and present
report interpreting and explaining
complicated financial information
 Solve a large puzzle

9. The Services a Forensic Accountant Provides
 Damages
 Antitrust Analyses
 Accounting
 Valuation
 General Consulting
 OtherAnalyses

10. Motive
Rationalization Opportunity
The Fraud Triangle

11. Proactive Fraud Auditing
 Going fishing
 Thinking like a fraud auditor
 Choosing a fraud type
 Procedures

12. Reactive Fraud Auditing
 Symptoms
 Cost Variances
 Expected Costs
 Employee’s Lifestyle

13. Fraud vs. White-CollarCrime
 “White collar crime is criminal conduct that does not involve
violence or the threat of violence and usually takes place in a
professional workplace”
 Fraud happens anywhere, white-collarcrime is in the workplace
 Fraud is perpetrated by anyone, white-collar crime is by
business people/professionals.
 Fraud is not always criminal, white-collar crime is mostly
criminal
 Fraud does not always involve something of value, white- collar
crime does.

14. Red Flags
 No Company Policy Manual
 Feeling of disorganized
bookkeeping, purchasing,
receiving, and/or warehousing
departments
 Missing documents
 Unrecorded transactions
 No bankreconciliations
 Subsidiary ledgers out of balance
 No physical inventory counts
 Checks written to cash
 Large related party loans
 Excessive otherrevenue
 Negative operating cash flow
 Downward earnings trend
 Handwritten checks
 Extensive fund transfers
 Unusual transactions
(inconsistent)
 Deficient hiring policies and
procedures
 Employees’ lifestyles
inconsistent with salaries
 Employees who don’t take
vacations
 SPEs
 Excessive insidersales of stock
 Unexplained resignations of
uppermanagement
 Excessive debt/equity ratio
 CPA switching
 Strange account titles

15. FORENSIC ACCOUNTING
 During an interview, the forensic accountant may focus
on a range of issues, including:
 The tone set by top management toward ethical
behavior
 Management’s values and beliefs
 Reward systems
 The potential for management override of internal
controls
 Forensic accountants may rely on evidence obtained
from real estate records, court records, corporate and
partnership records, and other public records to
uncoverpotential fraud motives.

16. INTERNAL AUDITING
 Accountants who work within entities as internal
auditors also perform important functions for
companies, not-for-profit organizations, and
government units
 The Institute of Internal Auditors (IIA) is the most
notable professional organization forinternal auditors.
 The internal auditor’s goal is to help improve the
organization’s operations, risk management, internal
controls, and governance.

17. INTERNAL AUDITING
 Internal auditors assist in SOXcompliance

18. INTERNAL AUDITING
 Internal auditors assist in SOXcompliance

19. STATE ANDLOCAL GOVERNMENT AUDITS
 Financial statement audits of state and local
governments are performed by external auditors who
work either for public accounting firms or separate
government-related units.

20. Single Audit Act
 This legislation called for audits to be conducted on an
entity-wide basis replacing requirements for multiple
audits of one entity on a grant-by-grant basis.
 When a governmental entity meets the $500,000
expenditure threshold, it is subject to a single audit of
both its financial statements and its compliance with
the provisions of any federal awards it received.
 The schedule of audit findings summarizes the results
of the audit.

21. GOVERNMENT AUDITING STANDARDS ANDTHE
YELLOWBOOK
 Audits of government entities, including those under
OMB Circular A-133, are conducted according to
generally accepted government auditing standards
(GAGAS) issued by the Government Accountability
Office (GAO).
 The Yellow Book contains standards covering financial
statement audits, attestation engagements, and
performance audits.
 The GAO’s primary role is to support congressional
oversight of the executive branch of the U.S.
government.

22. Workof the GAO

23. COMPILATION ANDREVIEWENGAGEMENTS
EXHIBIT 16-1
Hierarchy of
Financial
Statement
Assurance
Activities

24. Compilations
 In a compilation engagement, an accountant drafts
financial statements of an entity based on information
provided by the management orowners.
 The accountant needs to establish an understanding
with the client about the terms of the engagement, any
limitations on the use of the financial statements, and
must document the understanding through a written
communication with management.

25. Illustrative Compilation Engagement Letter
EXHIBIT 16-2

26. Illustrative Compilation Engagement Letter
EXHIBIT 16-2

27. Illustrative Compilation Engagement Letter
EXHIBIT 16-2

28. Standard Compilation Report

29. Reviews
 An engagement to review a nonpublic company’s
financial statements provides some assurance regarding
the fairness of the financial statements.
 The level of assurance provided by the accountant’s
report falls between an audit and a compilation.

30. Elements of an Engagement Letterfora SSARS Financial
Statement Review Engagement

31. Elements of an Engagement Letterfora SSARS Financial
Statement Review Engagement

32. Inquiries Made During a Review
EXHIBIT 16-3

33. Independent Accountant’s Review Report

34. ATTEST ENGAGEMENTS
Targets of attest engagements include financial
forecasts and projections, compliance with laws and
regulations, effectiveness of internal controls for
nonpublic companies, the accuracy and reliability of
reported performance measures, and the compliance
with SEC regulations of a company’s management
discussion and analysis.

35. Examples of Attest Engagements

36. Availability of Criteria
EXHIBIT 16-4

37. Types of Attest Engagements and Reports
EXHIBIT 16-5

38. Independent Accountant’s Attest Examination-Level
Report

39. SEC-RELATEDENGAGEMENTS
 CPAs perform many services in connection with SEC
filings such as issuing comfort letters to underwriters,
performing interim reviews, and conducting activities
related to registration statements for public offerings
of securities.
 Letters for underwriters are commonly called comfort
letters because of the concept that they provide
“comfort” on specific issues in a company’s financial
information.

40. Auditor’s Review Report on Interim Financial Statements

41. Review Question
Forensic accounting
(a) is best described by the term fraud
audit.
(b) includes investigative services and
litigation support.
(c) can only be carried out by CPAs.
(d) follows the same approach as
traditional auditing except that materiality
thresholds are
lower.

42. Review Question
The independence of internal auditors and
the internal audit function is enhanced by
(a) avoiding conflicts of interest.
(b) being placed high in the organizational
hierarchy
and having access to the audit committee.
(c) conducting their tasks in an objective
manner.
(d) all of the above.

43. Review Question
An examination attest engagement
provides:
(a) positive assurance.
(b) moderate or limited assurance.
(c) no assurance.
(d) agreed upon procedures
assurance.

44. Copyright
Thanks You ~ Rahul Magan
Corporate Treasurer , EXL Service Holdings , Inc. ( NASDAQ Listed )
91-9899242978 , Skype ~ Rahul5327 , Twitter @ Rahulmagan8