5. 4
Definitionoffraud
“Fraud” in relation to affairs of a company or corporate body, includes any act, omission, concealment
of any fact or abuse of position committed by any person or any other person with the connivance in
any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the
company or its shareholders or its creditors or any other person, whether or not there is any wrongful
gain or wrongful loss;
Companies Act 2013 defines fraud as….
Act – Omission – Concealment – abuse of position
By person or any other person with the connivance
Intent to deceive
To gain undue advantage – to injure the interests of the company or
shareholders/creditors
Whether or not there is any wrongful gain/loss
6. 5
CategoriesofFraudandMisconduct(Sample)
Fraudulent financial reporting (e.g., improper revenue
recognition, overstatement of assets, understatement of
liabilities)
Misappropriation of assets (e.g., theft of cash, physical
assets or intellectual property)
Revenue or assets gained by fraudulent or illegal acts (e.g.,
deceptive sales practices, market rigging, over-billing
customers)
Expenses or liabilities avoided by fraudulent or illegal acts
(e.g., improper avoidance of tax liabilities, wage and hour
abuses, falsifying information provided to regulators)
Expenses or liabilities incurred for fraudulent or illegal acts
(e.g., commercial kickbacks, bribery of domestic or foreign
officials)
Other misconduct (e.g., other violations of legal, regulatory
or ethical standards)
9. 8
Poor controls
Lack of effective
oversight
Exploiting
errors
Abuse of
authority
Lack of
segregation
of duties
Fraud can be hidden in
complex transactions
Thefraudtriangle-opportunity
Poor governance
10. 9
“They do not pay me
enough!”
“It’s a victimless
crime”
“Everyone
else does it”
“Who cares?”
“I’m in
charge!”
“They can
afford it”
“It’s a cost of doing
business”
“Rules are made to be
broken”
“I’ll never
get caught!”
“Its only small
amount”
Thefraudtriangle-rationalisation
18. 17
Globalprofilesofthefraudsterkeyfindings(2016)
Technology enables, while weak controls fuel frauds
Some key observations
68% of the global fraudsters were in the 35-55 age group. Indian fraudsters are younger in age with 32% of the
perpetrators in the 26-35 age group
38% of the global fraudsters were in service for more than 6 years as compared to Indian fraudsters who start early
with 27 % were in service anywhere between one and four years
Technology is increasingly being used to enable frauds, and this proportion was higher in India (33 %) compared to
trends observed globally (24 %)
Globally 62% of the frauds were committed in collusion , which was similar to what was observed in India
Globally 61% of the frauds were committed due to weak internal controls which was similar to what was
observed in India
Globally 35% of the frauds were detected as a result of a tip, complaint or a formal whistle blowing hotline,
compared to 59% in India
Globally 52% of the fraudsters were in the managers & staff category, compared to 63% in India
19. 18
HowFraudsweredetected
Source: Global profiles of the
fraudster, KPMG International, 2016
5%
25%
35%
14%
16%
9%
9%
7%
5%
6%
4%
5%
Management review
Formal whistle-blowing report/hotline/
Anonymous informal tip-off
Accidental
Internal audit
Suspicious superior
Other not listed above
Other internal control
External audit
Supplier complaint
Self-reported / Admitted
Proactive fraud-focused data analytics
22%
14%
14%
10%
7%
6%
3%
3%
Global India
Customer complaint
59%
5%
5%
5%
9%
5%
21. 20
Whatisforensicaudit?
• Forensic audit is an examination and
evaluation of a firm’s or individual’s
financial information for use as evidence
in court
• A forensic audit can be conducted in
order to prosecute a party for fraud,
embezzlement or other financial claims
22. 21
ForensicauditvsFinancialaudit
FORENSIC AUDIT
1. A forensic audit is a process of reviewing
a person’s or company’s financial
statements to determine if they are
accurate and lawful.
2. Emphasis on conclusive evidence
3. Conducted for investigative purpose, in a
manner suitable to a court.
4. Example:
Financial and accounting review
Digital forensic analysis
Field investigations
Data mining at an advanced level
Application of interviewing skills
Specimen signatures
FINANCIAL AUDIT
1. Financial audit is examination and
evaluation of financial statements of an
organisation, to form an opinion based
on the conclusions derived, in an audit
report.
2. Relies on persuasive documentary
evidence
3. Conducted for audit purpose, for users
of financial statements
4. Example:
Physical examination and count
Confirmation
Inquiry
Observation
Inspection
Year end scrutiny
Bank reconciliation
23. 22
Whocanbeaforensicauditor?
i. No standard qualifications stated
ii. Any person with requisite knowledge
and skills can be a forensic auditor
iii. CFE is majorly recognized qualification
iv. In India, any CA can be a forensic auditor
based on knowledge and experience in
financials and legal field
v. FAFP (ICAI) is an additional certificate for
enhancing the knowledge
24. 23
1. Sequential invoice numbers for same vendor
2. Vendor addresses
Do not match with the vendor application and no intimation of change of address provided
Multiple addresses for same vendor
Vendor address matches with employees’ address
3. Payments to vendors increased for no apparent reason
4. Vendor invoices received by departments other than accounts payable
5. Excessive adjustment entries in the vendor ledger
6. Applicable taxes not charged on vendor invoices
7. Applicable income tax not deducted on vendor payments
8. Lack of segregation of duties between:
Updation of vendor master and raising invoice
Preparation of cheques/ authority to make wire transfers and posting to vendor account
Preparation of cheques/ authority to make wire transfers and mailing cheques
AccountsPayable
25. 24
9. Non - reconciling general ledger and sub ledger
10. The payee as per the general ledger and bank statement
differs
11. Unrestricted access to blank cheques
12. No audit trail for addition/ deletion/ modification to vendor
ledger/ vendor master
13. Goods returned accounted in general ledger but no
evidence of physical return of goods into the warehouse
etc
AccountsPayable(contd.)
26. 25
1. Competitive bids seeming to be received from various parties
Have same fonts/ similar formats
Same/ similar address
Signed by the same person
Same spelling mistakes
2. The bid selected is always the last bid placed (which is by the same vendor) recurringly
3. Purchases made without placing purchase order
4. Purchases made even though re – order level is not reached
5. Inter state purchases made though goods are available locally at lesser prices without compromise on
quality
6. Rise in cost of purchases beyond inflation rate
7. Unusual purchases made – not consistent with prior history of purchases
Purchasing
27. 26
1. Documents such as employee interview details/ appointment letters not maintained/ not available
2. Unjustifiable increase in head count of employees
3. Amount of statutory deductions (like PF
, ESI, PT, Income Tax) do not commensurate with the salaries paid
4. Huge cash payments of salaries made without adequate acknowledgements from employees for receipt of
salary
5. Payroll processed for employee with nil or no attendance records
6. Falsified time sheets
7. Inadequate segregation of duties between
Updation of employee master and processing attendance/ salaries
Processing attendance/ salaries and disbursement of salaries
Disbursement of salaries and accounting of payroll costs
Accounting of payroll costs and making statutory remittances
Payroll
28. 27
1. No segregation of duties between:
Receiving cash and posting in general ledger
Issuing receipts and deposit preparation
2. Significant recurring negative cash balances shown in the books of accounts
3. Entries for sale of scrap, news papers, old stock etc not accounted though there is corroborative evidence of
such transaction
4. Infrequent bank deposits and holding huge balances of cash on hand
5. Recurring fluctuations of bank account balances
6. Missing copies of pre numbered receipts
7. Cash payments made without supporting documentation and with inadequate explanation
Cashreceipts
29. 28
1. No segregation of duties between:
Processing accounts receivable and posting to ledger
Posting to ledger accounts and cash receipts
2. Recurring adjustments, write offs etc.
3. Unjustified slow collection cycle
4. Unjustified increase in doubtful accounts
5. Unjustified increase in provision for doubtful debts in view of positive economic events
6. Unrestricted access to general ledgers and sub ledgers
7. Lack of accountability for invoice numbers raised
8. Lack of policies and procedures for write offs
9. Frequent adjustment entries passed between 2 or more customer accounts etc
Accountsreceivable
30. 29
1. Credit balances in inventory accounts
2. Consistent fluctuations in inventory accounts between months
3. Excessive inventory write offs without documentation or approvals
4. Large number of fixed assets classified as inventory and written off
5. Unrestricted access to inventory storage areas by non-responsible employees and/or vendors
6. No policy regarding inventory levels to be maintained
7. Inventory turnover rate does not correlate with operating cycle
8. Improper labeling of inventory and raw materials
9. Significant weaknesses in inventory cut off procedures
10. Consistent production runs and backlog orders
11. Abnormal expenditure for external maintenance services
12. No segregation of duties between
Receipt of inventory and issue of materials
Recording of inventory and ordering materials
Identification of obsolete materials and sale of the same etc
Inventory
31. 30
1. Significant adjustments to accrued liabilities, accounts receivable, contingencies, and other accounts prior to
acquisition of new financing
2. Dramatic change in key leverage, operating, and profitability ratios prior to obtaining financing
3. Adopting a change in accounting principle or revising an accounting estimate prior to obtaining financing
4. Increase in short-term cash and a decrease in receivables while sales are increasing prior to seeking new
financing
5. A change in external activities, legal counsel, or treasury department head prior to obtaining new financing
6. A delay in issuance of monthly, quarterly, or annual financial reports prior to seeking new financing
7. Reported profits but negative cash flows etc.
Finance
32. 31
Readthesigns
■ Marked personality changes - Staff under stress
without a high workload
■ Late working hours
■ Reluctance to take leave
■ Unexplained wealth or living beyond apparent means
■ Sudden change of lifestyle
■ Customer complaints of missing statements,
unrecognised transactions
■ “Relationships” with suppliers/contractors
■ Rising costs with no explanation
■ Key employees having too much control or authority
without audit checks
■ Employees with external business interests
33. 32
RedFlags-Limitations
Red flags” are
not always
obvious or easily
observed
They are only
indicators not
evidence
They may
indicate other
risks and not
exclusively fraud
They can be
ambiguous
There is no linear
relationship
between risk
factors and fraud
risk
1 2 3 4 5
35. 34
Mobileforensics–UFEDandOxygen
1. Data extraction from a mobile device.
3. Bookmarking the data.
Hardware and software based data extraction from mobile devices.
2. Forensic analysis of the extracted data.
4. Generating the report.
38. 37
vendor 1 vendor 2
PAN No. PAN No.
Different vendors with same PAN number
Different vendors with same bank account number
Different vendors with same phone number
Dataanomalies
39. Agenda
09.30 –09.45 Welcome and Introduction
09.45 – 11.00 What is Evidence & Types of Evidence
11.00 – 13.00 Key Principles-Evidence Act
13.00 – 13.45 Lunch Break
13.45 – 15.45 Key Principles-Evidence Act
15.45 – 16.00 Wake-up break
16.00– 16.30 Evidentiary Value of FIR
16.30 – 18.00 Case Studies
40. 39
IndianEvidenceAct,1872
Evidence is…
1. All statements which the Court permits or requires to be
made before it by witnesses, in relation to matters of fact
under inquiry, such statements are called oral evidence,
2. All documents including electronic records produced for the
inspection of the Court, Such documents are called
documentary evidence.
41. 40
TypesofEvidence
Oral
Documentary
Indirect: Circumstantial
Oral Evidences are those
evidences which are personally
seen or heard by the witness
giving them and not heard or
told by some one else.
Indirect: Hearsay
Hearsay evidences are the ones which the
witness has neither personally seen nor
heard, nor has he perceived through his
senses, but are those which have come to his
knowledge through some other person. These
are the most weak category of evidences.
All those documents which are presented in the
court for inspection regarding a case, such
documents are known as documentary
evidences.
The definition of 'documentary evidence' has
been amended to include all documents,
including electronic records produced for
inspection by the court.
Evidence
Circumstantial Evidence is the evidence that
does not point directly to the fact. A reasoning
must be made or an inference, that links
circumstantial evidence to the desired fact the
party is trying to prove.
51. 50
Entry of garbage bags inserted in the
security register by Employees
A
B
C
D
E
Scenario6–AleadingInsurancecompany(Contd)
52. 51
Comparative quotes of 3 vendors looked similar. In all the 3 quotes, same incorrect address of the company
was mentioned
Scenario6–AleadingInsurancecompany(contd)
60. 59
RevenueFraud
Photograph on application form does not match with
Voters ID and Driving License
Loan application
supported with
documents where the
photographs of the
applicant is different
from the identity
proofs
64. 63
KeyManagementConcerns
Robust Fraud risk framework – Prevention, Detection and Response
Syndicate crimes on the increase with organisations becoming
targets
Limited Forensic skill pool
Evolving product mix and profitable growth a key requirement
Collusion risk – how to handle it?
Effective early warning alert mechanism
Regular training and skill updation
Independence and objectivity at the process level to identify fraud
risk
Effective mechanism to investigate reported cases
Integrity of agencies/third parties in customer handling
Regulatory compliance framework to manage regulatory requirements
Strategic
Operational
Ongoing learning to be incorporated in the processes
Interplay of departments and accountability and responsibility
matrix for fraud
Effective strategy in handling third parties and related processes on
customer acquisition and collections
Regulation of outsourced vendors for customer service and
collection
Reputational
Functional
67. 66
Investigationslifecycle
• Review the
internal
investigation
reports
• Securing of
information
• Reporting
• Liaison with
management
• Liaison with
legal counsel
• Digital
data
recovery
• Forensic
Data
Analysis
• Interviews/
external
verifications
• Review of
documents
and
records
Forensic
Procedures
Phase 1 Phase 2 Phase 3
Preliminary assessment Detailed investigation Reporting and way forward
68. 67
FraudRiskManagementFramework
Fraud Risk Management framework
Prevention Detection Response
Internal Vigilance Unit and its reporting Structure
Anti-Fraud Manual (including Fraud Risk Management Policy)
Ongoing fraud risk assessment at business level
Fraud Monitoring Tools
Pre-employment background
screening
Communication and Training
Investigation protocols
Enforcement and accountability
protocols
Disclosure protocols
Remedial action protocols
Code of Conduct
Third party due diligence
Vigil mechanism (whistleblower)
Transaction Monitoring
Proactive data analysis
System assessment and review
69. 68
RoleofInternalAuditinFraudRiskManagement
Internal audit’s role is believed to include:
• Provide an independent review based on an objective assessment of the framework of
governance, risk management and control.
• Exercise due professional care by considering the probability of significant errors, fraud or non-
compliance
• Evaluate the potential for the occurrence of fraud and how the organization manages fraud risk
It is not a primary role of internal audit to detect fraud and corruption
New audit challenges require Internal Audit to evolve.....
Supporting fraud detection and investigation….is amongst the more important ones
70. 69
AuditorsVsInvestigators
Auditors Investigators
• Express an opinion concerning the
truth and fairness of financial
statements
• Concern limited to books of
account
• Concept of Materiality
• Rely primarily on examination of
documents
• State facts to help management make
informed decisions
• Invariably go beyond books of account
• Materiality is irrelevant
• - Document examination
- Forensic technology
- Market Intelligence
- Interviews
71. 70
Whyinternalauditorssometimesfailtodetect
FRAUD?
REASONS
Sample sizes too
small
The nature of
concealment and
misrepresentation
associated with
fraud
Management’s
emotional
response to
fraud
Fraudster’s
familiarity with
the control
environment and
thus ability to
conceal fraud
Concealed in
excessive loss
figures
Lack of effective
Forensic
integration
The auditor’s
lack of
familiarity and
awareness of
fraud (not
attuned to
fraud)
Insufficient
levels of
professional
skepticism
