Introduction to Forensic Accounting
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Transcript of Introduction to Forensic Accounting
FORENSIC ACCOUNTING
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 from other services.
6. Identify other auditors’ services provided for public companies, explain the auditors’ work activities, and describe the resulting report.
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.
FORENSIC ACCOUNTING
Forensic accountants investigate many situations and suspected illegal acts including: Employee theft Vendor fraud Customer fraud Tax evasion Conflicts in divorce and bankruptcy proceedings Insurance claim filings Identity theft Organized crime
What is Forensic Accounting?
An orderly analysis, investigation, inquiry, test, inspection, or examination along a “paper trail” in the search for fraud, embezzlement, or hidden assets
Two parts: Investigative accounting Litigation support
Treats all figures as suspect until proven otherwise
The History of Forensic Accounting
1931 World War II 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
The Need for Forensic Accountants
A 2001 survey found the following: 37% of the country’s top 100 accounting firms
are increasing their forensic 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
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
The Services a Forensic Accountant Provides
Damages Antitrust Analyses Accounting Valuation General Consulting Other Analyses
Motive
Rationalization Opportunity
The Fraud Triangle
Proactive Fraud Auditing
Going fishing Thinking like a fraud auditor Choosing a fraud type Procedures
Reactive Fraud Auditing
Symptoms Cost Variances Expected Costs Employee’s Lifestyle
Fraud vs. White-Collar Crime
“White collar crime is criminal conduct that does not involve violence or the threat of violence and usually takes place in a professional work place”
Fraud happens anywhere, white-collar crime 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.
Red Flags
No Company Policy Manual Feeling of disorganized
bookkeeping, purchasing, receiving, and/or warehousing departments
Missing documents Unrecorded transactions No bank reconciliations Subsidiary ledgers out of
balance No physical inventory counts Checks written to cash Large related party loans Excessive other revenue 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 insider sales of stock Unexplained resignations of
upper management Excessive debt/equity ratio CPA switching Strange account titles
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 uncover potential fraud motives.
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 for internal auditors.
The internal auditor’s goal is to help improve the organization’s operations, risk management, internal controls, and governance.
INTERNAL AUDITING
Internal auditors assist in SOX compliance
INTERNAL AUDITING
Internal auditors assist in SOX compliance
STATE AND LOCAL 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.
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.
GOVERNMENT AUDITING STANDARDS AND THE YELLOW BOOK
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.
Work of the GAO
COMPILATION AND REVIEW ENGAGEMENTS
EXHIBIT 16-1
Hierarchy of FinancialStatement AssuranceActivities
Compilations
In a compilation engagement, an accountant drafts financial statements of an entity based on information provided by the management or owners.
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.
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Standard Compilation Report
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.
Elements of an Engagement Letter for a SSARS Financial Statement Review Engagement
Elements of an Engagement Letter for a SSARS Financial Statement Review Engagement
Inquiries Made During a Review
EXHIBIT 16-3
Independent Accountant’s Review Report
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.
Examples of Attest Engagements
Availability of Criteria
EXHIBIT 16-4
Types of Attest Engagements and Reports
EXHIBIT 16-5
Independent Accountant’s Attest Examination-Level Report
SEC-RELATED ENGAGEMENTS
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.
Auditor’s Review Report on Interim Financial Statements
Review QuestionForensic 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 arelower.
Review QuestionThe independence of internal auditors andthe internal audit function is enhanced by(a) avoiding conflicts of interest.(b) being placed high in the organizational hierarchyand having access to the audit committee.(c) conducting their tasks in an objective manner.(d) all of the above.
Review QuestionAn examination attest engagement provides:(a) positive assurance.(b) moderate or limited assurance.(c) no assurance.(d) agreed upon procedures assurance.
CopyrightThanks You ~ Rahul MaganCorporate Treasurer , EXL Service Holdings , Inc. ( NASDAQ Listed )91-9899242978 , Skype ~ Rahul5327 , Twitter @ Rahulmagan8