CA FINAL PAPER 3

ADVANCED AUDITING ASSURANCE & PROFESSIONAL ETHICS

CHAPTER-17
2. Forensic Accounting

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Forensic Accounting:The integration of accounting, auditing and
investigative skills yields the specialty known as Forensic Accounting.

It is the study and interpretation of accounting evidence.It is the

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application of accounting methods to the tracking and collection of forensic
evidence, usually for investigation and prosecution of criminal acts such as
embezzlement or fraud.
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• Forensic accounting is the application of investigative and analytical

skills for the purpose of resolving financial issues in a manner that

meets standards required by courts of law.

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• Forensic accountants apply special skills in accounting, auditing,

finance, quantitative methods, certain areas of the law, research and

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investigative skills to collect, analyze and evaluate evidential matter

and to interpret and communicate findings.

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Red Flag: Red flags are indicators or warning of any impending danger

or inappropriate behavior,does not necessarily indicate the existence of

fraud however are indicators that caution needs to be exercised while

investigating the situations.

Red flags are classified in categories such as

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financial performance red flag, accounting system red flags, operational

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red flags and behavioral red flags.

Forensic Accounting can be conducted in order to prosecute a party

for fraud, embezzlement or other financial claims. In addition, an audit

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may be conducted to determine negligence in addition.

Example of Forensic Accounting

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The Accounting Officer in the pharma company performs a regular

reconciliation between the physical inventory counted in the factory and
the inventory as calculated by the books and accounts. He Performs
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detailed analysis & the same is an example of some Forensic Accounting

techniques to identify a case of accounting fraud.
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How is a forensic accounting analysis different from an audit?

The procedures for financial audits are designed to detect material

misstatements, not immaterial frauds, the vast majority of frauds could

not be detected because of dependence of financial auditors on a

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 sample and the auditors' reliance on examining the audit trail.

Forensic accounting and Audit differ in specific ways, as shown below:

Key elements of the Statutory Audit & Forensic Accounting are :

STATUTORY AUDIT

• It’s a legal mandate

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• Conducted only by Chartered Accountant

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• Expression of an independent opinion

• On financial statements

• As per ICAI new standards

FORENSIC ACCOUNTING
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• To support legal cases

• Non-CAs permitted
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• Report findings of evidence discovered

• Primarily financials
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• ICAI standards

Basis Statutory Audit Forensic Accounting

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Objective True & Fair picture Discover facts & evidence

Focus An overall review of the books of validate transactions & balances

accounts

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Approach Control tests of transactions & Focused testing to confirm suspicion /

substantive tests of balances allegation

Target Identify material misstatements in Identify / Confirm nature of violation

financial statements

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Skills Testing & checking, analysis, inquiry & Scrutiny & Analysis, Fact – Finding,

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observation

Professional skepticism, due Neutrality

Presumption professional care

Outcome Audit report opinion

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judge
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Basics Other Audit Forensic Accounting

Objectives Opinion on True & Fair Presentation Fraud actually occurred or not

Technique Sample Based In Depth Investigation

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Period Normally for accounting period No such limitation

Verification or Relies on management Independent Verification of

Estimation of representation suspected items
NRV of Assets

Adverse Findings Negative opinion or qualified opinion Legal determination of fraud

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Forensic Professional

● A Forensic Professional analyze, interpret, summarize and

present complex financial issues in understandable manner.

● Forensic Accountants Professional are trained to look beyond the

numbers and deal with the business reality of the situation.

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● A Forensic Professional must initially consider whether his/her

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firm has the necessary skills and experience to accept the work.

● Forensic Accounting is highly specialized, and the work requires

detailed knowledge of fraud investigation techniques and the legal

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● Forensic Professional needs to have an understanding on various

frauds and how evidence need to be collected.

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● Forensic Professional can be engaged in public practice or

employed by insurance companies, banks, police forces, government

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agencies and other organizations.

Forensic Accounting Services: An indicative list of services that can be

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provided by the Professional in this area are as follows:

● Financial Statement manipulations

● Fund diversions/Asset tracing
● Anti-Money laundering
● License Fees/Dues/Tax Evasion
● Related party transactions/valuations

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 ● Valuations/Estimations of loss/damage
● Suspicious transactions under IBC

A Forensic Professional often involved in

● Fraud Detection
● Computer Forensics
● Fraud Prevention

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● Providing Expert Testimony

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PROCESS OF FORENSIC ACCOUNTING
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Each Forensic Accounting assignment is unique. Accordingly, the

procedures performed will be specific to it.

General steps detailed below.

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• Step 1 Initialization

• Step 2 Develop the Plan

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• Step 3 Obtain Relevant Evidence

• Step 4 Perform Analysis

• Step 5 Reporting

• Step 6 Court Proceedings

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Step 1. Initialization

● Clarify and remove all doubts as to the real motive, purpose and
utility of the assignment.
● Meet the client to obtain an understanding of the important facts.
● A conflict check should be carried out as soon as the relevant
parties are established.

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● It is often useful to carry out a preliminary investigation prior to
the development of a detailed plan of actions.

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Step 2. Develop Plan

This plan will take into account the knowledge gained by meeting with

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the client and carrying out the initial investigation and will set out the

objectives to be achieved and the methodology to be utilized to

accomplish them.
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Step 3. Obtain Relevant Evidence

● This may involve locating documents, economic information,

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assets, a person or company, another expert or proof of the

occurrence of an event.

● The evidence should be sufficient to ultimately prove the identity

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of the fraudster(s), the mechanics of the fraud scheme, and the

amount of financial loss suffered.

● It is important that the investigating team is skilled in collecting

evidence that can be used in a court case within the stipulated

time period.

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 ● If any evidence is inconclusive or there are gaps in the chain of

custody, then the evidence may be challenged in court.

● Investigators must be alert to documents being falsified,

damaged or destroyed.

Step 4. Perform the analysis

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The actual analysis will depend upon the nature of the assignment and

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may involve:

• calculating economic damages;

• summarizing a large number of transactions;

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• performing a tracing of assets;

• performing present value calculations

• performing a regression or sensitivity analysis;

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• utilizing a computerized application such as a spreadsheet, database

or computer model, charts and graphics to explain the analysis.

Step 5. Reporting
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● Issuing a report is the final step of forensic accounting.

● Accountant / Investigators will include information detailing the

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fraudulent activity, if any has been found.

● The client will expect a report containing the findings of the

investigation, including a summary of evidence, a conclusion as to

the amount of loss suffered as a result of the fraud and to

identify those involved in fraud.

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 ● The report may include sections on the nature of the assignment.

● The report will include schedules and graphics necessary to

properly support and explain the findings.

● The report will also discuss how the fraudster set up the fraud

scheme.

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● It is also likely that the investigative team will recommend

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improvements to controls within the organization to prevent any

similar frauds occurring in the future.

Step 6. Court proceedings

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The evidence gathered during the investigation will need to be

presented at court, and team members may be called to court to

describe the evidence they have gathered and to explain how the suspect
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was identified.

FORENSIC ACCOUNTING AND INVESTIGATION REPORT The Forensic

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Accounting and Investigation Standard (FAIS or “Standard”) 510 deals

with the responsibility of the Professional to issue a written report to

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the stakeholders at the conclusion of the assignment.

Reporting results is the concluding part of the assignment.

Since one engagement may include multiple assignments,

multiple reports may have to be issued; one for each assignment.

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1. Written Report: The Professional shall issue a written report which

conveys the results of the assignment clearly and accurately. The

findings reported shall be based on evidence gathered which are reliable

and relevant.

2. Report addressee and distribution: The report shall be addressed to

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the Primary Stakeholders and shared with other stakeholder(s) if

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required or otherwise permissible.

3. Format or Content of Report: While no fixed form or content of

the report is mandated by this Standard, the report shall include

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certain key elements to enable the recipient to understand the purpose

of the assignment.

Where the form and content of the report is mandated by the

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stakeholders, or specified by Law, the Professional shall report in line

with those requirements, while keeping in mind the key elements.

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Key Elements of the Report:

● Title, addressee and distribution list (if any)

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● Scope and objectives of the assignment

● Approach and broad work procedures undertaken
● An Executive Summary of the results, covering all important
aspects and the essence of the findings
● Reference to use of an expert, where applicable
● The fact that the assignment has been conducted in accordance
with FAIS, or any material departures therefrom

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 ● List of findings supported by key evidences, sources of
evidences, and other relevant matter;
● Assumptions, limitations and disclaimers of the assignment
● Conclusions

4. Discussion of Draft report:

● Where the mandate of the engagement requires a discussion of

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the findings with the subject party prior to finalization, a

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summary of the responses received from them shall be included

in the report.

● Further, the Principles of Natural Justice requires a discussion of

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the observations with the subject party.

● In some cases, this is done by the Primary Stakeholders through

their own internal processes.

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● Any response received from the discussion shall be included in

the written report issued by the Professional.

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5. Assumptions and Limitations: The Professional shall list any relevant

assumptions made during the assignment having a significant bearing on

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the subject matter.The Professional may encounter limitations that

restrict the methodologies or procedures applied in carrying out the

assignment. These disclaimers would be covered in the report as a key

element of the report.

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The report shall not express an opinion or pass any judgment on the

guilt or innocence.

6. Reporting Timelines: The report shall be issued within reasonable

time frame as per the engagement terms. The Professional may be

required to provide interim reports as per the engagement terms. Such

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interim reports are also subject to this Standard.

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OVERVIEW OF FORENSIC ACCOUNTING AND INVESTIGATION STANDARDS (FAIS)

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The ICAI has recently published a full set of standards in the area of

forensic science.

These are referred to as the “Forensic Accounting and Investigation

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Standards (FAIS for short).

The FAIS are issued to ensure that the ICAI members deliver high

quality output in the area of Forensic Accounting and Investigations.

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The Framework Governing Forensic Accounting and Investigations lays

down the underlying principles and boundaries for undertaking such

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services.

The main objectives of the Framework are to:

1.Provide an overall understanding of Forensic Accounting and

Investigations and its key components;

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2.Outline the manner in which these components come together in an

inter-related cohesive manner when providing such services

3.Maintain and improve the quality of forensic accounting and

investigation services.

4.The Framework establishes the structure which governs the

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professions of Forensic Accounting and Investigations.

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It comprises of four components inherent to the process of forensic

accounting and investigations. These

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components implicitly form part of the FAIS, they all are mandatory in

nature, except the Guidance which is recommendatory.

The four key components (forming the pillars) of the Framework are:
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(i) Basic Principles of Forensic Accounting and Investigations.

(ii) Key Concepts.

(iii) Standards on Forensic Accounting and Investigations.

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(iv) Guidance.

The “FAIS” at a broad level seek to provide:

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(a) The minimum standards for undertaking forensic accounting and

investigation (FAI) assignments;

(b) The Users of FAI services with an indication of the quality of

service that can be expected from such engagements;

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(c) The Regulators and Governmental agencies with an appreciation of

what can be expected from FAI services; and

(d) To everyone, guidance on matters of implementation and related

practical issues.

The Standards are intended to be principle-based, rather than rule

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based, thereby providing ample room for professional judgment.

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If, for any reason, a member is unable to comply with any of the
requirements of the FAIS, or if there is a conflict between the
Standards and other mandates, the FAI report (or such similar

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communication) should draw attention to the material departures
therefrom along with appropriate explanation.
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