Orlyne Mhay D.

Dacanay Chapter 10: Fraud and Forensic Auditing

Conducting the Forensic Investigation

Steps: 1. Developing the Fraud Theory 2. Gathering Evidence 3. Interviewing 4. Invigilation 5. Indirect Methods of Proof Developing the Fraud Theory A forensic auditor normally has no prior knowledge about the company to be audited and so the first order of business is to be familiar with business or company. A forensic audit begins from simple suspicion. The three elements of the Fraud Triangle must be identified to go about the forensic investigation. These are: Opportunity- most important piece for without it fraud cannot occur - addresses the question on who has the chance to do it Pressure who might be under financial pressure Rationalization who might be prone to rationalizing or justifying a theft Once the forensic auditor has been able to identify possible perpetrators of fraud (suspects), the next step is to formulate an educated assumption or working hypothesis. Gathering Evidence Gathering evidence requires careful planning & execution of a plan. This should be done since evidence is the foundation of the Legal case against the perpetrator. There should be no tainting of evidence otherwise it would not be admissible in court or it would have no worth. Rules of Evidence requires that the a strict chain of custody or a written log of evidence be kept and maintained. Freezing the Audit Logs means making an immediate copy as evidence to ensure that a clear record exists when the investigation begins. Four Amendment Rights addressees the issue on alienation of private property. When seizing or investigating on the computer of a suspected fraudster which is on company premisses, doing so without a search warrant would not violate the law on search and seizure. But in cases when the computer to be investigated is located at the suspected fraudsters home, the search would require a search warrant.

Custody Form The Custody Form is subpoenaed by the court. The investigator must be able to explain where the evidence was at any time, why it changed hands, who authorized the change in custody, and what type of procedures were performed on the evidence. Techniques to Gather Evidence The following are the techniques to gather evidence: Interviewing When interviewing the forensic auditor must know who to interview in the company who may include someone suspected of fraud or someone in connection with it. The value of a "tip" must not be underestimated since 80% of all frauds are discovered through tips. Proper skills are required of an interviewer who should project a non threatening image. When the interviewees are more relaxed, they are more likely to let their guard down. An icebreaker is a good way to proceed. When interviewing, the interviewer must have a planned list of question which should be asked with finesse and patience. Verbal & Non-Verbal Cues must be appropriately observed like breaking eye contact, shifting body positions, crossing and recrossing arms and legs and removing eyeglasses. Also interesting characteristics of dishonesty must be noted. Invigilation Involves the following steps: 1. Impose Strict Internal Controls for a period of time 2. Compare, What's Different? Indirect Methods of Proof This is another easy way to gather evidence which may include: a. Looking at Financial Profile includes looking at assets, debts salary and other revenue sources, and expenses and expenditures. b. Looking at Individual Lifestyle When an employee is a marginal income earner but is able to spend beyond his means like being able to afford an expensive car, take expensive vacations and wear expensive clothes and jewelry or own an expensive home, a forensic auditor may consider such employee as a possible fraudster. But such is by far not yet conclusive since there may be legitimate reasons why such employee can afford such lifestyle.