preparing auditors in their usage of data analytics …...the characteristics of the caats: high...

A C F E A S I A - P A C I F I C F R A U D C O N F E R E N C E 2 0 1 1

Preparing Auditors In Their Usage of Data Analytics Tool In Fraud

Prevention Program

P r e s e n t e r :

F r a n s i s k u s O e y ( G r o u p M D )

T h e P r o d i g y G r o u p

w w w. p r o d i g y - g r o u p . c o m f r a n s i s k u s @ p r o d i g y - g r o u p . c o m

w w w . p r o d i g y - g r o u p . c o m

Introduction

Fraud is always intentional as contrasted to errors and misrepresentations that are unintentional by chance or

lack of training or skill.


Presentation Agenda

Challenges

Auditors’ New/Value-adding Role

Using CAATs for Audit Vs. Fraud Prevention

The Technology

The Techniques

Conclusion


Challenges


Challenges

a) Different vulnerability at different stages of the business process

b) Differentiating “fraud” transactions Vs. “error” transactions in digital domain of organisation system network

c) Lack of robust, scalable & near real-time preventive tools

d) Implementation steps

e) Automation vs. manual prevention/detection


Auditors’ New / Value-adding Roles


Auditors’ New / Value-adding Roles

Assist in fraud deterrence

Assist in fraud detection

Cost of fraud

Simplified Analytic Capability Model

Growing concerns


Fraud Deterrence

Internal auditor should determine that the:

Company set clear objectives

Company set realistic goals

Company’s Code of Conduct exist and updated

prohibited activities

course of action if violation is found

Continuous Control Monitoring (CCM)

Communication channel to the Management

Constant review for enhancement


Fraud Detection

Fraud indicators

Initial Detection of Occupational Frauds

Source: ACFE – Report To The Nation 2010

http://www.acl.com/products/ccm.aspx


Fraud Detection

Examples of fraud indicators:

Unauthorised transactions

Override of internal controls

Pricing exceptions

Change of lifestyle

Change in behaviour

Motivation of management


Cost of Fraud

Why is it important?

*The sum of percentages

in this chart exceeds

100% because several

cases involved schemes

from more than one

category.




Cost of Fraud

Distribution of Losses




Cost of Fraud

Warren Buffett, CEO, Berkshire Hathaway

If you lose dollars for the firm by bad decisions, I will be understanding. If you lose reputation for the firm, I will be ruthless.


Cost of Fraud

Reputation for integrity is one of the most valuable assets of an organisation

Action plan for detection & prevention control

Prevention is better and cheaper than Investigation

Prevention Detection Investigation

Co

sti

ng


Analytic Capability Model

…in order to increase its relevance and value, as well as secure a “seat at the table” with executive management, audit needs to understand what happened yesterday, provide insight into what is happening in the business today, and understand where the organizational risks may occur tomorrow. In short, audit needs to provide a continuum of hindsight, insight and foresight. Together, these form an internal audit department’s “line of sight.”

Richard Chambers, President, The IIA


Analytic Capability Model

Level 1

Basic

Level 2

Applied

Level 3

Managed

Level 4

Automated

Level 5

Monitoring

Analytic Sophistication

Au

dit

Co

ntr

ibu

tio

n

Hindsight

Insight

Foresight

Ad-hoc Repetitive Continuous

Source: www.acl.com/steps/



Growing Concerns

• Uncertain outlook • Fear of job security

Regional and global economy

• Increase in business risk • Consolidation of resources

Merger and acquisitions

• Inadequate resources with right skill set • Data migration/integration

Advancement in computerised systems

• Regulatory compliance • Public expectations • Protecting shareholders’ interest

Stakeholder expectations and requirements

• Flat or declining budgets • Added workload • Inadequate specialised training and tools

Auditors are already overwhelmed


Growing Concern


Recent economic crisis

Demands for better Corporate Governance by

Governments

General publics

Shareholders

Revenue leakages and errors can become frauds if undetected and not remedied


Growing Concern



Global Issue



Growing Concern

Why is it important? Primary Internal Control Weakness Observed by CFEs





Audit findings may not necessarily be fraud findings

Additional steps and considerations needed:

In-depth understanding of:

1. Business environment

2. Types of fraud schemes

3. Red flags and clues

4. Why employees commit fraud?

5. The technology - tools needed

6. The techniques


(1) Business Environment

Looking at INTERNAL CONTROLS: policies & procedures of the organisation.

People’s INTEGRITY can change, especially when there is OPPORTUNITY for them to commit fraud.

Looking at the different systems that are available in the organisation.


(2) Types of Fraud Schemes

Source: Uniform Occupational Fraud Classification System - ACFE



(3) Red Flags and Clues

Corruption

Is there conflict of interest between the staffs and the customers/vendors/suppliers?

Is there collusion to disadvantage the company between staffs and the customers/vendors/suppliers?

Is the company facing cash flow issues?



Asset Misappropriation

Is there “ghost” employees?

Cash register’s end-of-day balance does not tally with the stock on hand?

Purchases of resources/inventory do not tally with the purchase trend?

Any anomalies in the expense claims?



Fraudulent Statements

Is the revenue recognition timing adhering correctly?

Is management dominated by a single person or a small group?

Has management restricted the auditor's access to documents or personnel?

Has management set unrealistic financial goals?

Has that employee's lifestyle or behaviour changed significantly?


(4) Why Employees Commit Fraud?

- Weak internal controls - Weak system access control

- Others are doing it - Just “borrowing” - I deserve this - For the benefit of the organisation

- Gambling debts - “lifestyle” living - Hitting bonus incentives


(5) The Technology - Tools Needed

CAATs

Computer Aided Audit Tools

Computer Assisted Audit Techniques



The characteristics of the CAATs:

High speed

100% data analysis

Log files

Audit trails

Separate log files for fraud investigation

Read only

Ability to analyse “raw data”

Ability to automate procedures or tests



The characteristics of the CAATs:

Ability to upload materials (documents, pictures, audio, etc) for evidence

Secure knowledgebase retention


(6) The Techniques

CAATTs

Computer Assisted Audit Tools and Techniques

Initiate investigation predication

Prepare for investigation

Identify team members

Build business process flowchart

Apply analytical tests


(6) The Techniques

Initiate investigation predication


(6) The Techniques

Prepare for investigation

Set context or

parameter

(risk-based)

Define indicators of

fraud

Determine the presence of elements that make up the fraud, for each

indicator

Identify the required sources of

information

Obtain the data required for analysis. Ideally it should be original/raw format

data (no conversion)


(6) The Techniques

Identify team members

Internal / external

Fraud investigators

Technical specialists

Business process managers

Corporate lawyers

etc


ORDERING DEPARTMENT

PURCHASE REQUISITION

PURCHASING DEPARTMENT

PURCHASE REQUISITION

$ CHEQUE $ to VENDOR

$ CHEQUE $ to VENDOR

PURCHASE ORDER

ACCOUNTS PAYABLE

PURCHASE ORDER

PURCHASE ORDER

VENDOR

PURCHASE ORDER

RECEIVING DEPARTMENT

INVOICE INVOICE

GOODS GOODS

•Identifies products •Submits requisition to purchasing

•Selects Vendor •Places order

•Delivers goods •Sends Invoice

•Prepares Receiving Report •Distributes goods to Ordering dept.

•Compares Purchase Order to Receiving Report •Pays Vendor

RECEIVING REPORT

RECEIVING REPORT

GOODS GOODS

(6) The Techniques Flowchart: Purchases, Payables & Payment Systems

what, who, where, when and how?


(6) The Techniques Applying Analytical Tests (examples)

Purchases, Payments and Payables

• Duplicate payments • Early repayments • Analyse and age A/P • Correlate vouchers or

invoices posted versus purchase order amounts

• Create activity summary for suppliers with duplicate products

• Extract invoices posted with duplicate purchase order numbers

• Identify credits given before discount terms of payment days

Travel and Entertainment

• Duplicate claims • Dubious claims • Travel claims during period

when staff is on vacation or sick leave

• Running receipts numbers with no “gaps”

• Benford Test on claims • “No cents” on claims amount

Salaries and Payroll

• Compare and summarise costs for special pay, overtime, premium, etc.

• Report entries against authorisation records for new or terminated employees

• Extract all payroll checks where the gross dollar amount exceeds set amount

• Identify duplicate or missing payroll checks by check, bank, etc.

• Summarise payroll distributions for reconciliation to general ledger


(6) The Techniques Applying Analytical Tests

Other useful CAATs commands and functions:

Compare files – to detect changes

Verify command to check for field type mismatch

Analyse internal security logs, file permission, etc

Cross tabulate for trend analysis

Statistics to identify statistical anomalies

Digital analysis of leading digits using Benford’s Law

“SOUNDSLIKE” and “SOUNDEX” functions to identify similar or variation of company or employee names

Gaps testing of missing sequential numbering


(6) The Technique Early Warning Continuous Monitoring System

Data

Transactional Data

Data

Data

Data Data

Data

CONTROL & COMPLIANCE THRESHOLDS

Significant Control Breaches

Suspect Transactions

E-Mail Alerts

Exception Reports

Management/ Audit Committee / Fraud Investigation team

Management Action:

Investigation Recoveries Improved Controls & Procedures


Conclusion


Conclusion

Use the advance features of CAATs

Initiate investigation predication once “red flags” are raised

Build up a fraud team comprising of different skill sets

Build up a fraud plan using business process flowcharts

Access to original data and users access log files

Identify system / data owner

Build an early warning Continuous Monitoring through automation

Create FRAUD AWARENESS culture

Thank you…and happy hunting!

FRANSISKUS OEY ( G R O U P M D ) [email protected]

THE PRODIGY GROUP ( M E M B E R O F T H E A S S U R A N C E G R O U P A S I A P A C I F I C )

[email protected]

WWW.PRODIGY-GROUP.COM WWW.SATORIGROUP.COM.AU WWW.ACL.COM WWW.PENTANA.COM

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