(2) The Forensic Accountant
The forensic accountant’s (FA) objective is more complicated and requires a more detailed examination of the audit trail. Usually, the FA is tasked to determine the modus operandi used in perpetuating a fraud by establishing the accounting manipulations performed. In addition, he should be able to ascertain the aggregate amount that was misappropriated.
The primary purpose of his examination is to present evidence in court by showing the general ledger accounts that were affected and the entries used in order to manipulate the transactions.
We will still use our previous example about the validation of the sales entries. For this purpose, however, the FA will trace the validity of the sales transactions by validating information against batch controls for all products sold in a particular day. In this case, the entries affect the inventory account and the cost of goods sold.
Supposing that in one of the batch controls for inventory, the aggregate amount for inventory reduction was larger than the total sales recorded for the day. This denotes that there were stocks withdrawn and sold but have no corresponding sales entry, either as COD or sales on credit. Perceive that the norm would be a higher amount of sales over inventory reduction, inasmuch as sales comprise cost of goods plus price mark-ups.
The FA therefore will perform a detailed investigation of the entries that have reduced the inventory by tracking down each data input that was processed. His goal would be to determine the following:
(a) The point in time during the day that a sold product was not captured as a sales transaction in order to establish a pattern. Is the manipulation being done during peak or lean hours?
(b) The person responsible for the infraction and others who may have had a direct responsibility in allowing the manipulation to happen. This is to ascertain if there is connivance or lack of supervisory controls implemented.
(c) In verifying the audit trail of the transaction, the forensic accountant should have an idea of the data to look for. To illustrate by way of example, supposing that $2,000 worth of electronic appliances reduced the present inventory level but there was no corresponding sales transaction that would match the said item.
Roughly, if the selling price of the item is $2,500, the computer should have recognized the following related data entries:
Increase in Cash or Accounts Receivable - $2,500 (Dr.) – No Data Available
Increase in Sales - $2,500 (Cr.) - No Data Available
- Increase in Cost of Goods Sold - $2,000 (Dr)
- Decrease in Purchases Inventory - $2,000 (Cr.)
Cost to Sales Variance (Gross Profit) $500 - No Data Available
In lieu of the missing data and through a process of elimination, the forensic accountant found two undocumented and therefore unauthorized transactions that were used to balance the general ledger account:
- Decrease in Accounts Payable - $2,000 (Dr)
- Increase in Purchase Returns - $2,000 (Cr)
The FA now has a lead about which accounts are being manipulated as far as the missing sales entries are concerned. The trace-back procedure, however, has to delve deeper in order to determine the method used to cover up for the accounts payable. One way of validating these entries is to send out confirmation letters to the suppliers.
This also denotes that the perpetrator has unauthorized access to the accounts payable module or he is in connivance with the person in charge of that module. Hence, the forensic accountant can hasten the investigations by interviewing the users as a means to determine the extent of their participation and the total amount involved.
Inasmuch as the above explanations provide insights into how an audit trail is used by different types of audit examiners, business owners, managers and even resident control officers will have formed a new perspective in scrutinizing the different sets of data generated by a computerized business system.