Webinar Series Overview: In today’s world, fraud investigations have become an everyday part of corporate life and the auditor must gain expertise in this area. The 8 part series will cover the tasks of the fraud auditor, Forensic techniques and tools and the abilities required of the fraud auditor, the type and nature of common frauds, investigating fraud, computer fraud and control, white collar crime, the auditor in court. This session Forensic and Investigative Audit Reporting • Types of reporting • Management • Board/Audit committee • Disciplinary action • Litigation support • Criminal process • Follow up and remedial action

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Forensic and Investigative
Audit Reporting
About Jim Kaplan, CIA, CFE
 President and Founder of AuditNet®,
the global resource for auditors (now
available on iOS, Android and
Windows devices)
 Auditor, Web Site Guru,
 Internet for Auditors Pioneer
 Recipient of the IIA’s 2007 Bradford
Cadmus Memorial Award.
 Author of “The Auditor’s Guide to
Internet Resources” 2nd Edition
Page 2

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About Richard Cascarino, MBA,
CIA, CISM, CFE, CRMA
• Principal of Richard Cascarino &
Associates based in Colorado USA
• Over 28 years experience in IT audit
training and consultancy
• Past President of the Institute of
Internal Auditors in South Africa
• Member of ISACA
• Member of Association of Certified
Fraud Examiners
• Author of Data Analytics for Internal
Auditors
3
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Introductions
Page 4

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Today’s Agenda
 Fraud Reporting
 Types of reporting
 Management
 Board/Audit committee
 Disciplinary action
 Litigation support
 Criminal process
 Follow up and remedial action
Page 8

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Fraud Reporting and
Whistle Blowing
Internal Auditor "the eyes and ears of management"
Reporting to legal authorities and media neither required
nor encouraged by IIA
Where such reporting is required by law then IIA requires
compliance
Code of Ethics require loyalty in all matters pertaining to
the operations of the employer except where in conflict
with legal issues
Mandated to report wrongdoings internally as a minimum
State of Virginia has laws protecting Internal Auditors from
firing for whistle-blowing
9
From a US Survey of 8000
Employees
Most employees believe reporting wrongdoing is ethical and morally
right
Most employees who observe wrongdoing do not report it to
anyone
Internal auditors whose job entails reporting are more likely
to report wrongdoing
Employees who observe serious, well-documented, or
frequent wrongdoings are more likely to report it
Employees who observe wrongdoings are more likely to
report when their organization's policies encourage them to
do so
10

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Steps in Deciding to Report
 Did wrongdoing occur?
 Does the wrongdoing require action?
 Am I responsible for acting?
 What actions are available to me?
 Will the benefits of acting outweigh the costs?
 Has previous action proved beneficial to all
parties?
 Was my action effective?
11
Reasons for Non-reporting
 Not sure whom to report it to
 Nothing would be done
 Nothing could be done
 Not enough evidence
 Too risky
 Not my job
 Not important
12

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Reporting
13
 Who makes the decision?
 Under what conditions?
 To whom do they report?
 What are the effects on them personally?
 With management's approval?
Ethical Considerations of
Whistle Blowing
 Who is the client?
Originally management
(IIA Statement of Responsibility 1947)
Now the organisation
(IIA Statement of Responsibility 1981)
As a result of the growth in audit committees
14

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IIA Code of Ethics
II Members, in holding the trust of their
employers, shall exhibit loyalty .... however,
members shall not knowingly be a party to any
illegal or improper activity
V Members shall not use confidential information
for personal gain nor in a manner which would
be detrimental to the welfare of their employer
15
Employer - Employee
Relationship
 Trust
 Loyalty
 Internal Auditors in a privileged situation
 Breach would permanently impair working
relationship
Loss of unrestricted access
Fear and mistrust
16

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Reporting
 Internal Reporting
Is not whistle blowing
Is not a matter of choice
Part of the auditor's duty
Expected by employers
 External Reporting
If no law is broken, there is no obligation to externalize
If there is a legal requirement to report, it is not whistle
blowing
Non-reporting may not be, in itself a crime
Conspiracy to commit, aid, conceal or abet is a crime
Specific authority from employers to externalize is therefore
required
17
Fraud Reporting
Guidelines
All frauds must be reported to employers
Frauds should not be externalized unless authorized
Lawful interests of employers should not be
jeopardized by the audit process
Consult with the company's legal representatives
when unlawful activities become apparent
Audit files should be protected to avoid jeopardizing
the employers lawful business
Internal auditors should not knowingly be a party to
illegal acts
Whether or not the employer agrees to take action
18

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External Auditors
Leaking to external auditors probably falls under improper
activities
No requirement to communicate to external auditors
unless explicitly or implicitly authorized by management
If authorized by management, there must be no active or
passive misleading
If access to internal audit files only approved and no
representations are made about their completeness, there
is no ethical obligation to provide additional information
Internal auditors must not exceed the authorized
boundaries of cooperation
Fundamental judgment not legal but right and wrong
19
Overriding Social Need
Circumstances may eventually necessitate
whistle blowing
Social threats
Health
Safety
Threat to property
Conscience dictates
Report as an individual not as an internal auditor
May have unfortunate results for the whistle
blower
20

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From a US Survey of 8000
Employees
A substantial number, though not a majority, of
employees who report wrongdoing suffer retaliation
of some sort, particularly when the reporting is
externalized
Retaliation is more likely if the wrongdoing is
serious
Internal Auditors suffer retaliation at about the same
rate as other employees, even though they are
mandated to report wrongdoing
21
POLLING QUESTION

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Types of Reporting
 Typical recipients of risk reports/ profiles:
Board
Executive
Committees (Risk/Audit/Finance etc.)
Risk Owners/ Line Managers
Staff
External (Secretariats & Departments, Public)
Government Recovery Board
23
After establishing ‘Likelihood’ and
‘Consequence’ you can use a table like this to
set a level of risk.
Extreme Very high Moderate Low Negligible
Almost
certain
Severe Severe High Major Moderate
Likely Severe High Major Significant Moderate
Moderate High Major Significant Moderate Low
Unlikely Major Significant Moderate Low Very low
Rare Significant Moderate Low Very low Very Low
You must define what these risk levels mean to you in
terms of the Risk Appetite
You must define what these risk levels mean to you in
terms of the Risk Appetite
Board Reporting against Risk
Appetite
24

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Risks facing Management
Externally Driven
Internally Driven
Regulated
Rate
Decreases
Power prices /
Supplier of Last
Resort
RTO
Evolution
Post Merger
Integration
Increasing
customer
expectation
Evolving Technology / Alternatives
(e.g. micro generation)
Aging System
Load / Demand
Forecasting
System Reliability
Crew Productivity
Labor Contracts
Weather / Storms
Workers’ Comp
3rd Party
System Damage
Safety
Vehicular
Liability / Loss
Terrorism
Property
Damage /
Medical Liability
Interest
Rate
Fluctuation
Foreign
Currency
Exposure
Value Creation
from M&A
Information Systems
New Legislation
& Regulations
Enron Fall-Out
Liquidity /
Cash Mgt.
Working
Capital Mgt.
Credit Rating
Environmental
Damage
New
Ventures
CAPEX Over /
Under Investment
Major Facility Damage
(fire, earthquake)
Arrival of new
competitors
Impact of newly
de-regulated markets
Political risks
Cost control
Trading Risks
Industry margin squeeze
Strategic
Commercial and
Operational
Financial
Hazard Related
Oil price hike
PR / public
support
Infrastructure
economics
Supply base
risk
25
Evaluate Fraud Risks to Risk
Appetite/Tolerance
Scales for Tolerance
Very Low Tolerance – Management is not willing to
accept more than a nominal level of fraud risk. Adverse
fraud risks are intolerable whatever benefits the activity will
bring and risk reduction measures are essential – whatever
their cost.
Moderate Tolerance – Management will accept a
moderate level of fraud risk. Costs and benefits are taken
into account and opportunities balanced against potential
adverse consequences.
Extremely High Tolerance – Management will accept an
extremely high level of fraud risk. Negative fraud risks are
negligible or so small that no risk treatment measures are
needed.
26

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Evaluate Risks Against
Risk Tolerances
27
Impact Likelihood Tolerance Analysis
1 Industry 6.6 4.0 Moderate • Industry changes would have moderate to high impact as the
Company’s product may have to undergo significant changes.
• Technological changes are inherent with industry, hence ABC
Company’s likelihood and tolerance are both moderate
8 Brand
Equity
7.4 4.0 Low • Protecting ABC Company’s brand is paramount for future
growth and success; hence high impact and low tolerance.
• High quality assurance and ongoing R&D result in low
likelihood
12 Product
Failure
7.8 3.8 Low • High quality products and performance are very important to
the ABC Company; hence high impact and low tolerance.
• Company’s strong quality control helps keep likelihood low
(good audit candidate)
23 Legal &
Regulatory
6.6 3.4 Low • Changes in legal and regulations could have a moderately high
impact on the company
• As these changes are infrequent, ABC Company is successful
in managing these changes to low tolerance level
25 Health &
Safety
6.4 3.2 Low • Considering the high value placed on employees, Company
has a low tolerance to health & safety risks which could have a
moderate impact
• The Company has an effective health & safety program, which
has helped the likelihood of this risk remain low
Treat Fraud Risks
28
Accept
Reduce
Transfer
Avoid
Not CoreCore
Not
Manage
ManageConsistentExceedsHigh
Far
Exceeds
Choices
Risk to Company
Strategy
Management
Believes It Can
Effectively
Risk Impact to Company Tolerance

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POLLING QUESTION
Audit Committee Reporting
 Reporting on the results of Management’s
annual review of the effectiveness of internal
control
 Provision of periodic monitoring reports on the
high-level (and other significant) risks
 Auditing to ensure that ‘early warning
indicators’ are in place where appropriate
 Following-up on management assurances on
mitigating controls, further actions and residual
risks
30

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Audit Committee Reporting
 Ensuring that all corporate objectives are
adequately mapped against risks and the
audit plan
 Ensuring that there is a process in place to
identify new or emerging risks from an audit
perspective
 Challenging the acceptability and treatment
of residual risks
 Ensuring that ‘further actions’ identified in
the risk management process are actually
undertaken
31
Board /Audit Committee
Reporting
 Reviews of
Accounting and financial internal and
fraud/embezzlement related controls and processes
Risk assessment and management
Possible entity and individual liability and reputation risk
exposure
Compliance assessment and management relating to
laws, regulations, and rules
Page 32

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Audit Committees and
Whistleblowing
 The AC should review arrangements by which
staff of the company may, in confidence, raise
concerns about possible improprieties in matters
of financial reporting or other matters. The AC’s
objective should be to ensure that arrangements
are in place for the independent investigation of
such matters and for appropriate follow up action.
(Revised Singapore Code, Guideline 11.7)
33
REPORT FRAUD, WASTE & ABUSE
One of the core missions of the Recovery Board is to prevent fraud, waste, and mismanagement
of Recovery funds. Recovery.gov gives you the ability to find Recovery projects in your own
neighborhood and if you suspect fraudulent actions related to the project you can report those
concerns in several ways:
Submit a Complaint Form electronically
Call the Recovery Board Fraud Hotline: 1-877-392-3375 (1-877-FWA-DESK)
Fax the Recovery Board: 1-877-329-3922 (1-877-FAX-FWA2)
Write the Recovery Board:
Recovery Accountability and Transparency Board
Attention: Hotline Operators
P.O. Box 27545
Washington, D.C. 20038-7958
The Recovery Board is committed to helping ensure these funds are spent properly, but we
cannot do it without your help. Additionally, the Recovery Act provides protections for certain
individuals (whistleblowers) who make specific disclosures about uses of Recovery Act funds.
Source: Recovery.gov
Recovery Board

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POLLING QUESTION
The Purpose of Employee
Discipline
 Eliminate inappropriate behavior
 Create a "win-win" situation for manager and
subordinates
 Not to exercise vengeance or eliminate a
problematic employee
36

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The Purpose of Employee
Discipline
 Neglecting discipline has consequences:
Negative effect on productivity and morale
Difficulty in enforcing long-ignored standards later on
 Disciplinary Process - A step-by-step method of
dealing with performance problems in employees.
37
Organizational Policy and
Procedure
 Policy and Procedure (P&P)
A written standard used within an organization to
describe what is to be done and how to do it.
Usually policies and procedures are written for
tasks that are done repeatedly and by more than
one individual.
38

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Organizational Policy and
Procedure
 Importance of a written disciplinary policy and
procedure
Protects manager and organization
Guarantees rights of employee
Teaches manager how to discipline employees
39
Organizational Policy and
Procedure
 Components of policies and procedures
Policy Statement
The component of a P&P that states what is to be
done.
Progressive Discipline - A disciplinary process
characterized by the use of more drastic penalties for
each repeated instance of poor performance.
40

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Organizational Policy and
Procedure – Components
 Purpose
Statement of Purpose - Part of a P&P that explains
rationale for a policy and may include how the policy
relates to an organization’s philosophy.
 Scope
An optional component of the policy section of a P&P that
lists the individuals or groups impacted by the policy.
41
Organizational Policy and
Procedure – Components
 Procedure - usually has a minimum of 4
steps:
Verbal warning
Written warning
Suspension
Termination
42

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Organizational Policy and
Procedure – Components
 Procedure
Disciplinary Action - The activity performed by
a manager when implementing a step in
progressive discipline in order to assist an
employee to correct a behavioral or performance
problem.
43
The Disciplinary Process
 Verbal Warning
The first step in employee discipline, which includes
identification of the problem and information sharing
between the manager and the employee.
Manager:
Meets with employee
States problem that has been identified
Listens to employee's perspective
Discusses potential solutions with employee
Ends on a positive, hopeful note
44

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The Disciplinary Process
 Verbal warning
If employee is unaware of a policy they are
violating, they should be coached instead of
disciplined
Prior to a verbal warning, manager must become
aware of the problem and verify it exists
45
The Disciplinary Process
 Written Warning
The second, more formal, step in employee
discipline, which includes stating the problem and
noting repetition over time.
Includes:
Meeting similar to verbal warning
Placement of formal document in the employee's file
46

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The Disciplinary Process
 Suspension
The third step in the employee disciplinary
process, in which the employee is given time off,
usually without pay, to demonstrate the
seriousness of the problem.
Manager meets with employee as before, and
review formal documentation of suspension.
47
The Disciplinary Process
 Termination
The final action in the employee disciplinary
process, which leads to the end of employment
and that results after repeated failure of the
employee to correct the problem.
48

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The Disciplinary Process
 Special circumstances
Certain events such as fraud may result in
termination without progressive discipline
Before immediate termination, manager should
consider:
Magnitude of problem behavior
Prior record of employee
49
POLLING QUESTION

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The Fraud Auditor in Court
 Evidence collected will be
disputed for three reasons:
 Legality of the acquisition of the
evidence
 Integrity of the evidence
 Interpretation of the evidence
Evidentiary Considerations
 Preserving and Protecting Evidence
 documents – paper and electronic
 physical – i.e., core sample
 chain of custody/illegal search issues
 Interviewing Witnesses
 false imprisonment issues
 self-incrimination issues
 union contract issues
 Maintain Confidentiality – “Need to
know.”
 Let the “Pros” Handle It

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Definition of Forensic
Accounting Litigation Service
53
Forensic accounting litigation services are the
professional assistance accountants provide related
to the litigation process.
These services may involve accounting, financial,
auditing, tax, quantitative analysis, and investigative
and research skills, as well as an understanding of
the legal process to provide assistance for actual,
pending, or potential legal or regulatory proceedings
before a trial of fact in connection with the resolution
of a dispute between parties.
Definition of Forensic
Accounting Litigation Service
54
“Briefly, forensic accounting is a science that deals with
the relation and application of facts to business and
social problems.” Lenny smiled and turned toward the
jury. “As I tell my students, a forensic accountant is like
the Columbo or Quincy character of yesteryear, except
he uses accounting records and facts to uncover fraud,
missing assets, insiders’ trading, and other white-collar
crimes.” Lenny turned back to the pinstriped lawyer.
I.W. Collett & M. Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters, p. 76

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Six Areas of Litigation Services
55
1. Damages
 Lost profits
 Lost value
 Lost cash flow
 Lost revenue
 Extra cost
 Mitigation
 Personal Injury
 Environmental
2. Antitrust Analysis
 Price-fixing
 Market share, market
definition
 Pricing below cost
 Dumping and other price
distribution
 Anti-competition actions
 Monopolization
3. Accounting
 CPA malpractice
 Bankruptcy/
reorganization
 Tracing
 Contract cost and claims
 Regulated industries
 Frauds (civil and
criminal)
 Historical analyses
 Family law
Source: Management Advisory Services Technical Consulting Practice Aid 7: Litigation Services, (AICPA, 1986);
http://www.aicpa.org/innovation/fp/overview_litigat_disput.htm
Six Areas of Litigation Services
56
4. Valuation
 Business and professional
practices
 Pension
 Intangibles/intelligent
property
 Property
5. General Consulting
 Arbitration
 Mediation
 Actuarial analyses
 Statistical analyses
 Projections
 Industrial engineering
 Market analyses
 Computer consulting
 Industry practices
 Merger/acquisitions
 Document management
6. Analyses
 Tax bases
 Cost allocations
 Tax treatment of specific
transactions
Source: Management Advisory Services Technical Consulting Practice Aid 7: Litigation Services, (AICPA, 1986);
http://www.aicpa.org/innovation/fp/overview_litigat_disput.htm

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Ten Commandments of Demonstrative
Evidence
57
1. Keep it Simple
2. Use Graphics with Every Witness (show & tell)
3. (memory increases 700%)
4. Improve Interest Through Variety
5. Test Your Charts with Those Unfamiliar with the Dispute
6. Use Only Properly-scaled and Labeled Color Charts
7. Use Word Charts Rarely
8. Remember the Seriousness of the Setting
9. Charts Improve the Entire Process
10. Keep Up with Technology
11. Get Help
Fulcrum Inquiry, "The Ten Commandments of Demonstrative Evidence in Litigation."
Ten Commandments for
Depositions
58
 Always tell the truth, but answer only the question asked.
 Think before answering.
 Never answer a question you do not understand.
 Do not guess or speculate.
 Do not bring notes, diagrams, books, or other written material to the deposition
unless a subpoena or your attorney requires you to do so.
 Listen carefully to each objection made by your lawyer.
 Do not argue or become angry or hostile with the examining attorney.
 Even if a question calls for a yes or no answer, ask to explain your response if
you feel a qualification or explanation is required to complete your answer.
 Beware of questions which involve absolutes.
 Do not memorize your answers before the deposition.
Source: B.P. Brinig, “The Art of Testifying,” in Handbook of Financial Planning for Divorce and Separation, John Wiley, 1990.

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POLLING QUESTION
Report Follow-up and Remedial
Action
Page 60
 Response may be to:
 Accept the advice or recommendations
 Auditor must follow-up to ensure promised action is taken
 Reject the advice or recommendations
 Auditor must ascertain that top management has assumed the risk
of non-action
 No further follow-up is required
 Management's decision - not audit's
 Can be a major cause of auditor frustration
 The audit committee can help

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The Internal Audit Process
 The Nine Steps
 Selection of the Auditee
 Audit Preparation
 Preliminary Survey of Operations
 Internal Control Description and
Analysis
 Expanded Tests of Control Systems
 Develop Findings and
Recommendations
 Reporting
 Follow-up
 Audit Evaluation
Remember
61
POLLING QUESTION

32. 11/6/2017
32
Questions?
Any Questions?
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Thank You!
Jim Kaplan
AuditNet® LLC
1-800-385-1625
Email:info@auditnet.org
www.auditnet.org
Richard Cascarino & Associates
Cell: +1 970 819 7963 - South Africa +27 (0)78 980 7685
Tel +1 303 747 6087 (Skype Worldwide)
Tel: +1 970 367 5429
eMail: rcasc@rcascarino.com
Web: http://www.rcascarino.com
Skype: Richard.Cascarino
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