DATA MINING

&
FORENSIC AUDIT
By
Dhruv Seth
ds@sethspro.com | www.sethspro.com

CONTENT
Data Mining
Methods of doing
Difference with standard auditing
Benefits and Risks
Patterns in data
Utilisation in different audits

Forensic Audit
What is a fraud
Profile of a fraudster
Tools available in excel
Theorems

A PROBLEM
A large retail chain doing substantially
well
had
Dismal diaper sale ; Excellent Beer
sale

SOLUTION
Place them together !

WHICH IS SUSPICIOUS ?
User 1: Login Click on Product #8473
Click on Product #157 Click on Product
#102 Complete Purchase

User 2: Failed Login Request Password

Direct Link to Product #821 Change
Shipping Address Complete Purchase

Data Mining

Computer
Expertise

WHAT IS DATA MINING

Data
Informatio
n

IDENTIFYING SUSPICIOUS
TRANSACTIONS
Computer
Behavioral
Mouse Dynamics
Typing Speed
Previous Navigation
Habits
Entry & Exit points
on website

Smartphone
Analytics
Screen Pressure
Angle of usage of
phone
Movement across
screen
Heart Rate

DATA MINING - VALUE ADDITION

What was my total revenue in the last five
years?
TO
What were sales in UP last March? Drill down to
Kanpur
TO
Whats likely to happen to Kanpur sales next
month? Why?

DATA MINING - METHODS

Association
Sequence or path analysis
Classification
Clustering
Prediction

DATA MINING - TECHNIQUES

Artificial neural networks
Decision trees
The

nearest

method

neighbour

DATA MINING

V.

REGULAR AUDIT

Labor Verification
Regular Audit
1. Contracted rate =
Billing rate
2.
The billing is
relevant
to
the
audit period.
3. Statutory
Compliances

Data Mining
1.Contracted rate = Billing rate
2. Employee Pay grade wise
payment
3. Mapping resignation to Last
Pay
4. Mapping computer / biometric
logins
after resignation /
termination
5. Overtime Analysis to
determine

DATA MINING - STEPS

Business Understanding
Data Understanding
Data Preparation
Data Modelling
Evaluation
Deployment

DATA MINING WHY

INTEGRATE
Transaction Volume
Mitigate Inherent Risk
Value addition to the client
Cost Effective

DATA MINING BENEFITS

Remove Sampling risk 100% coverage

Decrease in Audit costs

Provide Real time audit opinions
Establish
accuracy

Completeness

and

DATA MINING SOFTWARE

TYPES
Generalized Software
Specialized Software

DATA MINING SOFTWARE

TYPES
Characteristics

Generalis Specialis
ed
ed

Batch Processing

No

Yes

Support entire audit

procedures
User friendly

No

Yes

Yes

No

Require technical skill

No

Yes

Automated

No

Yes

Capable of learning

No

Yes

Lower

Higher

Cost

DATA MINING RISKS

First year costs might be higher
Strong understanding of operations
Availability
format

of

data

Risk of Control totals

in

desired

DATA MINING PATTERNS

Numeric Patterns
Time Patterns
Name Patterns
Geographical Patterns
Relationship Patterns
Textual Patterns

DATA MINING INTERNAL

AUDITS

Purchases

Vendors and accounts payable

Employees and payroll
Expense reimbursement
Credit Card utilisation
Sales & Debtors
Inventory
Commission Payouts

DATA MINING INTERNAL

AUDITS

PURCHASES
Round number transactions
Duplicate transactions
Same, Same, Different Test
Above average payments
Transactions exceeding PO quantity
Sequential Invoice numbers
Too many invoices beginning with 9

DATA MINING INTERNAL

AUDITS
CREDITORS

Those with high percentage of returns

Those with rapid increasing purchases
Small denomination but quick frequency
SOD for vendor approver and purchaser

DATA MINING INTERNAL

AUDITS
PAYMENT TREND ANALYSIS
By the day of week

By the day of Month

DATA MINING EXPENSES

DATA MINING INTERNAL

AUDITS
VENDORS MASTER

Analysis of Vendors master for creation

date
Identifying regular prompt vendor
payment
Cross reference vendors to employees
Same, Same and Different test

DATA MINING INTERNAL

AUDITS
EMPLOYEES AND PAYROLL

Regularly working overtime

Not taking leaves
Satisfied with unjustified salary deduction
Segregating employees with salary in cash
Biometric analysis First to enter / last to
leave

DATA MINING INTERNAL

AUDITS
TRAVEL EXPENSES
Identify weekend or holiday travel
Search for same or similar claims
Identify costs outside of policy or costly late
bookings
Identify conveyance claim made for the same
time period as car rental or other transportation
Compare mileage claims to distances reported
Instances where employee has refunded a first
class ticket for an economy, but not reimbursed
the balance back to the company.

DATA MINING INTERNAL

AUDITS
SALES & DEBTORS
Comparing Invoice to Shipping
Conversely comparing Shipping to Invoice
Preference in sale to a particular customer
Same, Same, Different test to sale price
Debtors
Lapping
Old outstanding invoices

DATA MINING INTERNAL

AUDITS
INVENTORY
Determining slow moving inventory
Determining quick moving inventory
Purchasing frequency of a particular product
Mapping stock valuation to last sale price

DATA MINING BANKS

Transactions a customer does before shifting?
(to prevent attrition)
Profile of an ATM customer and what type of
products is he likely to buy? (to cross sell)
Patterns in credit transactions lead to fraud?
(to detect and deter fraud)
Traits of a high-risk borrower? (to prevent
defaults, bad loans, and improve screening)

DATA MINING BANKS

Duplicate Customer id
DP Limit = Limit = Outstanding
Comparing Unsecured and secured within
scheme
Rate of Interest being applied
Last Credit amount and Date
Same PAN Different Customer id
Last Stock statement summary

DATA MINING BEHAVIOR

Rubbing Nose
Frequent blinking
Moving or Tapping feet
Crossing Arms
Clearing throat
Pinched eyebrows
Smirk

FORENSIC AUDIT

REPORT TO THE NATION

Each organization loses 5% of their REVENUE to
fraud
Asset Misappropriation is the biggest factor
Fraud are generally NOT discovered for 18
months
Higher the fraud perpetrator BIGGER the fraud
58% organizations NEVER recovered anything

FRAUD DETECTION

BANK FRAUDS 9 MONTHS FY

2014-15

Name

Number of
Cases
PNB
123
CBI
174
SBI
474
Syndicate
114
OBC
86
BOB
--IDBI
--UCO
--United Bank
--TOTAL

Amount

2036,00,00,000
1736,00,00,000
1327,00,00,000
749,00,00,000
719,00,00,000
597,00,00,000
507,00,00,000
424,00,00,000
376,00,00,000
7542,00,00,000

WHAT IS FRAUD ?
Afalserepresentationofamatteroffact
whetherbywordsorbyconduct,
byfalseormisleadingallegations,or
By
concealmentofwhatshouldhave
disclosed

been

thatdeceivesandisintendedtodeceiveanother

sothattheindividual willact upon it to her or his

legal injury.

FRAUD TRIANGLE

WHAT IS FORENSIC AUDIT

The use of accounting skills;
To investigate frauds / embezzlement
and
To analyze financial information

For use in legal proceedings

FORENSIC VIS--VIS
STATUTORY
Forensic
Statutory
Very focused and micro approach Macro approach with wide
coverage
Examines Reliability of

Relies on Documentary

documentation

evidences

Not compulsory

Regulatory compliance

Establishing existence of fraud

Ensuring True and fair view

Determining the quantum of loss Verifying correct representations

Gathering evidences

Evaluating Internal Controls

GHOST EMPLOYEES

NEED FOR LEARNING THE

TRAITS

Why frauds go unnoticed during stat

audit extremely intelligent
Conversant with internal systems
Technology savvy
Aware of stale audit procedures

FRAUDSTERS PROFILE
Flamboyant lifestyle
Very aggressive in his approach / targets
Over protectiveness of data / documents
Being the first one in and last one out
Unusual close association with vendor /
customers

FRAUDSTERS PROFILE

FRAUDSTERS PROFILE

FORENSIC AUDITOR
Criminology
Investigativ
e Auditing

Accounting

Law

Forensic
Accountant

Computer
Science

TRAITS OF A FORENSIC
AUDITOR

Think out of the box

Distrust the obvious

Develop cognitive dissonance
Test of absurdity

TEST OF ABSURDITY

Think of events which may be possible

but not probable.

TOOLS AVAILABLE IN EXCEL

Analyze round number transactions
Duplicate detection
Same, Same and different tests
Above average payments to vendors

TOOLS AVAILABLE IN EXCEL

Gap detection
Automated sampling
MATCH function
Employee Vendor match

SPECIAL MENTION TIME &

SPACE

Establish transactions in quick

successions which take a substantial

time in happening

Storage in excess of the possible

space

SPECIAL MENTION RSF

Ratio of Largest number to the
second largest number in the set
RSF = Largest Number / 2nd Largest
RSF greater than 10 highlights
probability of fraud / error

SPECIAL MENTION RSF

Types of errors / frauds it can unearth
Data Entry mistakes
Fat Finger errors
Wrong coding with masters
Capital Asset written off in expense
Excess payments in payroll

SPECIAL MENTION
BENFORDS LAW

Formulated by Simon Newcomb in 1881 ;

further researched by Frank Benford in

1938
U.S. accepts Benfords law as an evidence
Statistical tool which can be applied to

normal audits also to automate samples

SPECIAL MENTION
BENFORDS LAW

SPECIAL MENTION MSCORE

Theory propounded by Prof. Beneish

Stipulates the accuracy of financial
statements based on certain ratios
Ratios such as
Sales to receivables and Sales Growth
Index
Gross margin Index
Asset Quality Index
Depreciation Index

SPECIAL MENTION MSCORE

Financial statements score >-2.22 is

considered as fudging
Statistically proven to have 76%
accuracy
Model being adopted by Income Tax
Department for CASS

EXCEL LIMITATIONS
Absence of Log
Not admissible in court
Involves slight complexity in applying
Data size limitation / Instability
Risk of Hidden data

THANK YOU !
By
Dhruv Seth
ds@sethspro.com | www.sethspro.com