What is Forensic Accounting?

What is Forensic Accounting?
An orderly analysis, investigation, inquiry, test, inspection, or examination along a “paper trail” in the search for fraud, embezzlement, or hidden assets

Two parts:
Investigative accounting
Litigation support
Treats all figures as suspect until proven otherwise





The Fraud Triangle
Rationalization ----- Motive ----- Opportunity

The Need for Forensic Accountants
Fraud is something the internal or external auditors were supposed to guard against through their periodic audits. Now that auditors can only check  for the compliance of a company’s books to generally  accepted accounting principles, auditing standards, and company policies, a new category of accounting  was needed to detect the fraud in companies that suspected fraudulent transactions

Forensic Accounting

The Services a Forensic Accountant Provides
  Investigating and analyzing financial evidence.
  Developing computerized applications to assist in the analysis and presentation of financial evidence.
  Communicating their findings in the form of reports, exhibits and collections of documents.
  Assisting in legal proceedings, including testifying in courts, as an expert witness and preparing visual aids to support trial evidence.

Investigative Accounts
Often associated with investigations of criminal 
matters. For eg: A typical investigative accounting assignment  would be an investigation of employee theft. 

 Review of the factual situation and provision of 
   suggestions regarding possible courses of action.
 Assistance with the protection and recovery of assets.
 Co-ordination of other experts

Litigation Support
Provides assistance of an accounting nature in a matter involving existing or pending litigation.  It deals primarily with issues related to the quantification of economic damages. 

 Assistance in obtaining documentation necessary to support
 or refute a claim.
 Review of the relevant documentation to form an initial 
 assessment of the case and identify areas of loss.
 Assistance with settlement discussions and negotiations.


Functions Of Forensic Accountant
Criminal Investigations
 Shareholders' and Partnership Disputes 
 Professional Negligence
 Business Economic Losses

Typical Approach To An Assignment
 Meet with the client
 Perform a conflict check
 Perform an initial investigation
 Develop an action plan
 Obtain the relevant evidence
 Perform the analysis
 Prepare the report

The need for niche consulting
Niche consulting refers to the need to specialize.
The need for niche consulting has become imperative because:
 Recent corporate accounting scandals
 Outcry for transparency and honesty in reporting 
 Fast based development in business 

Characteristics to be possessed by forensic accountant
Curiosity
 Persistence
 Creativity
 Discretion
 Confidence
 Sound professional judgment

Courses available in India
Post Graduate Diploma in Forensic Accounting
 Certificate Course in Forensic Accounting Profession
 Certified Anti-Money laundering Expert
 Certified Bank Forensic Accounting
 Certified Vigilance and Investigation Expert

Conclusion
Forensic accounting has come into the lime light due to following reasons:
-- rapid increase in frauds and white collar crime
-- belief that law enforcement agencies have insufficient                          expertise
Forensic accounting, in fact, integrates accounting, auditing, and investigative skills to conduct an examination into a company’s financial statements.

While the forensic accounting and auditing practice had commenced in the US as early as 1995, the seed of this specialization has yet to take off in India.

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Income Tax Basics in Common Language

Income Tax – Basics in Common Language

1. What is Income Tax?
It is a tax imposed by the Government of India on anybody who earns income in India. This tax is levied on the strength of an Act called Income tax Act which was passed by the Parliament of India.




2. What do you mean by income earned in India?
Income earned in India is not limited to income earned within the geographical limits or boundaries of the country. Certain incomes are also deemed to have been earned in India although they may have been earned outside the country.

3. Who administers the Income-Tax Act?
The job of monitoring the Income-tax collection by the government is entrusted to a Department called Income-Tax. This department functions under the Department of Revenue, Ministry of Finance, and Government of India.

4. What is the period for which a person’s income is taken into account for purpose of Income tax?
Income earned in the twelve months contained in the period from 1st April to 31st March (commonly called Financial Year [FY]) is taken into account for purposes of calculating Income Tax. Under the income tax Act this period is called a previous year.

5. What is an Assessment Year?
It is the twelve-month period 1st April to 31st March immediately following the previous year [refer answer-4]. In the Assessment year a person files his return for the income earned in the previous year. For example for FY: 2013-14 the AY is 2014-15.

6. Who is supposed to pay Income Tax?
Any Individual or group of Individual or artificial bodies who/which have earned income during the previous years are required to pay Income tax on it. The IT Act recognizes the earners of income under seven (7) categories. Each category is called a Status. These are Individuals, Hindu Undivided Family [HUF], Association of Persons [AOP], Body of individuals [BOI], Firms, Companies, Local authority, Artificial juridical person. When Companies pay taxes under the Income tax Act it is called Corporate tax.

7. Is Income tax Act applicable only to residents?
No, The Income tax Act applies to all persons who earn income in India, whether they are resident or non-resident.

8. Who is a resident?
If an individual stays in India for 182 days or more in a year, he is treated as resident in that year regardless of his citizenship. If the stay is less than 182 days he is a non-resident.

9. How can I know whether a company is resident or non-resident?
A company is considered as resident if it is incorporated under the Indian Companies Act. A foreign company can also become a resident if the control and management of its affairs is done entirely in India during the previous year.

10. How is resident/ non-resident status relevant for levy of income tax?
In case of resident individuals and companies, their global income is taxable in India. However non-residents have to pay tax only on the income earned in India or from a source/activity in India.

11. I am an Indian scientist, who had gone abroad on a government project. Should my return of income include income earned/received abroad?
It depends on your residential status. If you are a resident all incomes earned globally are taxable. Therefore the same needs to be included in the return. However if any tax is paid on that income in the foreign country, you will get credit for the same.

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Checklist for Internal Audit of Taxation

	Particulars	Checked By	Remarks
A	Check for applicability of various Acts
1	Income Tax
2	VAT
3	CST
4	Excise Duty
5	Service Tax
B	Payment
	Check that
1	Payment is made before due date by Authorised person
2	Proper due date chart is maintained and displayed.
3	The Unit Head intimates the Asst Taxation Manager about the statutory payments through mail/hard copy before 3 days of the due date.
4	Copy of challans is sent to Asst Taxation Manager by 10th of next month
5	Monthly consolidated report in prescribed format for all statutory payments is forwarded to Asst Taxation Manager
6	All the financials are certified by Unit Head
C	Filing & Checking of Returns
	Check that
1	All the challans and returns are submitted directly by the unit.
2	The same is verified by Asst. Taxation Manager before filing and confirmation sent
3	All legal compliances are fulfilled by Unit Head and the same is informed to ATM
4	The following returns are timely filed
i	e TDS Return
ii	Excise Return:
iii	VAT Return:
iv	Service tax Return:
v	ESI & PF Return:
D	Scrutiny/ Audit objection / Query from Govt. Department
	Check that
1	The information of the notice received by the unit from the department (i.e. Income Tax, Sales Tax etc.) is sent to the Asst Taxation Manager by the Unit Head.
2	Asst Taxation Manager checks the status of scrutiny/ audit objection/ query etc.
3	Asst Taxation Manager prepares the reply of the order / query received by gathering information requirements from Unit Head and send a copy to Unit Head
E	General
	Check that
1	Any amendment in the applicable act is informed by the Asst Taxation Manager to the Unit Head with the due date of applicability.
2	Unit Head follows the Notification / circular (Direct & Indirect tax) issued by Govt. when informed by the Asst. taxation manager.
3	The following certified details are provided by Unit Head to ATM -
i	Challan of tax payment
ii	Ledger of the account.
iii	Account statement of party / Purchase / sales etc.
iv	Rate of TDS/ VAT/ CST/ Excise Duty / Service tax / PF / ESI
v	Statement of VAT-7,VAT-8 & VAT-9
vi	Details of statutory forms (VAT forms) used during the period.
vii	Ledger of VAT / Excise / Service Tax
viii	Return shall be Certified / verified by Unit head.
ix	Return shall be authorized by taxation Dept.
x	Return shall be filed on due date

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Concept of Service Tax on Renting (renting of residential dwelling for use as residence)

SERVICE TAX - ON RENTING

Section 65B(44) of the Finance Act 1994, Service means any activity carried out by a person for another for consideration and includes a declared service but shall not include:

By virtue of Section 66E of the Finance Act, 1994, Declared service include the “Renting of Immovable property”

Under Section 66 D of the Act, S.No. (m) of  Negative list(Non taxable service) are as under:-

Service by way of renting of residential dwelling for use as residence

Service by way of renting of residential dwelling would fall within the ambit of negative list only it the residence dwelling is used for the purpose of residence.

Residential dwelling does not include hotel,motel, inn, guest house, camp-site, lodge, house boat, or like places meant for temporary stay. As per normal trade parlance is any residential accomodation.

It is also an important point to discuss here that if residential dwelling is used in the course or furtherance of business or commerce, then the benefit of this clause can not be availed.

From the above it is clear if immovable property is given on rent for the purpose other than residential is taxable.

Exemption under notification No. 25/2012-S.T 20.06.2012

Sr. 18     Service by way of renting of a hotel,inn, guest house, club, camp-site or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent.

Conditions are to be satisfied to avail the exmption:-

·       Service are provided by way of renting of a hotel, inn, guest house, club, campsite or other commercial place;

·         Such renting shall be meant for residential or lodging purposes; and

·         Declared tariff or a room shall be below rupee one thousand per day or equivalent.

If declared tariff exceeds Rs.1000/- per day, then as per Sr. No. 6 of Notification No.26/2012, Service tax is required to be paid on 60% of the value subjected to the condition that CENVAT Credit on inputs and capital goods used for providing the taxable service has not been taken under the CCR 2004.

Liablility under Reverse Charge

Wherever the service provider is located outside the taxable territory but the servce is being provided in taxable territory, the tax shall be payable by service receiver.

CENVAT Credit on Service tax paid for Renting of hotels,inns, guest house, clubs, campsits or other commercial places meant for residential or lodging purpose.

·         If Such Service is used for Personal Use                 CCR is not allowed

·          If Such Service is used for Employee Benefit          CCR is not Allowed

·         If Such service is used for providing taxable             CCR is allowed

Service                                                                  

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Checklist for Finance Internal Audit

Internal audit is the examination of a company's records and reports by its employees. Internal audits are usually intended to prevent fraud and to ensure compliance with board directives and management policies.

In contrast, the financial statements presented to stockholders are typically prepared by outside parties to ensure absolute objectivity Internal financial audit is very important for every organization.

Checklist for Internal Financial Audit.

Sr.No	Particulars	Checked By	Remarks
A	Stock
	Check that
1	Age wise analysis of FG is done on monthly basis by the stores keeper and authorised by Manager Commercial
2	Physical verification is done monthly by unit staff
3	Proper classification of Non Moving Stock is done by unit
4	Above records are verified by Manager Commercial and reported to Unit Head, which further reports it to Finance Officer
B	Cash
	Check
1	Physical cash in custody of Accounts assistant at least once a month, prefer surprise checks
2	The minimum & maximum cash balance at any point of time is Rs.10,000 and Rs. 1 Lac respectively
3	That physical cash is verified by person other than the person in who's custody cash is kept, which is further approved by unit Head
4	Payments > 20000 are made through cheque
5	That Assistant finance manager's surprise physical verification of the cash, done at-least twice a month
6	Cash Withdrawal Note for withdrawal of cash from bank which is authorised by Unit Head
C	Bank
	Check that
1	Minimum bank balance at any time is Rs 5000
2	Balance above a specified limit is invested in FD by approval of AFM
3	Monthly BRS is prepared by Mang. Comm and is sent to AFM after Unit Head's authorisation
4	The Cheque Details Register maintained by Ass. A/cs and vetted by Unit Head
5	The acknowledgement of the cheque received from the third party and the cheque issued to the third party
6	Proper recording of Bank Charges on monthly basis and informing the same to Unit Head and AFM
D	Debtors
	Check that
1	Age wise analysis on monthly basis is done by MC and the same is reported to Unit Head who forward it to AFM
2	Credit period & interest thereon as per Sales & Finance Policy
3	Quartly balance confirmation & turnover ratio is done by MC & reported to Unit Head
E	Creditors
	Check that
1	Payment is made through cheque only
2	Maximum credit period of 30 days or discount, as the case may be is availed
3	The Creditors Turnover Ratio is calculated on monthly basis
F	Real State Property
	Check that
1	Proper listing of documents is done in the prescribed format
2	All original & chain doc are kept in custody of Unit Head
3	Physical verification is done by person appointed by UH & Managerial Personnel and reporting of same to AFM
4	Search Report is obtained at the time of purchase.
5	Insurance of Property- documented with Unit Head, Copy is kept with A/cs Dept.
G	Investments
	Check that
1	Proper Investment Register for recording of investments and its verification by UH is done
2	New investments are made only after proper approval by AFM
3	Proper investment note is prepared by the Finance Officer.
4	The original documents of the investments are secured by the Unit Head
H	Loans & Advances
	Check that
1	Proper requirement assessment is made by UH
2	Comparative Rate Analysis is done by UH, which is approved by the BOD
3	Proper documentation & A/cing is done by FO
4	Loan to Staff is as per Loan Policy

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Checklist for Stock Investing

Company

1.  What is the business?
2.  What is the company’s bargaining power with suppliers?
3.  What is the company’s bargaining power with customers
4.  How is the company placed against competitors?
5.  What is the market share if data is available?
6.  Is the company innovative? Does it work on adding new product lines or service lines?
7.  Is management compensation reasonable or too high?
8.  What are the sustainable advantages or moats that the company enjoys?

Sector

9.  What are the factors that affect this sector?
10. What are the prospects for this sector for the future?

Quantitative

11.  Is return on equity at least 20%? What is the trend in return on equity over the last 5 years?
12.  Does the company manage working capital efficiently?
13.  What is the company’s dividend paying history?
14.  What is the dividend yield?
15.  If it does not pay dividends, is the company making good use of the retained earnings?
16.  What is the amount of debt as compared to equity?
17.  What are the growth rates of sales, operating profit and net profit in the last 5 years?
18.  What is the amount of free cash flow in each of the the last 5 years respectively?
19.  Is the operating cash flow at least equal to net  profit?
20.  Is net profit growth matched by EPS growth or is growth at the cost of dilution of equity?
21.  What is the trend in operating and net margins respectively over the last 5 years?

Growth Analysis

22. What are the company’s growth plans?

Risk factors

23.  What are the risks that this sector faces?
24.  What are the risks that this company faces?

Valuation

25.  What is the valuation in terms of price-earning ratio / price to book ratio? How does it compare with historical  ratios respectively?
26.  What are the results of the discounted cash flow analysis (DCF)?

Market

27.  Where is the market right now as compared to long-term averages for valuation?

Emotional factors

28.  How confident am I about this investment?
29.  If the stock price dips by 25%, would I still invest more money into this stock?
30.  Do I see any biases affecting my judgment?

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Internal Audit Checklist for Production

Production includes  raw material process, including various stages like job method,, batch methods, flow methods etc and  packing material, testing processes. Wastages etc.

Internal auditor have important role to check  production planning document, production data sheet and instructionss,  capacity of machines, availability of raw material, co-ordination with lab department for sending sample and get approval for continuing production. Internal auditor check necessary documents of all the production process.

Here is the Checklist for Internal audit of Production department.

	Production
	Particulars	Checked By	Remarks
A	General
	Check that
1	Proper reporting is done by assistants to respective division in charge & further reporting by in charge to immediate boss
2	Proper listing of products with their respective codes and brand names
3	The record for no. of labour required to work at each machine for standard production is maintained as per given format
4	Calculation of idle time is done on percentage basis and in case the idle time exceeds 25% the reporting of the same to the higher management on daily/weekly basis with proper reasons
5	Calculation of overtime and recording of the same is done by the Production Manger and he further reports it monthly to the Unit head and the HR coordinator of the unit.
6	The total area covered by the production floor with its utility including storage for raw and finished goods is recorded in prescribed format.
B	Machinery
	Check that
1	Fixed Assets Register is maintained & updated in the prescribed format
2	Proper coding for each capital asset
3	New Machinery-
a	The requirement of new machines can arise due to following reasons:
·	Increase in demand
·	Change in technology
·	Change in product line
·	Increase in production
b	Proper assessment is done by Production Manager/In charge approved by the Unit Head
c	Requisition to the purchase department is sent for further processing as per purchase and inventory policy of the Company based on Quotation Analysis.
d	The new machines is properly installed in supervision of the Technical person and the Unit Head and the reporting of the same is done to the higher management after installation.
4	Capacity Analysis of machines is done in the prescribed format
5	The upkeep and maintenance of machine is done on regular basis so as to increase their life and proper track of the machine overhauling is maintained in the prescribed format.
6	Separate machine log book is maintained and updated
7	User manual/instruction kit of machines is displayed through charts and hoardings at various places of factory.
8	Machine maintenance chart is displayed and updated for each machine near by the machine itself.
9	Proper reporting of machine breakdown/shout down is done by production in charge to unit head with valid reasons
10	Shut down for more than 3 hours is reported to Unit Head which further reports to higher management
C	Raw material
	Check that
1	Need assessment is done by the Store-keeper and the authorization is done by the Production Manager/In charge.
2	Purchase of raw material is done as per the Purchase Policy
3	The Quality Controller properly verifies the quality of the raw material by taking samples and records the same in prescribed format.
4	In case the quality of the raw material is not of good quality, the reporting of the same is done to the Unit Head and higher Management .The whole lot of raw material is stored separately and Material Return Form is filled by the Store keeper, duly verified by the Quality Controller.
5	The raw material to the production is issued by the storekeeper/store in-charge after signing the issue slip. The production in-charge give its receiving through its initials on the issue slip after properly weighing the material issued.
6	The issue of raw material for production is on the basis of production plan which is based on demand & availability.
D	PROCESS
	Method of production followed by Company-
·	Job Method
·	Batch Method
·	Flow/Process Method
·	Uniform Method
E	Finished Goods
	Check that
1	The production Manager verifies the final product according to the standard production plan and records the same with deviations, if any in respect of quality and quantity both.
a	Quantity Analysis is done by the Production Manager as set out in master chart of the particular product.
b	Quality Analysis is done by the Quality Controller for the finished goods. The Master Card for the quality check is pasted at each such place where the production process is carried on.
2	Samples taken for above purpose are recorded in the quality check register. Verify the no. of samples taken per lot of production.
3	The finished goods inventory is maintained as per the Purchase and Inventory Policy of the Company.
F	Wastage
	Check that
1	Proper classification of wastage is done into Normal & Abnormal.
2	Classification as abnormal is done if wastage is occurred due to the following:
·	Error in machine
·	Raw material quality issues
·	Power cut with prior information
·	Labour mistake
·	All other wastage which is not normal
2	The wastage is properly recorded in the wastage register/sheet on daily basis along with proper reasons and it is shown in the production MIS in the prescribed format.
3	The monthly average wastage is properly calculated and if the wastage exceeds the standard wastage than necessary steps to reduce the wastage are taken.

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