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Commission on Audit

Commission on Audit FORENSIC AUDIT MANUAL 09 SEPTEMBER 2011

FORENSIC AUDIT MANUAL

Commission on Audit FORENSIC AUDIT MANUAL 09 SEPTEMBER 2011

09 SEPTEMBER 2011

Fraud - Forensic Audit Manual

Preamble

 

TABLE OF CONTENTS

 

PREAMBLE

v

Key Terms

vii

INTRODUCTION GENERAL PROCEDURES

1

7

Chapter 1.

FRAUD RISK ASSESSMENT

11

1.1

Plan the Fraud Risk Assessment

13

1.2

Understand the Agency

16

1.3

Identify all Potential Fraud Risks

17

1.4

Assess the Likelihood and Impact of all Potential Fraud Risks

20

1.5

Identify and Evaluate Key Fraud Risks

21

1.6

Document Audit Responses for the Results of the Fraud Risk Assessment PROACTIVE GUIDELINES

23

Chapter 2.

24

Test of Controls

27

2.1 Identify Agency-Level Controls

27

2.2 Evaluate Design of Agency-Level Controls

27

2.3 Test Effectiveness of Agency-Level Controls

29

2.4 Identify Process-Level Controls

30

2.5 Evaluate Design of Process-Level Controls

30

2.6 Test Effectiveness of Process-Level Controls

32

Detection Procedures

33

2.7 Design Response to Address Identified Fraud Risks

33

2.8 Execute Fraud-Specific Detection Procedures 2.9 Reporting of Results 2.10 Case Samples REACTIVE GUIDELINES

Chapter 3.0

37

41

42

46

3.1 Preliminary Investigation

47

3.2 Full-Blown Investigation

48

3.2.1 Plan the Fraud Investigation

50

3.2.2 Execute - Investigation Fieldwork

56

3.2.3 Evaluate Results of Fraud Investigation

71

3.2.4 Reporting Results of Fraud Investigation

75

Fraud - Forensic Audit Manual

Preamble

ATTACHMENTS

78

 

1 FoAM Form-01 Fraud Risk Assessment Planning Template

:

78

2 Fraud

:

Scheme Categories

82

3 Sample FRA Template

:

94

4

: FoAM Form-02 Fraud Risk Assessment Template

96

5

:

Sample Procedures for Evaluating Design of ALC

99

6 : FoAM Form-03 Agency-Level Controls Design Evaluation Template

105

7 : Sample Procedures for Testing Operating Effectiveness of ALC

107

8 : FoAM Form-04 Agency-Level Controls Effectiveness Testing Template

112

9 : FoAM Form-05 Process-Level Controls Design Evaluation Template

115

 

10: FoAM Form-06 Process-Level Controls Effectiveness Testing Template

117

11:

FoAM Form-07 Detection Responses Template

120

12: FoAM Form-08 Red Flags Internal Memorandum Template

123

13:

FoAM Form-09 Preliminary Investigation Results Template

125

14: FoAM Form-10 Investigation Work Plan Template 15: Rules of Evidence 16: FoAM Form-11 Evidence Matrix Template 17: Guidelines in Conducting Fraud Investigation

127

129

135

137

Fraud - Forensic Audit Manual

Preamble

LIST OF DIAGRAMS

 

Diagram 1. Linkage of IRRBA and FoA Framework Diagram 2. Relationship between Fraud Risks and COA Services Diagram 3. Fraud- Forensic Audit Framework

3

4

5

Diagram 4. Procedures in Fraud- Forensic Audit Framework Diagram 5. COA Responsibilities in conducting Fraud-Forensic Audit Diagram 6. Proactive Phase Procedures Diagram 7. FRA linkage to IRRBA Framework

6

7

9

12

Diagram

8.

FRA

Process Flow

13

Diagram 9. Fraud Risk Universe Diagram 10. Fraud Triangle Diagram 11. Matrix for KFR Overall Assessment Diagram 12. Proactive Phase Linkage to IRRBA Framework Diagram 13. Proactive Phase Process Flow Diagram 14. ALC Testing Diagram 15. PLC Testing Diagram 16. Reactive Phase Process Flow Diagram 17. Execution of Full-blown Investigation Diagram 18. Responsibilities of Special Audit Team Diagram 19. Linking/Networking

18

19

21

25

26

28

31

49

56

72

74

Fraud - Forensic Audit Manual

Preamble

Fraud - Forensic Audit Manual Preamble PREAMBLE It is the vision of the Philippine Government to

PREAMBLE

It is the vision of the Philippine Government to reduce fraud within government agencies and instrumentalities. Fraud in government results in inability to achieve mandate or objective for the pursuit of good governance.

As stated in Section 2 Article IX of the 1987 Philippine Constitution,

1. “The Commission on Audit (COA) shall have the power, authority, and duty to examine, audit,

and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned or controlled corporations with original charters, and on a post- audit basis:

a. Constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution;

b. autonomous state colleges and universities;

c. other government-owned or controlled corporations and their subsidiaries; and

d. such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the Government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity.

However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto.”

2. “The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefore, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties.”

As can be understood from the above Section 2, the authority and powers of the Commission shall extend to and comprehend all matters relating to auditing procedures, systems and controls, the keeping of the general accounts of the Government, the preservation of vouchers pertaining thereto for a period of ten years, the examination and inspection of the books, records, and papers relating to those accounts; and the audit and settlement of the accounts of all persons respecting funds or property received or held by them in an accountable capacity, as well as the examination, audit, and settlement of all debts and claims of any sort due from or owing to the Government or any of its subdivisions, agencies and instrumentalities. The said jurisdiction extends to all government- owned or controlled corporations, including their subsidiaries, and other self-governing boards, commissions, or agencies of the Government, and as herein prescribed, including

Fraud - Forensic Audit Manual

Preamble

Fraud - Forensic Audit Manual Preamble non-governmental entities subsidized by the government, those funded by donations

non-governmental entities subsidized by the government, those funded by donations through the government, those required to pay levies or government share, and those for which the government has put up a counterpart fund or those partly funded by the

government. (Section 26 PD 1445).

The World Bank, consistent with this mandate, entered in a joint undertaking to develop a Fraud-Forensic Audit Manual (FoAM or the Manual) in order to strengthen the capacity, effectiveness, and consistency of state auditors in preventing and detecting fraud within the Government.

The COA has commissioned SyCip Gorres Velayo and Company (SGV & Co.) to provide technical assistance in preparing the FoAM to help the COA combat fraud in the government. The purpose of this is to increase the effectiveness of COA auditors in detecting fraud during the course of their regular audit and to provide consistency in the conduct of fraud (forensic) audit.

The FoAM provides guidance not only on fraud investigation but also on fraud prevention and detection.

The Manual is a living framework, and the COA should update the Manual at least annually to sustain its relevance to COA auditors and consider emerging trends of new frauds or techniques and tools to combat fraud.

This Manual is intended for use of all COA state auditors, whether they are in the National, Corporate, Local Sectors, Regional Sectors or other sectors.

Fraud - Forensic Audit Manual

Preamble

Fraud - Forensic Audit Manual Preamble KEY TERMS Agency/ies – Government bodies or offices ACD –

KEY TERMS

Agency/ies – Government bodies or offices

ACD – Assistant Cluster Director

ALC – Agency-Level Controls

AOM – Audit Observation Memorandum

ATL – Audit Team Leader

BAC – Bids and Awards Committee

CAATTs – Computer-assisted audit tools and techniques

CD – Cluster Director

COA – Commission on Audit

CGS – Corporate Government Sector

FAIO – Fraud Audit and Investigation Office

FRA – Fraud Risk Assessment

FoAM – Fraud/Forensic Audit Manual

GWSPA - Government-wide and Sectoral Performance Audit

INCOSAI - International Congress of Supreme Audit Institutions

INTOSAI - International Organization of Supreme Audit Institutions

IRRBAF - Integrated Results and Risk Based Audit Framework

IRRBAM - Integrated Results and Risk Based Audit Manual

ISA - International Standards on Auditing

ISSAI – International Standards of Supreme Audit Institutions

ITO – Information Technology Office

ITGC - Information Technology General Controls

KFR – Key Fraud Risk

LGS – Local Government Sector

LS – Legal Services

Fraud - Forensic Audit Manual

Preamble

Fraud - Forensic Audit Manual Preamble ML – Management Letter NGS – National Government Sector NGICS

ML – Management Letter

NGS – National Government Sector

NGICS – National Guidelines on Internal Control Systems

PD – Presidential Decree

PLC – Process-Level Controls

RD

– Regional Director

RO

– Regional Office

SA

– Supervising Auditor

SAT – Special audit team

TS – Team Supervisor/s

TSO – Technical Services Office

UTA – Understanding the Agency

WB – World Bank