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Using Analytics to Detect Possible Fraud: Tools and Techniques by Pamela S. Mantone

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Chapter 2

The “Norm” and the “Forensic” Preliminary Analytics: Basics Everyone Should Know

As discussed in the previous chapter, analytical tools reveal anomalies in financial statement information that may indicate possible fraudulent transactions that will require the use of further investigative techniques to provide detailed evidence required for prosecution. Some of the more basic preliminary analytics that almost everyone is familiar with include liquidity-to-debt ratios, profitability ratios, and horizontal analysis of accounts by comparing current-year results to prior-year results. A less recognized tool, vertical analysis, is extremely important in understanding account relationships. These basic tools allow the forensic financial examiner to focus on big-picture concepts before applying more enhanced analytical tools and techniques that drill down to specific areas for detailed investigation. When using Excel for calculating formulas, remember to use the “evaluate formula” function to make certain that the calculations are correct when numbers are negative.

One noteworthy item for the financial forensic examiner to remember is that sometimes the financial statements do not contain all of the financial transactions of the company. As in the case of Company 1 and Company 3, the transactions of the off-book bank accounts in the companies' names are not part of the financial transactions provided for examination. In addition, not all analytical tests will be applicable ...

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