A forensic audit is an examination and evaluation of a firm's or individual's financial records to derive evidence that can be used in a court of law or legal proceeding. Forensic auditing is a specialization within the field of accounting, and most large accounting firms have a forensic auditing department. Forensic audits require the expertise of accounting and auditing procedures as well as expert knowledge about the legal framework of such an audit.
Forensic audits cover a wide range of investigative activities. A forensic audit may be conducted to prosecute a party for fraud, embezzlement, or other financial crimes. In the process of a forensic audit, the auditor may be called to serve as an expert witness during trial proceedings. Forensic audits could also involve situations that do not involve financial fraud, such as disputes related to bankruptcy filings, business closures, and divorces.
Forensic audit investigations can uncover, or confirm, various types of illegal activities. Usually, a forensic audit is chosen, instead of a regular audit, if there's a chance that the evidence collected would be used in court. Below, we cite instances that could necessitate a forensic audit:
1. Asset Misappropriation
This is the most prevalent form of fraud. Examples include: misappropriating cash, submitting falsified invoices, making payments to non-existent suppliers or employees, misusing assets (like company equipment), and stealing company inventory.
2. Financial Statement Fraud
A company can get into this type of fraud to try to show that its financial performance is better than it actually is. The goal of presenting fraudulent numbers may be to improve liquidity, ensure that C-level executives continue to receive bonuses or to cope with the pressure to perform.
3. Conflicts of Interest - When a fraudster uses his or her influence for personal gains to the detriment of the company. For example, if a manager allows and approves inaccurate expenses of an employee with whom he has personal relations.
4. Bribery - Offering money to get things done or influence a situation in one’s favour.
5. Extortion - The wrongful use of actual or threatened force, violence, or intimidation to gain money or property from an individual or entity.
Forensic Auditors go much beyond the financial reporting standards and internal control lapses. They try to understand the intent. There are four primary stages of any forensic accounting engagement –
1. Plan the Investigation: It is necessary to understand the question of the client and accordingly plan the investigation to achieve the audit objectives.
2. Collecting Evidence: The forensic auditor should collect accurate and appropriate evidences to substantiate the audit procedures and frauds identified. To the extent possible they should try to simplify complex accounting issues.
3. Reporting: There is no particular template to report the audit findings. The forensic auditor should appropriately document the findings of the investigation and evidences collected during the investigation process.
4. Court Proceedings: Forensic Auditor is considered as the expert witness. In the court proceedings he needs to explain the findings of the investigation process and explain the importance of evidences.
Skills Required by a Forensic Auditor –
Forensic accounting skills enable an accountant to gather evidence of fraud and other financial crimes and present it clearly, often in a courtroom. Forensic accountants need to be well-versed in both accounting and law in order to determine whether a financial crime has occurred. The following skills are all necessary to perform successfully as a forensic accountant.
How Forensic Audit is different than Statutory and Internal Audits –
A forensic audit/examination is designed to focus on reconstructing past financial transactions for a specific purpose, such as concerns of fraud, whereas an internal audit is typically focused more on compliance and/or the performance of the organization.
Forensic audit is an examination and evaluation of a firm’s or individual’s financial information for use as evidence in court and also to determine whether fraud has actually occurred.
Whereas statutory audit is an independent examination of financial statements of a firm, irrespective of its size and legal perspectives with a view to express an opinion on true and fair presentation thereon.
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The article is contributed by @Nupur Didwania who is currently a Forensic Accounting & Fraud Examination consultant at Baker Tilly International