Forensic Audit Definition
A forensic audit is an accounting term that refers to the process of gathering and tracking of forensic evidence for use in a court of law to prosecute criminal deeds. Criminal actions usually involve things such as fraud or fund embezzlement. Another term for forensic audit is forensic accounting.
A Little More on What is a Forensic Audit
In accounting, forensic auditing is a specialization where forensic auditors give expert testimony during a court hearing. Large accounting companies usually have a forensic audit department.
Forensic audits are usually carried out by people with professional skills in accounting as well as in criminology. Such professionals have specialty if tracing the money, keeping track of actual and fake balance sheets, and checking inaccurate reports to do with income and expenditures. In other words, they have an understanding of different types of frauds and the procedure for collecting the evidence.
Types of Fraud that Require Forensic Audit
A forensic audit is capable of revealing various types of fraud. However, the most common ones are fraud to do with the following:
- Theft of inventory, cash, and fraudulent payment.
- Corruption including bribery, conflict of interest, and extortion
- Financial fraud such as company’s financial misstatements
In April 2016, there was a release of the second set of findings of Elizabeth’s New Jersey Board of Education forensic audit. In the report, there were improprieties in the lumber companies’ contracts.
According to the report, the lumber company had no authorization of doing business with the township because it did not have a valid contract. There was also an indication that there was no initial order of some of the things set for payment.
Forensic Audit Investigation Procedure
Forensic audit investigation follows the same procedure as that of a regular financial statement audit. Steps involved in a forensic audit are as follows:
Step one: Planning
It is the first step where forensic auditors have the obligation of establishing objectives. The forensic team should be able to understand what the audit is all about and what exactly they are targeting. Some of the things that the auditing team should focus on at this stage include:
- Determining if the fraud allegation in the company is true
- Finding out how long the fraud has been going in case there is one
- Identifying the perpetrators of fraud
- Finding out how the perpetrators were able to conceal the fraud
- Quantifying the financial loss resulting from the fraud
- Identifying and suggesting fraud prevention measures a company can take in future
Step two: Collecting evidence
Step two: Collecting evidence
A collection of evidence should be properly done to avoid providing inaccurate information. Remember that forensic audit information acts as evidence before a court of law to prove a case. The information should, therefore, have a flow for easy understanding.
The audit team, should at this stage be able to identify the type of fraud going on, and the method the perpetrators have been using to commit it. Note that the evidence the auditors collect should be enough to prove a case in court. For instance, the collection of evidence should be able to uncover the details of the fraud, reveal the perpetrators, state the total financial loss, etc.
Evidence presentation should have a flow for an easy understanding of the events by the court. In this case, precaution is necessary to ensure that there is no interference with the evidence. There should be no damaging of documents or altering of statements as may lead to the weakening of the evidence.
There are various types of techniques the forensic auditing team can use to collect evidence. They include the following:
- Substantive techniques: The technique involves auditors reviewing the financial documents and reconciling financial statements.
- Computer-assisted audit: The auditors also use computer software programs to identify fraud in the company’s systems.
- Analytical procedure: The auditors use this procedure to compare fraud trends over a given period of time. The procedure also helps them to compare data from various segments.
- Conducting interviews: Auditors conduct interviews with the suspects to find out more about the fraud.
- Internal controls studying and testing: Auditors use this technique to study the current internal controls of the company. They test them to see if there are loopholes that allow people to commit fraud.
Step three: Reporting
After collection of evidence is over, all the information is then put together in an orderly manner to ensure that it flows. If it is a fraud that necessitated the investigation, then the report findings are given to the client. If the client decides to take the fraud case to court, the court gets a copy of the report. The final report should have detailed findings of the investigation. The findings should have the following:
- A summary of the evidence (how much money was lost and the names of those involved in the fraud)
- Explanation of how the fraud was carried out
- Suggestions on how the company can improve its internal controls to prevent future frauds.
Reasons for Doing a Forensic Audit
Companies do forensic audits for different reasons. Most importantly, it applies where there is a concern with an entity’s finances, therefore, presenting a legal concern. Below are some of the instances when a forensic audit becomes useful:
Bribery: It involves the offering of money to receive a favor, influence a situation, or get things done all in favor of the person giving the bribe.
Conflict of Interest: It is where a fraudster uses his or her power to influence things for personal gain an act that is damaging to the company. A good example is when a manager approves an employee’s exaggerated expenses simply because they have a personal relationship.
Extortion: Extortion is where say Company ABC demands cash so that it can award a contract to Company XYZ.
- Asset Misappropriation
Asset misappropriation is the most common of fraud. Some of the examples of asset misappropriation include:
- Cash misappropriation
- Raising fake involves
- Payment made to suppliers that don’t exist
- Asset misuse
- Theft of inventory
- Financial Statement Fraud
Financial statement fraud is where companies use fake financial statements to show the public how well it is fairing on financially, which is not the case. The main reason why a company may do this is to enable it to deal with market pressure performance or improve its liquidity. The financial frauds may include:
- Intentional omission of a transaction such as expenses or revenues
- Accounting records forgery
- Intentional omission of transactions such as expenses or revenue
- Intentionally not disclosing relevant details on the financial statements
- Intentional refusal to apply the set standards of financial reporting.
Forensic Audit versus Financial Audit
Although forensic and financial audit may seem the same, they are carried out for completely different purposes. Some of the reasons for carrying out forensic audit include the following:
- Forensic Audit
For instance, a forensic audit involves analyzing and compiling financial information purposely for use as evidence in court cases.
Another purpose of carrying out a forensic audit is to examine a financial system of a company, to determine the accuracy, strength, and reliability of its internal control systems. Some of the court cases that may require forensic audit evidence include the following:
It is worth noting that any court evidence requires a complete, thorough, and well-documented report. Therefore, for a forensic report to qualify for representation in a court of law, it must meet the set standards.
To ensure this, financial auditors need to counter-check information such as vendor, bank balances, and customer accounts to ensure that it is accurate. The process makes available the necessary confirmation of the company’s standards and accounting practices.
Financial audit basically gives assurance that the financial record keeping of a company uses the generally accepted accounting principles (GAAP). However, there is a possibility that a financial audit may or may not reveal international fraud or facts misappropriation.
References for “Forensic Audit”