What is a Forensic Audit?  | Forensic Accounting Services

A forensic audit comes under the umbrella of forensic accounting services that involve an in depth examination of a company’s financial records along with operational and other data. A forensic audit aims to analyse financial transactions to detect bribery, fraud or corruption as opposed to standard audit and assurance engagements which focus on avoiding material misstatement. The report from this audit is evidence that can be used in a court of law to prepare for a legal case or alternatively, add to the weight of evidence as litigation support for ongoing legal proceedings.

In this article, we’ll explore the meaning of forensic audit, its purpose and objectives. We’ll also examine the differences between forensic and traditional auditing and the role of a forensic accountant.

Defining Forensic Audit v Internal Audit

Forensic audits are generally conducted on an ad hoc basis to uncover financial fraud or the misinterpretation of financial statements. This is usually driven by a particular event such as a known breakdown of internal controls, a matrimonial or family law matter arising involving controlling shareholders of private companies, or when a suspect was identified as having gained a fraudulent advantage.  Forensic audits are conducted using independent auditors including certified fraud examiners who are trained in collecting evidence to detect such activities.

This is totally different from other types of audits or public accounting services such as an internal audit. Internal auditors focuses on compliance, policies, accounting standards, and other procedures businesses must follow and provide advisory services to help improve risk management throughout the organisation. Providing forensic support, on the other hand,  is a specialty investigative process involving a different skillset although still based on planning and preparation, analytical procedures, reporting, and documentation.

Purpose and Objectives of a Forensic Audit

There are several reasons why businesses conduct forensic services. They are:

Uncover Financial Statement Fraud

This generally occurs when organisations have been the victim of a fraud scheme and subsequently the bad actor or a manager who allowed the fraud to be perpetrated used their position to  present an inaccurate picture of their financial success. This could be to protect the guilty party, protect their own role or in the hope that releasing false figures might boost liquidity, guarantee top management continues to get incentives or cope with market performance pressure.

Financial statement fraud can take several forms. These may include deliberate manipulation of accounting records, omission of income or cost transactions, concealing important data from financial statements, or failure to adhere to established financial reporting standards.

Bribery

As the term implies, it is the practice of offering money to get things done in exchange for favour or personal gain. For instance, Belemoth bribed an employee in YawnTech to provide specific data so Belemoth could develop a tender bid for YawnTech.

Conflicts of interest

This occurs when a bad actor exploits their position to further personal interests at the expense of the business. For instance, if a manager permits or authorises inaccurate expenses of an employee whom he is closely knitted to. Even though the manager did not directly benefit financially from this approval, he is also an accomplice.

Asset Misappropriation

This is the most common type of fraud. Examples include cash theft, forging false bills, paying imaginary contractors or workers, misusing assets, and inventory theft.

Scope of Forensic Auditing

Forensic auditing analyses and assesses financial records to get evidence used in a court of law or legal process. This involves using expert knowledge and AI tools to look for evidence to prove fraud, theft, falsification, or other criminal activity. This is completed via creating processes to validate data and decrease risks. They explain their results and recommendations for preventing and reducing fraud.

Differences Between Forensic Audits and Traditional Audits

Forensic and traditional audits ensures that organizations maintain accurate and reliable records. However, they vary in diverse ways.

  1. Forensic accountants perform audits when the company suspects a bad actor or corrupt activities. On the other hand, traditional assurance activities are performed periodically, such as the monthly internal and annual external activities in larger businesses.
  2. A forensic audit report enlightens firms about malpractices or frauds within the organization. Whereas, companies use traditional audit report to ascertain the financial position of their businesses.
  3. This report will help them make informed decision.It is not mandatory for general assurance providers to have extensive knowledge of court procedures however, in contrast, forensic professionals must be familiar with legal frameworks and the presentation of evidence.

Role of Forensic Auditors

Forensic professionals are trained legal and accounting experts who analyse and investigate financial information to uncover fraud or embezzlement. Below are the roles and duties which may be included.

  1. Forensic professionals carry out financial investigations and serve as an expert witness. For example, he analyzes the financial affairs, including fraud duration, the type of fraud (if any), and its impact on the company.
  2. He uses computer-assisted audit techniques, such as determining the date and location of detailed changed in the computer system.
  3. He presents relevant details and evidence pertaining to the findings of the investigation that can be used in court,
  4. He uses analytical procedure to compare trends over time across different segments of the business.

Steps Involved in a Forensic Audit

A forensic audit follows some of the same initial steps as a traditional assurance engagement. It takes planning, gathering evidence, and drafting a report, with court proceedings.

Planning and preparation

Each matter is different so prior to starting the work a well defined plan needs to be developed around the investigation objectives. These objectives include identifying the type of fraud that has been carried out, the parties involved, and assessing the amount of financial loss suffered.

Evidence collection and analysis

After the detection of the fraud, the team works to gather evidence that can be verified and accepted in court. The evidence gathered must be sufficient to prove the identity of the fraudsters, back up his claims of how the fraud occurred, and the amount of loss the business suffered.

Reporting and documentation

Upon completion of the above steps, a forensic professional will create a report and deliver it to management/client. This report will include a summary of facts and an estimate of the amount of damage caused. It could also tell how the fraudster set up the plan and the breached policies.

Litigation Support

Not all cases will lead to formal legal actions. But if the management decides to take legal action, then the forensic investigator will be at the court to explain and present all evidence. He will simplify the complex accounting issues in layman’s language so those who don’t understand accounting or legal terms will understand clearly.

Tools and Techniques in Forensic Services

There are various techniques and tools used for performing a forensic review of business. These are;

1. Data analysis: Tools like data mining software to run background checks on the data provided and analyze the financial statements. They identify trends, patterns, and anomalies to discover fraudulent activities.

2. Document review: AI based tools along with human resources review the invoices and other source documents performing an in depth financial analysis of the documents provided with the aim to identify discrepancies and irregularities.

3. Working undercover: Professionals under the field of forensic accounting conduct investigations because they know how and where to do it. Even little errors might tell the culprit that something is wrong and cause them to disappear.

4.  Surveillance: Making use of modern tools and huma resources to monitor and determine the suspects’ movements and abnormal activities at work.

Challenges Faced by Forensic Auditors

Forensic accountants sometimes lack access to relevant data which is required for accurate fact-finding. Unlike enforcement agencies, they may be unable to access books of account of similar companies.

Additionally, analyzing large amount of data requires innovative technologies, advanced analytics and forensic skills. Forensic accountants spend a lot of time in staying up to date on the latest regulations. These may include insolvency and bankruptcy codes, and prevention of corruption Act. For them to do their jobs effectively, they must stay current on these changing requirements.

Conclusion

In a nutshell, forensic audit is a detailed engagement that necessitates competence in not just accounting and auditing methods, but also legal framework understanding. A forensic professional must understand the numerous ways that corrupt activities can be undertaken as well as proper evidence gathering procedures to ensure the data the auditor needs can be subsequently used in any future legal actions.

Frequently Asked Questions

What differentiates a forensic audit from a traditional financial audit?

A Financial Audit is particularly beneficial to the firm’s investors since it gives information on how the company is currently operating. A Forensic Audit engages in a wide range of accounting activities in and determine if there is there is theft or other corrupt activities.

In what situations would a company or individual require a forensic audit?

A company or individual will require a forensic audit when there are fraud allegations, corruption or misappropriation of assets.

What specific tools and techniques do forensic professionals use to uncover fraudulent activities?

There are a myriad of tools including a mixture of technology and human resources.

How does a forensic auditor ensure the confidentiality and integrity of data during the audit process?

Confidentiality is of paramount importance when working to uncover potential bad actors.

What are the qualifications and skills essential for a forensic auditor?

Forensic professionals needs a myriad of skills including:

  • Decision making
  • Oral and written communication
  • Strong IT skills
  • Quantitative reasoning and problem solving
  • Observation and attention to detail
  • Public speaking
  • Personal relations and interpersonal skill

How do forensic professionals navigate the legal complexities associated with their findings?

This involves ongoing collaboration with legal professionals from the beginning of the process to ensure all evidence is collected and documented in an ideal manner.

Can a forensic audit be used as evidence in legal proceedings?

Yes, forensic audit can be used as evidence in subsequent lawsuits.

What are some notable real-world examples where forensic audits revealed significant irregularities?

A new disclosure regarding Lebanon’s central bank was revealed in August 2023. This is as a result of a forensic audit undertaken against it by the fresh York company Alvarez & Marsal. The most recent work revealed former governor Riad Salameh’s malfeasance and illicit commissions totaling $111 million. The assurance activity was carried out in accordance with directives issued by the International Monetary Fund.

Another famous example is the crumbling state of Robert Maxwell’s firms which was revealed by forensic accountants after his death. They proved that that he was stealing money from the pension fund to keep his businesses viable.

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