Forensic Auditing – Meaning and its Basic Concepts

Contents:

• Meaning
• Need of Forensic Audit
• Forensic Audit Procedures
• Methodology of Forensic Audit Investigation
• Common Areas where Forensic Audit is used
• Conclusion

Meaning

When it comes to auditing, many of organizations consider it is as simply a statutory requirement for getting the financials examined by a certified accountant to ensure compliance. However, this type of audit (financial audit) is just one of many other types of audits that any organization would undergo. Forensic audit is one among such audits which involves an examination of past financial records of an entity to detect any illegal action, manipulation in the books of accounts, siphoning of funds, etc. The forensic audit begins with the suspicion and doubts and ends with the performance of investigation procedures either to confirm the case or dispel the suspicion.

Unlike financial audits which are focused more on statutory compliance, the forensic audits are designed to investigate the financial records of an entity to derive evidences in support of fraud that can be used in court of law or legal proceedings.

Forensic Auditing – It is an independent, comprehensive and scientific approach of reviewing an entity’s financial statements in order to determine its accuracy, free from material misstatements and importantly, to derive evidences that can be used in a court of law or legal proceedings.

Need of Forensic Audit

As of now, the forensic auditing has emerged as a specialized field in the industry that requires a specific skill set to detect the fraud, leaving no scope for overlap. But, to determine when an organization needs forensic auditing is significant to deal with the early warning signals of fraud. Thus, there are few instances on the occurrence of which an entity should direct for forensic audit like (i) Theft of business information or where business systems have been hacked, (ii) Issues identified by Whistle Blowers, (iii) Reconciliations resulted in unidentified material differences, (iv) Suspicious of fraud or illegal activity (v) Turnover has occurred and balances are showing negative results.

Forensic Audit Procedures

Since the forensic audit is more of investigation and collection of evidences, it is of great importance that the audit should be conducted with an attitude of professional skepticism. However, a scientific approach involving use of forensic audit procedures should be used to conduct the assignments. These procedures are more specific towards detecting possible material misstatements in the financial records that result into fraudulent activities. Besides, forensic data analysis and fraud investigation techniques, a tool named fraud triangle is also used for addressing the presence of three elements which are common to any fraud being committed:-

1. 1. Incentives – a motive that derives a person to commit fraud
   2. Attitude – an ability to rationalize the fraudulent behavior
   3. Opportunity – that enable a person to commit fraud.

Methodology of Forensic Audit Investigation

The forensic audit investigation is the utilization of specialized investigation skills to conduct the forensic audit engagements in such a manner that the outcome can be presented in court of law as evidence. The auditor should use an approach considering both the aspects of whether the fraud could have occurred and whether the fraud could not have occurred. With this approach the forensic auditors will be able to bring the reality more closer to general public especially in the circumstances where perception and reality are not aligned. An auditor can follow a nine step methodology for fact finding in case of forensic audit engagements:-

1. 1. Accept the forensic audit engagement;
   2. Evaluate the allegations or suspicions;
   3. Conduct due diligence background notes;
   4. Complete the preliminary stage of investigation;
   5. Check the prediction assuming that there will be a litigation;
   6. Begin with external investigation;
   7. Gathering the required proofs and evidences;
   8. Preparing report on findings; and
   9. Court proceedings

Common Areas where Forensic Audit is used

With the increase in financial fraud popularly known as white-collar crime, the forensic accounting and auditing has emerged as prominence to ensure the financial growth for businesses and economy as well. Some of the common areas that are to be detected in forensic audit are:-

1. 1. Asset Misappropriation
   2. Instances of Corruption
   3. Extortion
   4. Financial Statement fraud
   5. Conflict of interest

Conclusion

To summarize, forensic auditing is a detailed examination of past financial records which requires the expertise of professionals not only in accounting and auditing but also in the area of assessing legal framework and fact finding. The forensic auditor is expected to adopt a practical approach in order to deal with the numerous loopholes which may arise during investigation procedures. With the key benefits of increased credibility, expert accounting, enhanced effectiveness and accuracy, the forensic audit is seen as a rapidly growing area in the detection and prevention of fraud and white-collar criminal activities.