Beginner’s Guide to Forensic Audit and Accounting

What is Forensic Audit?

A forensic audit is a comprehensive examination and evaluation of a firm's or individual's financial records to derive evidence that can be used in a legal proceeding. Forensic audits are primarily conducted to investigate and uncover activities such as fraud, embezzlement, or financial manipulation.

Key characteristics and components of a forensic audit include:
– Purpose: Unlike regular audits which aim to verify the accuracy of financial statements, forensic audits are specifically performed to identify wrongdoing or to provide evidence for legal cases.
– Investigation Techniques: Forensic auditors use specialized investigative techniques to analyze financial records. This includes tracing funds, identifying unauthorized transactions, and looking for discrepancies or anomalies in the records.
– Scope: The scope of a forensic audit is usually determined by the nature of the suspected fraud or legal issue. It can involve a deep dive into specific transactions, or a broader review of financial practices over a period.
– Documentation: A crucial part of a forensic audit is the documentation of findings. Auditors prepare detailed reports that can be used in legal proceedings, including court trials. These reports must be clear, precise, and able to withstand legal scrutiny.
– Skills: Forensic auditors are typically skilled in accounting, auditing, and investigative techniques. They often have a background in law or a deep understanding of legal procedures related to financial crimes.
– Outcome: The outcome of a forensic audit can lead to legal actions, including criminal charges, civil suits, or regulatory penalties. It can also result in internal actions like policy changes, enhanced controls, or personnel adjustments within an organization.

Table of Contents

1. Introduction
2. Financial Audit v/s Forensic Audit
3. Forensic Auditor
4. Forensic Accounting Process and Techniques
5. Best Forensic Accounting Firms
6. Conclusion

1. Introduction

With an upsurge of digital fraudulent activities in the recent times, forensic audit has emerged as a very lucrative field among practitioners. Forensic Audit involves all those techniques which can trace the digital frauds in an organisation. Forensic means “Suitable for use of Court of Law”. Forensic Audit becomes very crucial when the case or the proceedings are running before the Court of Law. Forensic Audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial crimes.

2. Financial Audit v/s Forensic Audit

For better understandability of the concept of forensic audit, one must compare the same with financial audit which is as follows-  

3. Forensic Auditor

I. Forensic Auditor is retained to:

• analyse
• interpret
• summarise and
• present

the complex business and financial issues.

II. Forensic Auditors are retained by:

• Lawyers
• Police force
• Banks
• Insurance Company
• Government
• Court, etc.

III. Forensic Auditor is often involved in:

IV. Services rendered by the Forensic Auditor are in great demand in the following areas:

• Professional negligence cases
• Fraud investigation and risk/control services
• Arbitration services
• Dispute Settlement
• Settlement of Insurance claims
• Criminal investigations

V. Services rendered by the Forensic Auditors:

• Crafting questions to be posed
• Responding to questions posed
• Identifying documents to be requested and/or summoned
• Identifying individuals to be most knowledgeable of facts
• Conducting research relevant to facts of the case
• Identifying and preserving key evidence
• Evaluating produced documentation and information for completeness
• Analysing produced records and other information for facts
• Identifying alternative means to obtain key facts and information
• Providing questions for deposition and cross examination of facts and expert witness

VI. Forensic Auditor’s characteristics and skills are discussed herewith:

4. Forensic Accounting Process and Techniques

• The process of forensic accounting in general involves the following steps:

1. 1. Initialisation: Being very clear about the objective and removing all the doubts as to the real purpose and utility of the assignment is required beforehand. Prior to making the plan, complete understanding of client and important facts is very crucial.
   2. Develop a Plan: Taking the information obtained into consideration to develop a plan with the objective of obtaining conclusive evidence.
   3. Obtain relevant evidence: Depending on the nature of the case, this may include locating documents, economic information assets, any entity person, investigator must be alert to documents being falsified, damaged or destroyed by suspects.
   4. Perform the analysis:

• • • • Calculating economic damages
      • Summarizing a large number of transactions
      • Performing tracing of assets
      • Performing present value calculations utilizing appropriate discount rates
      • Performing a regression or sensitivity analysis
      • Utilizing a computerized application such as a spreadsheet, database or computer model, and
      • Utilizing charts and graphs to explain the analysis

1. 5. Reporting: It is the final step of a fraud audit. Audits will include information detailing the fraudulent activity fraud. It should also discuss the way the fraudster had set up the scheme of fraud and which controls were circumvented and steps to prevent the same.
   6. Court Proceeding: The evidence gathered during the investigation will need to be presented at the court, and team members may be called to the court to describe the evidence they have gathered and to explain as to how the suspect was identified.

• Forensic Audit Techniques involve the following:

a) Analytical Steps:

1. 1. Understand the business.
   2. Identify possible frauds that could exist.
   3. Catalogue or trace possible fraud.

b) Technology Steps:

1. 4. Use technology to gather data about symptoms.
   5. Analyse results.
   6. Automate detection procedures.

c) Investigative Steps:

1. 7. Investigate symptoms.
   8. Follow up.

5. Best Forensic Accounting Firms

Forensic accounting being a vast field requires expertise and experience in financial matters. Thus, as per a report published in 2024, some of the best forensic accounting firms are as listed below:

• PWC LLP
• Deloitte
• Ernst and Young LLP
• KPMG LLP
• Grant Thornton LLP

6. Conclusion

Thus, forensic auditing comes into picture only when the courts and tribunals detect some fraudulent activities being carried out in an organisation and as a matter of fact, forensic auditors are appointed to examine the same and report their findings to the court of law. The scope of forensic audit services is likely to hike in the near future owing to the continuous reforms in the Indian financial sector and thus, increasing the demand for certified forensic auditing professionals in India.