Forensic Audit

 

What is forensic audit?

Forensic audit is an application of specialized knowledge, investigation skills and skepticism mind to analyze the data to collect, analyze and evaluate evidential matter and to interpret and communicate finding in the courtroom, boardroom or other legal/administrative venue.

 

Why forensic audit to be done?

Forensic audit investigations are made for several reasons, including the following:

Corruption:-

In a Forensic Audit, while investigating fraud, an auditor would look out for:

1. Conflicts of interest – When fraudster uses his/her influence for personal gains detrimental to the company. For example, if a manager allows and approves inaccurate expenses of an employee with whom he has personal relations. Even though the manager is not directly financially benefitted from this approval, he is deemed likely to receive personal benefits after making such inappropriate approvals.
2. Bribery – As the name suggests, offering money to get things done or influence a situation in one’s favor is bribery.
3. Extortion – If Techno smith demands money in order to award a contract to Telemith, then that would amount to extortion.

 

Asset Misappropriation

This is the most common and prevalent form of fraud. Misappropriation of cash, raising fake invoices, payments made to non-existing suppliers or employees, misuse of assets, or theft of Inventory are a few examples of such asset misappropriation.

 

Financial statement fraud

Companies get into this type of fraud to try to show the company’s financial performance as better than what it actually is. The goal of presenting fraudulent numbers may be to improve liquidity, ensure top management continues receiving bonuses, or to deal with pressure for market performance.

Some examples of the form that financial statement fraud takes are the intentional forgery of accounting records, omitting transactions – revenue or expenses, non-disclosure of relevant details from the financial statements, or not applying the requisite financial reporting standards.

 

Our standard process for forensic audit

A forensic auditor is required to have special training in forensic audit techniques and in the legalities of accounting issues. A forensic audit has additional steps that need to be performed in addition to regular audit procedures.

 

Plan the investigation

When the client hires a Forensic auditor, the auditor is required to understand what the focus of the audit is. For example, the client might be suspicious about possible fraud in terms of quality of raw material supplied. The forensic auditor will plan their investigation to achieve objectives such as:

• Identify what fraud, if any, is being carried out
• Determine the time period during which the fraud has occurred
• Discover how the fraud was concealed
• Identify the perpetrators of the fraud
• Quantify the loss suffered due to the fraud
• Gather relevant evidence that is admissible in the court
• Suggest measures that can prevent such frauds in the company in future

 

Collecting Evidence

By the conclusion of the audit, the forensic auditor is required to understand the possible type of fraud that has been carried out and how it has been committed. The evidence collected should be adequate enough to prove the identity of the fraudster(s) in court, reveal the details of the fraud scheme, and document the amount of financial loss suffered and the parties affected by the fraud. A logical flow of evidence will help the court in understanding the fraud and the evidence

Presented Forensic auditors are required to take precautions to ensure that documents and other evidence collected are not damaged or altered by anyone.

Common techniques used for collecting evidence in a forensic audit include the following:

• Substantive techniques – For example, doing a reconciliation, review of documents, etc
• Analytical procedures – Used to compare trends over a certain time period or to get comparative data from different segments
• Computer-assisted audit techniques – Computer software programs that can be used to identify fraud
• Understanding internal controls and testing them so as to understand the loopholes which allowed the fraud to be perpetrated.
• Interviewing the suspect(s)

 

Reporting

A report is required so that it can be presented to a client about the fraud. The report should include the findings of the investigation, a summary of evidence, an explanation of how the fraud was perpetrated, and suggestions on how internal controls can be improved to prevent such frauds in future. The report needs to be presented to a client so that they can proceed to file a legal case if they so desire.

 

Court Proceedings

The forensic auditor needs to be present during court proceedings to explain the evidence collected and how the suspect was identified. They should simplify the complex accounting issues and explain in layman’s language so that people who have no understanding of the accounting terms can still understand the fraud that was carried out.

 

As a forensic auditor we provides following services:

• Corruption and anti-bribery services:
• Anti-money laundering services:
• Forensic Technology Services:
• Dispute Advisory Services:
• Strategic Threat Advisory services: Bottom of Form

 

To summarize, a forensic audit is a detailed engagement which requires the expertise of not only accounting and auditing procedures but also expert knowledge regarding the legal framework. A forensic auditor is required to have an understanding of various frauds that can be carried out and of how evidence needs to be collected. There is a sudden spurt in demand for Chartered Accountants with skills to do forensic audit with regulators announcing plans to probe stressed companies for any financial fraud.