Forensic Audit Guide
All about forensic audits
All about forensic audits
A Forensic Audit is an examination of a company’s financial records to derive evidence which can be used in a court of law or legal proceeding.
For example, Telemart, on the recommendation of its Chief Financial Officer (CFO), entered into a contract with RJ Inc for the supply of carts. At the time, RJ Inc was not authorized to conduct business, as its license was suspended due to certain irregularities in taxes paid. The CFO had knowledge of this fact, but still recommended that Telemart enter into a contract with RJ Inc because he was secretly receiving compensation from RJ for doing so.
A forensic audit can reveal such cases of fraud.
Forensic audit investigations are made for several reasons, including the following:
In a Forensic Audit, while investigating fraud, an auditor would look out for:
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.
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 continue 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 – either revenue or expenses, non-disclosure of relevant details from the financial statements, or not applying the requisite financial reporting standards.
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.
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:
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.
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