Forensic Audit Guide
All about forensic audits
All about forensic audits
A Forensic Audit is an examination 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. RJ Inc was not authorized to conduct business as its license was suspended due to certain irregularities in taxes paid. The CFO had knowledge about this still it recommended and made Telemart enter into a contract with RJ Inc for his vested interest.
A forensic audit can reveal such cases of fraud.
Forensic audit investigations that are made for several reasons, including:
In a Forensic Audit, while investigating fraud, an auditor would look out for:
This is the most common and prevalent fraud carried out by fraudsters. Misappropriation of cash, raising fake invoices, payments made to non-existing suppliers or employees, misuse of assets or theft of Inventory are few examples of such asset misappropriation.
Companies get into such type of frauds so as to show a better performance of the company than what it is actually. This is done so as improve liquidity or ensure top management keep earning the bonuses or due to market pressure on performance.
Some examples of such frauds are – Intentional forgery of accounting records; omitting transactions – either revenue or expense transactions, non-disclosures of relevant details from the financial statements; or not applying the requisite financial reporting standards.
A forensic auditor is required to have specialist training so that he can understand the legal framework and also has the knowledge of forensic audit techniques.
A forensic audit has a few additional steps that need to be performed apart from regular audit procedures.
The steps would be:
Having the technical knowledge in collecting evidence that can be used in a court case is important. It is also important to keep a clear sequence of custody until the evidence is presented in court. A logical flow of evidence helps in understanding the fraud and evidence presented in a better manner. If the same is not done then the evidence can be challenged in court, or the court would not admit it.
Investigators are required to be alert to ensure that the evidence & documents collected do not get damaged or destroyed by the suspect(s).
To summarize, a forensic audit is a detailed engagement which requires the expertise of not only accounting and auditing procedures but also expert knowledge and experience about the legal framework. A Forensic auditor is required to have an understanding of various frauds that can be carried out and also how the evidence needs to be collected. Having an understanding of legal frameworks and ability to face the court and the stress put in by defense counsel is also required.
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