Forensic audit what is it

A forensic audit, also known as a forensic examination, is defined as an examination of financial records to find any illegal financial activity. The term forensic itself is defined as belonging to, used in, or suitable to courts of judicature or to public discussion and debate. The results of this examination include a report by the auditor attesting to the fairness of presentation of the financial statements and related disclosures.

Forensic audit investigations are made for several reasons, including the following:. 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 benefited from this approval, he is deemed likely to receive personal benefits after making such inappropriate approval.

For example, A bribing an employee of Company B to provide certain data to aid A in preparing a tender offer to B. If A demands money in order to award a contract to B, then that would amount to extortion.

If they are unsure of which direction to turn, they may go seeking the wrong investigative solution. To start, what is a forensic audit and what is forensic accountant? When you compare that to the definition of an audit, you will see a major difference between the two. The objective of a forensic accounting audit is to investigate the matter with the intention of finding evidence that will appear in a court of law for some type of litigation or mediation.

Forensic audits are conducted with the understanding the matter will appear in court. This investigation could be in relation to a trial or some form of mediation. Most of forensic audits and forensic examinations are conducted by Certified Fraud Examiners CFEs , or forensic accountants who are normally considered experts in a specific field of forensic accounting. As you can see, an internal audit is about more than just money.

It provides a complete picture of how the organization operates and where it needs to improve policies, procedures, and practices. Accepting the investigation The forensic accountant must initially consider whether their firm has the necessary skills and experience to accept the work. Forensic investigations are specialist in nature, and the work requires detailed knowledge of fraud investigation techniques and the legal framework.

Investigators must also have received training in interview and interrogation techniques, and in how to maintain the safe custody of evidence gathered. Additional considerations include whether or not the investigation is being requested by an audit client. If it is, this poses extra ethical questions, as the investigating firm would be potentially exposed to self-review, advocacy and management threats to objectivity.

Unless robust safeguards are put in place, the firm should not provide audit and forensic investigation services to the same client. Commercial considerations are also important, and a high fee level should be negotiated to compensate for the specialist nature of the work, and the likely involvement of senior and experienced members of the firm in the investigation.

Planning the investigation The investigating team must carefully consider what they have been asked to achieve and plan their work accordingly. The objectives of the investigation will include:. The investigators should also consider the best way to gather evidence — the use of computer assisted audit techniques, for example, is very common in fraud investigations.

Gathering evidence In order to gather detailed evidence, the investigator must understand the specific type of fraud that has been carried out, and how the fraud has been committed.

The evidence should be sufficient to ultimately prove the identity of the fraudster s , the mechanics of the fraud scheme, and the amount of financial loss suffered. It is important that the investigating team is skilled in collecting evidence that can be used in a court case, and in keeping a clear chain of custody until the evidence is presented in court. If any evidence is inconclusive or there are gaps in the chain of custody, then the evidence may be challenged in court, or even become inadmissible.

Investigators must be alert to documents being falsified, damaged or destroyed by the suspect s. Evidence can be gathered using various techniques, such as:. The ultimate goal of the forensic investigation team is to obtain a confession by the fraudster, if a fraud did actually occur. For this reason, the investigators are likely to avoid deliberately confronting the alleged fraudster s until they have gathered sufficient evidence to extract a confession.

The interview with the suspect is a crucial part of evidence gathered during the investigation. Reporting The client will expect a report containing the findings of the investigation, including a summary of evidence and a conclusion as to the amount of loss suffered as a result of the fraud.

The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any, were circumvented.