A forensic audit is an assessment or examination of the financial records of a company to derive evidence that can be used in a court of law or legal proceedings. Forensic audits can reveal cases of fraud.
Why are forensic audits conducted?
Forensic audit investigations are done because of several reasons. These include:
Forensic audits investigate fraud. Auditors usually look out for:
- Conflicts of interest. A cheater may use his or her influence for personal gains. An example is when a manager approves or allows inaccurate expenses by an employee with whom he or she has a personal relationship. Even if he does not benefit from his approvals, he or she may receive a personal benefit after approving the expenses.
- Offering money to get things done or influencing a situation in favour of someone or something is bribery. This may include bribing an employee to provide certain data to a company in preparing a tender offer.
- If a company demands money in order to award a contract, this act is a form of extortion.
Misappropriation or Misuse of Assets
Misuse of assets are the most common form of fraud. Misappropriation of cash, payments made to non-existing suppliers or employees, raising fake invoices, misuse of assets, inventory theft are some examples of asset misappropriation.
Fraud in financial statements
When the company tries to show that their financial performance is better than what it actually is, it is committing financial statement fraud. This type of fraud happens when the goal of the company is to present fraudulent numbers to improve liquidity, and to make sure that top management continue to receive bonuses or deal with the pressure of market performance.
An example of fraudulent financial statements are intentional forgery of accounting records, the omission of transactions either expenses or revenue, non-disclosure of relevant details in financial statements and not using required reporting standards.
Forensic audit investigation procedures or processes
The forensic auditing team need to have particular training in forensic audit methods or techniques and about the legalities and rules of accounting matters or issues. A forensic audit include additional steps in addition to the regular audit process. These include:
Planning the forensic investigation. When a client hires forensic audit services, the auditor needs or is required to understand the main focus or thrust of the forensic audit. If a client is suspicious of fraud or scam in terms of the quality of the supply of raw materials, the auditor should plan the investigation to achieve or accomplish this objective by:
- Identifying what the fraud is and how it is was carried out
- Determine the time or period on when the fraud has occurred
- Find out how the fraud was concealed
- Identify the offenders
- Quantify the loss due to the fraud
- Gather evidence that can be used in court
- Suggest ways on how to prevent such fraud in the future.
Collecting Evidence. Before concluding the forensic audit, the auditor should have understood the type of fraud that has taken place and how it was committed. The evidence collected from the forensic audit should be enough to prove the identity of the culprits in court, reveal the details of the fraudulent activities and document the amount of financial loss suffered and the parties affected by it.
Providing a logical flow of evidence can help the court in understanding the fraud and the evidence presented. Evidence collected should not be altered or damaged by anyone.
Here are some common techniques in collecting evidence in a forensic audit.
- Substantive techniques. These include doing a reconciliation or review of documents.
- Analytical procedures. These are done by comparing trends over a period of time to get comparative data from various segments.
- Computer-assisted audit techniques. Make use of computer software programs to identify fraud.
- Understanding internal controls and testing them to find loopholes that allowed the fraud to happen.
- Interview of suspects.
Reporting. A forensic audit report about the fraud is needed to be formulated after the audit and should be presented to the client. It should include the findings of the investigation, explanation of how the fraud was committed, the summary of evidence and suggestions on how controls can be improved to prevent it from happening in the future. The forensic audit report should be presented to the client for them to be able to proceed to file a legal case if they want to.
Court Proceedings. Forensic auditors should be present during court proceedings to explain the collected evidence and how the suspects were identified. They should know how to simplify accounting issues in question and explain in plain language for the people to understand how the fraud was carried out.
Forensic audits are detailed engagement that need the expertise of not only accounting and auditing processes and techniques, but also the expertise of legal framework. Forensic auditors should have an understanding of various frauds that can be committed and how evidence is collected.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.