Forensic Audit

In the world of finance and business, accuracy and integrity are paramount. This is where a forensic audit comes into play. But what exactly is a forensic audit, and when does your business need one? In this guide, we will explain the concept of forensic audits, explore the scenarios where they are essential, and delve into the process of conducting such audits.

Meaning : –

A forensic audit is an examination and evaluation of Individual’s or a company’s financial information for use as evidence in court. A forensic audit can be conducted to prosecute a party for fraud, embezzlement or other financial claims. In addition, a forensic audit may be conducted to determine negligence, misuse of powers or even to determine undue benefits given to any other company or individual.

Forensic audit is also conducted on behalf of the banks and financial institutions, insolvency professional agency, SEBI or Management of the company.

It is the process used to examine an individual’s or company’s financial information for use as evidence in court. It helps detect diversion of funds, willful defaults and window dressing of financial statements.

A forensic audit is therefore an independent and comprehensive process of reviewing a person’s or the company financial statements to determine if they are accurate and whether any financial benefit has been attained by way of presenting an unrealistic picture or any illegal activity.

Objectives of Forensic Auditing : –

• To use the forensic auditor’s conclusions to facilitate a settlement, claim, by reducing the financial component as an area of continuing debate.
• To avoid fraud and theft.
• To restore the downgraded public confidence.
• To formulate and establish a comprehensive Corporate Governance policy.
• To create a positive work environment.

Forensic Audit services typically include : –

• Financial Statement
• Computer Forensic

• Electronic Discovery
• Bankruptcies, Insolvencies, and reorganizations
• Workplace fraud investigations

Forensic Audit Methodology : –

Forensic audit is a process of resolving signs or allegations of fraud/misrepresentation from inception to disposition.

Forensic audit involves efforts to resolve allegations or signs of fraud when the full facts are unknown or unclear; therefore, it seek to obtain facts and evidence to help establish what happened, identify the responsible party, and provide recommendations where applicable.

When conducting the forensic audit to resolve signs or allegations of fraud, the forensic auditor should:

• Assume litigation will follow.
• Act on prediction.
• Approach cases form two perspectives.
• Move from the general to the specific.
• Use the fraud theory approach.

Type of Fraud : –

The forensic accountant could be asked to investigate many different types of fraud. The most common involves theft, including cash, inventory and fraudulent payments. The three categories of frauds are corruption, asset misappropriation and financial statement fraud

I. Corruption : –

There are three types of corruption frauds: conflicts of interest, bribery, and extortion. Research shows that corruption is involved in around one third of all frauds.

• In a conflict-of-interest fraud, the fraudster exerts his/her influence to achieve a personal gain which detrimentally affects the company. The fraudster may not benefit financially, but rather receives an undisclosed personal benefit because of the situation. For example, a manager may approve the expenses of an employee who is also a friend to maintain that friendship, even if the expenses are inaccurate.

II. Asset Misappropriation : –

By far the most common frauds are those involving asset misappropriation, and there are many different types of fraud which fall into this category.

The common feature is the theft of cash or other assets from the company, for example:

• Cash theft: Misappropriation of cash, the stealing of physical cash, for example
• petty cash, from the premises of a company.
• Fraudulent disbursements: raising fake invoices, company funds being used to make fraudulent payments. Common examples include billing schemes, where payments are made to a fictitious supplier, and payroll schemes, where payments are made to fictitious employees (often known as ‘ghost employees’).
• Inventory frauds: the theft of inventory from the company.
• Misuse of assets: employees using company assets for their own personal interest.

III. Financial Statement Fraud : –

This is also known as fraudulent financial reporting and is a type of fraud that causes a material misstatement in the financial statements. It can include deliberate falsification of accounting records; omission of transactions– either revenue or expenses, non-disclosure of relevant details from the financial statements, balances or disclosures from the financial statements; or the misapplication of financial reporting standards. This is often carried out with the intention of presenting the financial statements with a particular bias, for example concealing liabilities to improve any analysis of liquidity and gearing.

Difference between Forensic Audit and Statutory Audit :-

Conclusion : –

In summary, a forensic investigation is a very specialised and detailed type of engagement, which requires highly skilled team members who have experience not only of accounting and auditing techniques, but also of the relevant legal framework. There are numerous different types of fraud that a forensic accountant could be asked to investigate. The investigation is likely to ultimately lead to legal proceedings against one or several suspects, and members of the investigative team must be comfortable with appearing in court to explain how the investigation was conducted, and how the evidence has been gathered. Forensic accountants must therefore receive specialist training in such matters to ensure that their credibility and professionalism cannot be undermined during the legal process.

Author : Sachin Rathi