A forensic audit involves an analysis of financial records of a company to determine evidence that can be used in court or other legal proceedings.
Telemart entered into a contract for the supply of carts with RJ Inc on the advice of its Chief Financial Officer (CFO). RJ Inc was not licensed to operate business at the time because of irregularities in tax payments. Although the CFO was aware of this fact, he recommended Telemart sign a contract with RJ Inc as he was secretly being compensated by RJ. An Forensic Statement Analysis is not handwriting. It examines the written words provided by witnesses, accusers, victims, or defendants to describe an event. A written statement can be dissected to determine if it is truthful, misleading, or missing information.
What is a Forensic Audit?
There are many reasons why forensic audit investigations can be conducted, including:
Corruption
An auditor will look for the following things in a forensic audit to investigate fraud:
Conflicts of Interest – A situation in which a fraudster is able to use his/her influence to gain personal benefits that are detrimental for the company. If a manager approves incorrect expenses for an employee with whom he is in intimate relationships, this could be an example. Even though this approval did not directly benefit the manager, it is likely that he will receive personal benefits from making these inappropriate approvals.
Bribery – This is when you offer money to influence or get things done. Telemith, for example, bribed a Technosmith employee to give Telesmith certain data in order to help him prepare a tender to Technosmith.
Extortion – If Technosmith asks for money to award Telemith a contract, that would be considered extortion.
Asset misappropriation
The most widespread form of fraud is asset misappropriation. Examples of asset misappropriation include the theft or misuse of inventory, cash misappropriation, creation of fake invoices, payments to suppliers or employees not yet known, and payment of fraudulent amounts.
Financial statement fraud
This fraud is used by companies to present a company’s financial performance as higher than it really is. To improve liquidity, keep top managers receiving bonuses, or deal with market pressure, it is possible to present fraudulent numbers.
Financial statement fraud can take many forms, including the intentional forgery or omission of transactions (either revenue or expense), non-disclosure or failure to apply the required financial reporting standards.
Procedure for a Forensic Audit Investigation
Forensic auditors must have special training in forensic accounting techniques and legalities.
Additional steps are required for a forensic audit, in addition to the regular audit procedures.
1. Plan your investigation
The client will need to explain the purpose of the audit to the forensic auditor they have hired. The client may be suspicious of possible fraud regarding the quality of the raw materials they have received. To achieve these objectives, the forensic auditor will plan his investigation.
- Identify the fraud being committed, if any.
- Find out the time frame during which fraud occurred
- Learn how the fraud was hidden
- Identify the perpetrators
- Calculate the loss due to fraud
- Gather all relevant evidence that can be admissible before the court
- Please suggest ways to prevent future frauds within the company
2. Collect evidence
The forensic auditor must be able to identify the type of fraud and the methods used by the perpetrators of the fraud after the audit is over. The evidence should be sufficient to support the identification of the fraudster(s), reveal details about the fraud scheme, as well as document the financial loss and parties that were affected by it.
The court will be able to understand the fraud and the evidence presented if there is a logical flow of evidence. To ensure that the documents and evidence they collect are safe from damage or alteration, forensic auditors must take all precautions.
These are some of the most common techniques for obtaining evidence during a forensic audit:
- Substantive techniques: For example, a reconciliation or review of documents.
- Analytical procedures – Used to analyze trends over a specific time period or to obtain comparative data from various segments
- Computer-assisted audit methods – Software programs that can be used for identifying fraud
- It is important to test and understand internal controls in order to identify the loopholes that allowed fraud to occur.
3. Interview the suspects
Reporting – Clients will need to be provided with a report about fraud. Reports should contain the results of the investigation, summary of evidence, explanation of fraud and suggestions for improving internal controls to prevent future frauds. To allow a client to file a legal action, the report must be presented.
Court proceedings – A forensic auditor must be present in court to explain the evidence and to identify the suspect. The forensic auditor should be able to simplify complex accounting issues and explain them in layman’s terms so that anyone who doesn’t understand accounting terms can still comprehend the fraud.
A forensic audit is an in-depth engagement that requires expertise not only in accounting and auditing, but also legal knowledge. The forensic auditor must be able to identify and distinguish between the various types of fraud that could be committed, as well as how to collect evidence.