Written by Gagan Kumar Mishra Dt. March 30th, 2022
The term forensic comes from the Latin word called forensis. A forensic audit is an examination and evaluation of a firm’s or individual’s financial records to use them as evidence in a court of law or legal suit. It aids in the detection of fraud in the workplace in a high-risk environment. A forensic audit can be used to prosecute a party for fraud, embezzlement, or other financial allegations. Forensic audits necessitate knowledge of accounting and auditing procedures, as well as expert knowledge of the audit’s legal framework.
Forensic audits encompass a wide range of investigative activities aimed at reducing corporate fraud. Forensic audits may also include non-financial fraud situations, such as disputes involving bankruptcy filings, business closures, and divorces.
Why should a need arise to perform a Forensic Audit?
Forensic audit plays a critical role in assisting corporations to maintain efficiency and excellence by detecting, preventing, and regulating corporate fraud and favouring due investigation. On a broader scale, forensic auditing, as a combined effort of accounting and investigation, serves all five E’s of good governance, allowing corporations to cultivate and mature on the parameters of being “Effective, Efficient, Easy, Empowering, and Equity.” Various types of illegal activities can be discovered or confirmed by forensic audit investigations. If there is a possibility that the evidence gathered will be used in court, a forensic audit is usually chosen over a regular audit.
Cases where the requirement arises to perform a forensic audit:
The reasons for the forensic audit are discussed here.
- When suspicious transactions arises indicating fraud or illegal activities inside the business environment.
- At the time of reconciliation of balances resulting in unexplained material differences.
- Where crucial information is stolen and business system have been hacked by hacker.
- Issue informed by a person or an organization regarded as engaging in an unlawful activity.
- Turnover includes massive increase during the year but balances are showing negative.
Sources of Forensic Audit
Under the following headings, the detailed position of laws and regulations addressing corporate fraud and assisting in achieving forensic audit.
- Indian Laws
- Laws Relating to Information Technology and Business
- International Laws
- Other law which are required for performing the forensic audit
Techniques of Forensic Audit
- Computer Assisted Audit Techniques(CAATs): Computer assisted audit techniques (CAATs) are computer programs that the auditors use as part of the audit procures to process data of audit significant contained in a client’s information system, without depending on him.
- Data Analytics: The analysis of complete sets of data to identify irregularity and trends for further investigation, as well as to provide audit evidence. This tool normally used an analysis of entire population of data.
- Data Mining Techniques: It is assisted audit techniques designed to automatically mine large volume of data for new, hidden or unexpected information system or patterns.
- Generalized Audit Software (GAS): Generalized Audit software is a class of CAATs that allow auditors to undertake data extraction, querying, manipulation, summarization and analytical task. GAS support auditors by allowing them to examine the entitty,s data easily, flexibly ,independently and interactively in data base auditing.
- Other Techniques: Apart from the above techniques, the auditors may also consider other techniques at the time of conducting the forensic audit .like, Trend analysis, ratio analysis, Digital forensic techniques and common software tools.
How to Perform a Forensic Audit
The process of conducting a forensic audit is almost similar to other audits. These are like planning, collecting audit evidence, and writing a report, with the additional step of a potential court appearance.
Planning and investigation of facts
The forensic auditor and the entire team will organise their investigation at this stage to achieve core objective of the forensic audit such as finding of amount involved in fraud, determining the time period during which the fraud occurred and uncovering how the crime was disguised and other things which are necessary while investigation.
During the course of forensic audit, auditors should keep one thing in their mind that the required documents and other evidences collected and are not intentionally or unintentionally damaged or altered as they help a lot to the clients in case of sue. The evidence gathered during the audit should be sufficient to establish the fraud.
While gathering audit evidences, it is necessary to take care of the mentioned below points:
- There is any type of fraud or negligence.
- Is the impact of fraud material or not?
- Who is accountable or responsible, for the money involved and how that amount could be recover?
After doing all required things during the course of forensic audit a written report on the fraud will be deliver to the client having all in-depth details about audit which allow the users to proceed with filing a legal complaint.
Forensic audit is seen as a fast-growing sector in the detection and prevention of fraud and white-collar criminal activities. Specialist skills are not only needed in accounting and auditing, but also in legal framework assessment and fact-finding. Forensic auditing has major benefits, such as greater credibility, professional accounting, enhanced efficacy, and accuracy which help the users to deal with numerous loopholes in an organization and also help them to secure their misleading of funds.
Gagan Kumar Mishra