WHAT IS FORENSIC AUDIT?
Forensic audit is an anatomic audit that consists of editing numbers, studying its background, legitimacy and validity. So, it is a focused accountancy that looks for errors and study their reasons, such as fraud or deception. It looks for wasted funds through examining and assessing the whole financial movement. It’s a track that lasts for months and paves the way to create briefs and court files to help the judiciary in any investigation.
Forensic auditing can also be defined as a process in which forensic auditors gather, analyze and report on data for the purpose of finding facts or evidence in the context of legal financial disputes or other irregularities. That means it is an engagement in which the forensic auditor undertakes procedures for collecting evidence for the purpose of finding facts that support the issue they are called for.
A forensic audit differs from a financial audit in a way that it is not mandatory or willingly performed but its need is triggered by an event. Some events that result in the need for a forensic audit include:
- Financial disputes between companies
- Insurance disputes
- Money laundering
- And other civil & criminal investigations.
Let’s say a business has been damaged in fire and the owner has applied for insurance claim. The insurance company believes that there is something wrong with the event. The fire, their professionals are suspect, or it could be intentionally lit. The insurance company will hire forensic auditor to dig into the details and find out what happened exactly in the light of evidence(s) and facts.
DIFFERENCE BETWEEN ORDNARY AUDIT AND FORENSIC AUDIT
How forensic audit differs from the ordinary auditing and accountancy is that the latter looks only at meeting the accountancy standards, without deepening into numbers and their backgrounds in addition to the validity of constraints.
Forensic auditors are hired for different types of investigative and research-based services. Some prominent services that a forensic auditor may render include:
- Investigative Questions and Answers
Not everyone has an investigative mind. A forensic auditor can compile a list of questions and answers for an ongoing investigation. The Q&A will be based on psychological and professional knowledge of the auditor.
- Documentation Services
Being aware of both, the auditing standards and legal process, forensic auditors can provide a wide range of documentation services to clients.
Forensic auditors are experts in finding facts and unraveling scenarios.
The skillset and characteristics of forensic auditors enable them to investigate, collect and analyze evidence. They are also well aware of the means to preserve the evidence and secure it using different digital options.
- Criminal and Civil Investigations
Forensic auditors are hired by companies and auditors to investigate criminal offenses like bribery, money-laundering and insider dealings. They can also take care of civil cases like professional negligence, employee firings and disputes between companies etc.
THE STAGES IN AUDITING
- Planning: A methodology is structured based on the intensity, complexity, nature, risk involved, importance and professional judgement of the forensic auditor. The planning involves deciding what type of procedures will be performed, which individual to be investigated and when to perform certain tasks etc.
- Execution: The forensic auditors gather and retrieve evidence and facts related to the issue. Different investigative tactics are used to collect facts. The most important element in execution is preserving the evidence; unlike financial auditors, forensic auditors, in most cases deal with the corporate criminals and individuals involved in immortal activities. Therefore, preserving the evidence is yet another challenge in the engagement.
- Reporting: Once the planned procedures, tests and investigations are performed and facts are analyzed, the final stage is to conclude a report based on the findings. Sometimes, the reports will be presented to courts in which case, the forensic auditor will be dealing with the legal proceedings.
- Court Proceedings: After the report is being filed, and the court proceeding commences, the forensic auditor has to be present in the court when summoned, to present and explain the evidences collected during the investigation process.
ELEMENTS OF AUDIT REPORT
The forensic report is much more detailed than a financial audit as it is evidence oriented and the auditor has to explain, even the minor of details, in language that users of the report can understand. Elements of the forensic report include:
- Risk analysis
- Audit process
- Evidence of the event
As scams and fraudulent financial activities are accelerating day by day all around the world, and corporate accounting scandals are seen more frequently, consequently the need for forensic auditing has also increased. The forensic auditing has become a powerful strategic tool to detect and tackle all the financial crimes and frauds. It has become a vital part of the judiciary system as it helps in serving justice by providing accurate facts and figures collected during investigative process. Forensic auditing enhances the efficiency of businesses by examining their current financial situations and providing them with better solutions. It reduces the risk of loss and exploitation by keeping a complete check of business activities.
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