What exactly is a forensic audit?
Forensic audits investigate a company’s or individual’s financial records to provide court evidence. Large accounting companies sometimes include a forensic auditing section specializing in accounting. Forensic audits need accounting, auditing, and legal expertise.
Forensic audits investigate several things. A forensic audit is commonly used to prosecute parties for financial crimes such as fraud or embezzlement. Forensic auditors may testify as experts during trials. A forensic audit may also entail non-financial wrongdoing, such as disputes over bankruptcy filings, business closures, and divorces.
Forensic audits can reveal or confirm criminal actions. Courts prefer to utilize a forensic audit over a conventional audit when they may use evidence.
The Forensic Audit Process
Forensic audits are comparable to financial audits—planning, gathering evidence, and drafting a report—with a possible court appearance. The attorneys for both parties provide evidence that shows or disproves the fraud and assesses damages. They deliver their findings to the client and the court if a trial occurs.
Remember that padding an expenditure report is fraud and that a forensic audit may catch it.
Planning the Investigation
The forensic auditor and team will organize their investigation to meet goals like
- Detecting any scam
- Identifying the scam period
- Finding out how fraud was disguised
- Identifying fraudsters
- Quantifying fraud losses
- Obtaining court-admissible evidence
- Proposing ways to avoid such scams
The proof should be sufficient to show the fraudster’s identity in court, disclose the fraud plan, and document the financial loss and impacted parties.
A logical flow of evidence will help the court grasp fraud and evidence. Forensic auditors must protect records and other evidence.
To initiate a lawsuit, the customer must have a documented fraud report after a forensic audit. A minimal report should contain
- The inquiry found
- Collected evidence summary
- How the deception was committed
- Tips for preventing future scams, such as increasing internal controls,
The forensic auditor must explain the evidence and how the team identified the suspect(s) in court. They should reduce complex accounting concerns and describe the fraud in laypeople’s words so non-lawyers can grasp it.
Why is a forensic audit essential?
Fraud or Corruption
A forensic auditor looks for
- Conflicts of Interest—when a fraudster exploits their position to harm the firm Employees with whom a boss has a personal relationship may have erroneous costs approved.
- Bribery is offering money to get things done or influence a situation.
- Using force, violence, or intimidation to steal money or property is extortion.
Fraud most often involves asset theft. Examples are misappropriating funds, issuing false bills, paying non-existent vendors or workers, abusing corporate equipment, and stealing merchandise.
Financial Statement Fraud
A firm may commit this scam to inflate its financial performance. C-level executives may present fraudulent data to increase liquidity, maintain compensation, or manage performance pressure.
Case of Forensic Audit
Let’s say WysiKids, a computer manufacturer, followed the advice of its CFO and ordered processors from Smart Chips, Inc.
The IRS indefinitely canceled Smart Chips’ license due to problems in a recent file, which prevented Smart Chips from performing business when the deal was signed. Though their license was suspended, WysiKids’ CFO endorsed them, and Smart Chips privately paid.
Studying interpersonal interactions and showing a conflict of interest can reveal the fictitious scam mentioned above.
- A forensic audit examines a company’s or individual’s financial records.
- An auditor seeks court-admissible evidence during a forensic audit.
- Forensic audits reveal fraud and embezzlement.
- A forensic auditor specializes in one type of accounting. Most commercial accounting companies use forensic auditors, while smaller ones may not.