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Forensic Audit

A forensic audit is an examination and evaluation of a firm's or individual's financial records to derive evidence that can be used in a court of law or legal proceeding. Forensic auditing is a specialization within the field of accounting.

Procedure for a forensic audit investigation

A forensic audit has additional steps that need to be performed in addition to regular audit procedures.

Plan the investigation – When the client hires a Forensic auditor, the auditor is required to understand what the focus of the audit is. The forensic auditor will plan their investigation to achieve objectives such as:

Identify what fraud, if any, is being carried out

Determine the time period during which the fraud has occurred

Discover how the fraud was concealed

Identify the perpetrators of the fraud

Quantify the loss suffered due to the fraud

Gather relevant evidence that is admissible in the court

Suggest measures that can prevent such frauds in the company in future

Collecting Evidence – By the conclusion of the audit, the forensic auditor is required to understand the possible type of fraud that has been carried out and how it has been committed. The evidence collected should be adequate enough to prove the identity of the fraudster(s) in court, reveal the details of the fraud scheme, and document the amount of financial loss suffered and the parties affected by the fraud.

A logical flow of evidence will help the court in understanding the fraud and the evidence presented. Forensic auditors are required to take precautions to ensure that documents and other evidence collected are not damaged or altered by anyone.

Common techniques used for collecting evidence in a forensic audit include the following:

Substantive techniques – For example, doing a reconciliation, review of documents, etc

Analytical procedures – Used to compare trends over a certain time period or to get comparative data from different segments

Computer-assisted audit techniques – Computer software programs that can be used to identify fraud

Understanding internal controls and testing them so as to understand the loopholes which allowed the fraud to be perpetrated.

Interviewing the suspect(s)

Reporting – A report is required so that it can be presented to a client about the fraud. The report should include the findings of the investigation, a summary of the evidence, an explanation of how the fraud was perpetrated, and suggestions on how internal controls can be improved to prevent such frauds in the future. The report needs to be presented to a client so that they can proceed to file a legal case if they so desire.

Court Proceedings – The forensic auditor needs to be present during court proceedings to explain the evidence collected and how the suspect was identified. They should simplify the complex accounting issues and explain in layman’s language so that people who have no understanding of the accounting terms can still understand the fraud that was carried out.

To summarize, a forensic audit is a detailed engagement that requires the expertise of not only accounting and auditing procedures but also expert knowledge regarding the legal framework. A forensic auditor is required to have an understanding of various frauds that can be carried out and of how evidence needs to be collected.