2. What is
Forensic
Auditing
Forensic accounting, forensic
accountancy or financial forensics is
the specialty practice area of
accounting that investigates whether
firms engage in financial reporting
misconduct. Forensic accountants
apply a range of skills and methods to
determine whether there has been
financial reporting misconduct.
3. How Forensic Audits Work
The process of a forensic audit is similar to a regular financial audit—planning, collecting evidence,
writing a report—with the additional step of a potential court appeare 1ance. The attorneys for both
sides offer evidence that either uncovers or disproves the fraud and determines the damages
suffered. They present their findings to the client, and the court should the case go to trial.
Planning the Investigation
The forensic auditor and team will design their investigation in order to achieve objectives including
figuring out what fraud, if any, is occurring and when it happened.
4. Collecting Evidence
The evidence collected should be adequate to prove the fraudster's identity (s) in court, reveal the fraud scheme's
details, and document the financial loss suffered and the parties affected by the fraud.
Reporting
To continue with filing a legal complaint, the client must first have a written report about the fraud from the
forensic audit. The report should at the very least contain: The investigation's conclusions; A summary of the
evidence gathered
Court Proceedings
During court hearings, the forensic auditor must be present to discuss the evidence gathered and how the team
identified the suspect (s). So that those who are unfamiliar with legal or accounting jargon can see the fraud
properly, they should reduce any complicated accounting concerns and explain the case in layman's terms
5. What Necessitates a Forensic Audit?
Corruption or Fraud
In a forensic audit, an auditor would be on the lookout for
• Conflicts of Interest—when a fraudster uses their influence for personal gains to the
company's detriment. For example, if a manager allows and approves inaccurate expenses of an
employee with whom they have a personal relationship.
• Bribery—offering money to get things done or to influence a situation in one’s favor.
• Extortion—the wrongful use of actual or threatened force, violence, or intimidation to
gain money or property from an individual or entity.
6. Example of a Forensic Audit
Case
Let's say that a fictional computer manufacturer, WysiKids, on the
recommendation of its chief financial officer (CFO), entered into a contract with
Smart Chips, Inc. to supply WysiKids with processors. However, when the contract
was signed, Smart Chips was not authorized to conduct business because its
license had been indefinitely revoked based on certain irregularities in a recent
Internal Revenue Service (IRS) filing. WysiKids' CFO knew that Smart Chips' license
was suspended, yet still suggested that their company sign on with Smart Chips, as
they were secretly receiving compensation from Smart Chips for doing so.
The fictional example of fraud depicted above could be uncovered by investigating
the interpersonal relationships involved and exposing a conflict of interest.
7. Various types of forensic auditing can occur, and they are typically grouped by the types of legal proceedings
they fall under. Below are some of the most typical examples:
• Financial theft (customers, employees or outsiders)
• Securities fraud
• Bankruptcy
• Defaulting on debt
• Economic damages (various types of lawsuits to recover damages)
• M&A related lawsuits
• Tax evasion or fraud
• Corporate valuation disputes
• Professional negligence claims
• Money laundering
• Privacy information
• Divorce proceedings
Types Of Forensic Audit
8. Advantages of Forensic Auditing
Reduced Losses
The fundamental benefit of good forensic audit is that it may assist in minimizing & preventing
avoidable loss. Every day, fraudulent activities & general financial inconsistencies harm the corporate
sector with insane amounts of money. Here comes the role of the specialist forensic accountant, who
ensures that this does not happen & assists in discovering fraud at an early stage and taking
appropriate actions to stop such activities.
Dispute Resolution
Forensic auditing may aid in the prevention and resolution of contractual disputes and challenges, as
well as provide vital information to partners who may be hesitant to sign contracts with the firm.
9. Higher Efficiency
Forensic auditing is critical in reviewing & researching existing fiscal guidelines and processes in order to
identify more powerful solutions.
Reduced Risk of Exploitation
Forensic auditing considerably lowers the danger of future exploitation by proactively fixing any visible gaps in
current financial operating standards.
Assist with Effective Financial Management
A forensic audit acts as a third eye, ensuring that the company’s resources are used purely for the benefit and
needs of the organization.
10. The cost of a forensic audit can vary based on several variables.
1.The duration of the fraud. Are multiple years involved in the embezzlement
or not.
2.Are multiple companies or bank accounts involved?
3.The number of financial books affected. Have any or all source documents
been destroyed?
4.Testimony time.Means that How the fraud was concealed.
These variables impact the amount of time needed to investigate fraud and
embezzlement.
11. HOW TO GAUGE COST
1.The duration of the embezzlement and quality of source documents greatly affect the time which is necessary to
investigate the event.
2.Because of these unknown facts,most forensic auditors will not quote a set fee at the start.
3. However, most will quote the average billing rate.
4.Utilizing an average billing rate, a client can approximate the costs by calculating the hours and if needed the
testimony cost.
12. Forensic Accounting Techniques
1.Reviewing Public Documents and Conducting Background Checks:
The documents made available to the public are scrutinized as they are the easiest to obtain.
Also, thorough background checks of a particular company are done to see the past dealings of
the business.
2.Conducting Detailed Interviews:
Conducting an interview is an essential technique that can transform an unwilling person into a
source of valuable information.
It helps in fully understanding all the facts.
3.Gathering Information from Trustworthy Sources:
Information provided by a confidential and trustworthy source can be precious to any case.
When a piece of information is gained from a confidential source.
13. 4.Analyzing Evidence Gathered:
Proper analysis of the obtained evidence can point to the guilty party and assist in
understanding the extent of the fraud committed in the business.
5.Conducting Surveillance:This can be done physically or electronically and is one of the
conventional measures to uncover any fraud. It can be done by monitoring and tracking all the
official emails and messages.
6.Going Undercover:
This is an extreme measure and should be used only as a last resort. It is best left to the
professionals as they know how and where to conduct the investigations.
7.Analyzing the Financial Statements :
This is a special tool for finding out the fraud committed. All the necessary details are
summarised in the financial statement, and the analysis of these statements can help a forensic
accountant figure out the scam.
14. Forensic Accounting
Careers
For accountants who are interested in forensic accounting, there are many different job
choices available. The labor and duty might be very diverse depending on the client being
represented and the type of trial. Working on a personal divorce, as opposed to investigating
the Enron case, would be very different.
These professional accountants may conduct investigations into fraud, estimate losses,
appraise businesses, or determine tax liabilities.
15. While there are many other ways to enter the field, most of them typically include gaining several
years of standard audit experience at a public accounting company. To advance their careers in
forensic accounting, accountants might get a variety of professional accreditations.
1. Chartered Financial Analyst® (CFA®) certification
2. Certified Public Accountant (CPA) certification
3. Chartered Alternative Investment Analyst (CAIA®) designation
4. Certified Financial Planner® (CFP®) designation
5. Financial Risk Manager (FRM®) certification
6. Financial Modeling & Valuation Analyst (FMVA)® certification
