The Forensic Audit: The Science of Financial Fraud Investigation

By its true nature, forensic auditing is a science that deals with the application of accounting facts and theories gathered through auditing methods and procedures to resolve financial frauds and malpractices. Forensic auditing covers a wide area, and for people who feel compelled to solve riddles and puzzles, this is the field of choice.

Forensic means ‘suitable for use in a court of law’. Forensic auditors always work under the assumption that they will have to testify as experts in court proceedings. A forensic auditor is a detective, an examiner and an expert witness rolled into one. They are the accounting world Sherlock Holmes whose scope specifically covers uncovering financial frauds and misconducts.

When it comes to detecting financial frauds and misconducts usual work done by accountants and auditors is often inadequate as the scope and the nature of that work are normally not designed to find something that has been craftily concealed. These type of special cases call for multidisciplinary skills, knowledge about business processes and fraud risk management.

The objectives of a forensic audit often include finding who committed the fraud, how they did it, how much they took, how to stop it happening in future. The forensic audit is more encompassing than a financial statement audit in terms of assessing the entity’s internal control structure and in the identification of alleged fraudulent activities or irregularities.

Preventing frauds is always better than uncovering frauds after they happened hence these experts’ knowledge and experience is vital in designing proper internal controls. Forensic auditors are equipped with a set of skills, knowledge, and experience that can be used to design effective internal controls to mitigate the risk of frauds and malpractices in organizations, so it is up to the business entities to get maximum benefit out of these professionals.

Every forensic audit project is unique. However, most of them have a similar workflow. First, the team of forensic auditors meets the party that requested the audit to be performed to learn the specifics of the alleged fraud. Then, they begin their initial research and prepare the audit program. The next step is to search the records; bank statements, cash books, credit statements, journals, emails, memos and databases, anything that would provide a bigger picture of the situation. After gathering data and information from these sources they identify red flags and design follow up procedures to address the suspicions and high-risk areas within the organization. Then they usually have interviews with a wide range of company personnel from clerical staff to senior management. Forensic auditors must possess observational skills to pick up subtle hints or suspicious clues that may eventually lead them to the perpetrator when conducting interviews with the accused and the others involved.

Forensic audit report of findings is a fact-based document detailing and revealing internal control weaknesses, alleged acts of malfeasance, and the magnitude of the alleged losses, at the same time it provides recommendations to improve the identified weaknesses or gaps in internal controls. These reports are usually used by an entity’s management to seek restitution from the alleged perpetrators and to strengthen internal controls to prevent frauds from occurring in the future. And also it is used by law enforcement to bring charges against perpetrators.

Forensic audit and a financial statement audit have very different objectives that do not overlap. The scope and the nature of financial auditing do not specifically cover fraud detection. Special audit engagements aimed at uncovering frauds and similar malpractices call for special forensic audit techniques and a new set of forensic skills.

It is imperative to find a good audit partner when it comes to these type of audit engagements, good news is we have covered it for you here: Ceymplon Auditing

https://www.ceymplon.lk/service/finance-consultancy/auditing