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Forensic Audit- What, Why, and How?

What is a Forensic Audit?

A forensic audit reviews the accounting statements to collect facts used in a court of trial or civil practice.

Among municipal and federal law enforcement, corporate banking, and private investigators, it plays crucial positions. Forensic auditors are extremely valuable after a case has been constructed, from examining and evaluating records to aiding in court. Only with a professional forensic specialist’s intervention have some of the most significant and most interesting financial crime cases of all time been solved.

Why is a Forensic Audit conducted?

Following are the several reasons why the forensic audit is conducted.

1. Corruption

When detecting fraud, in a forensic investigation, an auditor will search for:

  • Conflicts of interest- Anytime a scammer uses his/her power to damage the business for personal benefits. For instance, whether an employee with whom he has personal connections allows and accepts incorrect expenditures from a boss. Even if the manager did not benefit financially from this approval, he would likely obtain unique benefits since making such improper approvals.
  • Bribery- As the name implies, it is bribery to pay money to get work done or manipulate a situation in one’s favor.
  • Extortion- If ABC Corporation needs money to give XYZ Company a deal, it will amount to extorting.

2. Asset misappropriation

The most prevalent and dominant form of fraud is asset misappropriation. A few examples of such asset misappropriation include:

  • Misappropriation of currency.
  • The production of false invoices.
  • Payments made to non-existing suppliers or employees.
  • Misuse of money.
  • Inventory theft.

3. Financial statement fraud

To portray the company’s financial performance as better than it is, businesses get into this kind of scam. The aim of presenting false estimates could be to boost liquidity and ensure top management continues to collect compensation or cope with stock results pressure.

The deliberate forgery of accounting documents, omitting sales, including income or expenses, failing to reveal relevant information from the financial statements, or failure to enforce the appropriate financial reporting requirements are several examples of the type that financial statement fraud takes.

How a forensic audit investigation takes place?

Special training in forensic audit methods and the legality of accounting matters is required for a forensic auditor.

In addition to standard audit processes, a forensic audit requires various actions that need to be completed.

1. Schedule the investigation

The auditor is expected to consider the audit’s focus when the client employs a forensic auditor. E.g., in terms of the nature of raw materials supplied, the customer may be suspicious of potential fraud. The forensic auditor will schedule their investigation to accomplish goals such as:

  • Identify what crime is being committed, if any,
  • Determine the span of time during which the scam took place
  • Discover how it hid the theft
  • Identify the culprits of the scam
  • Quantify the damage sustained because of the scam
  • Collect sufficient proof that is admissible in court
  • Offer steps that will avoid such frauds in the business in future

2. Collect proof

The forensic auditor is expected at the end of the audit to consider the potential form of crime that has been carried out and how it has been committed. The proof obtained should be sufficient to show the fraudster’s identity in court, expose the fraud system’s specifics, and record the extent of financial damage suffered and the parties harmed by the fraud.

In understanding the fraud and the facts provided, a logical flow of evidence would support the judge. Forensic auditors are expected to ensure that nobody destroys or alters records and other gathered data.

In a forensic audit, typical procedures used to gather evidence include the following:

  • Substantive approaches: such as reconciliation, analysis of records, etc.
  • Analytical techniques: are used to compare trends over a certain period or obtain comparative information from various segments.
  • Computer: assisted audit methods are software programs that can be used to identify fraud.
  • Understanding and checking internal controls: to understand the vulnerabilities that allowed the scam to be committed.

3. Interview the suspect

  • Reporting: A report is required so that it can be presented about the scam to a customer. The information should contain the audit results, a review of the facts, an overview of how the crime was conducted, and advice on strengthening internal procedures to deter potential fraud. The report must be sent to a client so that, if they so wish, they can continue to file a court lawsuit.
  • Judicial proceedings: During court trials, the forensic auditor must explain the evidence gathered and how the suspect was found. The complicated accounting problems should be condensed and clarified in the layman’s vocabulary. People who do not understand the accounting jargon will nevertheless understand the deception that has been carried out.

Taking the example of The Enron Scandal

One of the most prominent securities fraud cases in history may be the Enron scandal. Enron’s accounting staff collaborated with executives between the mid-1980s and 2001 to cover millions of dollars in unfinished ventures and debt.

Since the firm’s shares plunged in the span of a year from over $90 to $1, the U.S. Securities and Exchange Commission (SEC) launched an investigation. Enron’s innovative accounting tactics, such as burying leverage in partnerships, inflating the stock price and debt value, and misrepresenting financial documents, were uncovered by the SEC’s forensic auditors’ close analysis of financial statements.

Read More about the Enron Scandal

To conclude, a forensic audit is a systematic engagement that needs accounting and auditing methods and regulatory system expertise. A forensic auditor is expected to know multiple frauds that can be committed and how to gather evidence.

Our UAE forensic audit and investigative team have considerable expertise in delivering high-quality, timely, and cost-effective financial and accounting audits, recommendations, expert analyses, and expert testimony.

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