FORENSIC AUDIT Fraud Auditing: It is a meticulous review of financial
documents conducted when fraud is suspected. Some entities
“Forensic” means “suitable for use in the court of law”. do them as a precaution to prevent fraud from happening
Bologna said that it is the application of financial skills and and to catch it before the loss magnifies. A Fraud Audit
investigative mentality to unresolved issues, conducted however is not an Investigation. Fraud auditing is used to
within the context of the rules of evidence. As an emerging identify fraudulent transactions, not to figure out how they
discipline, it encompasses financial expertise, fraud were created. Fraud auditors often go outside the books of
knowledge and a sound knowledge and understanding of accounts to find fraudulent transactions.
business reality and the working of legal system.
Red Flag: Red flags are sign or warning of any impending
Important Definitions danger or inappropriate behavior. Red flags do not necessarily
indicate the existence of fraud however are indicators
Forensic: The word forensic comes from the Latin word that, caution needs to be exercised while investigating
forensis, meaning “of or before the forum.” It is - the situations. Red flags are classified in categories such as
♣ Relating to, used in, or appropriate for courts of law or for financial performance red flag, accounting system red flags,
operational red flags and behavioural red flags.
public discussion or argumentation.
♣ Relating to the use of science or technology in the Forensic audit can be conducted in order to prosecute a party for
investigation and establishment of facts or evidence in a fraud, embezzlement or other financial claims. In addition, an
court of law. audit may be conducted to determine negligence in addition, an
audit may be conducted to determine negligence
Forensic Accounting: The integration of accounting,
Audit vs. Forensic Accounting/ Forensic Audit
auditing and investigative skills yields the speciality known
as Forensic Accounting. It is the study and interpretation A forensic accountant will often look for indications of fraud that
of accounting evidence. It is the application of accounting are not subject to the scope of a financial statement audit.
methods to the tracking and collection of forensic evidence, ♦ In response to an event
usually for investigation and prosecution of criminal acts Forensic ♦ Financial investigation
such as embezzlement or fraud. Accounting ♦ Finding used as evidence in court or to
resolve disputes
Forensic Accounting can sometimes be referred to as Forensic
♦ Mandatory
Auditing. ♦ Measures compliance with reporting
standards
Forensic Investigation: Also known as forensic audit is the ♦ Obtain reasonable assurance that financial
examination of documents and the interviewing of people to statements are free of material misstatement.
extract evidence. Forensic Accounting examines individual or Audit In practice, there are differences in mind set
company financial records as an investigative measure that between forensic accounting and audit.
♦ “Investigative mentality” vs. “professional
attempts to derive evidence suitable for use in litigation. scepticism”. A forensic accountant will often
require more extensive corroboration.
♦ A forensic accountant may focus more on
seemingly immaterial transactions.
Sr. No. Particulars Other Audits Forensic Audit
1 Objectives Express an opinion as to ‘True & Fair’ Whether fraud has taken place in books
presentation
2 Techniques Substantive & Compliance. Sample based Investigative, substantive or in depth
checking
3 Period Normally for a particular accounting period No such limitations
4 Verification of stock, Relies on the management certificate/ Independent/verification of suspected/
Estimation realisable value Management Representation. selected items where misappropriation is
of assets, provisions, liability suspected
etc.
5 Off balance sheet items (like Used to vouch the arithmetic accuracy & Regulatory & propriety of these transactions/
contracts etc.) compliance with procedures. contracts are examined.
6 Adverse findings if any Negative opinion or qualified opinion Legal determination of fraud impact and
expressed with/without quantification. identification of perpetrators depending on
scope.
FORENSIC AUDITOR : A Forensic Auditor is often retained to analyse, interpret, summarise and present complex financial and
business related issues in a manner which is both understandable and properly supported. Forensic Accountants are trained to look
beyond the numbers and deal with the business reality of the situation.
A Forensic Auditor is often involved in:
Fraud Detection Computer Forensics Fraud Prevention Providing Expert Testimony
Investigating and analysing Developing computerised Either reviewing Assisting in legal
financial evidence, detecting applications to assist in internal controls to proceedings, including
financial frauds and tracing the recovery, analysis and verify their adequacy or testifying in court as
misappropriated funds. presentation of financial providing consultation an expert witness and
evidence. in the development and
implementation of an
preparing visual aids to
internal control framework support trial evidence.
aligned to an organisation’s
risk profile.
In order to properly perform these services, a Forensic Auditor must be familiar with legal concepts and procedures and have expertise
in the use of IT tools and techniques that facilitate data recovery and analysis. In addition, a Forensic Auditor must be able to identify
substance over form when dealing with an issue.
Forensic Auditors are retained by:
Government
Police Insurance Courts Business
Lawyers Regulatory Bodies and Banks
Forces Companies and Community
Agencies
Services rendered by Forensic Auditors:
♣ Crafting questions to be posed
♣ Responding to questions posed
♣ Identifying documents to be requested and/or subpoenaed
♣ Identifying individuals to be most knowledgeable of facts
♣ Conducting research relevant to facts of the case
♣ Identifying and preserving key evidence
♣ Evaluating produced documentation and information for completeness
♣ Analysing produced records and other information for facts
♣ Identifying alternative means to obtain key facts and information
♣ Providing questions for deposition and cross examination of fact and expert witnesses
The services rendered by the forensic accountants are in great demand in the following areas:
Forensic accountants render such services
Matters relating to financial implications
both when called upon to investigate
the services of the forensic accountants are
specific cases as well for a review of or for
availed of. The report of the accountants is
implementation of Internal Controls. Another
considered in preparing and presentation as Fraud area of significance is Risk Assessment and
Criminal evidence. Investigation
Investigation Risk Mitigation.
and Risk/
Control Reviews
Professional negligence cases are taken up by
the forensic accountants. Non-conformation Insurance companies engage forensic
to Generally Accepted Accounting Standards accountants to have an accurate assessment
(GAAS) or non-compliance to auditing of claims to be settled.
Professional practices or ethical codes of any profession.
They are needed to measure the loss due to In case of policyholders seek the help of
Negligence such professional negligence or shortage in a forensic accountant when they need to
Cases services. Settlement of challenge the claim settlement as worked
insurance claims out by the insurance companies. A forensic
accountant handles the claims relating to
consequential loss policy, property loss due
to various risks, fidelity insurance and other
Forensic accountants render arbitration types of insurance claims.
and mediation services for the business
community. Their expertise in data collection Business firms engage forensic accountants
and evidence presentation makes them sought to handle contract disputes, construction
Arbitration after in this specialised practice area. claims, product liability claims, infringement
service of patent and trade marks cases, liability
Dispute arising from breach of contracts and so on.
settlement
Characteristics- Forensic Auditor Skills - Forensic Auditor should possess
♣ Out of the Box Thinking ♣ Auditing standards, procedures and related methodologies
♣ Strong Visualisation and Imagination ♣ Accounting & Business reporting systems
♣ Curiosity ♣ Information Technology
♣ Persistence ♣ Data Analytics
♣ Detail-oriented ♣ Criminology
♣ Inquisitiveness ♣ Legal Framework
♣ Creativity ♣ Litigation processes & procedures
♣ Discretion ♣ Investigative Techniques
♣ Skepticism ♣ Evidence gathering
♣ Confidence ♣ Network of professional contacts in related fields viz.
♣ Sound professional judgement enforcement, regulatory bodies, law, industry, peers etc.
Process of Forensic Accounting : Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and
the procedures performed will be specific to it. However, in general, many Forensic Accounting assignments will include the steps
detailed below.
Develop the Obtain Perform Reporting Court Proceedings
Initialisation Plan Relevant Analysis Step 5 Step 6
Step 1 Step 2 Evidence Step 4
Step 3
Forensic Audit Techniques
Step 2 Step 3
Step 1 Identify Possible Frauds Catalog Possible Fraud
Understand The Business That Could Exist Symptoms
Analytical Steps:
Step 4 Step 5 Step 8 (optional)
Use Technology To Gather Analyse Results Automate Detection
Technology Steps: Data About Symptoms Procedures
Step 6 Step 7 (optional)
Investigate Symtoms Follow Up
Invetigative Steps:
Forensic Audit Report : Points to keep in mind while reporting
Clear thinking ♣ To whom the report is directed
♣ Purpose and aim
♣ Cool and calm thinking to have logical and coherent presentation
♣ Pattern of presentation
Keep the reader uppermost in mind ♣ Translate technical matters to layman’s language
♣ To visualise the reader’s viewpoint
Unbiased approach ♣ To mention the view point of the auditee
Impact of the report ♣ The probable reaction to reporting. Whether action or decision will follow
in quickest possible time or to be treated as of academic interest only.
♣ To remember the universal saying - “don’t jump to conclusions”
Facts and figures to be in proper sequences
The Chartered Accountant Student
The main factors to be considered for the various ways of presentations of written reports are
Nature of Nature of For whom Purpose for Management Forensic Extent of
business subject the report is which the attitude, auditor’s details
of the or aspect intended report is directives approach required by
organisation appraised prepared and needs and calibre auditee and
management.
Sample Table of Contents of a Forensic Audit Report may (iii) Obtain management approval for scope
include the following: 3.2. Collect Evidence
1. EXECUTIVE SUMMARY
3.3. Conduct Interviews
1.0 Background
1.1 Origin of the Audit 3.4. Analyse findings
1.2 Audit Objective 3.5. Validate Inferences and conclusions
1.3 Proposed Audit Outputs 4. EVIDENCE OF RISK EVENTS
1.4 Audit Implementation Approach
2. RISK ANALYSIS 4.1 Conflicts of interest
4.2 Bribery
2.1 Internal 2.2 External Environment
Environment Risk Forces 4.3 Extortion
4.4 Theft
2.1.1 Financial 2.2.1 Influence of Economics
Management and relevant Market 4.5 Fraudulent transactions
2.1.2 Customers, Products 2.2.2 Political and Legal 4.6 Inventory frauds
and Competitors Scenario 4.7 Misuse of assets
2.1.3 Information 2.2.3 Technology in the 4.8 Financial Statement frauds
technology Sector
2.1.4 Business Process 5. AUDIT RECOMMENDATIONS
2.1.5 Human Resource 5.1 Logical Framework Approach
Management 5.2 Preconditions and Risks
3. AUDIT PROCESS 6. GOVERNANCE ON RECOMMENDATION
3.1.
Preliminary understanding of scope and incident IMPLEMENTATION
coverage 6.1 Stakeholders
(i) Identification of all related data elements 6.2 Budget Considerations
(ii) Preparation of a List of “persons of interest” for
LIST OF ANNEXURES
interview
Professional
Integrity Objectivity Competence Confidentiality Professional
and Due Care Behaviour
