Forensic audit definition
/What is a Forensic Audit?
A forensic audit involves the examination of a firm’s financial records for evidence to be used in a legal proceeding.
Examples of Forensic Audits
There are numerous situations in which an auditor might become involved in a forensic audit. Here are several examples:
Fraud audit. A forensic auditor may search for evidence of fraud, which can then be used to prosecute a perpetrator. This might involve a search for conflicts of interest, bribery, or asset misappropriation.
Financial statement fraud audit. An auditor might investigates a case where company managers manipulate the financial statements to mislead the users of those statements, usually to make the business appear to be in better financial health than is really the case.
Bankruptcy audit. An auditor might be involved in a bankruptcy filing, to track down assets and liabilities.
Divorce audit. An auditor might become involved in a divorce case, to track down assets being hidden by one of the spouses.
Of the preceding items, the most common issue for a forensic auditor is asset misappropriation, such as the outright theft of cash, the use of company credit cards for personal use, setting up ghost employees in the payroll system, or the theft of fixed assets.
Related AccountingTools Courses
The Forensic Audit Process
The forensic auditing process involves planning the investigation, collecting evidence, and writing a final report. Depending on the nature of the investigation, the final report may include an estimate of the damages incurred by the business, which may be used in legal proceedings. The key activities included in a forensic audit are noted below.
Step 1. Planning Phase
Includes writing procedures to identify the type of fraud being carried out, when it occurred, how it was concealed, who was involved, and the size of the loss incurred.
Step 2. Evidence Phase
Includes carrying out the indicated procedures in sufficient detail to build a case against those involved, as well as to determine the amount of the loss incurred.
Step 3. Reporting Phase
Includes the findings of the investigation, an explanation of how the fraud was conducted, and recommendations for how to keep this fraud from occurring again.
Forensic Auditor Requirements
Forensic auditing requires unusual expertise, so larger audit firms typically maintain forensic audit departments that specialize in offering this service to clients. A forensic auditor typically specializes in forensic auditing, and so does not participate in more general audit engagements.
It is likely that the fraud auditor will have to attend court proceedings in order to explain the findings of the investigation, and undergo questioning by attorneys for the defendant.