In order to obtain evidence for a court of law or legal process, a forensic audit examines and assesses the financial records of a company or an individual.
Most big accounting firms have a forensic auditing division. Accounting has a specialization called forensic auditing. Forensic audits need knowledge of advanced legal principles, accounting, and auditing procedures.
Forensic audits cover a wide range of research techniques. A forensic audit is frequently carried out when a party is being looked into for fraud, embezzlement, or other financial crimes. In a forensic audit technique conducted during court proceedings, the auditor may be called an expert witness. Conflicts, including bankruptcy filings, company closures, and divorces—events unrelated to financial fraud—may also be part of a forensic audit.
Workflow of Forensic Audits
A forensic audit follows the same steps as a conventional financial audit—planning, gathering data, and drafting a report—with the prospective court appearance as an additional stage. Both parties’ counsel present evidence that reveals or refutes the deception and establishes the losses incurred. In the event that the case goes to trial, they offer their conclusions to the client and the judge.
If you’ve ever inflated an expense report—or even just considered doing so—you should be aware that this constitutes fraud and that it could be quickly discovered through a forensic audit.
The forensic auditor and team will prepare their investigation during the planning stage to accomplish goals like
The gathered evidence must be sufficient to establish the identity of the fraudster(s) in court, explain the specifics of the fraud scheme, and show the parties affected by the scam as well as the monetary losses incurred.
The court will understand the deception and the proof more easily if the evidence is given in a logical order. It is necessary for forensic auditors to take security measures to make sure that no one tampers with the documents and other evidence they have collected.
To continue with filing a legal complaint, the client must first have a written report about the fraud from the forensic audit. The report must, at the very least, include
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.
Why is a Forensic Audit Required?
1) Embezzlement or fraud
When doing a forensic audit, an auditor would be watching for
2) Misappropriation of Assets
The most common type of fraud is the misuse of assets. Theft of company inventory, filing fake bills, paying suppliers or employees who aren’t there, and misusing assets (such as company equipment) are a few examples.
3) Fraudulent Financial Statements
A business may engage in this kind of deception to make it appear as though its financial performance is better than it actually is. Presenting false data may be done to increase liquidity, guarantee that C-level executives continue to get bonuses, or deal with performance-related pressure.
A case study of a forensic audit
Let’s imagine that a fictitious computer company named WysiKids signed a deal with Smart Chips, Inc. to receive processors on the advice of its chief financial officer (CFO). However, Smart Chips was unable to operate when the deal was signed because its license had been permanently suspended due to inconsistencies in a recent Internal Revenue Service (IRS) filing. The CFO of WysiKids urged that their company sign up with Smart Chips while being aware that the company’s license was suspended because Smart Chips were secretly paying them for doing so.
The fictitious case of fraud shown above could be exposed by looking into the relationships between the parties and identifying a conflict of interest.
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