An Introduction

Forensic auditing is a specialization within the field of accounting, and forensic auditors often provide expert testimony during trial proceedings. The audit covers a wide range of investigative activities performed by accountants. The process may also include serving as an expert witness in a fraud trial. A forensic audit could also cover situations that do not involve fraud or embezzlement, such as disputes related to a bankruptcy, business closures, and divorces.

The Process

The investigation process follows a similar path as a regular audit of financial statements. The steps can include planning, review and a report. If the investigation was undertaken to discover the presence of fraud, evidence is presented to uncover or disprove the fraud and determine the amount of the damages suffered. The findings are presented to the client — and possibly the court should the case go that far.

During the planning stage, the forensic auditing team establishes objectives, such as identifying if fraud has been committed, how long it has been going on, the parties involved, quantifying the financial loss and providing fraud prevention measures. While gathering evidence, the team collects evidence in the proper manner in order for it to be used in a court case. There are various techniques used to gather evidence. A report is produced for the client with the findings. Lastly, those involved in the forensic audit may be asked to present their findings to the court.

1. Acquisition and Debtors

A number of small businesses prefer to use acquisition as a growth or expansion strategy, yet most do not have audited financial statements. Small businesses can use tax returns for the process, but tax figures often lack information as owners try to minimize tax obligations. A forensic accountant can help the acquiring business track financial transactions and assess whether the target business is worth the value stated in the tax records. In addition, businesses that have trade credit transactions can use forensic accountants to assess the credit worthiness and liquidity of the debtor.

2. Fraud Detection

One of the main functions of forensic accountants is financial statement misrepresentations engagements, especially during litigation and fraud investigations. Instead of organizations waiting for yearly audits by external auditors to assess financial records, it can help to have an internal and permanent forensic accountant. Regular external audits expose a business’s secrets, which could affect its performance, as it is carves out its market share. On the contrary, regular internal forensic audits can identify lapses early enough and provide remedies without exposing the business to its clients and public. An accounting with forensic accounting skills can catch fraud cases early through financial records screening and tracking of computer systems.

3. Strong Internal Controls

Internal controls are organizational policies and procedures that prevent misguided use of business resources for unauthorized or illegal functions. The controls help prevent loss and enhance operational efficiency. Internal control activities include safeguarding business cash and assets, ensuring reliability and integrity of financial records and risk assessment. Forensic accountants can easily identify areas that are susceptible to fraud through computer forensic analysis. They can also carry out risk assessment to recommend areas that require advanced controls because they have proper understanding of the internal processes. For instance, a forensic accountant can track sales of the company through a computer system to ensure stock taking, sales and inventory figures all agree.

Types of Fraud

Forensic audits uncover several types of fraud. The most common involves theft, including cash, inventory and fraudulent payments. Another type of fraud is corruption, such as a conflict of interest, bribery and extortion. The last major category is financial statement fraud. This relates to misstatements of the financials of a company.

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