Banking and Finance
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Forensic Audit Definition, Example and Investigations
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Forensic Audit Definition, Example and Investigations
A forensic audit is an examination and evaluation of a firm’s or individual’s financial records to derive evidence that can be used in a court of law or legal proceeding. Forensic auditing is a specialization within the field of accounting, and most large accounting firms have a forensic auditing department. Forensic audits require the expertise of accounting and auditing procedures as well as expert knowledge about the legal framework of such an audit.
Forensic Audit vs. Internal Audit
An audit is defined as a formal examination of an organization’s or individual’s accounts or financial situation. It is conducted by a public accounting firm for the purpose of providing “comfort” in relation to an organization’s financial statements. In many organizations, members of the audit committee, board of directors, owners, managers or other individuals in supervisor positions have limited (if any) experience with other types of audits, including forensic or internal audits. If they are unsure of which direction to turn, they may go seeking the wrong solution.
Forensic Audit vs. Financial Audit
A forensic audit, also known as a forensic examination, is defined as an examination of financial records to find any illegal financial activity. The term forensic itself is defined as belonging to, used in, or suitable to courts of judicature or to public discussion and debate. A financial audit, sometimes called a financial statement audit, is defined as the examination of an entity’s financial statement and accompanying disclosure by an independent auditor. The results of this examination include a report by the auditor attesting to the fairness of presentation of the financial statements and related disclosures.
Common techniques used in Forensic Audit:Why is a forensic audit conducted?
Forensic audit investigations are made for several reasons, including the following:
Conflicts of interest
When a fraudster uses his/her influence for personal gains detrimental to the company. For example, if a manager allows and approves inaccurate expenses of an employee with whom he has personal relations. Even though the manager is not directly financially benefited from this approval, he is deemed likely to receive personal benefits after making such inappropriate approval.
Bribery
As the name suggests, offering money to get things done or influence a situation in one’s favor is bribery. For example, A bribing an employee of Company B to provide certain data to aid A in preparing a tender offer to B.
Extortion
If A demands money in order to award a contract to B, then that would amount to extortion.
What is Financial statement fraud?
Companies get into this type of fraud to try to show the company’s financial performance as better than what it actually is. The goal of presenting fraudulent numbers may be to improve liquidity, ensure top management continue receiving bonuses, or to deal with pressure for market performance.
Elements of a Financial Audit
A financial audit has one purpose – to provide assurance that a company’s financial record keeping follows generally accepted accounting principles, or GAAP. To this end, the auditor must objectively examine the company’s financial records and use his best judgment in making the appropriate determination. A financial audit may or may not uncover intentional fraud or misrepresentation of facts.
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