All about Forensic Audit
A typical organization loses 5% of its revenue every year due to fraud – (Association of certified Fraud Examiners)
In this context name such as : Enron, World Com, Satyam, Sahara, Tyco etc have been established as biggest crime of all times which have led the regulators and experts and to shift their focus from traditional auditing techniques to investigation based techniques to safeguard the investor’s confidence and maintain the reliability over the truthfulness of the reported financials.
Forensic accounting has risen to prominence because of increased financial frauds popularly known as white collar crimes. Forensic accounting can be described as a specialized field of accountancy which investigates fraud and analyse financial information to be used in legal proceedings. Forensic accounting uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.
Meaning of Forensic Audit:
Forensic means suitable for use in the court of law and Audit is related to the independent examination of the data of an entity.
A forensic audit is therefore an independent and comprehensive process of reviewing a person’s or the company’s financial statements to determine if they are accurate and whether or not any financial benefit has been attained by way of presenting an unrealistic picture or any illegal activity.
Objectives of Forensic Auditing:
- To use the forensic auditor’s conclusions to facilitate a settlement, claim, or jury award by reducing the financial component as an area of continuing debate.
- To avoid fraud and theft.
- To restore the downgraded public confidence.
- To formulate and establish a comprehensive corporate governance policy.
- To create a positive work environment.
A forensic auditor can ensure the integrity and transparency of financial statements by actively investigating for fraud, identifying areas of risk and associated fraud symptoms and a good fraud prevention program can help to create a positive working environment where employees do not indulge themselves to abuse their responsibilities.
So, by helping companies to prevent and detect fraud the forensic auditors can help to establish a comprehensive corporate governance policy. Let us now understand the concept of fraud with the help of following Fraud Triangle which has led to the occurrence of Financial Frauds leading to the emergence of concept of Forensic Audit.
There is no doubt that frauds and malpractices provide the impetus for forensic accounting or investigative auditing. But what are the factors for which people commit frauds or lead to accounting or economic irregularities .If an attempt is made to analyze the business or corporate frauds, one can unveil three main components for committing such ‘white-collar crime’.
These factors are Pressure, opportunity and justification for committing fraud which all together constitute ‘fraud triangle’. Components of the fraud triangle are similar to the fuel, spark, and oxygen which together cause fire. When the three come together, inevitably fire breaks out.
TYPES OF INVESTIGATION:
The forensic auditors investigate many different types of fraud. It is useful to categorize these types into three groups to provide an overview of the wide range of investigations that could be carried out. The three categories of frauds are corruption, asset misappropriation and financial statement fraud.
There are three types of corruption fraud: conflicts of interest, bribery, and extortion. Research shows that corruption is involved in around one third of all frauds.
- In a conflict of interest fraud, the fraudster exerts their influence to achieve a personal gain which detrimentally affects the company. The fraudster may not benefit financially, but rather receives an undisclosed personal benefit as a result of the situation. For example, a manager may approve the expenses of an employee who is also a personal friend in order to maintain that friendship, even if the expenses are inaccurate.
- Bribery is when money (or something else of value) is offered in order to influence a situation.
- Extortion is the opposite of bribery, and happens when money is demanded (rather than offered) in order to secure a particular outcome.
TECHNIQUES AND TOOLS OF FORENSIC AUDIT:
1.CRITICAL POINT AUDITING:
Critical point auditing technique aims at filtering out the symptoms of fraud from regular and normal transactions in which they are mixed or concealed. For this purpose, financial statements, books, records, etc. are analyzed mainly to find out:
- Trend-analysis by tabulating significant financial parameters.
- Unusual debits/credits in accounts normally closing to credits/debits respectively.
- Account/inventory discrepancies as evidenced from the unrecognized balance between financial records and corresponding subsidiary records (like physical verification statement, priced stores ledgers, personal ledgers, etc.)
- Accumulations of debit balances in loosely controlled accounts (like deferred revenue expenditure accounts, mandatory spares account capitalized as addition to respective machinery item, etc.)
- False credits to boost sales with corresponding debits to non-existent personal accounts, and
- Cross debits and credits and inter-account transfers, weaknesses/inadequacies in internal control/check systems, like delayed/non-preparation of bank reconciliation statements, etc.
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2. PROPRIETY AUDIT:
Generally, we here this term in case of Government audit. Propriety audit is conducted by Supreme Audit Institutions (SAI) to report on whether Govt. accounts, i.e., all expenditure sanctioned & incurred are need-based and all revenues due to Government have been realized in time and credited to the Govt. account.
In conducting the propriety audit, the core focus is on Value for Money audits aimed at lending assurance that economy, efficiency and efficacy have been achieved in the transactions for which expenditure has been incurred or revenue collected. The same analogy, with modifications to the principles of propriety of public finance, applies in forensic audit to establish fraudulent intentions if any, on the part of the management. Financial frauds are results of wasteful, unwarranted and unfruitful expenditure from the monies available to the entity.
3. OTHER TOOLS FOR FORENSIC AUDIT
Conventional accounting tools like trend analysis, ratio analysis, fund flow analysis, cash movement analysis are to be supplemented by forensic technology for source data and few other forensic accounting tools like: