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Forensic audit

• A forensic audit is an examination and evaluation of a firm's or individual's financial information for use as evidence in court.
• Forensic auditing is a specialization within the field of accounting, and forensic auditors often provide expert testimony during trial proceedings.
• Most large accounting firms have a forensic auditing department.
• 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.
• It helps detect diversion of funds, wilful defaults and window dressing of financial statements.

When Are Forensic Audits Used?

• Forensic audits are used wherever an entity's finances present a legal concern. For instance, it is used in cases of suspected embezzlement or fraud, to determine tax liability, to investigate a spouse during divorce proceedings or to investigate allegations of bribery, etc.
• An audit may be conducted to determine negligence or even to determine how much spousal or child support an individual will have to pay.

Why is a forensic audit conducted?

Asset Misappropriation:

• This is the most common and prevalent fraud carried out by fraudsters.
• Misappropriation of cash, raising fake invoices, payments made to non existing suppliers or employees, misuse of assets or theft of Inventory are few examples of such asset misappropriation.

Financial statement fraud:

• Companies get into such type of frauds so as to show a better performance of the company than what it is actually. This is done so as improve liquidity or ensure top management keep earning the bonuses or due to market pressure on performance.


• Bribery: As the name suggest offering money to get things done or influence a situation one’s favour would be bribery.
• Conflicts of interest: When fraudster used his/her influence for personal gains detrimental to company.

Procedure for a forensic audit investigation:

The investigation process follows a similar path as a regular audit of financial statements. A forensic auditor is required to have specialist training so that he can understand the legal framework and also has the knowledge of forensic audit techniques.
The investigation steps: The steps can include planning, review and a report.

• Plan the investigation:

• When the client hires a Forensic auditor, the auditor is required to understand what is required to be achieved.
• For example, the client would be suspecting of fraud in terms of quality of raw material supplied. In such scenario the forensic auditor will plan investigation accordingly.
• Forensic auditor needs to achieve the objectives such as:
1. Identify the fraud if any is being carried out.
2. Time period for which this fraud has been conducted in the organisation.
3. How the fraud has been concealed so far.
4. Identify the fraudsters.
5. Quantify the loss suffered due to this fraud.
6. Gather relevant evidence that is admissible in the court.
7. Suggest measures that can prevent such frauds in the company in future.

• Collecting Evidence:
• Forensic auditor is required to understand the possible type of fraud that has been carried out, and how it has been committed.
• The evidence so collected should be adequate enough to prove the identity of the fraudster/(s) in the court, the technicalities of the fraud scheme, the amount of financial loss suffered and parties effected.

• Report:
• A report is produced for the client with the findings.
• It is also important to keep clear sequence of custody until the evidence is presented in court.
• A logical flow of evidence helps in understanding the fraud and evidence presented in a better manner. If the same is not done then the evidence can be challenged in court, or the court would not admit it.
• Investigators are required to be alert to ensure that the evidences & documents so collected do not get damaged or destroyed by the suspect(s). Those involved in the forensic audit may be asked to present their findings to the court.

Practice question:

Which of the following statements are true regarding Forensic Audit?
1. It is an examination and evaluation of firms and not the individual’s financial information for use as evidence in the court.
2. It could also cover situation that do not involve fraud or embezzlements such as disputes related to bankruptcy etc.
3. It may also conducted to determine negligence or even to determine how much spousal or child support an individual have to pay.


A. 1 and 2

B. 2 and 3

C. 1 and 3

D. All.

Answer: b





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