Corruption or Fraud
In a forensic audit, an auditor would be on the lookout for
- Conflicts of Interest can be when a fraudster uses their influence for personal gains to the company's detriment.
- Bribery is offering money to get things done or to influence a situation in one’s favour.
- Extortion means demanding money for securing an outcome from it.
Asset Misappropriation
Asset misappropriation is the most prevalent form of fraud. It includes misappropriation of cash, submitting falsified invoices, making payments to non-existent suppliers or employees, misusing assets like company equipment, and embezzlement of stock in trade.
Financial Statement Fraud
This type of fraud causes material misstatement in the company’s financial statement to show that its financial performance is better than it is. The goal of presenting fraudulent numbers by omitting, adding or misrepresenting the facts is to deceive the users of the financial statements and influence their decisions.
Steps of Forensic Audit
1 – Planning the Investigation
Auditors will plan the investigation to leave nothing out and achieve the audit’s objective. Below are some points which auditors keep in mind:
- Identifying the fraud being carried out
- The period during which fraud has been carried out
- Reason or root cause of fraud
- Find out employees involved in the fraud
- The loss suffered by the company because of the fraud, whether it is financial or non- financial
- Establishing evidence collection in court proceedings.
- Suggesting actions for preventing these types of frauds in future
2 – Collecting Evidence
It is an essential part of forensic audits. After identifying the fraud, the auditor will collect the evidence, which can be substantiated and accepted in court. These documents must reflect how the fraud has happened, who has done it, and what amount of loss the company has suffered.
3 – Reporting
After completing the above process, a forensic auditor will prepare a report summarizing the audit and present it to the management/client. The report contains the below points:
- Observation/findings during the audit
- Evidence gathered which will substantiate the fraud
- How much loss the company has suffered
- How the fraud has been conducted
- What steps should be taken to stop this type of fraud
Based on the report, the management can decide whether they should go for legal proceedings or not.
4 – Court Proceedings
In case the management decides to take legal action based on the forensic audit report then the auditor should also be present at the court to explain how the fraud has been done and how the evidence will support the statement. The forensic auditor has to present the accounting fraud in simple language so that everyone can understand it.