Money Management and Forensic Auditing

Forensic Auditing

Forensic auditing' covers a broad spectrum of activities, with terminology not strictly defined in regulatory guidance. Generally, the term forensic accounting' is used to describe the wide range of investigative work which accountants in practice could be asked to perform. The work would normally involve an investigation into the financial affairs of an entity and is often associated with investigations into alleged fraudulent activity.

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Forensic accounting refers to the whole process of investigating a financial matter, including potentially acting as an expert witness if the fraud comes to trial.

Although this article focuses on investigations into alleged frauds, it is important to be aware that forensic accountants could be asked to look into non-fraud situations, such as the settling of monetary disputes in relation to a business closure or matrimonial disputes under insurance claims.

The process of forensic accounting as described above includes the forensic investigation' itself, which refers to the practical steps that the forensic accountant takes in order to gather evidence relevant to the alleged fraudulent activity. The investigation is likely to be similar in many ways to an audit of financial information, in that it will include a planning stage, a period when evidence is gathered, a review process, and a report to the client. The purpose of the investigation, in the case of an alleged fraud, would be to discover if a fraud had actually taken place, to identify those involved, to quantify the monetary amount of the fraud (i.e. the financial Loss suffered by the client), and to ultimately present findings to the client and potentially to court.

Finally, forensic auditing' refers to the specific procedures carried out in order to produce evidence.

Audit techniques are used to identify and to gather evidence to prove, for example, how long the fraud has been carried out, and how it was conducted and concealed by the perpetrators. Evidence may also be gathered to support other issues which would be relevant in the event of a court case. Such issues could include:

1. the suspect's motive and opportunity to commit fraud
2. whether the fraud involved collusion between several suspects
3. any physical evidence at the scene of the crime or contained in documents
4. Comments made by the suspect during interviews and/or at the time of arrest attempts to destroy evidence.

Scope of Forensic Auditing

In forensic auditing special procedures are carried out in order to produce evidence. Moreover the auditing techniques are also used to identify and to gather evid (bader) (tommie W. singleton) (casey, october 26, 2009)fence to prove any fraud. For example, how long the fraud has been carried out and how it was conducted and concealed by the perpetrators. Furthermore the forensic auditing is distinct from statutory auditing in various perspectives. The main objective of statutory audit is to express opinion on financial statements as to true & fair' presentation whereas forensic auditing objective is to determine whether fraud has actually taken place in the financial statements. Basically forensic auditing refers to the whole process of investigating a financial matter. Furthermore, show more content 2004).

In forensic auditing special procedures are carried out in order to produce evidence. Moreover the auditing techniques are also used to identify and to gather evidence to prove any fraud. For example, how long the fraud has been carried out and how it was conducted and concealed by the perpetrators. Furthermore the forensic auditing is distinct from statutory auditing in various perspectives. The main objective of statutory audit is to express opinion on financial statements as to true & fair' presentation whereas forensic auditingObjective is to determine whether fraud has actually taken place in the financial statements. Basically forensic auditing refers to the whole process of investigating a financial matter. Furthermore, forensic accountants could be asked to look into non fraud situations, such as the settling of monetary disputes in relation to closure of business or matrimonial dispute under insurance claims.(Alan Gilmore 2008,FMI*IGF journal)

The forensic auditing generally includes 3 stages, a period where evidences are gathered, a review process and a report to the client. For example if any alleged fraud has taken place then the purpose of forensic investigation is to find out if a fraud had actually taken place, to discover who are involved, to identify the monetary amount of the fraud and then at the end presenting all this information to the client or to the court. Why is a forensic audit conducted?Forensic audit investigations are made for several reasons, including the following:CorruptionIn a Forensic Audit, while investigating fraud, an auditor would look out for:

• Conflicts of interest "When 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 benefitted from this approval, he is deemed likely to receive personal benefits after making such inappropriate approvals.
• Bribery " As the name suggests, offering money to get things done or influence a situation in one's favour is bribery. For example, Telemith bribing an employee of Technosmith company to provide certain data to aid Telesmith in preparing a tender offer to Technosmith.
• Extortion " If Techno smith demands money in order to award a contract to Telemith, then that would amount to extortion.

Asset Misappropriation

This is the most common and prevalent form of fraud. Misappropriation of cash, raising fake invoices, payments made to non-existing suppliers or employees, misuse of assets, or theft of Inventory are a few examples of such asset misappropriation.Financial statement fraudCompanies 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.Some examples of the form that financial statement fraud takes are the intentional forgery of accounting records, omitting transactions " either revenue or expenses, non-disclosure of relevant details from the financial statements, or not applying the requisite financial reporting standards.Procedure for a forensic audit investigation

A forensic auditor is required to have special training in forensic audit techniques and in the legalities of accounting issues. A forensic audit has additional steps that need to be performed in addition to regular audit procedures.  Plan the investigation " When the client hires a Forensic auditor, the auditor is required to understand what the focus of the audit is. For example, the client might be suspicious about possible fraud in terms of quality of raw material supplied. The forensic auditor will plan their investigation to achieve objectives such as:

1. Identify what fraud, if any, is being carried out.
2. Determine the time period during which the fraud has occurred
3. Discover how the fraud was concealedIdentify the perpetrators of the fraud
4. Quantify the loss suffered due to the fraudGather relevant evidence that is admissible in the court
5. Suggest measures that can prevent such frauds in the company in future

Collecting Evidence " By the conclusion of the audit, the forensic auditor is required to understand the possible type of fraud that has been carried out and how it has been committed. The evidence collected should be adequate enough to prove the identity of the fraudster(s) in court, reveal the details of the fraud scheme, and document the amount of financial loss suffered and the parties affected by the fraud.A logical flow of evidence will help the court in understanding the fraud and the evidence presented. Forensic auditors are required to take precautions to ensure that documents and other evidence collected are not damaged or altered by anyone.Common techniques used for collecting evidence in a forensic audit include the following: Substantive techniques " For example, doing a reconciliation, review of documents, etc.Analytical procedures " Used to compare trends over a certain time period or to get comparative data from different segmentsComputer-assisted audit techniques " Computer software programs that can be used to identify fraudUnderstanding internal controls and testing them so as to understand the loopholes which allowed the fraud to be perpetrated.

Interviewing the suspect(s)

Reporting " The forensic auditor needs to be present during court proceedings to explain the evidence collected and how the suspect was identified. They should simplify the complex accounting issues and explain in layman's language so that people who have no understanding of the accounting terms can still understand the fraud that was carried out.To summarize, a forensic audit is a detailed engagement which requires the expertise of not only accounting and auditing procedures but also expert knowledge regarding the legal framework. A forensic auditor is required to have an understanding of various frauds that can be carried out and of how evidence needs to be collected.

References

1. Bader, M. g. (n.d.). forensic nursing. L.Sue gabriel CRC press.casey, e. (october 26, 2009). handbook of digital forensics and investigation paperback.
2. Tommie W. singleton, a. J. (n.d.). Fraud auditing and forensic accounting, 3rd Edition. ISBN.