What is a Forensic Audit?

A Forensic Audit is an examination of a company’s financial records to derive evidence which can be used in a court of law or legal proceeding.

For example, Telemart, on the recommendation of its Chief Financial Officer (CFO), entered into a contract with RJ Inc for the supply of carts. At the time, RJ Inc was not authorized to conduct business, as its license was suspended due to certain irregularities in taxes paid. The CFO had knowledge of this fact, but still recommended that Telemart enter into a contract with RJ Inc because he was secretly receiving compensation from RJ for doing so.

A forensic audit can reveal such cases of fraud.

Why is a Forensic Audit Conducted?

Forensic audit investigations are made for several reasons, including the following:

Corruption

In a Forensic Audit, while investigating fraud, an auditor would look out for:

• 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 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 favor 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 Technosmith 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, creating 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 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.

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.

Types of Forensic Audit Cases

Conclusion

A Forensic Audit is a critical tool to uncover fraud, corruption, and manipulation of financial statements. By ensuring transparency, it protects companies, shareholders, and stakeholders, and provides credible evidence in legal disputes.