Forensic Audit

A forensic audit involves the examination of a company’s account books and financial statements to find evidence of fraud or accounting malpractices that can then be presented in a court of law for criminal proceedings.

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What is the purpose of a forensic audit?

A forensic audit is not a regular form of audit but mandated by a court of law on any one of the following grounds or others:

Corruption

1. Bribery - Offering monetary benefits or other personal favours in exchange for securing an unfair advantage over others.

2. Conflict of interest – When a person uses or misuses his/her position within an organisation to grant favours to employees or staff he/she has personal relationships with, it is unfair to others and detrimental to the company morale.

3. Extortion: Blackmailing or demanding money in exchange for business opportunities, between two businesses selling or purchasing from each other.

Asset misappropriation

As the name suggests, it is a fraudulent activity that involves the mishandling or misuse of assets, as well as cash, for personal gains.

Financial statement fraud

Financial statements are falsified using bolstered numbers to enhance the financial performance of companies or share prices for companies listed on the stock exchange.

Thereby, top management may ensure better liquidity or uninterrupted receipt of executive bonuses.

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Forensic audit in India

Forensic audit in India is carried out for publically listed companies and banks and other financial institutions on a regular basis. However, a forensic audit in India does not have a planned or set format.

SEBI (Securities Exchange Board of India) mandates a forensic audit in India for publically listed companies. They enlist forensic auditors to examine their various financial records and transactions.

Apart from SEBI, the RBI (Reserve Bank of India) mandates a forensic audit in India for all banks within the country. SEBI, RBI and other government bodies rely on SFIO (Serious Fraud Investigation Office) for assistance in the field of forensic accounting.

With respect to forensic audit in India, the SFIO is the statutory body for investigating fraudulent activities. The requirement for their services are on the rise with:

  • Increase in digital criminal activities
  • Fewer regulatory bodies to track cyber-security frauds
  • More and more co-operative banks going out of business
  • Forensic auditors provide information as well as evidence as per the request from a court of law, based on their investigations. This may include cases on corruption, conflict of interest, extortion commercial litigation, bankruptcy, and fraud.

    How to conduct the Forensic audit?

    Forensic auditors are not only focussed on auditing financial transactions but also identifying fraud and its intent. This is necessary for providing proof in a court of law. There are four steps involved in the forensic audit procedure:

  • The plan - The forensic auditor prepares a plan to go through the books, to discover the fraud, the people involved, etc. This procedure is all about formulating an effective investigation plan.
  • Securing evidence - The forensic auditor audits the accounting records, and collects evidence, based on his/her findings.
  • Reporting - A forensic audit report documents the findings from the audit investigation, with references to the evidence discovered as well.
  • Court witness - The forensic auditor is called to court as an expert witness as the expert witness, to substantiate his/her findings based on the evidence, and simplify any complicated terms or information.
  • Forensic audit report

    The forensic audit report documents the findings from the audit investigation, with references to the evidence discovered as well. The forensic audit report is presented to the client to help him/her take legal action or file a lawsuit.

    The format of a forensic audit report can vary, however, they all have the same objective.

  • The findings
  • The brief explanation of the evidence collected
  • Details of how the fraud was committed.
  • Suggestions to improve accounting procedures to prevent similar fraudulent activities.
  • What are Forensic audit courses?

    Forensic audit courses pertain to unique areas of investigative techniques for accounting and auditing. In India, these forensic audit courses are available with several certification providers such as; Institute of Chartered Accountants of India (ICAI), Indiaforensic Center of Studies, Institute of Certified Forensic Accountants, Gujarat Forensic Sciences University and the National Stock Exchange (NSE) Academy.

    The focus areas of these courses include legal research, the ability to identify fraud or criminal activities, as well as court procedures. Aside from this, forensic audit courses also focus on comprehending the workings of insurance claims, preparation of legal contracts and insider trading.

    Choosing the right forensic audit course

    When it comes to choosing forensic audit courses chartered accountants working at accounting firms often opt for Certified Forensic Accounting Professional courses.

    At the same time, accountants who have their own practice prefer to specialize in the field of Stock Market Forensics.

    There are several certification courses that focus on investigative techniques for financial fraudulent activities, that are used by professionals. Here are a few:

  • Forensic Accounting and Fraud Examiner – IFS EDUCATION DEPARTMENT
  • Forensic Accounting and Fraud Prevention as offered by The Institute of Chartered Accountants of India (ICAI)
  • CFE by Association of Certified Fraud Examiners – ACFE
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