Forensic Audits: All You Need to Know

A forensic audit investigates an organization’s or individual’s financial records. While forensic audits are frequently completed to find evidence for a court or legal proceeding, there is not an inherent criminal connotation to forensic audits. 

If the audit is related to a criminal case, the forensic audit can identify whether an audited party committed fraud or has broken the law. Common cases calling for forensic audits include embezzlement, fraud and disputes related to bankruptcy, divorces and business closures. Executives and stakeholders may also request forensic audits to simply learn more about a company or business partner before investing in them. 

In either case, forensic audits are typically completed by a team of accounting and/or criminology specialists known as forensic auditors. They follow money trails, track balance sheets and locate any inconsistencies leading to fraudulent conclusions in detailed financial documents. 

Let’s discuss the role of forensic auditors, when to call for a forensic audit and how to optimize the process from start to finish. 

Who is a forensic auditor?

A forensic auditor is a CPA who specializes in detecting and preventing financial crimes. Larger companies and organizations often have in-house forensic auditors, while smaller organizations can hire auditing services when required. 

Forensic auditor skill set

Both accounting and legal expertise are required for successful forensic auditing. Forensic auditors must possess enough accounting skills to understand how financial documents should look so they can spot inconsistencies. To detect any fraud or illegal activities, they also need an in-depth understanding of the law as well. 

Qualities of a successful forensic auditor include:  

• Detail-oriented: Detecting irregularities and discrepancies within dense documents and finding patterns requires a keen eye. Any discrepancy may unlock fraudulent patterns, and successful forensic auditors can find every irregularity in financial documents. They must spend a lot of time interpreting numbers and data sets while documenting every step of their investigation. 
• Effective interviewer: While forensic accountants spend a lot of time nose-deep in documents, they must also interview prominent witnesses to gather evidence and information. 
• Analytical: All accountants should have strong analytical skills. Forensic auditors must analyze incoming information from documents and witnesses to piece together any probable financial crimes.  
• Good ommunicator: Outside of interviewing, forensic auditors must communicate their findings clearly and thoroughly, sometimes in the courtroom during a case. During a court case, these auditors will summarize technical and complex results in a way that non-experts can also understand. 
• Problem-solver: Accountants must adapt and solve problems quickly and effectively. As they progress through the audit, it is crucial to extrapolate possible solutions while they examine the data. 

Forensic audit versus financial audit

Though both forensic audits and financial audits are reviews of financial documents, they are very different procedures. 

Financial audits

Financial audits are usually completed annually by internal or external teams or through the IRS. They focus on reviewing a company’s financial records to ensure they are fair and accurate. Though financial audits do search for apparent signs of fraud, it is not the primary goal of the audit.  

During the financial audit, a team of auditors will examine income, cash flow and other financial records. The findings of the financial audit will be used to prove the accuracy of a company’s finances to the board, executives and stakeholders.

Forensic audits

The primary goal of a forensic audit is to find fraudulent or illegal activity. Forensic audits are therefore more focused than financial audits, moving deep into a company’s records to search for fraudulent activity. This extra level of scrutiny allows forensic audits to be used as evidence in court cases. 

Steps of a forensic audit

There are four general steps to a forensic audit. The first three are similar to those of a financial audit: The team plans the investigation, collects evidence and documents their findings. However, forensic audits have an additional final step of a potential court appearance. 

1. Investigate

The forensic auditor and team plan the investigation, mapping out what they might find. If fraud is found, they want to discover the intensity and duration of the illegal activity, discover who perpetrated the crime and outline preventative measures for the future. 

2. Collect evidence

While examining financial records, financial auditors keep a detailed report of their findings. If patterns are found and fraud is discovered, there must be sufficient evidence to back it up. 

3. Report findings

The collected evidence and relevant findings are documented and given to the client. 

4. Court appearance

The forensic auditor must appear in court during the trial and may be asked to explain the evidence of fraud that they discovered. 

Forensic audits in the courtroom

Forensic audits are designed to find evidence that is admissible in the courtroom. As such, the evidence of fraud must be gathered with enough support that it can prove fraud beyond a reasonable doubt to the jury and judges. 

This means that forensic audits are detailed, thorough and constructed in a way that lay people can understand. Forensic auditors must be masters of their trade while also being able to ensure everyone can understand the documents they provide and the cases they tell, should they be expert witnesses. 

Forensic audit examples

There are many different types of fraudulent activity that a forensic audit may find. Some common forensic audit examples include: 

• Conflict of interest: Employees within the company use their status for personal gain to the company’s detriment. For example, a manager may approve falsified expenses for friends within the company and profit from the differential.
• Bribery: A forensic audit may uncover bribes sent within and without the company to influence a situation unfairly. 
• Asset misappropriation: This is the most common fraud that forensic audits find. This includes submitting false invoices, making fraudulent payments, and stealing company inventory. This generally falsifies documents that put money in the perpetrator’s pockets.
• Financial statement fraud: Another common fraud is the inflating of numbers on company statements or otherwise making it seem like the company is performing better than it is. 

How often do companies require forensic audits?

Forensic audits are generally reserved for instances when fraud is suspected, but they can occur at any time within a company. It is often beneficial to audit high-risk areas within an organization once every few years, as they may uncover burgeoning fraud or weak spots in company policy that a crafty criminal may exploit. 

Preventative auditing is an effective countermeasure to potential fraud within a company, regardless of size. While large companies have many more avenues where criminals may commit fraud, smaller companies often have fewer policies to stop fraud from occurring. 

Does your company need a forensic audit?

Before you request a forensic audit, remember the differences between forensic audits and financial audits. Financial audits are an essential routine step in any business. Financial audits can uncover a lot when done yearly, and even more if a company is not in a routine of regular audits. 

However, if a routine financial audit uncovers discrepancies that suggest potential company fraud, it is time to complete a forensic audit. Starting routine forensic audits is an excellent preventative measure on top of financial audits, but forensic audits do not need to occur with the same frequency.  

Tips for an effective forensic audit

A forensic audit is a complicated, in-depth examination of a company’s financial record. If you are completing one, here are some tips to ensure you can maximize its effectiveness: 

• Understand the client’s business: Forensic auditors must understand clients’ actions to look for inconsistencies and discrepancies effectively. 
• Understand the client’s industry: A greater understanding of general business practices and the environment will give your forensic audit greater focus and clarity. 
• Review internal controls: A thorough investigation of a client’s internal controls may show weaknesses criminals may exploit to perpetrate fraudulent activity. 

Utilize new technology: Advanced tools, such as those from Caseware, are extremely beneficial when performing forensic audits. Making use of the latest digital tools is essential to achieving the best forensic audit possible.