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Getting the Best From a Forensic Audit

A forensic audit is an investigation conducted by forensic accountants. It is almost certainly going to be a fraud investigation – either investigating a suspected fraud, checking to see if an organisation may be suffering from fraud or even just examining the risk of it becoming a victim of fraud in the future.

A forensic audit differs from a statutory audit because there is no prescribed outcome – in a statutory audit, sufficient checking and verification work is carried out to ensure that a set of financial statements is “true and fair”. In practice this means that the financial statements comply with accepted accounting methods and principles and are not materially wrong. This does not meant that they do not contain errors and instances of fraud – just that their appearance is good enough for the reader to understand the general financial position and results from them.

Many organisations suffer frauds that have been taking place during many years of apparently successeful audits – a specialist forensic audit will give a better chance of detecting frauds, or weaknesses that will allow frauds. A fraudster might be spending all of his time looking for the weaknesses in a business – to exploit. Therefore, a forensic audit must be more thorough and susbtantive than a statutory annual audit, and must be carried out by a more experienced forensic investigator.

The best forensic auditor will be a seasoned forensic accountant specialising in fraud, and though he or she may be assisted by junior accountants in the routine checking work being carried out, they will rely very much on an intuitive approach and an awareness of the fraudster’s psychology and methods of operation.

A forensic audit will focus on certain areas that are vulnerable to the attention of the fraudster. This will include analysing the trail of money as it enters the organisation, is processed and then disbursed in various ways. It will look at the way in which payments are made to both suppliers and staff, and the way that any managers or directors may be in a position to abuse the trust placed in them or collude with others to defraud their employers.

Very often a forensic audit in very large companies can be efficiently run by employing a fraud expert to oversee work carried out by junior staff, though care is always taken to ensure that there is no possibility that the person committing the fraud could be allowed to unknowingly assist with the forensic audit! For example, it would not be prudent to allow the wages clerk to assist with the audit of the wages function! Such a sensitive area must be looked at solely by an independant forensic accounting expert.

A forensic audit is normally commissioned by owners of a business who are unhappy with the management, and want the running of the business checked by an outside expert. The regular auditors or accountants will be too close to the management of the company in any case and would not necessarily possess the required skills.

Knowing what is wanted from the audit is the best way to get the optimum results from an expert accountant employed to investigate fraud risks in an organisation. It may be that the owners or managing director have received a tip-off that the finance director has been stealing. They might have noticed that he was driving a flashy new car and was taking expensive foreign holidays too frequently. Focusing investigations in this way are much better and more cost effective than general fishing expeditions – but must be carried out sensitively and with due attention to contractual obligations and employment law restrictions.