Forensic Audit Procedures: 5 Main Procedures You Should Know

Overview:

Forensic audit procedures are not so much different from audit procedures. They also perform important procedures to obtain the evidence, including analytical reviews, inquiries, observations, recalculations, inspection, etc.

However, as said in our previous post, What is forensic accounting? The evidence gathered from forensic accounting or auditing is normally used for legal purposes rather than the general purpose of auditing financial statements.

This is because the requirements to have a forensic audit are different from requiring a financial statements audit like a statutory or non-statutory audit. Therefore, the procedure to obtain those evidence is more specific and fact rather than assumption.

Below are the important procedures that are normally used to perform forensic audits:

1) Inquiries:

Forensic auditing procedures need to obtain evidence. Sometimes a forensic auditor requires the officers or personnel who are being investigated to be vacant temporarily.

This will allow the auditor to inquire about the employees involved with the relevant transactions, enabling them to obtain more detailed information about the case.

This procedure also has its own purpose. It allows the auditor to obtain information from other related personnel and lets the auditor observe what wrong might have happened.

For example, once the officers investigating is on leave. Then his daily job is done by someone else.

During this time, the forensic auditor could notify if there is an opportunity that the fraud or any inappropriate could have happened.

Yet, this procedure does require the corporation from the top management of the company. Or the people who have the right to force or encourage the target personnel to take leave.

Otherwise, those target personnel will not take leave as they might know that other people who take over the job will temporarily know the mistake they have made.

However, the inquiry provides the information for the forensic auditor to have a better picture or understanding of the inappropriate might have happened so that they could perform an additional procedure to gather the fact.

The evidence from the inquiry might not be solid evidence to be basic for the conclusion.

2) Analytical Procedures:

In the analytical procedure, a forensic auditor should always pay extreme caution to ensure that the data they use for analysis is accurate before performing any analytical review.

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Otherwise, the result of the analytical review could not be used as evidence, and it could be led to make a wrong conclusion.

However, sometimes the analytical review may not be used to gather data since the result from the analytical review is based on the best projection and estimate.

The most important point of this procedure is that it could help the auditor see the trend or fluctuation of certain transactions, for example, sales or expense, so that the auditor will perform a detailed procedure to see or obtain that deviation.

For example, suppose there is a concern about fraud related to salary expenses. In that case, the auditor will perform the analytical review on the salary expenses over the period by incorporating other financial data like the number of staff, output, attendant list, and other data to see if it is consistent.

A detailed review should be performed if it does not flow consistently.

3) Recalculations and Inspection:

Inspecting the data and the records is the most popular procedure for gathering evidence regarding the forensic accountant’s job.

It just simply means collecting a sample of original invoices, receipts, and other important documents. Then, figure out how much the loss should be or figure out which item is in this procedure.

The performance of this procedure should be alight with the result of the analytical review and inquiry that the auditor already performs above.

For example, a detailed review of salary expenses for the months or period that are not consistent with the other data or records.

4) Observations:

Before performing some specific testing of the cause, it is required to understand some specific procure or function and do so.

They need to perform actual observations. It is an essential part of the forensic auditors should not avoid otherwise, the performance of other procedures like inspections will not run smoothly or naturally. 

Other important things are that they might need some specific information from the person involved in specific to procure like payroll accountant, which involves calculating salary.

Moreover, the forensic auditors might inquire information from the low-level staff to the top level or external parties if required, like banks, suppliers, or investors.

Factor to Consider then Prepare Forensic Audit Procedures

When preparing forensic audit procedures, the following factors should be considered:

  1. Objectives: Identify the specific objectives of the audit and ensure that the procedures align with those objectives.
  2. Scope: Define the scope of the audit in terms of the area, time frame, and types of transactions to be examined.
  3. Evidence: Determine the type of evidence required to support the audit findings and how it will be obtained, preserved, and analyzed.
  4. Resources: Assess the resources required to complete the audit, including personnel, software, and equipment.
  5. Methodology: Develop a systematic approach for conducting the audit, including a review of internal controls, data analysis, and investigative techniques.
  6. Data security: Ensure the confidentiality, integrity, and availability of data throughout the audit process.
  7. Reporting: Establish a reporting structure and ensure that the final report is comprehensive, clear, and supported by adequate evidence.
  8. Legal and regulatory requirements: Be aware of and comply with relevant laws and regulations, including data privacy laws and industry standards.
  9. Communication plan: Establish a communication plan to ensure effective and efficient communication with stakeholders throughout the audit process.
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What is the different between Forensic Audit Procedures and Internal Audit Procedure?

Forensic audit procedures and internal audit procedures are similar in that both involve the systematic examination of financial records, but there are several key differences:

  1. Purpose: The purpose of a forensic audit is to investigate suspected fraud or other illegal activities, while the purpose of an internal audit is to assess the efficiency and effectiveness of a company’s internal controls, operations, and financial reporting processes.
  2. Evidence: Forensic audits are often conducted in response to a specific complaint or incident, and the objective is to gather evidence that can be used in a legal or administrative proceeding. Internal audits, on the other hand, are conducted to identify potential problems and make recommendations for improvement.
  3. Approach: Forensic audits are often more focused and intensive than internal audits, and may involve the use of specialized techniques and software, as well as interviews with employees and third parties. Internal audits are more general in nature and typically involve a review of financial records, policies, and procedures.
  4. Scope: The scope of a forensic audit is usually more limited than that of an internal audit, as the focus is on specific transactions, activities, or individuals. Internal audits, on the other hand, typically cover a broader range of areas, including financial reporting, operations, and risk management.
  5. Reporting: The results of a forensic audit are typically documented in a report that is used as evidence in a legal or administrative proceeding, while the results of an internal audit are used to make recommendations for improvement to the company’s management.
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What techniques should be used to gather evidence during forensic auditing?

The techniques used to gather evidence during forensic auditing vary depending on the nature and scope of the investigation, but some common techniques include:

  1. Document review: Reviewing financial records, contracts, invoices, and other relevant documents to identify any irregularities.
  2. Data analysis: Using data analytics tools to identify patterns and anomalies in large amounts of financial data.
  3. Interviews: Conducting interviews with employees, third-party vendors, and other relevant parties to gather information and gain insights into the activities being investigated.
  4. Electronic discovery: Collecting and analyzing electronic data, such as email messages, financial records, and other relevant information stored on computers and other digital devices.
  5. Physical examination: Inspecting physical evidence, such as property or equipment, to gather additional information.
  6. Tracing: Following the flow of money or other assets to determine how they were used and whether they were properly accounted for.
  7. Comparison: Comparing information from various sources, such as bank records, contracts, and invoices, to identify discrepancies.
  8. Recreating transactions: Recreating transactions to test their accuracy and validate information gathered from other sources.
  9. Forensic imaging: Creating digital images of computer systems and other electronic devices to preserve evidence for future analysis.

It is important to follow a systematic and structured approach when conducting forensic audits and gathering evidence, and to ensure that all evidence is properly documented and preserved for future use.

Conclusion:

Forensic accounting or auditing procedures are similar to audit procedures, but the evidence needs to be more specific and realistic. It also involves planning, detailed testing, and conclusion, but the decision needs to be more precise, like the fraud or loss.

Of course, forensic accounting also needs to issue the report, but this report will be used for legal purposes or dispute resolutions. This report is different from the audit report.