Cases of economic fraud have multiplied in recent years. But the phenomenon of fraud is not static and every day new methods and methods of defrauding arise, as do social habits and the environment as a whole.
Therefore, it is necessary to adopt important security and fraud detection measures that are capable of detecting and preventing almost any fraud, no matter how complex. One of these measures is the forensic audit. This is developed above all in the field of public and private finances and is one of the types of audits that are mainly responsible for the investigation of fraud.
What is a Forensic Audit?
The forensic audit is a technique that has as its objective criminal investigation, integrated into the field of accounting, legal-procedural knowledge and focused on skills in finance and business.
The forensic audit, after its investigation and analysis, will express a series of opinions and certain and objective information, which will serve as evidence in the face of judicial proceedings. This type of audit involves a wide and complex team of professionals, among whom we can find: auditors, computer specialists, lawyers, accountants, graphical technicians, etc.
This team will be variable and will be composed according to the type of company audited, its activity, dimensions, employees, type of operations and other important elements to be taken into account. For example, if the company to which the forensic audit is to be carried out belongs to the environmental sector, it will be necessary to take forestry professionals.
The purpose of forensic auditing is to investigate fraud in the field of finance and accounting
The forensic auditor defines concepts of wide technical value, allowing the justice system to act with greater certainty and objectivity, basic pillars when resolving any judicial process. However, this audit is not limited only to cases of administrative corruption and may be applied to activities related to investigations on:
- Tax crimes
- Corporate crime and fraud
- Money laundering and terrorism
- Discrepancies between partners or shareholders
- Losses insured
The forensic audit is a fundamental technique since it determines in a company if the registered accounting information is adapted to the economic contingencies of that specific accounting period. In this way, the risk of fraud is narrowed and investigations are facilitated for matters where such a possibility exists.
Objectives of the Forensic Audit
The forensic audit is a method of prevention of fraud and corruption, it puts in the hands of judges and the relevant legal authorities information and sufficient evidence to analyze and put as evidence in the judicial process, thus determining, based on legal texts, whether or not it is a fraud case or not.
And, what are the objectives of the forensic audit?
- Identify cases of fraud.
- Prevent and reduce cases of fraud through the implementation of recommendations and advice, through internal control actions in the company.
- Participate in the design and creation of fraud prevention programs.
- Evaluation of internal control systems.
- Investigation and collection of evidence that will be placed in the hands of the judicial authority
Methodologies of Conducting Forensic Audit
Forensic Audit Methodology is constituted by the following activities:
- Definition and recognition of the problem
- Collection of evidence of fraud
- Evaluation of the evidence collected
- Preparation of the final report with the findings
- Forensic risk assessment
- Fraud detection
- Evaluation of the Internal Control System
Definition and recognition of the problem
Determine if there are enough reasons or indications to investigate the symptoms of possible fraud. A clue is simply a sufficient reason to guarantee fraud investigation.
Before beginning a formal investigation, approval of the organization’s board of directors must be obtained since a fraud audit is extremely complicated, controversial, exhausting and may be detrimental to members of said organization.
Compilation of evidence of fraud
Once there are indications and the search for sufficient evidence is made to guarantee the success of the investigation, the evidence must be gathered to determine if the fraud has taken place. The evidence is gathered to determine Who, What, When, Where, Why, How Much and how the fraud was committed.
Evaluation of the evidence collected
The evidence must be evaluated to determine if it is complete and accurate if it is necessary to continue collecting more evidence.
Preparation of the Final Report with the findings
The fraud report is usually the primary evidence available and in some cases, the only evidence supporting the investigation is of such importance since legal claims are won or lost mostly based on the quality of the report presented.
For the preparation of a good fraud report we must take into account that it must be:
Evaluation of forensic risk
The auditor should evaluate the risk of material distortion that fraud or error can produce in the financial statements and should investigate:
- There are frauds or significant errors that have been discovered
- Visualization of weaknesses in the design of management systems
- Unusual internal or external pressures on the entity
- Questions about the integrity or competence of the administration
- Unusual transactions.
- Problems to obtain sufficient and competent audit evidence
Detection of fraud
The auditor seeks sufficient and competent audit evidence to ensure that fraud or error has not materially affected the financial statements or that if it has occurred, the effect of fraud is adequately reflected in the financial statements. Financial statements or that the error has been corrected.
The probability of detecting errors: In general, it is greater than detecting fraud, since fraud is commonly accompanied by acts specifically conceived to hide its existence.
Evaluation of the Internal Control System
The procedures for evaluating the internal control system will be aimed at studying and verifying the internal control of the organization, the evaluation of the internal control system helps to identify the possible responsible for the fraudulent operations (which may be from the same organization or with third parties related).
Likewise, the evaluation procedures will be aimed at achieving an adequate understanding of the internal control system that the company maintains over its operations or its assets. This understanding will be necessary to:
- Plan the investigation
- Verify that the internal control system operates according to its original design.
- Establish whether it is adequate for the purposes of the investigation, especially as a guarantee of the reliability of the probative material it provides and as a source of said material.
- Check the adequate safeguard of assets and resources of the organization.
- Verify the timely and accurate economic-financial information issued.
- Verify adherence to company policies.
- Visualize proper compliance with local regulations and strict compliance with the law.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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