An audit is an inspection of an individual or a business’s financial accounts. The word forensic means applying scientific methods and analysis to investigate a crime. When you put these concepts together, you get a forensic audit. This is a deep dive into an entity’s financial records to find crimes or other issues. Here’s what you need to know.
What Is a Forensic Audit?
A forensic audit consists of digging into financial records to look for issues or find answers to questions. Businesses use forensic audits when they suspect embezzlement or fraud. Investors may require forensic audits when they want to ensure a business’s records are accurate. Individuals utilize forensic audits during divorce proceedings if they want to find out if a spouse is hiding assets.
These are just a few of the uses of a forensic audit, but in all cases, they are performed by accounting professionals who know how to follow money trials and look for inaccuracies in balance sheets and other reports.
What Instigates a Forensic Audit?
Business leaders and other stakeholders request forensic audits when they want to learn more about their company, a business partner, or a company they’re thinking about investing in. In some cases, tax auditors or legal professionals may request forensic audits when they suspect foul play. Forensic audits can help you uncover conflicts of interest, extortion, asset misappropriation, and tax fraud as well as other issues.
How Does a Forensic Audit Work?
Forensic audits consist of many different steps. Here is a general overview to help you get a sense of the process:
1. Planning the audit
The exact audit process varies based on your objectives. What type of issue are you trying to uncover? What concerns do you have about the business’s financial records? Do you want to target a specific time frame? Those are the first questions to consider.
Then, you may also narrow down the scope of the audit with any additional suspicions or concerns you have. For instance, if you suspect that a specific person carried out fraud against your company or if you know that you lost a certain amount of money, those elements will also affect the investigation. If there is a court proceeding involved, the auditor will also consider the evidence they need to make their case in court.
2. Collecting evidence
This is the meat and potatoes of the audit. This is when the auditor takes an in-depth look at the company’s financial records. They’re trying to uncover what happened, identify who did it, and determine how much was lost.
To get this information, they may use substantive techniques such as reconciling financial reports to look for discrepancies. They may also leverage analytical procedures to compare trends to look for aberrations. In the past, this used to happen by hand, but modern forensic audits, unsurprisingly, feature a lot of computer-assisted research.
Like traditional auditors, forensic auditors don’t just look at your records. They also find out how your records were put together. They talk with you about your internal controls. They find out who can access and change which parts of your records. If relevant to the scope of the audit, they may also test your controls to look for vulnerabilities.
3. Reporting the audit results
Once the auditor has learned as much as possible about the situation through an exhaustive analysis of the business’s records, they are ready to make their report. Typically, they make a written summary of the investigation findings. Then, they explain how the fraud was carried out, and they provide the business with guidance on how to avoid this scenario in the future.
If necessary, they can advise the subject of the audit whether or not they should file legal charges. If so, the auditor will create reports for the courts. They will also have to testify in court and be able to explain the issues in a way that a non-accounting professional can understand.
Determine If You need a Forensic Audit
If you’re concerned about the issues listed above such as fraud or embezzlement, you need a forensic audit, but it’s important to note that this isn’t the only type of audit. In some cases, you may need an internal audit to help you access the accuracy of your records. Internal audits can also help you ensure that your internal controls are working, and they help you ensure that you don’t create a business environment that has a high risk of fraud.
In other cases, external stakeholders may require your records to be audited, but that doesn’t necessarily mean that you need a forensic audit. There is a wide range of assurance and audit services. A full-scale audit, like a forensic audit, looks at almost all of your financial records. This is the type of audit you undergo before taking your company public or when you want to attract investors.
In contrast, with assurance services, an external accountant doesn’t look at every aspect of your records. Instead, they simply review or compile your records. This can be necessary when you apply for loans or want to present your financial records to other third parties.
To ensure you select the right audit services for your needs, you should hire professional help. A professional can perform the audit for you, but they can also ensure that you select the right services for your needs.
DHJJ is Here to Help!
At DHJJ, we provide professional, personal, and customized accounting services to our clients. We provide a full gamut of audit services from statement compilations and reviews to full-scale audits including forensic accounting services. We also offer everything from bookkeeping to fractional CFO services.
Do you need help uncovering potential fraud or theft? Need to learn more about a target investment? Want to ensure your financial records are in order? Then, contact us today. Let’s talk about how our services can help your business.
