Mehak Bathla


Reading the current headlines such as ‘Sebi has directed the exchange to appoint an independent forensic auditor to verify any misrepresentation of financials and business of VDPL as well as any misuse of the funds or books of accounts’ and ‘Sebi has directed the NSE to conduct forensic audit on two companies — ARSS Infrastructure Projects and Nu Tek India’ makes us question what  forensic audit is all about.

Forensic auditing procedures target mostly financial and operational fraud, discovery of hidden assets, and adherence to federal regulations. It aims to establish a complete view of a single entity’s finances. The application of accounting methods to the tracking and collection of forensic evidence, usually for investigation and prosecution of criminal acts such as embezzlement or fraud or to determine tax liability. It refers to the specific procedures carried out in order to produce evidence. Audit techniques are used to identify and to gather evidence to prove, for example, how long the fraud has been carried out, and how it was conducted and concealed by the perpetrators.

Reserve Bank of India has made forensic audit mandatory for large advances and re structuring of accounts. The Enforcement Directorate and the Serious Fraud Investigation Office have underscored the need for forensic audit following the rise in money laundering, window dressing and willful default cases that are plaguing the banking system.

Types of Investigation

The three categories of frauds are corruption, asset misappropriation and financial statement fraud.

  • Corruption- There are three types of corruption fraud: conflicts of interest, bribery, and extortion.
  • Asset misappropriation- The common feature is the theft of cash or other assets from the company. Cash thefts usually occur in three different ways:

1. Fraudulent disbursements –  company funds being used to make fraudulent payments.

2. Skimming- the theft of cash during its collection but before it is recorded on the company books.

3. Cash larceny- the theft of cash after it has been recorded.

Inventory frauds – the theft of inventory from the company.

Misuse of assets –  employees using company assets for their own personal interest.

  • Financial statement fraud

This is also known as fraudulent financial reporting, and is a type of fraud that causes a material misstatement in the financial statements. It can include deliberate falsification of accounting records; omission of transactions, balances or disclosures from the financial statements; or the misapplication of financial reporting standards.

The purpose of Forensic Accounting is to reduce the “Fraud Risk”, the likelihood of fraud remaining undetected in business entities

According to Donald R. Cressy, in his proposition Fraud Triangle  he highlighted that there are three interrelated elements that enable someone to commit fraud: the

Motive that drives a person to want to commit the fraud, the Opportunity that enables him to commit the fraud, and the ability to Rationalize the fraudulent behavior.

How is Forensic Audit conducted

Since each and every fraud and financial irregularity is unique, accordingly the approaches to be adopted to unveil each of them will be specific to it. Forensic investigator has to develop some specific unique procedures to detect the frauds and malpractices which indeed should be situation oriented procedures.

 The procedures are discussed below:

1) Plan the investigation –

Meeting with the client and accepting the engagement In order to understand important facts, players and issues etc. and performing conflict check in order to achieve objectivity.

This action plan will set out the objectives to be achieved and the methodologies to be adopted. The investigation team must carefully take into consideration the objectives to be achieved and plan their work accordingly. The objectives of such assignments include:

  • Identifying the types and nature of the frauds or irregularities that have been operating.
  • The estimated time period of their occurrence.
  • How the fraud was concealed, the techniques and methods adopted for their concealment.
  • Identifying the fraudster(s) involved.
  • Assessment of the financial losses and quantification of them.
  • Gathering the evidences to support the court’s proceeding.
  • Providing advice so that re-occurrence of the fraud can be prevented.

2) Analysis of evidences and other supporting information- It includes:

  • Summarisation of a large number of transactions.
  • Performing robust procedures to trace unidentified assets.
  • Calculating the economic damages and if required, the loss of goodwill.
  • Estimating the present value of the financial losses or frauds involved in case such irregularities or frauds took place for a long period of time.
  • Performing the statistical regression or sensitivity analysis of the frauds etc.
  • Using various computerized application softwares and graphs etc. to explain and analyze the frauds.

3) Reporting – A report is required so that it can be presented to client about the fraud. The report would have the findings of the investigation done, evidence so collected in summarized form, loopholes that caused the fraud and how internal controls can be improved to prevent such frauds in future. The report needs to be presented to client so that they can proceed to file a legal case against fraudster.

4) Court Proceedings – Investigations done by auditor may lead to legal proceedings against suspected fraudster. The team that carried out the Forensic auditor need to be presented during the court proceedings as they would be required to explain the evidence collected and how suspect was identified.

Techniques and tools of forensic audit

  • Bench marking – comparing one financial period with another or the performance of one cost center, or business unit, with another, overall business performance with its standards defined.
  • System analysis – to examine the systems in place and identifying any weaknesses that could be opportunities for the fraudsters.
  • Exception reporting – that generates automatic reports that unchangeable for results that fall outside of predetermined threshold values, enabling immediate identification of results deviating from the norms.
  • Substantive techniques – For example doing a reconciliation, review of documents etc
  • Analytical procedures. These procedures help in comparing trends over a certain time period or to get comparatives among segments
  • Applying computer assisted audit techniques
  • Understanding internal controls and testing them so as to understand the loopholes which allowed fraud perpetrated.


The need for fraud prevention is necessary in every company, but the degree of protection varies based upon the size of the company. Forensic audit is a detailed engagement which requires expertise of not only accounting and auditing procedures but also expert knowledge and experience about the legal framework.  There is a great scope for forensic accounting in investigation during merger, amalgamation and acquisition, tax investigations, economic crime investigations, all kind of civil litigation supports, specialized audits, and other investigations.

The author can also be reached at [email protected]

Author Bio

Qualification: CA in Job / Business
Company: N/A
Location: New Delhi, IN
Member Since: 21 Dec 2017 | Total Posts: 2

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  1. Subramanian Natarajan says:

    Only today I had time to read this simple but informed article. Congratulations. Unfortunately even CBI or others hardly publish cases where everything has been done. Lack of information even from ICAI or CMA are affecting learning on forensic inspection which is well paying for professionals. Banks intensionally do not train their officials.

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September 2021