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Forensic audit is an important tool for uncovering financial fraud and mismanagement in organizations, large and small. It is often used to investigate potential unethical, illegal, or fraudulent activities occurring within a company. Forensic auditors are specially trained forensic accounting professionals who have the necessary skills and knowledge to identify, analyze, and provide legal proof of any questionable activity within a business or organization.

This article will discuss what is a forensic audit, the different types of forensic audit, how to start a forensic audit, and the forensic audit plan.

What Is a Forensic Audit?

Forensic audit, also referred to as forensic accounting or investigative accounting, is an auditing specialty in which accountants utilize accounting, auditing and investigative skills to conduct extensive reviews of accounting systems and processes. Forensic auditors are often brought in after suspicions or suspicions of fraud or mismanagement have already been raised. In addition to the traditional financial audits performed by certified public accountants, forensic auditing is a particularly powerful tool for uncovering irregularities, embezzlement, improprieties, and other financial criminal activity that have gone unnoticed or have been hidden through conventional audits.

Types of Forensic Audit

There are several different types of forensic audit processes depending on the scope and complexity of the investigation. Generally there are three main types of forensic audit processes: fraud examination, asset tracing and recovery, and litigation support.

  • Fraud Examination: In fraud examination, the forensic auditors are called upon to detect, uncover and investigate fraudulent activities or financial improprieties. The auditors will generally analyze internal accounting controls, examine documents and/or communications for evidence of illicit activities, review transactions for proper documentation, assess data for anomalies, and develop strategies for preventing future fraud.
  • Asset Tracing and Recovery: In this type of forensic audit, the forensic auditors are tasked with locating and recovering assets and funds or property that has been illegally seized, damaged, reduced in value, or diverted from the rightful owner. Auditors can typically trace and recover assets through reviewing transaction data and documents in areas such as investments and securities, real estate, and banking.
  • Litigation Support: Forensic auditors may be asked to provide litigation support by providing expert witness testimony and other accounting services to attorneys. This type of forensic audit often involves identifying risks, assessing damages, validating claims, analyzing evidence and supporting witnesses.

How to Start a Forensic Audit

There are a number of steps that must be taken in order to begin a forensic audit. It is important to note that a forensic audit should always begin with a competent internal audit as many of the issues uncovered in forensic audits can be identified and rectified by an experienced internal audit team.

The first step in starting a forensic audit is to determine the scope and objectives of the audit. It is important that the scope is accurately defined and reviewed with all stakeholders involved. Once the scope is defined, the next step is to develop the audit plan. The audit plan should include the objectives, timelines, budget, methodology and any other information that may be relevant to completing the audit.

The third step is to select the audit team. The audit team should include members with expertise in forensic accounting and auditing, investigative skills, and other relevant skills. It is important to select a team of auditors who have the necessary qualifications and experience to effectively adhere to the audit plan and successfully complete the audit.

The fourth step is to develop the audit program. The audit program typically includes a risk assessment, detailed procedures, analytical review, controls testing and a sampling procedure. It is also important that the audit program is documented for future reference.

The fifth step is to review relevant documents, records and internal controls. It is important to review all relevant information in order to identify any potential issues or irregularities in the company’s financial processes and systems.

The sixth step is to develop a test plan and perform tests. The tests should cover the scope of the audit and provide the necessary evidence to draw conclusions.

The seventh step is to review the results of the audit and communicate any findings.

Forensic Audit Plan

The use of a forensic audit plan is very important in order to ensure that the audit is conducted efficiently and effectively in compliance with all accepted standards and regulations. A sample forensic audit plan is provided below.

  •  Objectives: The primary objectives of the audit are to identify any fraudulent activities or other financial mismanagement.
  •  Scope: The scope of the audit includes an analysis of all financial transactions, internal accounting controls, and documents relevant to the audit.
  •  Methodology: The methodology for the audit will include walkthroughs, interviews, tests of controls, and analytical reviews.
  •  Organizational Chart: A chart of the company’s organizational structure should be provided to identify relevant individuals and departments.
  •  Audit Plan: The audit plan should include timelines, budgets, objectives, and procedures for each step.
  •  Audit Team: The audit team should have the necessary qualifications, expertise and experience to successfully complete the audit.
  •  Test Plan: An audit plan to ensure risk assessment is conducted and the necessary tests are in place to draw audit conclusions.
  •  Reporting: Reports should be issued to ensure all relevant individuals are informed and kept up to date on the progress of the audit.

Conclusion

Forensic audit is a powerful tool for uncovering financial irregularities, improprieties, and/or fraud. It is important that a forensic audit plan is in place prior to beginning an audit as it will help to ensure that the audit is conducted efficiently and effectively. This article has discussed what is a forensic audit, the different types of forensic audit, how to start a forensic audit, and the forensic audit plan.

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