Topics Covered: Forensic Audit
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Hello everyone, our topic was on due diligence, investigation and forensic audit.

In this chapter, we have covered 2 main topics, 1 is due diligence and second 1 is investigation.

In this session, we will cover the topic of Forensic Audit.

In Forensic Audit, we have to cover all the topics.

How it can be differentiated with the financial audit what are the various steps that are involved in forensic audit What are the eligibility criteria of a forensic auditor?

What are the skills required for a forensic auditor?

What are the characteristics required for a forensic auditor?

These are the topics that we will cover in this chapter.

First, I will tell you a small concept of Forensic Audit.

And thereafter, we will cover up from the notes.

These 2 terms are interchangeable terms though there is a minor difference.

There is a minor difference in both of them.

But generally in the whole chapter, these 2 terms will be used interchangeably.

Now, we have our traditional accounting, traditional audit.

Recording of transactions and preparation of financial statements.

Preparation of Financial Statements When we talk about Auditing i.e.

Examination of Financial Information to express information to express an opinion on true and fair view of financial results and financial affairs now accounting auditing We have studied these 2 things in great detail.

Forensic word is used to be used in connection with, to be used in court of law such evidence, such analysis which can be produced in court as evidence so that court can give its own judgment on the basis of it.

So now, what is the basic difference between these 2 terms?

1 is traditional accounting and the other is forensic accounting.

In traditional accounting, we are recording financial transactions and in audit, those financial transactions are being examined.

But when we examine these financial transactions, we have a view that we have to express an opinion on the view of true and fair.

And for this, we collect audit evidences.

The audit evidences are evidences by performing the audit procedures.

These audit evidences are persuasive in nature.

But when we talk about forensic account or forensic audit, there should be some basis supporting our evidence.

You can go to the court and say that these are the findings and analysis like fingerprint experts fingerprint experts are considered as admissible evidence in the court so, when we consider the financial aspects of the forensic audits when there are financial irregularities, financial scams, corporate scams, then forensic word is used in reference to them.

When detailed investigation of fraud, fraud detection, fraud prevention or suspected fraud is covered in forensic audit.

So, when we talk about forensic account or forensic audit, if we incorporate the person's accounting skills, auditing skills, accounting skills, auditing skills, along with that, incorporate the investigative skills of that person and based on those investigative skills, they do a detailed investigation and make a report that can be used in the court of law then we call that activity as Forensic Audit or Forensic Accounting Now, a question must be arising in your mind that what is the difference between these 2 terms, Forensic Accounting and Forensic Auditing?

When we talk about Financial Account and Financial Audit, there is a difference between the 2.

Auditing starts when the accounting ends.

But when I talk about forensic account or forensic audit, then it is not that when the forensic accounting ends, the forensic audit starts.

Forensic accounting, what do you do in this?

You collect evidences, investigate, and do analysis.

The things that you performed here, you do further examination so that they get an admissibility in the court of law.

When forensic auditor's report is kept as evidence in the court, then they get an admissibility.

So, for the consistency of the collected collected, to further support them, the checking that you do later, you call it Forensic Audit.

Otherwise, in general, you check on Google, forensic account, forensic audit, these 2 are interchangeable terms with some minor difference.

When you examine the activities that you did in forensic accounting, double checking, if I use the word, then what is it?

And when you are doing this forensic accounting, forensic auditing, then in this, along with your accounting and auditing knowledge, the investigative skills, you are also applying them appropriately.

And the reports made on the basis of this are used in court proceedings as evidence.

So, in forensic audit, we will study the topic that what is the meaning of the term forensic accounting, forensic auditing and how the forensic accounting or auditing is different from the financial audit.

Thereafter, there will be some topics on which areas forensic audit can be used.

Our discussion on forensic audit will be primarily on the financial point of view.

Being a chartered accountant, we can get forensic audit assignments in the financial matters.

But when we talk about other areas like theft or murder case or similar criminal investigations, there generally we don't have any role in being a chartered accountant.

So, if there is any corporate scam, financial irregularities, suspicion of fraud, then our involvement as a forensic auditor, forensic accountant is there.

Forensic audit, forensic accounting, they do not have any statutory framework.

They do not have any mandatory requirement in any law.

When a requirement arises in case of any suspected fraud, then it is done on the basis of the management of the forensic audit.

Or during an investigation, corporate fraud, corporate scams, the government can also order for a forensic audit.

But not under the provisions of corporate law.

There is no such provision in corporate law.

So, what I have done for you is, first I will tell you about the basic concept of What is the meaning of the term Forensic, what is Forensic Accounting, what is Forensic Auditing, and what is the difference between the Forensic Audit and the Financial Audit.

And a small concept of Forensic Audit, who uses Forensic Audit, what should be the characteristics of forensic auditor, in which areas forensic auditor helps.

So, we will cover this general aspect first, thereafter we will cover different steps of forensic audit, different techniques of forensic audit, and lastly, we will cover the report of forensic audit.

Our first topic is Concept of Forensic Accounting and Forensic Audit Forensic, This word has literal meaning of suitable for use in court of law.

Those things which you can produce as evidence during court proceedings.

And the court should also consider them admissible during these proceedings.

And it is to that standard and potential outcome that forensic accountants generally have to work.

So, when forensic accountants are doing their work, they has to keep in mind that the report that we have to make for forensic audit, this report will be used in the proceedings of the tribunal, court, etc.

So, from this point of view, the forensic auditor has to prepare his report.

And when, as a forensic auditor, we are doing our work, at the same time, because generally, in these matters, litigation is involved, so, along with the advocates and clients, we should perform these activities.

Forensic accounting, how can we define it?

It can be described as a specialized field of accountancy which investigates fraud, analyzes financial information to be used in legal proceedings.

Forensic accounting uses number 1 accounting, number 2 auditing and number 3 investigative skill.

This is the entire framework of forensic accounting and forensic auditing where account, audit as well as investigative skill are used as such to conduct investigations into theft and fraud and therefore it encompass both litigation support as well as investigative accounting.

Litigation support is used to be used in the court of law.

Forensic audit, now in general, even In Forensic Audit, I can cover only these things which are covered in Forensic Accounting.

But there is a slight difference in Account and Audit.

Forensic Audit is a further examination of the evidence collected during the Forensic Accounting.

During the forensic accounting, unki further examination hai regarding an assertion, ek particular assertion ke reference mein to determine its correspondence to established criteria which is being carried out in a manner that is suitable to the court.

So, now, suppose you get an engagement of a forensic account or forensic audit.

That is in relation to a corporate fraud in relation to corporate fraud while investigating that corporate fraud, you collected some evidences and those evidences were basically in reference to financial matters, were dealing with financial aspects and you did their detailed analysis.

Thereafter, now you have to further examine those evidences regarding an assertion Now what is that assertion?

How much impact is being made on financial statements?

So, the things that you did in accounting, further rechecking those things, double checking, reassuring yourself.

Because this subject matter has to be dealt with in a court of law.

So, like the investigating agencies like CBI or other investigating agencies like SFIO serious fraud investigation office, if they do these things, then the reports after these finally goes where?

Like any investigation of CBI, after doing investigation of CBI, they lodge an FIR.

It goes to CBI's court, matter or civil court, high court, wherever it goes.

But the court proceedings are generally there.

So, the same things that you have done an investigation, you have collected evidences, which is a prima facie that this thing has happened, to recheck those evidences, to double check, to ensure that yes, this is an assertion.

The evidence of the crime, double check the evidence to ensure that it is an assertion.

So, we are establishing a particular assertion so that when we have to prove that assertion in court, we have necessary evidences available with detailed analysis.

So, forensic accounting, it involves elaborate inquiry and investigation into the transactional typicality of the connected issues and events.

And forensic audit to provide a double check on the consistency issues and question that the council may ask in the context of argument in the court.

When there will be arguments in the court, The council can raise questions on these things, it has already been analyzed.

So, this topic of ours, what is the difference between the terms forensic accounting, forensic audit, primarily, if we talk in the reference of an overview, there is no difference between the 2.

And after this, forensic accounting, forensic auditing, these 2 will be used interchangeably.

It is not that if you write accounting, there is no auditing cover, if you write auditing, there is no accounting cover.

These 2 terms will be used interchangeably.

So, this is about the meaning of the word forensic audit and the forensic accounting.

What is the framework of Forensic Accounting and Forensic Auditing?

3 main things Accounting, auditing and investigation.

In forensic accounting and auditing, these 3 things are used.

Accounting skills are used, auditing skills are used, and investigating skills are used.

When we talk about accounting, we go a little ahead of normal accounting.

Because these things will be used further in the court.

Looking beyond numbers while examining the financial reports and business information system that means we have to do this accounting with investigative skills.

Ensure compliances of generally accepted accounting principles.

The regional financial reporting framework, at the international level, the IFRS, their compliances.

Re-framing of the accounts based upon the legalities and the gap.

If the financial statements are misrepresented, then re-framing and restructuring the financial statements as per the applicable law and provision.

The applicable law, the applicable gaps according to them, the financial information should be redesigned, restructured and the financial reports should be appropriately in compliance with the financial reporting framework.

Now, I can discuss with you about auditing.

In auditing, we will discuss all the activities like risk assessment procedure, compliance procedure, substantive procedure, analytical procedures.

Professional skepticism and critical evaluation of evidences.

Risk Assessment and analytical procedures performance Designing and performing extended audit procedures In which we will cover compliance and substantive procedures compliance of standards of auditing wherever applicable introspective and skeptical mindset the professional skepticism we exercise that is a state of alertness alertness being a questioning mind that financial misstatements can arise in financial statements, with the same things we apply our auditing skills in forensic accounting.

And thereafter, investigation, fixation of direction of investigation, gathering the evidences and clues through scientific and latest investigation techniques.

Investigation techniques, We will study different techniques in forensic audit.

These are the techniques of forensic audit in which Benchmarking, analytical tools, digital techniques, CATS, system analysis, software tools, data mining techniques all these are applied.

Basically, in auditing, these techniques are not used much except we use CATS, we use analytical skills too, but primarily these techniques are in relation to the field of investigation.

So gathering the evidences and the clues through the scientific and latest investigation techniques we will cover later on.

Analysis of psychological behavior of the human beings.

It is a fraud, human beings will do it, not the system.

Because who will get the personal benefits?

If we talk about a company that a company has committed a fraud, the company is an artificial person.

So, the mechanism and system of fraud, who designed it, who must have thought about it, it must be human beings.

Evidence documentation for the legal proceedings.

So, this topic, Framework of Forensic accounting and auditing, the discussion in this is of these 3 words.

1 is accounting, second is auditing and third is investigation.

There are very few chances of questions being asked on this.

It is a very basic question that in the framework of forensic accounting, in the accounting, auditing, investigation, what all things you will cover up.

But conceptually, for conceptual clarity, you have to study these thoroughly.

Now I will leave the objective what is the difference between the forensic audit and the financial audit what is the meaning of forensic audit The meaning I just gave you examining evidences in a relation to an assertion to determine its correspondence to established criteria which is being carried out in a manner suitable to the court.

Evidences are being examined in a relation to an assertion.

For example, I have given you an example in assertion.

So, the evidence that you have collected has to be examined regarding an assertion to determine its correspondence to the established criteria established criteria what do we mean by criteria that parameter or a benchmark against which an actual fact is examined.

So, criteria is a parameter or benchmark against which an activity is to be evaluated or measured.

Whereas, if we talk about financial audit, you will remember this definition very well.

That is what, examination of financial transactions contained in a financial statement so as to express an opinion on true and fair.

When you read this definition for the first time, then you would have found this definition difficult.

Similarly, the definition of forensic audit may seem difficult to you today.

But when you revise it 2-3 times, you will find this definition as easy as the definition of financial audit.

Objective The objective of forensic audit is to determine what fraud has happened and what is the objective of financial audit?

To express an opinion on true and fair view.

The Frequency of Forensic Audit is not fixed.

Forensic Audit is required when a fraud is suspected.

At that time, Forensic Audit may be asked for.

Financial Audit is generally carried out for a financial year.

Techniques, forensic audit techniques, they are investigative and substantive.

Whereas, if we talk about financial audit, it is risk-based with the help of compliance and substantive procedures.

Extent, Forensic Audit, In-depth checking, but Financial Audit, Test checking.

Forensic Audit, Assets or Liabilities verification.

Verification of suspected or selected item is done where misappropriation of fund is suspected but if we talk about financial audit all assets and liabilities are verified with the help of audit procedure and management certificates or management representations.

So, this is a topic which you should learn.

You can be asked about 4 marks in exam and I think so maybe once this question has been asked in exam.

Yes, in May 18 exam 4 marks question was asked.

Explain how a forensic audit differs from an assurance engagement?

Assurance engagement means financial audit.

How does a financial audit differ from a forensic audit?

Now, I will tell you about Forensic Auditor.

Now, before the area of forensic audit, let me tell you about the forensic auditor.

Forensic auditor either like chartered accountant do their public practice so either they can work as a practitioner in public practice or They may work as an employee and they may be employed by either insurance companies, banks, police force, lawyers, government or other organizations.

Like insurance companies for investigations of claims, banks for investigation of financial irregularities, for the purpose of advances, police forces for investigation of various cases, lawyers again for the purpose of investigation, Government agencies again investigations.

Here primarily working is done in the form of investigative skills.

What is the importance of forensic auditors?

Forensic auditors can resolve the matters by combining accounting knowledge and experience with respect to fraud prevention, fraud detection and risk management.

What services can forensic auditors render?

Criminal investigation, professional negligence cases, arbitration services, fraud investigation, settlement of insurance claim, dispute settlements.

These are the various services that a forensic auditor can render What are the characteristics of a forensic auditor?

Forensic auditor must possess The following characteristics Strong visualization and imagination Visualization means visualizing a particular event or incident For example, if there is a fraud I am taking this topic in reference to corporate fraud If there is a fraud, then who must have done it, how must have done it, how must have he made the strategy, what all things must have he studied, analyzed and why, what was the need to do this fraud Like, you read SA 240, so in In SA-240, there are some things related to fraud.

Visualization is visualizing an incident, how it happened, what steps were taken, how much time was taken in it.

When things are visualized, we can easily find out the incidental aspects of the event.

Curiosity, Persistence, Detail-oriented inquisitiveness, higher level of curiosity.

Curiosity word is here too, but a very high level of anxiety, very high level of curiosity, that yes, this has happened, why did it happen?

Finding out its reasons, that refers to inquisitiveness.

Creativity, out of the box thinking, which others cannot think of in a particular situation, developing such thoughts, discretion, rationalization, skepticism, confidence, sound professional judgment, all these are the characteristics that a person should have to work as a forensic auditor.

Because, until a person has accounting, auditing, investigative skills, all 3, he cannot work as in forensic audit or forensic accounting.

And these things, like professional skepticism, this is a major requirement of audit.

Professional judgment, this is also a major requirement of audit.

Curiosity, persistence, detail-oriented, etc.

Out-of-box thinking is not used in normal financial audit.

We work according to the standards on auditing.

But when it comes to investigative skills, then out-of-box thinking is necessary.

And along with this, we talked about general characteristics, but the level of skills, knowledge of accounting standards, knowledge of auditing standards, knowledge of accounting policies, and knowledge of business frameworks, all these things come under their skills, which the forensic auditor must possess.

Skills which are to be possessed by the forensic auditor.

Forensic auditor must possess the skills related with the following.

Number 1, Standards of Auditing, Auditing Procedures and Related Methodologies Accounting and Business Reporting Systems IT and Data Analytics Criminology, Legal Framework, Litigation Process and Procedure investigative technique and evidence gathering and network of professional contact in related fields like enforcement, regulatory bodies, law, industry, peer group etc.

So, this topic which I discussed with you is a very general topic that who can engage forensic auditors?

They may be engaged by bank, may be engaged by insurance companies, may be engaged by police forces, may be engaged by lawyers, may be engaged by government agencies, may be engaged by any other organization.

In criminal investigation, in cases of negligence, in financial scams, in corporate frauds, in arbitration services, can they be involved?

In skills, we will talk about accounting, auditing, data analysis, IT systems, contact with other networks like investigating agencies, enforcement directorates, peer group members, advocates.

It is important to have a strong network of correspondents with them.

Because when you work as an investigative, your resources, your sources should be very strong.

Only then you will be able to do a proper analysis, otherwise it will not be possible.

So, this was 1 topic of forensic auditor.

Now, keeping this in mind, you do this topic.

I can say that this topic is a reading topic.

What characteristics of the forensic auditor should be?

In which areas can the forensic auditor provide services?

What are the skills of the forensic auditor?

I don't think it will be asked on the final level.

But, the first question is the Difference between financial audit and forensic audit.

Second question, what are the various areas where where forensic auditors can be involved.

In this area, fraud detection involves investigating and analyzing the financial evidences, detection of financial frauds and tracing of the funds that are being misappropriated in the organization.

Prevention Fraud prevention, How will fraud be prevented?

If you have an appropriate internal control system, your policies are strong, then we can say that fraud is being prevented in an organization if strong policies, strong internal control system, a culture of honesty, ethical behavior are being developed.

So when a forensic auditor is engaged in fraud prevention, their primary work is to review these internal control policies.

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