Forensic Audits

Forensic researchers have special skills for detecting fraud, and ways to write it down. Their role goes beyond just looking at statements, which includes investigations, submitting evidence, writing reports, understanding the extent of the evidence, and ways to prove it in court.

Therefore, a forensic auditor needs more professional uncertainty and should conduct a thorough audit of all important matters, known as forensic thinking. It can be understood that the work of a forensic auditor has two phases.

• Investigative Tasks - Initially the auditor begins with an investigation; look at accounts and statements, and point out errors in them. Then it goes on to find ways to deal with such disabilities, which are the task of accountability.
• Claims Services - It is possible that the found crime is resolved within the company itself. However, there are times when they need to be resolved through legal channels. 

Forensic audits are conducted for a number of reasons, including the following:

• Corruption

In Forensic Audit, during a fraud investigation, the auditor will consider:

Conflicts of Interest - When a fraudulent person uses his or her influence to a risky advantage in a company. For example, if the supervisor approves the incorrect costs of the employee with whom he or she is in a relationship. Even if the manager does not directly benefit financially from this approval, he or she is considered to have the opportunity to receive personal benefits after making such improper permits.

Bribery - As the name implies, giving money to do things or influencing a situation that favors a person is a bribe. 

Robbery - If a person demands money to award a contract, which would be tantamount to robbery.

Extortion – It is step ahead of robbery, including force or threat or violence to extract money or something else.

• Asset misuse

This is a common and widespread form of fraud. Misappropriation of funds, creation of fake invoices, payments made to non-existent suppliers or employees, misappropriation of assets, or theft of Inventory is just a few examples of such misuse of assets.

• Fraud of financial statements

Companies go into this type of fraud to try to portray the company's financial performance as better than it actually is. The purpose of introducing fraudulent numbers could be to improve revenue generation, ensure that senior executives continue to receive bonuses, or cope with market pressure.

Other examples of the forms taken by the financial statements are deliberate misappropriation of financial records, the abandonment of transactions - either income or expenses, non-disclosure of relevant information from financial statements, or failure to apply the required financial reporting standards.

PENAL PROVISIONS

Reserve Bank of India (RBI) and Enforcement Directorate (ED) are the regulatory stances for forensic audits and they have now made forensic audits necessary.

There are penal consequences of being caught in forensic audits. The statutes that mention the implementation of forensic audits in India are:

• Companies Act 1956 – Section 235 and 237 provides the central government with the power to inspect books of accounts of a company, special audits, power to launch investigation and prosecution for violation.
• Provisions of Sick Industrial Companies Act incorporated in the Companies Act, 1956 – Section 424A (5) – Power to National Company Law Tribunal (NCLT) to prosecute the issue whether it is a sick industrial company u/s 2(46AA). And section 424B – power to the tribunal to make an inquiry as it may deem fit.
• SEBI Act, 1992 – Regulation 11 C of the SEBI Act.
• Prevention of Money-Laundering Act, 2002 – Section 3.
• The Companies (Auditor’s Report) Order, 2003.
• Punishment of various offenses mentioned in the Indian Penal Code.

The forensic auditor is required to have specialized training in legal and accounting techniques in accounting matters. Examining case studies using additional steps that need to be done in addition to the standard audit procedures.

Schedule an Inquiry - When a client hires a Forensic Auditor, the auditor is required to understand what is being audited. For example, a client may suspect fraud that may occur depending on the quality of the materials provided. 

• Step 1 - Accepting the Inquiry

Audit case studies are always provided to an independent company / team of investigators for an impartial and accurate audit. Therefore, when such a company receives an invitation to conduct an audit, their first step is to determine if they have the tools, skills, and expertise needed to carry out such an investigation. They need to conduct a training for their training and knowledge of fraud detection and legal framework. Only when they are satisfied with such consideration, they can continue and accept the investigation.

• Step 2 - Planning the investigation

Planning an investigation is an important step in the investigation of cases. The auditor must carefully verify the purpose of the audit, and he or she must determine the procedure to be followed, using effective tools and techniques. Before planning an investigation, they should be clear about the final stages of the report, as follows.

Identify the type of deception that has worked, how long it has been working, and how it is hidden

• Identify the fraudsters involved
• Measuring customer financial losses
• Collecting evidence to be used in court proceedings
• Provide advice on preventing recurrence of fraud.
• Fraud Triangle and Risk Fraud

The fraud triangle is a tool used in the investigation of probation cases to explain the three related factors that assist the commission of fraud - Stress (motivation), opportunity (ability to deceive) and excuses (forgiveness of dishonest intentions). Risk of fraud, the risk the company / organization has for those who can overcome these three factors in the fraud triangle. Fraud risk assessment to identify the risk of fraud in a company / organization. Planning includes the development of strategies and procedures related to fraud risk and fraud risk management.

Editing includes identifying the best method / evidence collection mode. Therefore, more research is needed on specific investigative, analytical and technical methods, and related legal process, in relation to the outcome of that investigation.

• Step 3 - Collecting Evidence

In forensic research certain procedures are performed to produce evidence. Auditing techniques and procedures are used to identify and gather evidence to prove, for example, how long fraudulent activities have been carried out in an organization, and how they have been and are being concealed by perpetrators. In order to proceed, it is important that the planning phase is well understood by the investigative team, who has the ability to gather the necessary evidence.

Investigators may use the following methods to gather evidence:

1. Experimental controls to collect evidence indicating weaknesses,
2. Processing techniques are used to compare styles over time or to provide comparisons between different business segments
3. Implementing computer-assisted research techniques, for example, identifying the time and place of relevant information converted into a computer program
4. Interviews with the staff
5. Engagement strategies such as consolidation, accounting and document review.
6. Forensic Data Analysis (FDA) - FDA is a technology used to conduct fraud investigations; the process by which evidence is collected, summarized and compared with different sets of data. The purpose here is to detect any data misconduct and identify the pattern of irregularities that indicate fraudulent activity. Such an analysis requires three types of expertise,
7. Data analyst performs technical measures and writes questions
8. A team member who has extensive knowledge of processes and internal controls in the relevant area of the company under investigation
9. A forensic scientist who is accustomed to patterns of deceptive behavior

• Step 4 - Reporting

The reporting phase is the most obvious aspect of case studies. After investigating and gathering evidence, the investigative team is expected to provide a report on the findings of the investigation, as well as a summary of the evidence and conclusions about the losses resulting from the fraud. It should also include the fraud plan itself, and how it happens, basically the whole course of events, and suggestions to prevent such fraud in the future.

• Step 5 - Court Procedures

The final section expands on that audit which leads to legal proceedings. Here the auditors will provide case support as mentioned above. The auditors were summoned to Court, and they were included in the advisory process. The understanding here is that they are called in because of their expertise and expertise in commercial matters and their legal process. It is important that they set out the facts and findings in a way that is understandable and purposeful so that everyone can understand them so that the desired action can be taken. They need to simplify complex accounting processes and problems so that others can understand the evidence and their results.

Financial auditing is a comprehensive integration that requires not only expert accounting and research processes but also technical knowledge about the legal framework. An auditor needs to have an understanding of the various types of fraud that can be committed and how the evidence seeks to be collected.