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