Class 12 - Forensics

Forensic Audit

A specialized audit designed to discover, disclose, and follow up on fraud and crime but also other legal matters. It typically occurs after the detection of fraud. The primary purpose is to gather, develop, and present evidence for review by legal authorities.

Auditor Responsibility - To Detect Fraud

Auditors are responsible to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. They are required to design the audit to provide reasonable assurance of detecting misstatements that are material (due to errors or fraud) and should assess the risk of material misstatement due to fraud.

Material Misstatement due to Fraud

Auditors should assess the risk of material misstatement due to fraud at the financial statement and assertion level, which impacts the design of the audit. For a fraud examiner, fraud is always material because it grows, indicates control weaknesses, and a lack of integrity.

Professional Skepticism

Audits should be performed with professional skepticism = an attitude that includes a questioning mind and critical analysis of audit evidence.

When to Disclose Fraud Outside the Client

Disclosure outside the client is required to comply with legal/regulatory requirements, to a successor auditor when they make inquiries, in response to a subpoena, or to a funding agency in accordance with requirements for audits of entities receiving governmental financial assistance.

Internal Audit - Definition

An independent, objective assurance and consulting activity, designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Internal Audit Mission

To enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight.

Role of Internal Auditor

Works within an individual entity and reports the results of their work to management or (ideally) to the company's audit committee or Board of Directors (BOD). They provide Assurance and Consulting Services, including evaluating risks and controls, reviewing compliance, and financial and operational auditing.

Forensic Accounting - Definition

A specialized field of accounting that involves investigating financial discrepancies, irregularities, and fraud. It is also known as fraud examination, investigative accounting, and financial forensics.

Analogy for Auditors and Forensic Accountants

"You have an external auditor that is like a guard dog, maybe a bull-dog. An internal auditor is a seeing eye dog. A forensic accountant is a bloodhound."

Primary Purpose of a Forensic Audit

To gather and develop and present evidence for review by legal (law enforcement, judicial authorities) or investigative matters. It also aims for the development of evidence for review by law enforcement and judicial authorities.

Skills Utilized in Forensic Accounting

Combines the skills of accounting, auditing, and investigating.

Two Main Areas of Forensic Accounting

Litigation support and Investigation.

Litigation Support - Definition

A specialized service provided by professionals such as accountants, consultants, forensic experts, to assist in legal matters, particularly during litigation or legal disputes.

Role of Forensic Accountant in Litigation Support

To collect evidence, investigate, analyze data, and serve as an expert witness.

Examples of Litigation Support

Business valuations, disputes between partners, buy-sell agreements, mergers and acquisitions, estate planning, divorce, eminent domain.

Forensic Investigation - Definition

Typically follows transactions to determine whether criminal matters such as theft, securities fraud, false financial statements, insurance fraud, etc... have occurred. It is hired to investigate after a situation has already happened.

Duties in Forensic Investigation

Investigating fraud, supporting criminal and civil investigations, writing reports, and becoming an expert witness.

Fraud Examiner Responsibilities

To uncover fraud when individuals bring forth evidence that indicates that a fraud might exist. Key questions include: Is fraud present? What is the scope of the fraud? Who are the perpetrators? What control weakness allowed this to occur?

Who Performs a Fraud Examination?

Forensic accountants, internal audit, independent auditors, security, Certified Fraud Examiners, or a combination working as a team.

Certified Fraud Examiner (CFE)

The most recognized credential related to forensic accounting, issued by the Association of Certified Fraud Examiners (ACFE).

Requirements to Become a CFE

Member of the ACFE, meet academic requirement (BS degree or equivalent), professional experience (2+ yrs fraud related experience), high moral character, agree to abide by the ACFE bylaws and Code of Professional Ethics, and pass the CFE Exam.

Acceptable Fraud-Related Work Experience for CFE

Accounting and Auditing, Criminology and Sociology, Fraud Investigation, Loss Prevention, Law.

Where Forensic Accountants Work

Accounting professionals, internal auditors, Federal Bureau of Investigation (FBI), Internal Revenue Service (IRS), Office of the Inspector General, state and local government, CPA firms, investigative firms, law firms, corporate security and risk management.

Government Roles for Forensic Accountants

Extremely useful in large government investigations to track complex money trails. Employers include the FBI, SEC enforcement division, and the IRS. The FBI has five main entry programs - accounting is one of those programs. They also support prevention measures designed to keep fraud expenses at a minimum.

Fraud Auditing

A specialized approach and methodology to identify and detect fraud. The auditor looks for evidence of fraud to prove or disprove that fraud exists. Fraud auditors are generally accountants or auditors who are experts at detecting and documenting fraud. The objective is to determine whether a discrepancy in accounting records is due to fraud or human error.

Fraud Investigation

Encompasses the same thing as fraud audit but typically involves more non-financial evidence, such as testimony from interviews. So, it's fraud audit + non-financial evidence.

Role of Forensic Accountant vs. Fraud Auditor

Forensic accountants usually get involved after the fraud auditors have detected fraud. They translate complex financial transactions and numerical data so non-technical people can understand. They have expertise in accounting, auditing, criminal investigation, interview, report writing, and testifying as expert witnesses. They support criminal matters, civil litigation, and corporate investigations.

Scope of Forensic Accounting

Covers two areas: Investigation (can be criminal matters like embezzlement and theft) and analyzing financial assets for civil and fraud prevention.