Forensic Audit

1.0 Definitions

  • Forensic Accounting: Engagements stemming from actual or anticipated disputes or litigation.

  • Forensic Audit: The process of gathering, analyzing, and reporting data within a specific context to find facts or evidence related to financial/legal disputes or irregularities.

1.1 Forensic Investigations

  • Two types of forensic investigations:

    • Related to civil disputes.

    • Related to criminal matters, typically after fraud.

1.1.1 Civil Disputes

  • Engagement categories include:

    • Calculation and quantification of losses/economic damages from tort or breach of contract.

    • Company acquisition disagreements (e.g., "earn outs" or warranty breaches).

    • Assistance in professional negligence claims concerning the work of other professionals.

1.1.2 Criminal Matters

  • Involves assessing accounting systems and evaluating whether accounting figures reflect reality.

1.2 Main Aspects

  • Two key aspects of forensic investigations:

    • Determining the loss.

    • Reporting findings in accordance with established rules.

1.3 Major Applications

1.3.1 Fraud Investigation

  • Focus on gathering evidence for suspected fraud to present in court.

  • Main objectives:

    • Prove/disprove suspicions of fraud.

    • Identify involved persons.

    • Provide evidence for legal action.

  • Can be proactive to identify and manage fraud risks.

1.3.2 Negligence

  • Encompasses:

    • Personal injuries.

    • Fatal accidents.

    • Medical and professional negligence.

  • Damage measure aims to restore the injured party to their previous financial position.

1.3.3 Insurance Claims

  • Claims for business interruption or other losses according to policy terms.

1.3.4 Other Applications

  • Contract disputes, copyright and royalty audits, matrimonial investigations, and asset tracing pertaining to criminal gangs.

1.4 Expert Witness

  • Forensic accountants appointed as expert witnesses require recognized accountancy qualifications.

  • Duty is to the court, not the instructing party, and their work is subject to scrutiny.

1.5 Fundamental Ethical Principles

  • High ethical standards are expected in professional life under the IESBA Code and ACCA's Rules.

1.5.1 Integrity

  • Importance of honesty and fairness.

  • Must avoid conflicts of interest.

1.5.2 Confidentiality

  • Essential in litigation support; client info must not be disclosed without consent.

  • Information should be protected against unauthorized access.

1.5.3 Objectivity

  • Forensic accountants must remain impartial and open-minded, setting aside personal biases.

1.5.4 Professional Competence and Due Care

  • Continuous up-to-date knowledge and skills requirement.

1.5.5 Professional Behaviour

  • Applies to all contacts during assignments, not just clients.

1.6 Professional Scepticism

  • Essential for forensic audits and fraud investigations, ensuring that assumptions and evidence are thoroughly assessed.

2.1 Initial Scope

  • Requires defining the scope of investigation detailing:

    • Involved parties and their roles.

    • Duration of employment relevant to fraud.

    • Possible types of fraud.

2.2 Purposes of a Fraud Investigation

  • To:

    • Quantify claims under fidelity policies.

    • Provide evidence for prosecuting perpetrators.

    • Identify weaknesses leading to fraud.

2.3 Types of Fraud

2.3.1 Asset Misappropriation

  • Common examples include:

    • Simple cash or inventory theft without concealment.

    • Teeming and lading with cash management.

    • Fraudulent disbursements (e.g., ghost employees).

2.3.2 Financial Statement Fraud

  • Manipulation of accounts to inflate profits, potentially utilizing:

    • False sales invoices, expense suppression, and inventory manipulation.

2.4 Investigation Procedures

  • Procedures include:

    • Conducting audit tests on suspect areas and items.

    • Assessing sudden changes in profit margins to detect possible fraud.

    • Circularizing receivables/payables or retrieving documents if necessary.

2.5 Reporting

  • Report findings summarizing evidence and concluding on loss amounts.

  • Recommendations for control improvements.

Syllabus Coverage

  • Covers learning outcomes on forensic audits including definitions, ethical considerations, planning, assurance levels, and investigative procedures.