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After RBI has mandated compulsary Forensic Audit for large advances above Rs. 200 crore, ICAI has decided to frame Forensic and Investigative standards (FAIS) to enable auditors to conduct Forensic Audit. But before we check the reason, lets understand What is Forensic Audit?

What is Forensic Audit?

Forensic Audit is an Audit of financial transactions to determine or uncover any fraud or embezzlement. Such an audit is done to gather evidence to present in court of law of proceedings.

For e.g, if Bank IDICI has approved loans worth crores of rupees without any procedure/credentials to company VLL. The director of IDICI ltd was receiving commission from VLL ltd as director of VLL and IDICI bank are related. In this case, the director of IDICI ltd has abused his position by funding VLL Ltd.

Purpose of Forensic Audit

There could be various reasons to conduct a Forensic Audit to unearth any illegality in transactions. Some of them are

Bribery – Financial transactions are done to favor someone by an employee in return of some money as a bribe. E.g If an employee is bribed to approve expense which is overcharged by the vendor.

Extortion – This type of illegality is done where some kind of benefit whether in cash or kind is done to award some project/contract to the applicant.

Conflict of Interest – This type of activity is basically done for personal gains which could be detrimental to the company/organization. The above example of IDICI Ltd is one such example.

Financials Fraud – This act implies changing the numbers of financial transactions and financial accounts like omitting some transaction, inflating expenses, non-disclosure of accounting policies, etc

Misappropriation – This simply means misapplication of misappropriation of cash, assets or any of organisation resources. For e.g payment to ghost vendors, generating fake invoices.

What is Forensic Audit – Steps

An Auditor who has to conduct the audit has to follow additional steps apart from the regular audit. These are

  1. Planning – Understand the requirement of the client and plan accordingly. He should decide what is the purpose and focus of this audit. If the client is suspicious about fraud in inventory, seller or there is cash embezzlement then the auditor has to get his focus on this suspicious department.
  2. Investigate- After plan preparation, the auditor should investigate the relevant transactions which he thinks is necessary for such an activity.
  3. Identification – The auditor through his investigation should identify the perpetrators and if possible, take the written confession from them.
  4. Evidence Collection- Not only identify but the auditor has to collect sufficient evidence against the preparators. For such evidence, he may verify documents, bank statements, invoices, notes, etc
  5. Reporting – A report containing the possible fraud, amount of loss, the person responsible for such fraud, and his opinion should be prepared. Not limited to this but the technique and procedure used for unearthing the fraud should also be mentioned in the report.
  6. Preventive measures- To prevent such fraud going forward, the auditor need to suggest measure to avoid such instances. He also needs to advise various technological solutions to avoid such frauds in the future.
  7. Presence in court- After decoding the fraud and collecting the evidence, the auditor has to be present in the court for any litigation, proceedings, etc. The auditor would be in a better position to make the court understand the logical flow and evidence of fraud.
What is Forensic Audit – Techniques

Analytical – Various analysis such as trends, previous year records, comparative data would provide some hints to the auditor

Computer Assisted Audit Techniques – Various computer software which gives the person some insights about data can be used by the auditor

Interview- The auditor can interview the person/s connected with the transactions to identify the possible perpetrators.

Other techniques – Auditor may use other techniques like reconciliation, documents review, external stakeholders confirmation, bank confirmations, etc

What is Forensic Audit – Who can do it?

As Forensic Audit deals with uncovering of financial frauds and misappropriation, a forensic auditor is the one who has specialized knowledge and skills to detect fraud. However, these auditors are definitely financial accountants to understand the basics of financial transactions.

What is Forensic Audit

Not only normal audit is required for such engagement but it includes more detailed analysis, investigation, evidence findings and reporting. A forensic auditor has to be more skeptical and follow clinical assessments in his approach.

Every Chartered Accountant can’t be a forensic auditor. A forensic auditor needs to acquire special training and skills set for such engagement. His knowledge should not be restricted to accounting but he should be well equipped with criminal laws, psychology and legality of the judiciary system.

What is Forensic Audit – Future of Forensic Audit

I would reiterate that RBI has mandated Forensic Audit for large advances above Rs. 200 crores to the organization. RBI is also planning to create a Forensic audit pool where it will register a few eligible audit firms to conduct Forensic audit. They will pick the audit firm from such a pool whenever the need arises for Forensic Audit.

RBI has also operationalized the Central Fraud Registry (CRF) which includes a web-based searchable database of frauds. Such a tool will help the lenders to identify the defaulters and understand the fraud and its quantum. RBI has also well-established practices to determine whether lenders follow procedures for the lending of loans to the borrower.

What is Forensic Audit – Role OF ICAI

ICAI is the accounting body set up by Parliament which deals with accounting and statutory audit for India. The ICAI Council has started a Certificate course on Forensic Audit and Fraud Detection” through their faculty.

Not only this, but ICAI would be the first accounting body in the world who will develop Forensic Audit standards in the coming period. This will be one of the guiding steps to the incumbents who wish to make the mark in a forensic audit.

Also setting up standards will eliminate the discepancies between various reports as the Standard Forensic report would be rolled out by the ICAI. Not only will such report will assist court but also to ED, SFIO, RBI, lenders and Economic Offence wing.

So with this, I would like to conclude this article. Hope this article What is forensic Audit was informative.

Please do like and comment for any queries. Also, find my other articles

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