Question

What are some unwritten rules for auditors and accountants who plan to engage in forensic accounting and fraud examination, as relates to evaluating the internal controls.

Answer 1

The internal control system comprises all the methods and procedure adopted to assist in achieving the objective of efficient conduct of business, ensure adherence to management policies, safeguarding of assets, prevention and detection of frauds and errors and checking the accuracy and completeness of accounting records. Internal check and internal audit are integral parts of the internal control system.

Auditor’s duty in regards to internal check system

In the case of big concern where there is a good internal check system, the auditor may, to a great extent, presume the accuracy of the accounting. But he must not be negligent. he should apply a few test checks, that is, he should check a few transactions here and there at random or check fully the accounts for a few months, and carry out a strong check of the whole of a certain class of transaction taking place during that particular period

Auditors duty regarding internal checks are as follows;

• To pin down to definite persons responsibility for particular act, default or omission by the segregation of tasks
• To obtain confirmation of facts and entries physical and financial by the creation and preservation of necessary record.
• To facilitate the break down of routine procedures so as to avoid bottleneck and to establish an even flow of work

• To reduce to a minimum the possibility of fraud and error

Forensic Accounting And Fraud Examination

A forensic audit is an examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court. Forensic accounting is a specialized field of accountancy which investigates fraud and analyze financial information to be used in legal proceedings. Forensic accounting has risen to prominence because of increased financial frauds popularly known as white collar crimes. Forensic accounting uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. It encompasses both Litigation Support and Investigative Accounting. A forensic audit is, therefore, an independent and comprehensive process of reviewing a person’s or the company’s financial statements to determine if they are accurate and whether or not any financial benefit has been attained by way of presenting an unrealistic picture or any illegal activity.

Forensic accountants can support the propagation of the required information about governance and ethics policies to interested parties within and outside the organization. In this way, they can help to maintain a good image of their respective companies to its stakeholders and also build up an effective communication process and transparency. The fraud prevention strategy outlines a high-level plan on how the organization will go about implementing its fraud prevention policy. Fraud risk management is not a one-time exercise but a continuous process. As businesses change and grow, so do their fraud risks

An effective fraud risk management approach encompasses controls that have three objectives:

• Prevent

• Detect

• Respond

Fraud risk management strategy can follow the following steps:

• Identify risk areas

. • Understand and assess the scale of risk.

• Develop a risk response strategy.

• Implement the strategy and allocate responsibilities

. • Implement and monitor the suggested controls.

• Review and refine the process and do it again

Techniques and tools of forensic audit:

1. Critical point auditing

Critical point auditing technique aims at filtering out the symptoms of fraud from regular and normal transactions in which they are mixed or concealed.

2. Propriety audit

Propriety audit is conducted by Supreme Audit Institutions (SAI) to report on whether Govt. accounts, that is all expenditure sanctioned & incurred are need-based and all revenues due to Government have been realized in time and credited to the Govt. account.

3. Other tools for forensic audit

Conventional accounting tools like trend analysis, ratio analysis, fund flow analysis, cash movement analysis are to be supplemented by forensic technology for source data

The significance of forensic audit

In the forensic audit, the auditor needs to plan the Investigation, and with this, he is required to understand what the focus of the audit is. For example, the organization might be suspicious about possible fraud in terms of the quality of raw material supplied. The forensic auditor will plan their investigation to achieve objectives such as

• Identify what fraud, if any, is being carried out
• Determine the time period during which the fraud has occurred
• Discover how the fraud was concealed
• Identify the perpetrators of the fraud
• Quantify the loss suffered due to the fraud
• Gather relevant evidence that is admissible in the court
• Suggest measures that can prevent such frauds in the company in the future

Further after understanding the possible type of fraud that has been carried out and how it has been committed, the auditor is required to support the evidence collected with adequacy, enough to prove the identity of the fraudsters in court, reveal the details of the fraud scheme, and document the amount of financial loss suffered and the parties affected by the fraud. With this, Forensic auditors are required to take precautions to ensure that documents and other evidence collected are not damaged or altered by anyone. Henceforth the forensic audit needs to be done with a specialized method of the investigation so that the audit could rear the objective results