Auditing, Fraud Examination and Forensic Accounting

With so many changes on companies’ operations, processes, and controls make audit environment much more different than it was in the days before COVID-19 pandemic. In the current environment, fraud risk may be heightened for fraudulent financial reporting. 

In general terms, fraud is an intentional act by one or more individuals involving the use of deception to obtain an unjust or illegal advantage.

Auditing is a term many are familiar with. Auditing includes process to plan the audit, conduct risk assessment, identify and test internal controls and then collect sufficient and appropriate audit evidence and finally report on the findings of the audit. During the audit process, auditing of financial statements may detect symptoms of fraud. However, auditors have no responsibility to plan and perform audit procedures to detect immaterial misstatements including those caused by error and fraud. 

Allegations of fraud that are often being resolved through court action suggest the overlap of auditing, fraud examination and forensic accounting. How do auditing, fraud examination and forensic accounting intersect with each other? Auditing, fraud examination and forensic accounting sometimes overlap, depending on the nature and extent of facts and circumstances observed.

During audit process, auditor may detect symptoms of fraud. Because most occupational frauds are financial crimes, there is necessarily a certain degree of auditing involved for fraud examination. But it encompasses much more than just the review of financial data, it also involves the techniques to define the “who, what, when, where and how the fraud took place”. Fraud examiner’s objective is to determine whether fraud has occurred and who is likely responsible. Fraud examination includes efforts like prevention, deterrence, detection, investigation and remediation.

Fraud examination has many similarities to the field of forensic accounting. Because forensic accounting uses accounting or financial knowledge, skills and abilities for court action purpose, it can involve not only the investigation of potential fraud, but a host of other litigation support services. Testifying in court - that's where auditing intersects with forensic accounting. Because auditors may be called into court to testify on behalf of client or defend their audit work. The term “forensic” is relating to courts of law. This means that forensic accounting is the intersection of the accounting and the law. Forensic accounting, hence, implies that there is accounting issue where accounting provides monetary and non-monetary evidence in connection with the detection of crime.

Nevertheless, successful auditors, fraud examiners and forensic accountant have several similar attributes: they are all diligent, detail-oriented, critical thinkers, excellent listeners and communicators.