The primary difference between financial and forensic audits lies in the purpose of the audit. A financial audit confirms the validity of a company’s financial records, providing investors and creditors with confidence in the financial information. Forensic audits relate directly to an issue defined by the audit client. This issue may involve employee fraud or a dispute with a vendor or customer. The auditor’s report must meet the standards for presentation in court.
A financial audit has one purpose – to provide assurance that a company’s financial record keeping follows generally accepted accounting principles, or GAAP. To this end, the auditor must objectively examine the company’s financial records and use his best judgment in making the appropriate determination. A financial audit may or may not uncover intentional fraud or misrepresentation of facts.
An auditor plans his work in a way that allows him to focus on gathering sufficient objective, verifiable evidence to support his report. To obtain the information he needs, a financial auditor investigates documents and traces documentation. Where appropriate, he discusses issues and findings with the target company’s staff.
Financial auditors confirm certain information such as bank balances or vendor and customer accounts with the appropriate third parties. This provides the necessary confirmation of the company’s accounting practices and standards.
Forensic audits require analysis of financial transactions and compilation of the information for use in court cases. The forensic auditor may also examine a company’s financial systems to determine reliability, accuracy and the strength of internal control systems. Court cases requiring the evidence provided by a forensic accountant may include:
- commercial litigation
- business valuation
- bankruptcy and
- of course
A forensic accountant’s education begins with certification as a public accountant. Beyond that, forensic accounting requires knowledge of specific areas of accounting and investigative techniques. These include court procedures, legal research and the ability to recognize criminal activity. A forensic accountant must understand more than just fraud. She also must understand insurance claims, insider trading, and legal contracts.
The Institute of Certified Forensic Accountants and the American College of Forensic Examiners, among others, provide certification as a forensic accountant. The Forensic Society of North America provides a professional organization for forensic accounting firms.
To an external observer, financial audits and forensic audits may look similar. Both types of auditors closely examine and confirm accounting records, using similar methods. The two types of audits differ significantly in their end product – the auditor’s report.
A financial audit results in a statement from the auditors (or the audit firm) that they have examined the books of XYZ Corporation. The statement notes that the auditors find that the financial statements report the company’s financial position fairly.
Because companies engage forensic auditors to answer specific questions, a standard forensic audit report format does not exist. The forensic auditor must supply the requested information and provide sufficient evidence to argue the results in court, if needed.