In the last several years, the term forensic auditing came into usage. What really does it specifically mean? The following article will discuss the importance of this process.
First off, let us define accounting. Accounting is the method of identifying, measuring, recording, and communicating economic information regarding an entity or an organization. This procedure permits informed judgments by users of the information. On the opposite side is forensic auditing which is a fairly new procedure under the field of auditing.
Crime was the reason why forensic auditing was born, most specifically economic crime. Economic crime has affected every country and industry and has escalated in recent times. The number of cases of fraud and corruption that are being reported has continued to grow. This is complicated by the challenges faced by the criminal justice system. Plus the general absence of the necessary skills to gather the proper audit evidence that is vital to criminal investigations.
According to information gathered from law enforcement and criminal justice agencies, the success rate for convictions are not good because prosecuting authorities lack skills and knowledge to provide effective investigation and prosecution. This is where forensic auditing comes in. Thus, forensic accounting gets its name from its association with a court of law. It is carried out to accomplish an objective that entails a judicial process.
An example of this is the computation of asset values in a divorce proceeding. Another is the assessment of damages due to the negligence of an auditor. Still another is fact-finding to see whether fraud had taken place, in what amount, and whether or not criminal proceedings are to be set off. And lastly, the collection of evidence in a criminal proceeding. Forensic accounting focuses primarily on both the evidence of financial transactions and reporting as found within an accounting system. It is the legal framework that allows such evidence to be suitable to the purpose of accounting.
Forensic accountants are chartered accountants that specialize in these types of cases and when there is a need for such evidence. Their job is to distinguish and interpret the evidences of both non-fraudulent and fraudulent transactions in the books and records of an accounting system. They also look out for the ensuing effect upon the accounts, inventories, and presentations. So, it is important that forensic accountants must first understand the regular accounting procedures and processes. In other words, forensic accounting is a specialization.