Why companies may prefer forensic over financial statement audits

Scrutinising a financial document. Forensic accounting requires training in fraud detection. PHOTO | FILE 

By PETER WERE

As a business owner, you need to determine reasons for requesting an audit. A forensic audit and a financial statement audit have different objectives that do not overlap.

Request a forensic audit if you suspect asset-theft fraud. Request a financial statement audit for assurance that your business’s financial statements fairly state the company’s financial position as of a certain date.

An auditor conducting a financial statement audit is charged with performing procedures to discover financial statement fraud but not asset-theft fraud.

Forensic accounting is a specialised branch that requires training in fraud detection. Why are auditors not good at detecting fraud? The reasons are many.

Use of internal controls

The depth of audit testing and the types of procedures used are heavily influenced by the assessment of internal controls by auditors. They look at the company’s policies and procedures which help ensure accurate financial statements.

Auditors determine whether those controls exist, are adequate and enforced.

Auditors will then plan their work based on their assessment of the risk and controls. Any faulty assessment at this stage can be detrimental to the entire audit. If auditors are not in control of risks they cannot plan to deal with them.

Predictable audit tests

When employees know the risk and accounts the auditors will target, the effectiveness of audit testing is affected. The element of surprise is quite effective in unveiling fraud, yet auditors do not often employ this technique.

Surprise helps to prevent fraud because employees do not know which accounts will be investigated.

Audit sampling

The heart of an audit is testing transactions. Auditors select a sample and test transactions to ensure that they were properly recorded in the accounting system.

The limitation in sampling is that all transactions are not tested. It is not possible for auditors to examine all transactions a company enters into in a year. So many transactions are not tested which means that there is a chance that a fraudulent item can elude testing.

Focus on large transactions and balances