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Many forensic accountants and fraud investigators come from a traditional auditing background. It makes sense for an auditor to use his or her accounting and financial skills in this way, as this foundation is critical to a high-quality financial investigation. A financial investigator position may be a natural fit for someone who is comfortable with numbers.
On the other hand, additional skills go into a fraud test, including investigative techniques, interviewing techniques, reconstructing financial information, and more. But a position as an external auditor can be one of the best foundations for success in forensic accounting, as it provides a professional opportunity to effectively look at financial statements and accounting departments.
Auditing is conducted to verify the truth and fairness of an entity’s financial records, but investigations are conducted to prove a specific fact. The scope of the audit is based on the audit criteria, but the scope of the investigation depends on the conditions of engagement. Audits have never been designed to detect fraud, and they probably never will. They are designed to find loopholes and improper applications of rules. Fraud, by its nature, is difficult to detect during an audit, because of the steps taken by the fraud actors to conceal it. Fraudsters try to hide fraud not only from company management and owners, but also from auditors. Familiarity with company operations and auditing procedures will help an employee successfully conceal fraud.
There are some clear differences between an audit and a fraud investigation The process of conducting an investigation versus an audit is completely different. Audits are often very qualitative, testing specific financial statement items on a regular basis. Certain procedures, such as inventory test counts and accounts receivable confirmations, are standardized and do not vary greatly from engagement to engagement. Auditors are primarily looking for documentation that supports the accounting entries, but are not typically attempting to verify the authenticity of the documentation or determine whether the transactions under examination are suspicious.
In contrast, fraud tests are anything but routine, and they materially affect the planning and execution involved. The most obvious difference between an audit and a fraud investigation is the lack of standard work programs for fraud investigations.
Audits are mainly based on standard work programs that outline areas of testing and testing. There are some differences in these work programs from audit to audit based on client circumstances. The work is done on a test basis, with the auditors selecting a sample of transactions within their pre-defined scope. If these transactions pass the auditors’ test, it is generally assumed that other transactions will also pass the test.
There is no such standard procedure during fraud testing. Checklists and investigation guides can help to some extent, but investigative procedures are often determined based on the results of work just completed. The work is not usually done on examination basis. An area of suspicion is isolated, and the fraud investigator will typically examine all transactions within that area.
Auditing relies heavily on material concepts. Auditors regularly consider whether an item or transaction would make a difference in the eyes of the user of the financial statements. Materiality is often defined primarily in terms of money, but it also includes situational considerations that a financial statement user might find important.
The other major difference between an audit and an investigation relates to the opinion expressed. Audits are aimed at providing negative assurance: the auditors are not aware of anything that would cause the financial statements to be misstated. Forgery tests confirm positives: We found X, Y, and Z during our tests, and here’s the proof
Fraud investigations are routinely referred to as fraud audits, although this term should really be avoided because of the confusion it can cause. An audit is a specific type of service provided by accountants and a fraud investigation is completely different from an audit. It is more appropriate to refer to the project as a fraud investigation, fraud examination, or forensic accounting project. Although the terms used to describe this type of engagement may seem trivial, you should use the most specific language to describe your work.
