What Is Forensic Audit? How Is It Different From Financial Audit?

Audit is a verification or cross examination for likely errors and the term ' forensic' relates to what can be used in the court of law. In today's business environment where money laundering and other illicit practices are part of the system, RBI in order to make the system more transparent as well as streamline it has made the process of forensic audit compulsory for large businesses who take large advances and undergo account restructuring.

There are qualified CA professionals with special skill set who perform such an audit and through it an individual's or a company's financial information is studied for willful default, fund diversion or other illicit practise.

Some of the areas involved in forensic audit include criminal laws, forensic tools, fraud psychology. Technology by way of softwares and other qualitative and financial techniques sum up the forensic audit for financial analysis.

The banking industry that is facing huge NPA crisis also manages their stressed assets with the help of forensic auditors. There have been noted cases in which individuals or entities despite having huge cash reserves and borrow huge money from banking institutions so hence they are declared willful defaulters.

Some of the areas of forensic audit are included here

Economic damages loss calculation due to breach of contract or tort, post-acquisition disputes including breaches of warranties, earnouts, securities fraud , money laundering, tax fraud, computer forensics or business valuation.

In a case of professional negligence, their role once again comes into action as they need to comment and analyze the work of other professionals.

At instances, SEBI orders forensic audit for companies to check on fund diversion. This is done in the event when the capital market regulator finds that there is prima facie evidence on the misrepresentation of financials by the company as well as suspicion of misuse of funds/ books of accounts, submission of partial and incomplete information.

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