Auditing of the financial records and statements of every commercial organization is a mandatory process necessary not only for meeting compliance requirements but also for the efficient running of the institution. There are different types of auditing activities that are required to be done for any business and owners hire the best audit firms in India for conducting them but there is one form of auditing about which not many owners possess much knowledge. While every entrepreneur knows about statutory audit in India, the awareness about forensic audit is poor and in this article by highlighting the difference between the two, we will explain the definition of the latter.
Before learning about the differences between the two forms of auditing, it will be beneficial to read a brief overview about both of them.
What Is Statutory Auditing?
The purpose behind conducting of a statutory audit is to assess whether the organization, whose financial statements and records are being evaluated, is providing a correct representation of its financial health or not. Documents related to bank balance, financial transaction, tax records, bookkeeping etc. are scrutinized to check whether details like earnings or profits, returns on investments as reported by the company are accurate or not. Government regulations have made financial audit compulsory for every organization and every business engages any of the numerous accounting services in India for the purpose.
What Is Forensic Auditing ?
Forensic auditing, is carried out in a similar fashion to a statutory financial audit but the motive behind it is to uncover evidence related to fraud committed by an organization or individual. The necessity of such a scrutinizing process arises only in case of suspicion of financial irregularities and accountants are asked to evaluate documents to generate evidence that can be used in a court of law to establish the presence of fraud. Forensic auditors are also accountants but they receive special training in the field and apart from the compulsory knowledge of accounting practices, techniques and applicable laws, they are also aware about criminal laws, court procedures and fraud psychology. A forensic auditor is a key figure in the investigation of any white collar crime involving financial misappropriation or misreporting and is asked by courts to provide expert testimony in such cases.
The basic definition of both the practices must be clear and now we will try to understand the differences between them in a detailed manner.
Differences Between Forensic And Statutory Audit
1. Objective Of The Audit
The primary objective of conducting a statutory audit in India is to get an opinion by an expert accountant on whether the financial statements and records of an organization have been prepared and maintained according to the legal framework of financial reporting prescribed by the regulatory laws of the jurisdiction in which it operates.
A fraud or any other financial misconduct may or may not be discovered by the mandatory scrutiny of records but the motive behind forensic audit is to find evidence that proves the occurrence of an irregularity and which is admissible in a judicial court. The audit may be done after a request from a client on suspicion of any irregularity or by a legal agency on discovery of a white collar crime.
2. Techniques Used For The Purpose
The techniques used by any accountant for carrying out statutory audit in India involve processes like vouching which is examination of original documents to prove the accuracy of account book entries or posting verification which multiplies two accounts to find out the accuracy of the final total, which are designed to establish the accuracy of the information generated by the client and whether they fulfill all compliance requirements or not.
Forensic auditing techniques, on the other hand include tactics like using software tools to find comparative data for a certain time period or in depth checking to ascertain the veracity of certain transactions.
3. Time Period Under Consideration
All transactions and the related records and statements of the previous financial year are generally scrutinized for completing the mandatory financial audit of a company. Compliance regulations dictate that most such evaluations be done on an yearly basis and necessary guidelines are issued for the specified time period.
A forensic auditor on the other hand, can evaluate documents that belong to any date as long as they are pertinent to the investigation being carried out. In order to find substantial evidence that will be helpful in ascertaining whether a fraud or misappropriation had occurred or not, the professional has to analyze accounts and records belonging to any time period.
4. Scrutiny Of Off-balance Sheet Items
All off-balance sheet items like operating leases or research & development partnerships, though not appearing on the balance sheet of a corporation, are important indicators of its financial health. In a statutory audit, all records related to such items are analyzed for establishing the accuracy of the statistics associated with them and the following of all applicable compliance regulations.
On the other hand, a forensic audit looks at assets and liabilities not listed on a balance sheet from a completely different point of view. It scrutinizes all the records for investigating whether there was a sound and logical reason for the transaction or contract to occur and if yes whether the propriety of the activities can be established or not.
5. Dependance On Management Representation
The management representation is a document provided by the company management to the professional conducting the evaluation, certifying that all the details provided to an auditor for the financial audit are authentic, complete and do not withhold any necessary and relevant information. A statutory auditor is completely dependant on the letter for conducting his/her job and the final report is based on the information provided along with the document.
Any such representation from the management is meaningless for the purpose of forensic audit and all the records related to any suspicious financial transaction are sought and analyzed independently by the professionals.
Every commercial organization must invest in a transparent business structure which will help in not only meeting compliance requirements such as statutory audit in India but also in building the credibility and reputation of the institution.