Forensic auditing is an activity that consists of gathering, verifying, processing, analyzing of, and reporting on data to obtain facts and evidence in a predefined context. Required: (a) Explain the main distinction between forensic audit and financial audit. [10 marks] (b) Describe the different stages that should be followed in performing forensic investigations. [15 marks] END OF QUESTION PAPER Page 4 of 4

Financial Auditing - is done in order to express an opinion weather financial statements are prepared by following generally accepted accounting principles and are free from material misstatements with out errors and frauds.

Forensic Audit - forensic audit is done by forensic accounting expert to uncover the frauds committed by the company. The objectives of forensic audit offten includes that who committed the fraud , how the fraud taken place, level of fraud, measures taken to stop the same in future.

MAIN DISTINCTION BETWEEN FORENSIC AUDIT AND FINANCIAL AUDIT -

Financial statement audit is conducted by auditors to verify weather the company financial statements are fairly present its financial position as on a particular date. Generally the responsibility to prepare financial statements is on management and auditor should verify weather the financial statements are prepared in accordance with generally accepted accounting principles and auditor should give an opinion on financial statements after attaining sufficient appropriate audit evidence to give opinion. To obtain sufficient appropriate audit evidence auditor should verify transactions of organization financial and non financial transactions by using test checking or anyone other appropriate method. Here the auditor of financial does not analyse each and every transaction. And the main aim of financial auditor is not to find and go deep into frauds he just intimates management about the fraud taken place and give the audit opinion based on his findings.

Forensic audit is mainly conducted to find and detect the frauds taken place in the company.

Forensic audit is conducted by forensic accounting expert.they are specially trained to uncover frauds.

Forensic audit will go deep into financial statements and evaluate internal controls weakness.

Forensic audit is done by following professional accounting standards applicable to forensic audit with are not subject to GAAP.

DIFFERENT STAGES THAT SHOULD BE FOLLOWED IN PERFORMING FORENSIC AUDIT -

1) Accepting the investigation

2) planning

3) collecting evidence

4)internal controls

5) Analysis

6)reporting

Accepting the investigation -

forensic auditor must think before accepting the audit that weather the firm has sufficient knowledge and skill in performing audit.

Forensic audit requires detailed knowledge of frauds, investigation techniques and legal frame work.

Planning -

Here a forensic auditor must gain knowledge of organization and should go through previous forensic audit reports and back ground of the organization and should create and appropriate plan according to his planning.

Collecting evidences -

Analysis should be done on financial transactions and should keep more eye on the material areas where frauds take place. And should apply techniques to obtain appropriate evidence. Should check weather there exists any concealment of profits etc, and seek external and internal confirmations for supporting evidences.

Internal controls -

Understand the internal controls of organization and verify there exists any loop holes to make any frauds.

Test the efficiency of internal controls that they should be sufficient enough as per the complexity of organization.

Find the weak areas of internal controls and make notes of them.

Analysis -

Analysis each and every transaction and use appropriate techniques to find out the frauds taken place. Do reconciliation where ever required ,

Take external confirmation where ever required.

Obtain written representations from the management for any doubtful transaction. They serve as evidence in case of guilty.

Verify source of data and compare the raw data with actuall accounted for data.

Note every single material misstatements which may lead to fraud.

Reporting -

Documentation should be done based on factual data and should report all the mistatements found during audit.

Conclusions should be supported with appropriate evidence and supporting documents.

Mention the areas that may lead to fraud in future and give appropriate measure

Mention the suggestions to improve internal controls.