Page 342 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Forensic Accounting

(CNO- FA.020) Important Definitions:
Forensic:
Forensic: The word forensic comes from the Latin word forensic, meaning "of or before the forum." It is -
Relating to, used in, or appropriate for courts of law or for public discussion or argumentation. Relating to the
use of science or technology in the investigation and establishment of facts or evidence in a court of law.
Forensic Accounting
Forensic Accounting: The integration of accounting, auditing and investigative skills yields the specialty
known as Forensic Accounting. It is the study and interpretation of accounting evidence. It is the application of
accounting methods to the tracking and collection of forensic evidence, usually for investigation and
prosecution of criminal acts such as embezzlement or fraud.
Book definition: Forensic Accounting by Hopwood, Leiner, and Young
Book definition: Forensic Accounting by Hopwood, Leiner, and Young
• Forensic accounting is the application of investigative and analytical skills for the purpose of resolving
financial issues in a manner that meets standards required by courts of law.
• Forensic accountants apply special skills in accounting, auditing, finance, quantitative methods, certain areas
of the law, research and investigative skills to collect, analyse and evaluate evidential matter and to interpret
and communicate findings
Red Flag
Red Flag: Red flags are indicators or warning of any impending danger or inappropriate behaviour. Red flag
does not necessarily indicate the existence of fraud however are indicators. that caution needs to be exercised
while investigating the situations. Red flags are classified in categories such as financial performance red flag,
accounting system red flags, operational red flags and behavioural red flags
Example of Forensics
Incident: The company received an anonymous letter threatening the CEO and his family, demanding a
ransom to ensure their safety. The CEO reported this to the police.
Forensic Analysis: The police initiated a forensic analysis of the letter and envelope, examining the paper,
potential fingerprints, the writing implement used, and the handwriting style to identify the sender.
Investigation: Alongside forensic analysis, the police investigated potential suspects, collecting handwriting
samples to find a match with the letter and identify the most likely suspect.
Example of Forensic Accounting
Reconciliation: The Accounting Officer in a pharma company noticed a significant discrepancy during the
monthly reconciliation of physical and book inventory, which considered purchases, sales, and wastages.
Investigation: To find the cause of the variance, the officer reviewed quantities of large inventory items,
tracing receipts to production runs and checking wastage records, suspecting potential pilferage of expensive
raw materials.
Security Involvement: Unable to find a plausible explanation for the discrepancy, the officer involved the
security head to further investigate the matter, focusing on the time of receipt of the missing items.
Resolution: The security team reviewed CCTV footage and delivery records, identifying instances of short
delivery, thus unveiling a case of accounting fraud through forensic accounting techniques.

How is a forensic accounting analysis different from an audit?
Statutory Audit.
Objective: To provide a true and fair picture through a general review of the books of account.To identify
material misstatements in financial statements.
Skills: Involving testing and checking, analysis, inquiry, and observation.

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