INTRODUCTION TO FORENSIC ACCOUNTING

Forensic
The word forensic comes from the Latin word forēnsis, meaning "of or

before the forum." Means –

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
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.
Forensic Investigation
Also known as forensic audit is the examination of documents and the
interviewing of people to extract evidence. Forensic Accounting examines
individual or company financial records as an investigative measure that
attempts to derive evidence suitable for use in litigation.
Forensic Accounting can sometimes be referred to as Forensic Auditing.
Purpose can be:
A forensic audit can be conducted in order to prosecute a party for
fraud, embezzlement or other financial claims
In addition, an audit may be conducted to determine negligence
Fraud auditing
In a fraud audit one searches for the point where the numbers and/or
financial statements do not mesh. It is a meticulous review of financial
documents conducted when fraud is suspected. Some entities do them as a
precaution to prevent fraud from happening and to catch it before the loss
magnifies.
A Fraud Audit however is not an Investigation. Fraud auditing is used to
identify fraudulent transactions, not to figure out how they were created. The
auditor simply traces every
Study on Forensic Accounting and Fraud Detection

transaction performed by the company, looking for the one that is

fraudulent, if any. A regular auditor simply checks the numbers for
accuracy.
Fraud auditors often go outside the books of accounts to find fraudulent
transactions. This may include reviewing receipts, not only from the
company, but from customers as well. Any inconsistencies in these numbers
could help uncover an act of fraud. These auditors also interview employees,
customers and sometimes clients to find out if a fraud has taken place.
How is a forensic accounting analysis different from an audit?
The general public believes that a financial auditor would detect a fraud if
one were being perpetrated during the financial auditor’s audit. The truth,
however, is that the procedures for financial audits are designed to detect
material misstatements, not immaterial frauds. While it is true that many
of the financial statements and frauds could have, perhaps should have,
been detected by financial auditors, the vast majority of frauds could not be
detected with the use of financial audits. Reasons include the dependence of
financial auditors on a sample and the auditors’ reliance on examining the
audit trail versus examining the events and activities behind the documents.
The latter is simply resource prohibitive in terms of costs and time.
There are some basic differences today between the procedures of forensic
auditors and those of financial auditors. In comparison, forensic accounting
and audit differ in specific ways, as shown below:
Forensic Accounting
In response to an event
Financial investigation

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Study on Forensic Accounting and Fraud Detection
Findings used as evidence in court or to resolve disputes
Audit
Mandatory
Measures compliance with reporting standards
Obtain reasonable assurance that financial statements are free
of material misstatement
In practice, there are differences in mindset between forensic accounting and
audit:
“Investigative mentality” vs. “professional skepticism”. A forensic
accountant will often require more extensive corroboration.
A forensic accountant may focus more on seemingly immaterial
transactions.
A forensic accountant will often look for indications of fraud that are not
subject to the scope of a financial statement audit.

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 Introduction to Forensic Accounting

Sr. Particulars Other Audits Forensic Audit

No.
1. Objectives Express an opinion as to Whether fraud has
‘True & Fair presentation take
n place in books
2. Techniques Substantive & Investigative,
Compliance. substanti
Sample based ve or in depth
checking
3. Period Normally for a No such limitations.
particular
accounting period
4. Verification of Relies on the Independent
stock, Management certificate verification of
estimation / Management suspected / selected
realizable value Representation items where
of assets, misappropriation is
provisions, suspected
liability etc.
5. Off balance Used to vouch the Regulatory&
sheet arithmetic propriety of
items (like accuracy & compliance these transactions
contracts etc.) with procedures. / contracts
are examined.
6. Adverse findings Negative opinion or Legal determination
if any qualified opinion of fraud impact and
expressed with/without identification
quantification o
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 Introduction to Forensic Accounting
f perpetrators
depending on scope.
.

What is Fraud?
Fraud is a type of criminal activity, defined as:
'abuse of position, or false representation, or prejudicing someone's rights for
personal gain'.
Put simply, fraud is an act of deception intended for personal gain or
to cause a loss to another party.
The general criminal offence of fraud can include:
deception whereby someone knowingly makes false representation
or they fail to disclose information
or they abuse a position.
Apart from the general meaning let us study some notable definitions of
Fraud as per various statutes and standards. Although definitions vary, most
are based around the general theme mentioned above

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The Companies Act, 2013 defines Fraud in relation to affairs of a company

or anybody corporate, to include,
(a) any act
(b) omission,
(c) concealment of any fact
(d) abuse of position committed by any person or any other person
with the connivance in any manner
❖ with intent to deceive
❖ to gain undue advantage from, or
❖ to injure the interests of,
➢ the company or
➢ its shareholders
➢ or its creditors or
➢ any other person
Whether or not there is any wrongful gain or wrongful loss;
“wrongful gain” means the gain by unlawful means of property to
which the person gaining is not legally entitled
“wrongful loss” means the loss by unlawful means of property to which
the person losing is legally entitled
Fraud is also defined in Para 11(a) of SA 240 issued by the Institute of
Chartered Accountants of India –“Auditors Responsibilities relating to Fraud
in Audit of Financial Statements” as
‘An intentional act by one or more individuals among
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Management
those charged with governance
employees or
or third parties,
Involving use of deception to obtain an unjust or an illegal advantage.”
Similarly Standards on Internal Audit i.e. SIA 11 – “Consideration of
Fraud in an Internal Audit define Fraud as
“An intentional act by one or more individuals among management, those
charged with governance or third parties involving the use of
deception to obtains unjust or illegal

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advantage. A Fraud could take form of misstatement of an information

(Financial or otherwise) or mis-appropriation of assets of that entity”
Another notable definition of Fraud is the one of Indian Contract Act.
According to Section 17 of the Indian Contract Act, 1872
‘Fraud’ means and includes any of the following acts committed by
a party to a contract or
with his connivance,
or by his agent,
With an intent to
Deceive another party thereto or
His agent or
To induce him to enter into the contract
1. The suggestion, as a fact, of that which is not true, by one who does
not believe it to be true
2. The active concealment of a fact by one having knowledge or belief of
the fact
3. A promise made without any intention of performing it
4. Any other act fitted to deceive
5. Any such act or omission as the law specially declares to be fraudulent
Explanation:
Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud, unless the circumstances of the case are such
that, regard being had to them, it is the duty of the person keeping silence
to speak, or unless his silence, is in itself, equivalent to speech.
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This can be illustrated by way of an example –A sells, by auction, to B, a
horse which A knows to be unsound. A says nothing to B about the horse’s
unsoundness. This is not fraud in A sells, by auction, to B, a horse which A
knows to be unsound. A says nothing to B about the horse’s unsoundness.
This is not fraud in A.”
Also Section 25 of IPC defines "Fraudulently” as: A person is said to do a
thing fraudulently if he does that thing with intent to defraud but not
otherwise.
The purpose of fraud may be monetary gain or other benefits.
Here is an insight on certain other statutes/standards/circulars/framework
principles which have mentions of frauds and have given a framework with
regards to their prevention, classification, detection and reporting

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Circular No. IRDA/SDD/MISC/CIR/009/01/2013 date 22nd October 2013

issued by IRDA has mentions of Fraud in Insurance Sector an act of omission
intended to gain dishonest or unlawful advantage for a party committing
the fraud or for other related parties.

Circular No. RBI/2014-15/85 by RBI dated 1st July 2015 on Fraud

Classification and Reporting in Banking Sector – Gives classification of
Frauds based on the provisions of the Indian penal code mainly to have
uniformity in reporting.
COSO principle 8 – talks of “Consider potential of Fraud”. It requires
identifications of the opportunities, pressures, incentives, attitudes &
rationalizations that may lead stakeholders to act outside the boundaries
of ethical conduct & standards of behaviour.
SA 240This Standard on Auditing (SA) deals with the auditor’s responsibilities
relating to fraud in an audit of financial statements and expands on how SA
315, “Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment,” and SA 330, “The Auditor’s
Responses to Assessed Risks,” are to be applied.
SA 315 requires the auditor to identify and assess the risks of material mis
statements whether due to fraud or error in the financial statements.

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