Forensic Accounting and Auditing
Forensic engagement versus audit
An audit expresses an opinion on whether the financial statements are fairly presented and gives reasonable, not absolute, assurance. A forensic engagement answers a specific question - was there fraud, how much, who benefited - for a court, board or regulator. Under ISA 240 the auditor must apply professional scepticism, assess fraud risk (including management override and revenue recognition) and investigate inconsistencies, but the auditor is not a fraud investigator, and an unmodified opinion is not a certificate of honesty.
Know the engagement types: fraud examination, litigation support, expert witness testimony, and damages or loss quantification. Know the indirect income-reconstruction methods used when records are unreliable: net worth, source and application of funds (expenditure) and bank deposits. Document examination, data mining, Benford's analysis and fund tracing support them.
Traps: equating a 'forensic audit' with a statutory audit; assuming the auditor must detect every fraud; confusing the civil standard (balance of probabilities) with the criminal standard (beyond reasonable doubt); mixing up the net worth and expenditure methods; asserting a loss figure without reconciling it to identified assets.
Net worth rule: unexplained income = increase in net worth + personal expenditures − known legitimate income.
Worked example: opening net worth KES 4m, closing KES 7m (increase 3m), living expenses 1.2m, disclosed salary 2m. Unexplained income = 3 + 1.2 − 2 = KES 2.2m, which must then be traced to specific assets or deposits before it is reported.