Forensic Audit vs. Financial Audit: What’s the Difference?

December 1, 2020 | Article

It’s important to understand the difference between a financial audit, which is normally conducted by Certified Public Accountants (CPAs) on an annual basis, and a forensic audit, which is normally conducted by certified fraud examiners (CFEs) when there is a sign of fraudulent activity.

What is a financial audit?
A financial audit, sometimes called a financial statement audit, is defined as “the examination of an entity’s financial statement and accompanying disclosure by an independent auditor.” The results of a financial audit include a report by the auditor attesting to the fairness of presentation of the financial statements and related disclosures. This type of examination is designed to provide a picture of the financial health and performance of public companies. The Security and Exchange Commission (SEC) requires all public companies to have this type of audit conducted on a yearly basis by an independent accounting firm.

Non-public traded companies may also have annual financial audits conducted to help the ownership, board of supervisors, board of trustees, current or future investors or their financial institution understand the financial health of the business. A financial audit is also designed to protect or identify financial statement fraud and is conducted according to established accounting standards or Generally Accepted Accounting Principles (GAAP).

What is a Forensic Audit?
forensic audit, also known as a forensic examination, is defined as “an examination of financial records to find any illegal financial activity.” The term forensic itself is defined as “belonging to, used in, or suitable to courts of judicature or to public discussion and debate.” A forensic audit employs different types of investigative techniques than those used in a financial audit and gathers evidence for use in a civil or criminal court of law.

With such a difference between these types of audits, the first step in determining which one you need is identifying the “why.”

We broke down why forensic accounting is so important for your organization.

Financial Audit

  • Are you looking to determine your company’s financial health for its current or potential investors?
  • Do you want to examine whether your organization appears to be (or is) losing money?

Forensic Audit

  • Do you need support with litigation or a potential court case?
  • Has someone been caught misappropriating money?

The greatest threat to any organization is its own employees, so it’s important to monitor your finances and investigate thoroughly if anything seems out of place.

Who conducts an audit?

An audit team typically includes CPAs with accounting and audit process experience in various types of industries as well as CFEs with a wide variety of forensic accounting and auditing experience. CPAs help organizations understand the financial position of their company, while forensic accountants help organizations understand the many different types of fraud schemes occurring in the business world.

Forensic accountants can also help with internal control testing by conducting an Internal Control Examination, or ICE. An ICE is designed to identify any potential opportunities for employees to manipulate current company controls to misappropriate funds or assets from the company.

Understanding the types of audits your organization could encounter is important, especially if you think you’ve encountered fraud.

Here’s how to utilize forensic accountants on a budget

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