When it comes to auditing your organization, many think it’s simply a financial requirement to ensure compliance. However, this type of financial audit is just one of many types of audits your organization can go through. Other types of audits can be used to review and report the health of your organization, uncover potential areas of vulnerability and ensure proper controls are in place.
Understanding the difference between different types of audits is essential to knowing which is the right type for your organization to conduct.
Learn more about the different types of audits.
An audit is defined as “a formal examination of an organization’s or individual’s accounts or financial situation.” It is conducted by a public accounting firm for the purpose of providing “comfort” in relation to an organization’s financial statements.
In many organizations, members of the audit committee, board of directors, owners, managers or other individuals in supervisor positions have limited (if any) experience with other types of audits, including forensic or internal audits. If they are unsure of which direction to turn, they may go seeking the wrong investigative solution.
Let’s look at the differences between forensic accounting and auditing. To start, what is a forensic audit and what is forensic accountant? A forensic accountant is defined as “someone whose job is examining financial records to help find out whether a crime has been committed, or help with a legal case.”
An internal auditor is defined as “a person who does internal audits for a company.”
Taking it a step further, the definition of a forensic auditing is “an examination of financial records to find any illegal financial activity,” while an internal audit is defined as “an examination of a company’s accounts or activities by its own accountants or managers.”
The word “forensic” is often misunderstood in the context of an audit. Forensic simply means “suitable to courts of judicature or to public discussion and debate.”
When you compare that to the definition of an audit, you will see a major difference between the two. The objective of a forensic accounting audit is to investigate the matter with the intention of finding evidence that will appear in a court of law for some type of litigation or mediation. An audit, on the other hand, is prepared to be presented to the company’s governing body or owners to discuss the financial health of the organization.
What is a Forensic Audit?
Forensic audits are conducted with the understanding the matter will appear in court. This investigation could be in relation to a trial or some form of mediation.
Most of forensic audits and forensic examinations are conducted by Certified Fraud Examiners (CFEs), or forensic accountants who are normally considered experts in a specific field of forensic accounting.
Internal audits are often conducted by either Certified Internal Auditors (CIAs) or other accounting professionals.
After determining what is a forensic audit, the next concern is to determine the need for an internal audit or a forensic audit/examination, consider the following: Your organization may need to implement an internal audit process if:
As you can see, an internal audit is about more than just money. It provides a complete picture of how the organization operates and where it needs to improve policies, procedures, and practices.
On the other hand, your organization may need a forensic audit/examination if:
By reviewing the above information, it’s easy to see that a forensic audit is much more focused on financial operations than an internal audit.
While some matters require both a forensic audit/examination and an internal audit, the key to determining which service to use is to determine the time and objectives of the project(s).
So what is a forensic audit’s purpose? A forensic audit/examination is designed to focus on reconstructing past financial transactions for a specific purpose, such as concerns of fraud, whereas an internal audit is typically focused more on compliance and/or the performance of the organization.
When in doubt, your organization should reach out to both a forensic accountant (also known as a forensic auditor) and an internal auditor to further discuss your needs. These professionals can assist you with determining which service offering is more appropriate for the scope of the matter as well as ensure that the most qualified person(s) are on your engagement team.
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