i) Vouching

Vouching is defined as the "verification of entries in the books of account by examination of documentary
evidence or vouchers, such as invoices, debit and credit notes, statements, receipts, etc.

Vouching is concerned with examining documentary evidence to ascertain the authenticity of entries in

books of entries in books of accounts. It is an inspection by the auditor of an evidence supporting and
substantiating the transaction made in the books.

Vouching is the act of reviewing documentary evidence to see if it properly supports entries made in

the accounting records.
Vouching is a technical term that refers to the inspection of documentary evidence supporting and
substantiating a financial transaction, by an auditor. It is the essence of auditing

Vouching is the practice followed in an audit, with the objective of establishing the authenticity of the
transactions recorded in the primary books of account. It essentially consists of verifying a transaction
recorded in the books of account with the relevant documentary evidence and the authority on the basis of
which the entry has been made; also confirming that the amount mentioned in the voucher has been
posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the
final statements of account. Vouching does not include valuation.

Vouching can be described as the essence or backbone of auditing. The success of an audit depends on
the thoroughness with which vouching is done. After entering in all vouchers, only then can auditing start.
The object of vouching is to establish that the transactions recorded in the books of accounts are (1) in
order and have been properly authorized and (2) are correctly recorded. “Simple routine checking cannot
establish the same accuracy that vouching can. In routine checking, entries recorded in the books only
show what information the bookkeeper chooses to disclose, however these entries can be fictitious without
any vouching or vouchers. By using a vouching or a voucher system a company will have concrete and
solid documentation and evidence of expenses, capital, and written proof in audits.
Vouching is the essence or backbone of auditing because when performing an audit, an auditor must have
proof of all transactions. Without the proof provided by vouching, the claims provided by the auditor are just
that, only claims. In most cases, hard to detect frauds can only be discovered through the use of vouching.

ii) Verification
Verification:
It refers to “the verification of assets implies an inquiry into the value, ownership and title, existence and
possession and the presence of any charge on the assets.
It is also defined as a process by which the auditor substantiate the accuracy of the right hand side of
Balance Sheet and must be considered as having 3 distinct objects, i.e., verification of the existence of
assets, the valuation of assets and authority of their acquisition.
The auditor is required to report whether the Balance Sheet exhibits the true and fair view of the business.
For this, he has to examine and ascertain the correctness of money value of assets and liabilities as shown
in the Balance Sheet. In the case of London Oil Storage Company Ltd, it was held that it is the duty of the
auditor to verify the existence of assets, stated in the Balance Sheet and that he will be liable for any
damage suffered by the client, if he fails in this duty.
The Institute of CA of India, states that the verification of assets should be aimed at establishing their:
a. Existence
b. Ownership
c. Possession.
d. Free from Encumbrance.
e. Proper recording and proper verification.

Thus, verification includes verifying:

1. The existence of the assets and liabilities.
2. Legal ownership and possession of the assets
3. Correct valuation, and
4. Ascertaining that the asset is free from any charge
Verification in an audit process can be done offsite or onsite. Offsite verification [3] means verification by
checking documents, official records, photos and by questioning staff responsible or otherwise trusted to be
a reliable source for the facility in verification. Onsite verification means the verifying party is physically
visiting the facility, getting introduced into due facts about it on the site where the facility is located and
operated. The process may be regulated by law in certain countries.

Objectives

Objectives of Verification are

 To find out whether assets were in existence
 To detect frauds and errors, if any
 To find out whether there is an adequate internal control regarding acquisition, utilization and
disposal of assets.
 To verify the arithmetic accuracy of the accounts
 To ensure that the assets have been recorded properly
 To know whether the assets are mentioned above is used in the company
 To show correct valuation of assets and liabilities.
 To know whether the balance sheet exhibits a true and fair view of the state of affairs of the
business
 To find out the ownership and title of the assets

iii) Management assertion

Management assertions are the inherent claims made by the company’s management concerning the
recognition and presentation of the different elements of the company’s financial statements, which are
used for the audit of those financial statements. The concept is primarily used in regard to the audit of a
company's financial statements, where the auditors rely upon a variety of assertions regarding the
business. The auditors test the validity of these assertions by conducting a number of audit tests.
Management assertions fall into the following three classifications.
Types of assertions
There are numerous audit assertion categories that auditors use to support and verify the information
found in a company’s financial statements.
1. Existence
The existence assertion verifies that assets, liabilities, and equity balances exist as stated in the
financial statement. For example, if a balance sheet indicates inventory on hand for $10,000, it is the
job of the auditor to verify its existence.
The same process is used when verifying accounts receivable balances. The auditor is tasked with
authenticating the accounts receivable balance as reported through a variety of means, including
choosing a particular accounts receivable customer and examining all related activity for that
particular customer.
Bank deposits may also be examined for existence by looking at corresponding bank statements and
bank reconciliations. Auditors may also directly contact the bank to request current bank balances.
2. Occurrence
The occurrence assertion is used to determine whether the transactions recorded on financial
statements have taken place. This can range from verifying that a bank deposit has been completed
to authenticating accounts receivable balances by determining whether a sale took place on the day
specified.
3. Accuracy
Accuracy looks at specific transactions and then checks the accuracy of the recorded entry to
determine whether the amounts are recorded correctly. In many cases, an auditor will look at
individual customer accounts, including payments. to verify that the amount recorded as paid is the
same as received from the customer.
4. Completeness
Completeness helps auditors verify that all transactions for the period being examined have been
properly entered in the correct period.
For example, an auditor may want to examine payroll records to make sure that all salaries and
wages expenses have been recorded in the proper period. This may include an examination of payroll
records, a payroll journal, an active employee list, and any payroll accruals that were made and
reversed in the period being examined.
Inventory can also play a large role in the completeness assertion, with auditors looking at inventory
transactions that took place during a specific period by examining inventory levels and corresponding
sales numbers to determine that inventory was recorded properly.
Completeness, like existence, may examine bank statements and other banking records to determine
that all deposits that have been made for the current period have been recorded by management on a
timely basis. Auditors may also look for any deposits in the bank that have not been recorded.
5. Valuation
The valuation assertion is used to determine that the financial statements presented have all been
recorded at the proper valuation.
For instance, the reporting of a company's accounts receivable account does not provide a guarantee
that the customer will pay the accounts receivable amount owed. In this case, an auditor can examine
the accounts receivable aging report to determine if bad debt allowances are accurate.
Inventory is another area that auditors may review to determine that inventory is properly valued and
recorded using the appropriate valuation methods.
6. Rights and obligations
Rights and obligations assertions are used to determine that the assets, liabilities, and equity
represented in the financial statements are the property of the business being audited. In other
words, if your small business is being audited, the auditor may ask for proof that the cash balance of
your bank account belongs to the business.
Auditors may look at other assets as well to determine whether they are the property of the business
or are just being used by the business. Liabilities are another area that auditors will review to
determine that any bills paid from the business belong to the business and not the owner.
7. Classification
The classification assertion addresses the financial statements themselves. Are the statements
presented properly in an acceptable format? Do they include all of the necessary information and
related disclosures? Are they easy to understand?
For example, accounts payable notes payable and interest payable are all considered payables, but
they are all very separate entities and should be reported as such. For example, notes payable
transactions should never be classified as an accounts payable transaction, with the same being true
for interest payable transactions.
It is the auditor’s responsibility to determine that these items are properly disclosed in the financial
statements.
8. Cut-off
The cut-off assertion is used to determine whether the transactions recorded have been recorded in
the appropriate accounting period. Payroll and inventory balances are often checked for cut-off
accuracy to determine that the activity that took place was recorded in the appropriate period. This is
particularly important for those accruing payroll  or reporting inventory levels.
The audit assertions above are used in three different categories.
 Transaction level assertions
 Account balance assertions
 Presentation and disclosure assertions
TRANSACTION LEVEL ACCOUNT BALANCE PRESENTATION &
ASSERTIONS ASSERTIONS DISCLOSURE ASSERTIONS
(Used when examining journal (Used when examining asset, (Used to determine proper
entries and transactions) liability, and equity totals) format and clarity)
Completeness, Accuracy, Rights & Obligations, Existence, Accuracy, Occurrence,
Classification, Occurrence, Cut- Completeness, Valuation Completeness, Classification
Off

iv) Audit recording

A records audit formally reviews how your agency controls who recovers, changes, or owns a particular
record. During this process, the auditor examines your files in light of both legal and practical terms, and
delivers a report detailing record retention or possible destruction.
Importance of audit recording
a). Ensure compliance
While the goal of a records audit varies, they’re often focused on making sure your organization follows the
procedures for records management as defined by your operational controls and RM policies. In other
words, conducting an audit ensures your organization complies with all legal and regulatory requirements.
With repeat audits, your organization can stay up-to-date on a range of regulations, and operate more
freely as a result. 
b). Confirm consistency of records management
Records management is centered around preserving an accurate archive of the happenings and
transactions within your organization. At its core, records management is accountable for the systematic
control over the creation, maintenance, use, and disposal of organization records and consistency is key
when it comes to keeping each of these responsibilities in check. Taking part in periodic records audits
supports consistency in how records are initially created, how they’re stored, how they’re used, and
eventually, how they’re discarded.
c). Understand which records are no longer needed
Proper management of your organization records is essential for maintaining control of confidential
employee data and other pertinent (but private) information. While the preservation of records can extend
for years after an employee has left your organization, there does come a point when certain files are no
longer needed. A records audit can reveal which documents are ready for disposal, and which paperwork
still requires retention. The timely and steady destruction of inactive files keeps your agency organized,
streamlined, and performing at its fullest potential. 
v) Rights, duties and liabilities of an external audit
Rights of External Auditors.
According to Section 227(7) of the Companies Act, a External Auditor has the following rights.
1. Right of Access t Books of Accounts:
As per Section 227(1) of the Companies Act every auditor of the company has the right to access at all
times to the books of accounts and vouchers of the company, whether kept at the head office of the
company or elsewhere.
Under section 209(1) (d), a External Auditor has the right to examine the cost records also which are
required to be maintained by certain companies relating to production sales, stores etc.
2. Right to Obtain Information and Explanations:
An auditor can call for any information or explanation from different officers of the company which he
may think necessary for the performance of his duties.
Under section 221, apart from the auditor’s right to obtain information and explanation it is the duty of
every officer of the company to furnish without delay the information to the External Auditor.
The power is so wide; the decision as to what information and explanation is left entirely to the
discretion of the auditor. If the directors or officers of the company refuse to supply some information on
 the ground that in their opinion it is not necessary to furnish it, then the auditor has the right to mention
that in his audit report.
3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend them.
According to section 231, of the companies act an auditor of a company has the right to receive notices
and other communications relating to the general meetings in the same way as that of the members of
the company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at
those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has
audited. But he auditor is not expected to answer questions in the general meeting.
4. Right to Visit Branches.
According to section 228 of the companies act the auditor of the company has the right to visit the
branch office or offices of the company.
He can also audit such accounts of eh offices of the company provided that there is not qualified auditor
to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the
right to access at all times to the books of accounts and vouchers that the company maintains at branch
office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch
accounts audited by some of the local auditors, even the auditor has access at all times, to the books,
accounts an vouchers of the company and he can also visit the branches, if he feels necessary.
5. Right to Correct Any Wrong Statement.
The External Auditor is required to make a report to the members of the company on the accounts
examined by him of the final accounts and the related documents which are laid down before the
company in the general meeting.
Similarly, the auditor can advice the directors to amend their system of maintaining accounts. If the
suggestions are not carried out, he has the right to refer the matter to the members and also to report
that in the audit report.
Duties of External Auditor.
The various duties of the External Auditor are as follows:
1. To make special enquiries and investigation: in connection with the following matters under section
227(1-A) of the Companies Amendment Act 1965.
A External Auditor shall enquire:
a. Whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms of which they have been made are not prejudicial to the interests
of the company or its members.
b. Whether the transactions which are not supported by any fact or evidence, though recorded in the
books are not prejudicial to the interests of the company.
c. Whether personal expenses have been charged to the revenue account.
d. Whether it has stated in the books of accounts of the company that any shares have been allotted
for cash and whether cash has actually been received in respect of such allotment, and if no cash
 has actually been received, whether the position as stated in the account books and the Balance
Sheet is correct and regular.
2. Duty to make a Report to the Shareholders.
Under Section 227(2,3,4&5) of the Companies Act, the auditor shall report to the share holders about
the accounts examined by him. The report so mentioned shall contain the following.
a. Whether in his opinion, the Profit and Loss Account referred to in his report exhibits a true and fair
view of the profit or loss.
b. Whether in his opinion, the Balance Sheet referred to in his report is properly drawn up, so as to
exhibit a true and fair view of the state of affairs of the business according to the best of his
information and explanations given to him and as shown by the books of accounts.
c. Whether he has obtained all the information and explanation which to the best of his knowledge
and belief were necessary for the purpose of his audit.
d. Whether in his opinion, proper books of accounts as required by law have been kept by the
company and proper returns adequate for the purpose of his audit have been received from
branches he visited or not.
e. Whether report on branch accounts audited under section 28 by a person other than the
company’s auditor has been forwarded to him as required by clause (c) sub section (3) of that
section and how he had dealt with the same in preparing the auditor’s report.
f. Whether the company’s Balance Sheet and Profit and Loss Accounts dealt with by the report are
in agreement with the books of accounts and returns.
If the answer to any of the above mentioned questions is in the negative, the auditor should submit
his report accordingly.

3. Duty to comply with the Directives of the Central Government.

It is the duty of the auditor to comply with the various directives issued to the auditor of the joint stock
companies from time to time to give specific reports on the financial accounts of the companies.
For example in 1975 it was made compulsory for some of the specified companies which are engaged
in any of the below mentioned activities to conduct cost audit, that is, those companies engaged in
a. Manufacturing, mining or processing.
b. Supplying and rendering services
c. Trading
d. Business of financial investments, chit funds, nidhi or mutual benefit societies.
4. Duty to sign the Audit Report.
As per section 229 of the companies act 1956, it is the statutory duty of the company auditor to sign the
report prepared by him. Only a partner practicing in a firm in India can sign the audit report for and on
behalf of a partnership firm practicing as chartered accountants.
5. Duty to give a Statement in the Prospectus.
As per section 56(1) of the companies act, the prospectus issued by an existing company shall contain
a report from the auditor of the company regarding
a. Profits and losses during the previous year.
b. Assets and liabilities of the company and its subsidiaries and
 c. The rate of dividend paid by the company in respect of each class of shares in the company for
each of the five financial years preceding the issue of prospectus.
So it is the statutory duty of the company auditor to submit his report containing the above
mentioned points.
6. Duty to Certify the Statutory Report.
According to section 165(4) the auditor of the company has to certify the statutory report regarding the
shares allotted by the company, the cash received in respect of shares, and the receipts and payments
of the company. The statutory report should also be certified as correct by two directors, one of whom
shall be managing director.
Every company shall within a period of not less than one month and not more than 6months from the
date which the company is entitled to commence business has to conduct a general meeting of the
members of the company which is known as the statutory meeting.
7. Duty to make a declaration of Solvency, if the company Goes into Voluntary Winding up
When a company goes into voluntary winding up, then a declaration of solvency is to be made by the
directors of the company. Under section 488(1) of the Companies Act, this declaration is to be
accompanied by the report of the auditor of the company under the section 488(2) of the companies
act. So it is the duty of the auditor to make such reports.
8. Duty to produce information and to assist the investigation, if any investigation is conducted regarding
the working of the company.
Under section 240(6) (b), it is the duty of an auditor to preserve and produce to the inspector or any
other person authorized by him in this behalf with the previous approval of the central government, all
books and papers of or relating to the company or as the case my be, of relating to the other body
corporate which are in their custody or power and other wise to give to the inspector all the assistance
in connection with the investigation which they are reasonably able to give.
9. Duty to perform the contract
It is the duty of the auditor to discharge the duties according to the terms of contract between the
auditor and the party who has appointed him. It is to be remembered that the scope of statutory duties
of a company auditor cannot in any way be curtailed. But on the other hand, the scope of duties of the
auditor can be enlarged by passing a resolution at the annual general meeting making a provision in the
Articles of Association of the company. If so, it is the duty of the auditor to perform the additional work.
10. Duty to care and caution.
The auditor is appointed in the capacity of an expert, therefore, he must act honestly and exercises
cure care and caution in the performance of his duties. The auditor can never give ignorance as an
excuse for defense. So the auditor must prove that in the course of his audit work, he has employed
skills that would reasonably be applied by any other auditor.

The Liabilities of a External Auditor

1. Civil Liability of an Auditor for negligence.
The liability of an auditor to pay damages are known as Civil Liabilities. Every auditor in the
performance of his job is expected to exercise reasonable care and skill as per the circumstances,
because the shareholders of the company appoint the auditor as their agent and therefore, he must
 exercise reasonable degree of skill and care in the performance of his duties. If not, the auditor will
have to face the consequences.
Therefore, we can conclude that an auditor can be held liable for negligence of his duty if it is proved
that
a. There has been a negligence in the performance of his duty and it may be due to the absence of
requisite professional skills or failure to exercise it.
b. There happens to be a loss or damage as a result of his negligence and
c. The loss was suffered by his client.
However, the court has the power to grant relief, wholly or partly to an auditor. We can also
present the situation as given below.
1. Loss without negligence and
2. Negligence without loss.
a. Liability of the Auditor for Mis-statements in the Prospectus.
As per section 65 of the companies act 1956, an auditor may be held liable for damages suffered by
those persons who subscribed to the shares or debentures of a company or debentures of a
company proposing in the faith of the prospectus, which included auditor’s report containing some
untrue statements or facts. The auditor and every person who has authorized the issue of the
prospectus shall be punishable with imprisonment for a term which may extent of 2years or with fine,
which may extend to Rs. 5000 or with both, for the damages sustained directly resulted from those
untrue statements. For the purpose of this clause, even those statements shall be taken to be untrue
which are misleading in form and the context in which they are included.
But the auditor can escape from his liability if he is able to prove:
i. That he withdrew his consent in writing before the delivery of the copy of the prospectus for
registration.
ii. That he withdrew his consent in writing from such a prospectus on coming to know of the untrue
statement by giving a reasonable public notice before the allotment of shares.
iii. That he was competent to make the statement and that he has reasonable grounds to believe up
to the time of allotment of the shares, that the statement was true or he relied upon the opinion of
an expert whose name he has quoted in his certificate.

b. Civil Liability of an Auditor for Misfeasance.

By misfeasance we mean breach of trust or duty imposed by law for negligence in the performance
of duties, which results in some loss or damage to the company. If an auditor does something wrong
in the performance of his duties resulting in financial loss to the company he is guilty of misfeasance.
As per section 543 of the companies act. The liquidator can bring the suit in the name of the
company against the auditor, that is “in the course o winding up of a company, it appears that any
officer, including eh auditor or any other person associated with the promotion or the management of
the company has misapplied or retained wrongfully, any property of the company or is guilty of
breach of duty, he can be held liable for the damages caused to the company”
 But section 633 grants relief to directors, officers, and auditors of the company against liability in
respect of negligence, default, breach of duty, misfeasance or breach of trust. But for getting any
relief there under, it must be proved by the person concerned.
a. That he has acted honestly.
b. That he has acted reasonably and
c. That having regard to all the circumstances of the case, he ought fairly to be excused.

2. Criminal Liabilities of a External Auditor

The auditor of a company becomes criminally liable for various offences during the course of his audit.
Criminal liability of an auditor will arise when he is found to be guilty of willful non compliance under the
provisions of law. Under the criminal liabilities, he may be imprisoned, fined or punished with both as
per the companies act, income tax act, and the Indian Penal Code. Criminal liability of an auditor arises
from errors in the performance of audit.
The auditor can be held criminally liable under:
1. The Companies Act.
2. The Income Tax Act.
3. The Chartered Accountant Act

a) Criminal Liabilities under the Companies Act.

i. Section 233
If the auditor does not comply with the requirement of section 227 and 229 as to make of his
report, of signing or authenticating any document and if such default on his part is willful, he shall
be punishable with fine which may extend to Rs. 1000
ii. Section 240
If the auditor of a company doesn’t give the required assistance to an inspector appointed by the
central government to investigate into the affairs of the company, the auditor of the company is
punishable with imprisonment up to 6months or fine up to Rs.2000 or both. For persistent default
a further fine at Rs. 200 per day may also be charged.

iii. Section 242

When on the basis of the report submitted by an inspector, the central government takes action
and prosecutes any person connected with the affairs of the company is required to assist the
prosecution. If he does not do so, he is guilty of contempt of court and punishable to the extent of
imprisonment for 6months of fine of Rs 500 or both.
iv. Section 477
When the company is wound up, the auditor is subjected to a private examination by the court
and is also liable to return to the court any books and documents of the company in his
possession. If he does not appear before the court he can be arrested.

b) Criminal Liabilities under the Income Tax Act.

 A qualified chartered accountant or the auditor of the company can act as authorized representative
and may attend the Income Tax Authority or the Appellate Tribunal in connection with the
proceedings under the Income Tax Act.
a. Section 288
This section provides that if a person who is convicted of an offence in connection with taxation
proceedings will be disqualified from representing an assesse. The commissioner of Income Tax has been
empowered to determine the period of such disqualification.
If the council of the Institute of Chartered Accountants of India finds that any chartered accountant is guilty
in his professional misconduct, default in taxation etc. the institute can also declare him disqualified for
certain specified period.
b. Section 277
As per this section 2years imprisonment may be imposed on the auditor if he auditor submits knowingly any
false statements in the form of accounts for the preparation of income tax returns.
c. Section 278
As per this section any person who induces in any manner any other person to make and deliver to the
income tax authorities, some false statements or declaration relating to chargeable income tax, highlighting
the fundamental principle of criminal law that any person who aids, counsels or procures the commission of
an offence is liable to be punishable with rigorous imprisonment for a minimum period of 3months and
maximum of 3years with fine. In case the amount of tax to be evaded is in excess of Rs. 100000 the
minimum and maximum period of rigorous imprisonment will be 6months and 7 years maximum with fine.
c) Criminal Liabilities of an Auditor under the Chartered Accountants Act 1949.
1. If a person not being a chartered accountant within the meaning of chartered accountants act of
1949 acts as an auditor of a company and signs any documents, then he may be held liable for
criminal prosecution under section 29 of the chartered accountants act 1949. The punishment for
this is fine which may extend to Rs.1000 on first conviction and with imprisonment extending to
6months or fine amounting to Rs.5000 or both on any subsequent conviction.
2. According to Part III of the first schedule of Chartered Accountants Act 1949 a member of the
institute whether in practice r not, shall be deemed to be guilty of professional misconduct if he:
a. Includes in any statement return or form to be submitted to the council any particulars knowing
them to be false.
b. Not being a fellow styles himself as fellow
c. Does not supply he information called for or does not comply with the requirements asked for
by the council or any of its committees.
3. Auditors Liabilities to Third Parties.
Besides the client, the creditors, bankers, prospective share holders, tax authorities etc depend fully upon
the final accounts certified by the auditor and do different dealings with the company.
The liability of an auditor towards third parties can be discussed under 2circumstances.

a. For Frauds.
If in case there is any fraud on the part of the company’s auditor, the third parties can however hold him
liable. This 3rd party can sue the auditor if the report of the auditor is of such a nature, as amounts to fraud,
even in there is no contractual obligation between the auditor and the 3 rd party.
It was decided in the case of Derry Vs Peek (1882) that the auditor can be held liable to 3 rd partied only
when the following facts are proved against him.
i. That the statement or balance sheet signed by the auditor was materially untrue
ii. That the statement or the Balance Sheet was made an intention that a 3 rd party should act
on it.
iii. That the auditor knew that the statement of balance sheet was untrue.
iv.That the 3rd party acted upon such a statement and consequently suffered a loss.
v. That the auditor gave his consent for the inclusion of such a statement in the prospectus.

b. For Negligence.
An auditor in general is not liable to 3 rd parties for negligence of duty as no contractual
obligation exists between the auditor and the 3 rd party. As he is not appointed by them, he
owes no duty towards them and hence there is no question of any type of liability.

vi) Forensic Audit Meaning

A forensic audit is a structured examination of the financial records of a business entity in an investigative
manner to find out the evidence that can be used for legal proceedings in court. It is one step ahead of an
internal audit, and the person who conducts such an audit should know the law and legal frameworks and
have expert knowledge of accounting and auditing.
Reasons for Conducting Forensic Audit
Conflict of Interest
When an employee misuses their position for personal gains and causes the company to incur a loss, a
forensic audit comes into the picture.
For instance, a manager approving an employee’s excess/unwanted expenses due to personal relations
will get some leverage over the employee on a personal level. However, in this case, the manager will not
benefit financially from this activity.
Bribe
An organization offering money or giving expensive gifts to get things done or making the situation in its
favor is a bribe.
For example, the head of the purchasing department approves purchases from a vendor that will supply the
material at a higher cost or cost less than other vendors. Although the quality of the product is not good, the
head is getting some personal compensation from that vendor.

Misappropriation of Assets
It is the most prevalent type of fraud where employees misuse the company’s assets for their benefit.
For example, an employee submitting a fake bill for using the company stationery or showing the damaged
or expired inventory (primarily in FMCG companies) and receiving funds.
Misrepresentation of Financial Statement
This type of fraud generally happens at a higher level of the company by showing better business
performance against the actual performance. Thus, investors will not hesitate to invest in the company, and
lenders can easily offer loans at lower interest rates. Top management will also benefit by getting bonuses
or incentives based on the company’s performance. Misrepresentation can be done by showing less
provision against accrued expenses or debtors, hiding any contingent liability, and not giving the proper
disclosure about the information which can influence investors or lenders.
Steps of Forensic Audit
There are four steps of forensic audit:
1. Planning the investigation
2. Collecting evidence
3. Reporting
4. Court Proceedings
Planning the Investigation
Auditors will plan the investigation to leave nothing out and achieve the audit’s objective. Below are some
points which auditors keep in mind:
 Identifying the fraud being carried out
 The period during which fraud has been carried out
 Reason or root cause of fraud
 Find out employees involved in the fraud
 The loss suffered by the company because of the fraud, whether it is financial or non-financial
 Establishing evidence collection by copying in court proceedings.
 Suggesting actions for preventing these types of frauds in future
Collecting Evidence
It is an essential part of forensic audits. After identifying the fraud, the auditor will collect the evidence,
which can be substantiated and accepted in court. These documents must reflect how the fraud has
happened, who has done it, and what amount of loss the company has suffered.
For example, a vendor has finalized the purchase of raw material. If it suspects that some malicious things
happened in that finalization, the auditor will examine the below things:
 Who has approved the vendor
 Whether company policy was followed at the time of finalizing
 Quotation from other 3-4 vendors has been taken or not
 If taken, whether all these quotations were compared with each other in terms of pricing and quality
 After finalizing, whether the vendor provided the same quality of material, which it has shown at the
time of selection
Reporting
After completing the above process, a forensic auditor will prepare a report summarizing the audit and
present it to the management/client. The report contains the below points:
 Observation/findings during the audit
 Evidence gathered which will substantiate the fraud
 How much loss the company has suffered
 How the fraud has been conducted
 What steps should be taken to stop this type of fraud
Based on the report, the management can decide whether they should go for legal proceedings or not.
Court Proceedings
Suppose management decides to take legal action based on the forensic audit report. In that case, the
auditor should also be present at the court to explain how the fraud has been done and how the evidence
will support the statement. The forensic auditor will also simplify the accounting fraud in simple language so
that everyone can understand it.