AUDITS AND INVESTIGATIONS

DIFFERENCES BETWEEN AUDITS AND INVESTIGATIONS

Many forensic accountants and fraud investigators come from a traditional auditing background. It makes sense for an auditor to use her or his accounting and financial expertise in this way, because that foundation is critical for a high-quality financial investigation. It can be a natural fit for the person who is comfortable with numbers to move into a financial investigator position.

On the other hand, additional skills go into a fraud examination, including investigative techniques, interviewing techniques, financial data reconstruction, and much more. But a position as an outside auditor can be one of the best foundations for success in forensic accounting, because it offers the professional opportunity to see financial statements and accounting departments in action.

Auditing is conducted to verify the extent of truthfulness and fairness of the financial records of an entity, but Investigation is performed to prove a certain fact. The scope of the auditing is based on the Standards on Auditing, but the scope of the investigation rests on the terms of engagement. Audits have never been designed to find fraud, and they likely will never be. They are designed to find errors and improper applications of rules. Fraud, by its nature, is difficult to find during an audit, because steps have been taken by the actors in the fraud to conceal it. Fraudsters try to conceal a fraud from not only the company’s management and owners but also the auditors. Familiarity with the company’s operations and the auditing procedures will help an employee successfully conceal the fraud.

There are a handful of obvious differences between an audit and a fraud investigation. The process of performing an audit versus an investigation is quite different. Audits are often very standard, with the examination of certain financial statement items done on a routine basis. Certain procedures, such as inventory test counts and accounts receivable confirmation, are standard and do not vary a lot from engagement to engagement. The auditors are essentially looking for documentation that supports the accounting entries, but are not usually trying to verify the authenticity of the documentation or determine whether the transactions under examination are suspicious.

In contrast, fraud examinations are anything but routine, and this materially affects the planning and execution of the engagement. The most obvious difference between an audit and a fraud investigation is the lack of standard work programs for fraud investigations.

Audits are done largely based on standard work programs that outline areas of testing and examination. There are some differences in these work programs from audit to audit, based on client circumstances. Work is done on a test basis, with auditors selecting a sample of transactions within their predetermined scope. If those transactions pass the auditors’ tests, it is essentially assumed that other transactions would pass the tests as well.

There is no such standardized process during a fraud examination. Checklists and investigation guides can help to some extent, but the investigative procedures are often determined based on the results of work just completed. Work is usually not done on a test basis. An area of suspicion is isolated, and the fraud investigator will usually examine all transactions within that area.

Audits rely heavily on the concept of materiality. Auditors regularly consider whether an item or transaction would make a difference in the eyes of the user of financial statements. Materiality is often defined largely in terms of money, but also involves circumstantial considerations that a financial statement user might consider important.

The other major difference between audits and investigations relates to the opinions expressed. Audits are aimed at giving negative assurance: The auditors are not aware of anything that would make the financial statements incorrect. Fraud examinations give positive assurance: We found X, Y, and Z during our examination, and here is the evidence.

Fraud investigations are regularly referred to as fraud audits, although that term really should be avoided because of the confusion it can cause. An audit is a specific type of service offered by accountants, and a fraud investigation is quite different from an audit. It is more appropriate to refer to the project as a fraud investigation, fraud examination, or forensic accounting project. While the terms used to describe this type of engagement seem like an insignificant matter, the most precise language possible should be used to describe your work.