Forensic Accounting And Auditing: Compared And Contrasted To Traditional Account

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his paper begins by defining forensic accounting and describing differences between it and traditional
accounting and auditing. The paper then explains the role of forensic accountants. This includes
identifying knowledge and skills forensic accountants are expected to possess. Forensic accountants’
opportunities are described along with the organizations that support their work.
Forensic accountants are viewed as a combination of an auditor and private investigator. Knowledge and
skills include the following: investigation skills, research, law, quantitative methods, finance, auditing, accounting
and law enforcement officer insights. Investigation skills will be covered later in the paper. Organizational behavior
and applied psychology knowledge and skills are essential.
Forensic accountants have been employed by the Federal Bureau of Investigation (FBI), Central
Intelligence Agency (CIA), Internal Revenue Service (IRS), Federal Trade Commission (FTC), Homeland Security,
Bureau of Alcohol, Tobacco and Firearms, Governmental Accountability Office (GAO) and other government
agencies. The focus is on what is referred to as white collar crime. This is why financial and other skills are
required.
Outside of government employment, big employers of forensic accountants include financial intermediaries
such as banks and insurance organizations plus divorce attorneys. Forensic accountants often testify in civil and
criminal court hearings. In this capacity, they are serving as expert witnesses. They do not testify as to whether fraud
has occurred. This is the court’s decision. The expert witness presents evidence. Forensic accountants have a
number of organizations that support their work.
Here is the list of key organizations that support forensic accountants work along with the URL to access
them: Association of Certified Fraud Examiners (http://acfe.com); American College of Forensic Examiners
(www.acfei.com); Association of Certified Fraud Specialists (www.acfsnet.org); National Litigation Support
Services Association (www.nlssa.com); National Association of Certified Valuation Analysts (www.nacva.com);
American Institute of Certified Public Accountants (www.aicpa.org); and The Institute of Business Appraisers
(www.go-iba.org) .

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REGULATION
External auditors who are CPAs are regulated by the state association of CPAs that issued their license. All
state associations belong to the National Association of State Boards of Accountancy (NASBA) ( www.nasba.org ).
CPAs and CIAs must complete a number of continuing professional education (CPE) hours each year or the license
will be taken away. The requirements to become and continue being a CIA are detailed at the web page for the IIA
(www.theaii.org ). Certified fraud examiners also must complete CPE each year. (www.acfe.com ).

RULE-MAKING BODIES
Traditional auditors typically adhere to the generally accepted auditing standards (GAAS) as promulgated by
the Public Company Accounting Oversight Board (PCAOB). This organization’s web page is at www.pcaob.com .
External auditors are typically reviewing whether an organization is following GAAP. GAAP are promulgated by the
Financial Accounting Standards Board (FASB) (www.fasb.org ). The SEC supervises both of these organizations. This
means that auditors are affected by all three of these organizations and must stay current with old, new and changing
standards and principles issued by all three of these organizations. Internal auditors are employees of an organization and
address the responsibilities assigned by the employer.

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TRADITIONAL AUDIT REPORTS
Audit reports provide a degree of assurance to those who used audited financial statements. The language of the
audit report is very specific. It can be confusing to individuals who are not knowledgeable of the language of business,
which is accounting. For example, an unqualified audit report is desirable. Unqualified sounds like a bad evaluation. A
person who is unqualified is thought of as not having the required qualifications for something. An audit report that is
unqualified is perfect. It means that there are no qualifications that were not met. Sounds like an attorney talking in
double negatives. Attorneys played a role in the development of the audit report language. It is too strong of a statement
to say that all of the qualifications were met. It might sound like the same to most people, but it is a legal issue. The audit
report does not promise that everything is perfect when an unqualified report is issued. It merely states that no material
imperfection was found. When an audit report is qualified it is typically due to the organization using accounting
principles other than the GAAP or the scope of the audit was limited. Scope refers to whether the auditor was allowed to
gather the needed evidence. Worse than a qualified report is an adverse report where there are material problems with the
financial statements. The third type of report is the disclaimer report where the auditor does not express an opinion on the
financial statements.

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AUDIT ASSERTIONS
An assertion is a statement. Audit assertion refers to the organization’s management’s statements. The key
qualities of how the statements are presented and disclosed are the following: occurrence and rights and obligations;
completeness; classification and understandability; and accuracy and valuation. Traditional and forensic accountants and
auditors gather evidence regarding the organization’s assertions.
Rights and obligations are where the organization holds or controls the title to assets and liabilities. Existence or
occurrence of the assets, liabilities, events and transactions must be documented with evidence. The evidence must be
complete. It must provide support for valuation and allocation methods. Third standard about audit documentation is at
the following URL: http://www.pcaob.org/Standards/Standards_and_Related_Rules/index.aspx .

EVIDENCE-GATHERING PROCEDURES
Confirmation is where the auditor checks with third parties regarding the aspects of the audited organization’s
management assertions. Auditors can also observe using the senses such as sight and touch to gather evidence that
confirms or refutes management’s assertions. One form of observation is to do a physical examination of tangible items
and processes that can be seen.

Re-performance is where the auditor duplicates processes management asserts were completed to see if the
results of the process are identical to those asserted by management. Another approach to gather evidence is to compare
asserted and expected results using analytical procedures. This is where the concept of reasonableness emerges.
Identifying reasonableness is a skill that evolves through education experiences.
Where there is inconsistency or missing evidence or a lack of reasonableness, auditors ask the organization
management. This is called inquiry of client and it with all of the methods just mentioned is part of the documentation
process.
AUDIT TESTS
Tests of controls are used to determine the required sample size. This is where information systems expertise is
vital. If the information system is secure, then the internal control is deemed to be strong. If the internal control strength
is good, then a smaller sample size is used. Whatever the sample size, auditors do substantive tests of transactions. This
is checking to see if the transactions and events were correctly measured and recorded in the financial statements.
Analytical procedures are another form of looking for reasonableness. It takes a level of expertise based on
education and experience to be able to interpret the results of efforts to check for anything that might be unusual.
Auditors look for evidence that corroborates and supports management assertions.