Forensic Audit Services: Investigating Financial Fraud and Business Irregularities

Financial irregularities can be difficult to identify through routine accounting and auditing procedures. Unexplained transactions, missing funds, unusual payments or concerns about employee conduct may require a more detailed investigation. This is where forensic audit services can provide valuable support.

A forensic audit combines accounting, auditing and investigative techniques to examine financial information and identify evidence of suspected fraud, misconduct or financial disputes. The work may be undertaken when a business suspects wrongdoing, during a legal dispute, or when management needs a detailed examination of financial activities.

For New Zealand businesses, choosing the right approach is important because a forensic investigation can involve sensitive financial information, electronic records, employees and potentially legal proceedings.

What Are Forensic Audit Services?

Forensic audit services involve the detailed examination of financial records and other relevant information to identify irregularities and establish what happened.

Unlike a conventional financial statement audit, which is designed to provide an independent opinion on financial statements, a forensic engagement is generally investigative in nature.

A forensic auditor may examine transactions, accounting records, emails, contracts, bank information, invoices and other documentation to establish whether financial activity appears legitimate.

The investigation may focus on questions such as:

• Was money misappropriated?
• Were transactions deliberately concealed?
• Were company funds used for unauthorised purposes?
• Were financial records manipulated?
• Were fictitious transactions created?
• Did an employee or director breach financial controls?
• Are there unexplained differences in financial records?
• What financial loss may have occurred?

The exact scope depends on the circumstances and objectives of the engagement.

When Are Forensic Audit Services Needed?

A forensic audit may become appropriate when there are specific concerns about financial misconduct or unexplained financial activity.

Some common situations include suspected employee fraud, management misconduct, asset misappropriation, financial statement manipulation, procurement irregularities and disputes involving financial information.

Businesses may also engage forensic specialists when they need to understand the financial impact of suspected wrongdoing.

For example, a company may discover that payments have been made to an unfamiliar supplier over an extended period. A forensic investigation could examine the supplier relationship, supporting invoices, payment records and relevant communications to determine whether the transactions were legitimate.

Common Types of Financial Fraud Investigated

Forensic audit services can cover many different types of suspected financial misconduct.

Asset Misappropriation

This occurs when an individual improperly takes or uses an organisation’s assets.

Examples can include unauthorised withdrawals, theft of inventory, misuse of company credit cards or diversion of customer payments.

Financial Statement Fraud

Financial information may be deliberately manipulated to create a misleading picture of a company’s financial position.

This could involve deliberately overstating revenue, concealing liabilities or manipulating accounting records.

New Zealand’s auditing standards specifically address the auditor’s responsibilities relating to fraud in financial statement audits. ISA (NZ) 240 requires auditors to consider risks of material misstatement arising from fraud and respond appropriately when fraud or suspected fraud is identified.

However, a standard financial statement audit and a forensic investigation have different purposes. A conventional audit provides reasonable assurance over the financial statements; a forensic engagement is generally designed to investigate specific allegations, transactions or circumstances.

Procurement Fraud

Procurement processes can create opportunities for conflicts of interest, inflated invoices, fictitious suppliers or inappropriate payments.

A forensic investigation can examine supplier records, purchase orders, invoices and payment information to identify unusual patterns.

Payroll Fraud

Payroll investigations may identify issues such as fictitious employees, unauthorised overtime, manipulated wages or payments made to inappropriate accounts.

Expense Fraud

Businesses may also investigate suspicious employee expenses, duplicate claims, personal purchases charged to the business or fabricated receipts.

What Does a Forensic Auditor Do?

A forensic auditor’s role depends on the scope of the engagement.

The process generally begins by understanding the allegation or concern and establishing the objectives of the investigation.

The forensic professional may then collect and analyse relevant financial and non-financial information.

This can include:

Financial records: General ledgers, journals, invoices, bank statements and payment records.

Transaction data: Detailed examination of unusual, high-value or repetitive transactions.

Contracts: Review of agreements with customers, suppliers, employees or other parties.

Electronic information: Relevant emails, files and other electronic records where appropriate and legally obtainable.

Supporting documents: Receipts, purchase orders, payroll records and other evidence supporting transactions.

Interviews: Discussions with relevant employees, management or other parties where appropriate.

The investigation may involve data analysis to identify unusual transaction patterns or relationships that are difficult to identify through manual review.

The Forensic Audit Process

While every investigation is different, forensic audit services generally follow a structured process.

1. Understanding the Issue

The investigation begins by understanding the allegation, concern or dispute.

The forensic team determines what is known, what remains unclear and what questions the investigation needs to answer.

2. Defining the Scope

The scope establishes which entities, accounts, transactions, employees, periods and records will be examined.

A clearly defined scope helps ensure that the investigation remains focused.

3. Collecting Evidence

Relevant financial and supporting records are collected and preserved.

The evidence required depends on the nature of the investigation.

4. Analysing Financial Information

The forensic team examines transactions and financial information to identify unusual activity, inconsistencies and relationships.

Analytical procedures may include transaction testing, trend analysis, comparisons and examination of unusual entries.

5. Investigating Findings

Potential irregularities are investigated further to determine their nature and significance.

Additional documentation or information may be requested where necessary.

6. Quantifying Financial Loss

Where appropriate, the investigation may estimate the financial impact associated with identified irregularities.

The calculation method depends on the circumstances and the purpose of the engagement.

7. Reporting

The findings are documented in a report explaining the work performed, evidence considered and conclusions reached within the agreed scope.

Where litigation is involved, the reporting requirements may be more specific.

Forensic Audit vs Financial Audit

Although both involve financial information, forensic audits and financial statement audits serve different purposes.

Forensic Audit	Financial Statement Audit
Investigates specific concerns or allegations	Provides an independent opinion on financial statements
Often focuses on suspected fraud or misconduct	Focuses on material misstatements in financial statements
May examine specific individuals or transactions	Examines financial statements as a whole
Can involve detailed investigative analysis	Uses audit procedures designed under applicable auditing standards
May support a dispute or investigation	Primarily provides reasonable assurance
Scope is generally tailored to the investigation	Scope is determined by the audit requirements and assessed risks

The distinction is important. A routine audit is not automatically a substitute for a forensic investigation.

The XRB’s auditing framework establishes the standards applicable to audit and assurance engagements in New Zealand, including standards dealing specifically with fraud and audit evidence.

What Evidence Can Be Examined?

A forensic investigation may involve a wide range of evidence.

Depending on the circumstances, this can include:

• Bank statements
• General ledger entries
• Invoices
• Receipts
• Credit card records
• Payroll records
• Supplier information
• Customer records
• Contracts
• Purchase orders
• Expense claims
• Emails and electronic records
• Accounting system data
• Company correspondence

The objective is not simply to find unusual transactions. The investigation needs to establish the relevant facts using appropriate evidence.

Audit standards also emphasise the importance of obtaining sufficient appropriate evidence when reaching conclusions in an audit engagement.

Why Businesses Use Forensic Audit Services

A forensic investigation can provide several benefits when financial misconduct or irregularities are suspected.

Identifying Financial Irregularities

Detailed transaction analysis can help identify activity that may not be apparent from routine financial reporting.

Understanding What Happened

A forensic investigation can help management establish how an irregularity occurred, when it occurred and which transactions may be involved.

Assessing Financial Impact

Where appropriate, forensic specialists can assist in calculating or assessing the financial impact of identified issues.

Supporting Decision-Making

Management and governance teams may use investigation findings when deciding what action to take.

Supporting Dispute Resolution

Forensic financial analysis can be useful in commercial disputes where the parties disagree about financial information or losses.

Forensic Accounting and Litigation

Forensic accounting can play an important role in disputes involving financial information.

A forensic professional may be engaged to analyse financial records, quantify losses or explain complex financial information.

Where findings may be used in legal proceedings, the engagement needs to be planned carefully. The appropriate scope, documentation, evidence handling and reporting approach can depend on the circumstances and legal requirements.

Businesses should therefore consider obtaining appropriate legal advice alongside financial investigation services when litigation or regulatory proceedings are involved.

How to Choose Forensic Audit Services

Choosing the right forensic professional requires consideration of more than accounting experience.

Relevant Investigation Experience

Look for experience dealing with investigations similar to the issue facing the business.

Financial Analysis Skills

The professional should be capable of analysing large volumes of financial information and identifying unusual relationships or patterns.

Understanding of Evidence

A forensic engagement depends heavily on the quality and relevance of the evidence examined.

Independence and Objectivity

The investigator should approach the engagement objectively and avoid conflicts of interest.

Clear Reporting

Findings should be presented clearly, with the scope of the work and basis for conclusions properly explained.

Confidentiality

Forensic investigations often involve sensitive business and employee information, making appropriate confidentiality practices particularly important.

How Can Businesses Reduce the Risk of Financial Fraud?

Forensic investigations often highlight weaknesses in internal controls.

Businesses can reduce exposure to fraud by establishing appropriate controls around payments, purchasing, payroll, banking and access to accounting systems.

Controls such as segregation of duties, approval procedures, bank reconciliations, access restrictions and regular management reviews can make unauthorised activity more difficult.

However, controls should be proportionate to the organisation. A small business may not have the resources to maintain the same control structure as a large organisation, but it can still introduce practical checks and independent reviews.

What Should You Do If You Suspect Fraud?

If a business suspects financial fraud, it should avoid immediately altering or destroying potentially relevant records.

Management should consider documenting the initial concern, restricting inappropriate access where necessary and obtaining appropriate professional advice before taking significant action.

The response will depend on the circumstances. Where the matter could lead to employment action, litigation or regulatory involvement, legal advice may also be appropriate.

A forensic specialist can help determine what financial records and other information should be examined as part of the investigation.

How Aurora Financials Can Help

Aurora Financials supports New Zealand businesses with accounting and financial services that can help improve the quality and organisation of financial information.

Maintaining accurate records, performing regular reconciliations and establishing appropriate financial processes can make unusual transactions easier to identify and investigate.

Where a business has concerns about financial irregularities, specialist forensic audit or forensic accounting services may be appropriate depending on the circumstances and scope of the issue.

Aurora Financials can also help businesses strengthen their underlying accounting processes, giving management better visibility over financial information and helping establish more consistent financial controls.

Final Thoughts

Forensic audit services can provide valuable support when a business needs to investigate suspected fraud, financial misconduct, unexplained transactions or a financial dispute.

Unlike a conventional financial statement audit, a forensic engagement is typically focused on answering specific investigative questions and examining evidence relating to particular concerns.

For New Zealand businesses, an effective investigation requires a clear scope, appropriate evidence, careful financial analysis and objective reporting.

Businesses can also reduce the likelihood and impact of financial irregularities by maintaining accurate records and implementing appropriate internal controls throughout the organisation.

Frequently Asked Questions

1. What are forensic audit services?

Forensic audit services involve investigating financial information and transactions to identify suspected fraud, financial misconduct, irregularities or other issues. The scope is generally tailored to the specific circumstances.

2. What is the difference between forensic auditing and regular auditing?

A regular financial statement audit provides reasonable assurance and an independent opinion on financial statements. A forensic audit is generally investigative and focuses on specific concerns, allegations, transactions or disputes.

3. Can a forensic audit detect fraud?

Forensic investigations are designed to examine suspected financial misconduct and identify relevant evidence. However, the ability to establish fraud depends on the circumstances, available evidence and scope of the investigation.

4. What records are examined during a forensic audit?

Records may include bank statements, invoices, accounting ledgers, payroll information, contracts, expense claims, supplier records, electronic information and other documents relevant to the investigation.

5. Can forensic accounting support legal proceedings?

Yes. Forensic financial analysis may be relevant to litigation or other disputes. Where legal proceedings are involved, the scope and reporting requirements should be considered alongside appropriate legal advice.

6. Do standard audits investigate fraud?

Financial statement auditors have responsibilities relating to fraud risks under applicable auditing standards. ISA (NZ) 240 specifically addresses auditors’ responsibilities relating to fraud. However, a standard financial statement audit is not the same as a dedicated forensic investigation.