No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected. The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when aRead more
No, forensic accounting and auditing are not the same thing. Forensic accounting is a much more detailed task that is normally done when fraud or other illegal activity is suspected.
The evidence collected by forensic accountants is used in the court of law. Forensic accounting is mostly done when a suit has already been filed or is likely to be filed.
How Forensic Accounting Differs from Auditing?
Auditing means an inspection of financial statements done by experts with a view to obtaining reasonable assurance as to whether or not the financial statements correctly state the financial position and financial performance of the entity during the period under audit.
Forensic accounting is the use of accounting skills to detect any fraud, embezzlement or other illegal activity that may have occurred within the entity.
This is how forensic accounting differs from auditing:
- Forensic accounting is different from auditing in that forensic accounting is done with an intention to identify and uncover frauds while auditing is normally done to provide the users of financial statements reasonable assurance that the statements are correct and true.
- Auditing usually identifies only those misstatements that are material. Materiality is the one of the main concerns of auditors. However, in forensic auditing every type of misstatement is scrutinized as material. The forensic accountants try to identify fraud in every misstatement.
- Forensic accounting is usually done only when fraud and other illegal activities are suspected and some suit has been filed or is likely to be filed while auditing of annual financial statements is mandatory for firms meeting certain threshold limits of turnover/gross receipt/revenue.
Importance of Forensic Accounting
- Forensic accounting is used to detect frauds, forgery, misappropriation of assets and other illegal activities.
- The evidence collected during forensic accounting can be used in a court of law. Often, those conducting forensic accounting are also called upon to testify as experts in a court.
- Forensic accounting identifies loopholes in the internal controls of an entity that has been or may be exploited for conducting frauds and other illegal activities.
- Forensic accountants suggest different measures that an entity can take to make it’s internal controls more effective and prevent illegal activities in the future.
Conclusion
Forensic accounting and auditing are very different from each other. While auditing is done to identify only material misstatement, forensic accounting is done with an objective of detecting possible fraud or other illegal activity. Auditing of financial statements is mandatory for firms exceeding certain threshold limits of turnover/gross receipts/revenue while financial accounting is usually done when a suit for fraud, embezzlement etc has been filed or is likely to be filed.
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Introduction As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection. In simple words, sampling in auditing refers to the practice deriving aRead more
Introduction
As per SA 530, audit sampling refers to the application of auditing procedures to less than 100% of items within a population relevant under audit such that all the sampling units have an equal chance of selection.
In simple words, sampling in auditing refers to the practice deriving a conclusion by the auditor about a population of data by evaluation of only a part or sample of the whole data. Population means a set of data.
Concept of sampling
We know, an audit involves inspection of financial information of an entity by an auditor to form an opinion on its financial statements. Now the financial information of a firm usually contains large volumes of data. For example, a firm may have entered into 50,000 purchase transactions in a year.
Now, checking each and every purchase transaction will cost both time and money. Also, nowadays, almost every enterprise have internal controls and automated accounting systems that are established to ensure accuracy and prevention of errors. Hence, a full-fledged inspection of each and every transaction is not worth the time and effort.
Instead, a wise thing to do is to take a sample from the whole volume of transactions or accounts and apply the auditing procedures to the sample. The results derived from the sample are then projected upon the whole volume of data. Samples are often taken using statistical methods to ensure that sample is taken randomly and represents the whole population of data in a true and unbiased manner.
Consideration regarding the population before audit sampling:
Irrespective of the method of sampling, the sample must represent the whole population closely.
Approaches to sampling
There are two approaches to sampling:
- Statistical Approach: It is a scientific way of ensuring that the sample is chosen randomly from data and represents the data in a true and unbiased way. It employs mathematical and statistical tools like the theory of probability and also considers sampling risk characteristics.
- Non-Statistical Approach: Under this approach, the auditor employs his personal experience to collect sample from the population. No mathematical tools are used but the personal judgement of the auditor regarding sampling. Sometimes, this approach may give satisfactory results depending upon the capability of the auditor. But in most cases, reliability is less compared to the statistical approach.
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