Techniques used in forensic audit
The techniques used in Forensic Auditing include general tools used for auditing as well as specialised software. Listed below are commonly used forensic audit techniques:
- CAAT: Includes broad category of techniques and tools to perform audits using technology. These tools help auditors detect abnormalities, test internal controls and automate audit procedures, thereby supports structured financial data analysis.
- Generalized Audit Software: Subset of CAAT. Automates the analysis of large volume of data quickly and therefore auditors can perform routine tasks like data extraction, sorting, sampling, and report generation quicker and efficiently.
- Ratio and Trend Analysis: most commonly employed technique to compare financial metrics over time to spot unusual fluctuations.
- Document Examination: Involves Analysis of the document to determine their authenticity and origin. Check for any potential tampering, forgery that could have happened with the record. Look for inconsistencies between physical and digital records.
- Data Mining and Analytics: Scans large datasets to detect patterns and predictions of future outcome using machine learning and statistical analysis. Unlike CAAT, data mining can be used on any large dataset and needn’t necessarily be structured financial data.
- Forensic Interviews: Gathers insights from structured conversations with individuals, who may be employees or even third party witness who might have relevant knowledge abt the subject matter, involving open ended questioning techniques so as to encourage detailed narrative from the part of the interviewee.
- Benford’s Law Analysis: Also known as first-digit law, is another statistical technique used to detect unnatural number distributions in financial data.
Benford’s Law predicts how often each digit (1–9) appears as the first digit in naturally occurring numbers, where smaller digits (1, 2, 3) occur more frequently as leading digits than larger digits (7, 8, 9). If a company’s expense records show that 9 is the leading digit in 20% of entries (instead of the expected occurrence of 4.6% of the time), that’s a red flag. - Background Checks and Financial Profiling: Investigates individuals’ financial history, their lifestyle pattern, past legal history, social media accounts and public records, for red flags, if any.
The individuals that are profiled include those who are suspected of financial misconduct, Key decision-makers (people in power/authority), counterparty to transactions or even the whistleblowers/witness (to ensure the credibility of their claim) and individuals that connected to the transaction in some form or other and are going through litigations or financial crisis during the period. - Digital forensics: It is the practice of extracting and analyzing evidences (data) from digital devices from digital devices like computers and smartphones and preserving those electronic evidence for legal or investigative purposes.
Specialised techniques:
Who orders forensic audit in India?
Forensic audits can be initiated by various entities depending on the situation. Tabulated below are common cases where forensic audit is called for and the situation warranting it.
| Authority/Entity | When They Order a Forensic Audit |
|---|---|
| RBI | In cases of suspected banking fraud or loan defaults. |
| Lenders and Banks | Financial institutions may order audits before declaring an account fraudulent or during restructuring processes |
| Securities and Exchange Board of India (SEBI) | When listed companies show signs of financial irregularities. |
| Income Tax Department | To investigate large scale tax evasions or benami transactions . |
| Comptroller and Auditor General (CAG) | For audits of government departments or public sector undertakings. Any misuse of public resources, be it for personal gain or misdirected projects, can trigger a forensic audit. |
| Serious Fraud Investigation Office (SFIO) | CG can order for forensic audit investigation of company’s affairs by SIFO, on receipt of inspection report from registrar u/s S. 208 or based on public interest considerations or request from Govt departments. |
| Courts or Tribunals | Judicial bodies may direct forensic audits during legal proceedings or as litigation support (providing expert opinions) |
| Even the Company board or Shareholders can order/request for forensic audit | If they suspect internal fraud or mismanagement. |
Is there any time limit for forensic audit? (Under any Indian law)
There’s no universal applicable statutory time limit for forensic audits. Specific regulators have prescribed timelines under their respective statute.
RBI Guidelines: The Reserve Bank of India (RBI) has issued clear timelines for forensic audits in cases of suspected loan fraud. Completion Deadline is within 3 months from the date of the Joint Lenders’ Forum (JLF) meeting that authorizes the audit.
Other Legal Contexts: Forensic audits ordered under Companies Act, 2013, Income Tax Act, or Insolvency and Bankruptcy Code have no fixed statutory timeline prescribed. It might be decided on case-to-case basis.
Delays can weaken the impact of findings or affect prosecution. To ensure relevance and legal admissibility, most forensic audits aim to be completed within reasonable duration depending on complexity of the case, data access and case urgency.