A forensic audit is an examination and evaluation of a firm’s or individual’s financial records to derive evidence that can be used in a court of law or legal proceeding. Forensic auditing is a specialization within the field of accounting, and most large accounting firms have a forensic auditing department. Forensic audits require the expertise of accounting and auditing procedures as well as expert knowledge about the legal framework of such an audit.
If you’ve ever padded an expense report or even thought about it knows that that is an example of fraud and could be uncovered easily via a forensic audit. Reasons for Conducting a Forensic Audit
Forensic audit investigations may expose, or confirm, various kinds of illegal activities. Normally, instead of a normal audit, a forensic audit can be used if there is a possibility that the evidence gathered would be used in court. The forensic audit process though similar to a traditional financial audit has an additional step of a possible appearance in court. Below, are instances that could necessitate a forensic audit:

• Corruption or Fraud
  Conflicts of Interest when a person uses his or her influence for personal gains to the detriment of the company. For example, if a manager approves inaccurate expenses of an employee with whom he has personal relations.
• Bribery offering money to get things done or influence a situation in one favor.
• Asset Misappropriation This is the most common of fraud. Cash misappropriation is a common example, submitting falsified invoices, making payments to non-existent suppliers or employees, misusing assets (like company equipment), and stealing company inventory.
• Financial Statement Falsification A company may try to show that its financial performance is better than it actually is. The reason could be to improve liquidity, ensure that C-level executives continue to receive bonuses, or cope with the pressure to perform.   

How Forensic Audits Work

The process of a forensic audit is similar to a regular financial audit.

• Planning the Investigation. The forensic auditor and the team will plan their investigation in order to meet their objectives.
• Collecting Evidence. The evidence gathered should be sufficient to prove in court the identity of the fraudster(s), reveal the details of the fraud scheme, and document the financial loss suffered and the parties affected by the fraud.
• Reporting: A forensic audit will require a written report about the fraud to be presented to the client to proceed to file a legal case if they so desire.
• Court Proceedings: During court proceedings, the forensic investigator must be present to explain the evidence collected and how the suspect(s) were found. They should use language to explain complex accounting issues so that people who have no understanding of legal or accounting terms can understand the fraud clearly.