In every business entity, its ultimate objective is to generate more and more profit into the business. However the transactions must be prudent, or in the other word there must be a check and balance to ensure its operation is in orderly manner. Financial statements may be falsified to conceal when it falls under the following condition:
- Absolute theft of money or money’s value (mainly relating to employees frauds).
- True results of operations, or financial position of the entity with a view to prevent timely detection of corporate frauds.
‘Fraud’ refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Fraudulent financial reporting involves intentional misstatements, in any one or more ways as stated below:
- Deception such as manipulation, falsification or alteration of accounting records or supporting documents.
- Misrepresentation in, or intentional omission from the financial statements, significant events, transactions or other information.
- Intentional, mis-application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure of material transactions.
The concept of Financial Auditing may be defined as “a concentrated audit of all the transactions of the entity to find the correctness of such transactions and to report whether or not any financial benefit has been attained by way of presenting an unreal picture”.
Forensic auditing aims at legal determination of whether fraud has actually occurred. In the process, it also aims at naming the person(s) involved (with a view to take legal action).