Forensic Audit vs. Financial Audit: Understanding the Differences

A certified audit of financial statements can be an important factor for an entity in maintaining its financial integrity. Certainly, not all companies or other types of entities need a certified audit conducted by an independent CPA firm. In fact, in many cases it’s not necessary for a company’s purposes, and the benefit derived from having an audit doesn’t warrant the cost involved. However, if either the management or owners of an entity have uncovered some sort of evidence of wrongdoing, such as misappropriation of assets, or there is a strong suspicion that this has occurred, whether internally or by the alleged actions of one or more parties with which the entity has had financial dealings, then forensic accounting procedures (sometimes referred to as a forensic audit) might be indicated.

Although a certified audit and a forensic audit might appear to be similar, each serves a distinct purpose and involves many different procedures and methodologies, not to mention that the purposes of each type of audit differ greatly.

What Is a Forensic Audit?

A forensic audit is an in-depth investigation conducted to detect and substantiate fraudulent activities, such as embezzlement and other misappropriations and/or diversion of assets; intentionally reported financial inaccuracies, normally for the purpose of covering up wrongdoings; non-compliance with the terms of agreements with other parties or with certain governmental requirements, which is usually intentional; and other situations where the conducting of investigatory procedures are indicated, such as in partner/shareholder disputes, or valuations or purchases or sales of companies or interests therein.

What Is a Financial Audit?

Unlike a forensic audit, a certified audit (or financial audit) is a more standardized process for the purpose of providing an independent opinion of a CPA or CPA firm that the appropriate audit procedures have been conducted and that the financial statements are in compliance with generally accepted accounting principles. A certified audit is indicated for such purposes as when:

• There is a statutory requirement for public companies and private companies that perform services and receive its revenue from governmental agencies or quasi-governmental agencies or entities, or from other companies that are required to report to governmental agencies.
• Compliance with regulatory bodies, especially in highly regulated industries.
• Reporting to owners or other stakeholders, such as banks and other lenders, of a company regarding the financial conditions of an entity is required.
• Preparing for a significant financial event such as a private or public offering, or merger or acquisition.

Which Type of Audit Is Right for Your Situation?

Your company may have had certified audits in the past and may continue to need them for such purposes as delineated above. An accounting firm that is equipped to conduct a certified audit and which is required to be subject to peer review procedures can undertake this task. Important to note is that if a certified audit is not needed but a CPA firm’s report is still necessary or desired, then there are other levels of reports that can be issued that are based on certain procedures that are less thorough than those for a certified audit and which have a lower level of assurance, but often are sufficient for the company’s purposes. If you need your company’s financial statements to be accompanied by a report from a CPA firm, then you will need a firm that has met the peer review requirements in order to be able to issue reports on financial statements.

At Teichner Accounting Forensic & Valuations, PLLC, from our offices in Reno and Las Vegas, Nevada, we provide our services in forensic accounting, economic damages analysis, and business valuations, and in other financially related areas throughout the United States, with many years of experience in these areas. Whether you are an attorney or a business owner or an individual, including someone going through a divorce, who recognizes that there may be a need for a forensic accountant, economic damages analyst, and/or a business valuator, contact us at (775) 828-7474 or (702) 724-2645, or by email at accountingforensics@gmail.com.