A fraud audit is a review of a company’s financial records to detect and prevent fraudulent activity. It is separate from the routine financial audit and is used as a compliance tool by company management. The audit is more investigative in nature and focuses on identifying warning signs of fraud. The auditors are not responsible for determining guilt or innocence, which is the responsibility of management.
A fraud audit is a review of a company’s financial records by an internal or independent auditor in an attempt to identify unauthorized and improper activity. It focuses on transactions that appear to have been undertaken in the ordinary course of business by managers and employees who have various levels of discretion and positions of trust. This type of audit is primarily concerned with detecting and preventing fraud and is not typically part of the annual financial audit to produce a company’s financial statements.
A routine audit of a company’s financial records is conducted each fiscal year by an independent auditor or accounting firm to produce financial statements that can be used by managers to evaluate performance, submitted to regulators, and reviewed by investors. The auditor verifies the accuracy of the company’s financial records, for example by matching bank account debits and credits to their appropriate record in the company’s books. Determining whether or not any of the transactions are legal is not part of the normal verification process.
A fraud audit is a compliance tool that is used by company management to meet their internal and regulatory obligation to protect themselves from illegal employee activity. It is both a corrective and preventive measure designed to not only identify fraudulent activity, but to discourage employees from engaging in such activity in the first place. An internal audit policy for fraud may require a review at any appropriate interval, such as every six months or every two years.
The review may be conducted by the company’s internal auditors or may be assigned to an individual or external agency. Either way, a fraud audit is more investigative in nature than the ordinary financial audit. These auditors take the next step and actually evaluate the characteristics of a transaction to determine if there are any warning signs that would indicate signs of certain types of fraud that auditors are trained to identify. Standard types of fraud include false transaction logging, theft, embezzlement, bribery, extortion, and kickbacks.
Fraud investigation stops at identifying suspicious transactions. Auditors identify transactions but are not responsible for establishing whether a transaction is actually fraudulent or how the fraud occurred. That part of the investigation is the responsibility of management, which must determine if and how the fraud occurred and the guilt or innocence of the employees involved.
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