Anthony Cavaluzzi Explains How a Forensic Audit Differs From Normal Audits

Anthony Cavaluzzi Explains How a Forensic Audit Differs From Normal Audits
Anthony Cavaluzzi Explains How a Forensic Audit Differs From Normal Audits

These days, the latest buzzword when something goes wrong financially is to call for a forensic audit. Somehow, magically, doing so will answer everyone’s questions and provide a solution. In reality, a forensic audit goes well beyond answering a singular question. Anthony Cavaluzzi regularly sees misapplication of forensic audits, usually because managers don’t understand how the tool is supposed to be used. Most times, it unexpectedly uncovers and identifies new questions as well as opens up hidden financial information no one expected to find. Then management has a bigger problem to deal with.

The primary goal of a forensic audit is to confirm, objectively and methodically, if some kind of intentional error or unallowed financial practice has occurred.

Everything Starts With Rules & Boundaries

Most financial systems and operations follow the rules. Anthony Cavaluzzi has seen plenty of examples with his consulting via Profit Management Solutions LLC. These rules are defined as business practices or standard generic accounting rules. If a company is required to produce regulatory filings, then there are additional public accounting rules that apply as well. A similar burden applies if a company seeks a commercial loan or public investment. However, none of these rulesets actually address the examination of practices.

Audits are Not Investigations; They are Tests

Audits are general examinations designed to test whether rules are adequate in form and whether they are being followed. Audits do not take the place of an actual investigation, but they are frequently confused for the same. Instead, an audit first establishes what rules apply. This is done through background establishment and rule definition.

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Then the audit tests the application of the rules. Where issues are found, they are identified as findings. If serious, they are highlighted as material findings. It is then up to the audit recipient, Cavaluzzi points out, to do something about them or accept the noted risk.

The Purpose of the Forensic Audit

As Cavaluzzi and others regularly see in the business world, a forensic audit is typically brought in as a response to an irregularity that may end up being even more serious, maybe even criminal, but there’s not enough information yet to ascertain a problem is present. Instead, the forensic audit, applied by a specific third-party auditor, looks specifically for the problem, its origination, and the reason why.

Fundamentally, forensic audits are proactively looking for fraud and intentional problems versus just testing rulesets and systems. In this regard, a forensic audit is the next level between an audit and an outright criminal investigation. However, it’s important to understand a forensic auditor is not an investigator; instead, a forensic auditing team completes its work, and if there is evidence, it is then turned over to a licensed investigator to pursue for a case.

The Forensic Methodology is Flexible

Also, forensic audits are not limited to finances and accounting. While those areas do make up the bulk of demand, forensic auditing can be applied to inventory, IT systems, operations, manufacturing, sales, and more. Again, the goal is similar – to dig deeper when there seems to be activity indicating intentional wrongdoing, but more work is needed to arrive at that determination conclusively.

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Per Anthony Cavaluzzi, the power of the forensic audit is knowing when to bring it in for the best results and timeliness. Overused, and it will drive away valuable team members and staff. Underused, and it won’t have any impact. Find the right balance, Cavaluzzi points out, and the forensic audit can be a powerful deterrent to wrongdoing as well as reinforce good financial practices in a company.