Over recent years, audit firms have increased their use of forensic specialists, tools and techniques. Although routine use remains rare outside of the largest and most high-risk financial statement audits, insights from these – and our Forensics in audit webinar – may offer wider opportunities to strengthen professional scepticism and enhance the quality of smaller and less complex audits. 

A decision on whether to engage forensic specialists, as part of the auditor’s response to identified risks of material misstatement due to fraud, is contingent on the auditor’s judgement and on circumstances. Some firms do, however, mandate the use of forensic specialists on certain types of audit engagement and/or on a risk-assessed basis. 

“We don’t have forensic specialists to assist on every single audit,” says Andy Royle, a Director in the Corporates, Listed and Regulated Audit Business Unit at KPMG, a firm with in-house forensic specialists. As he explains during our webinar: “Most of our FTSE 250 and FTSE 100 audits will have forensics involved. Otherwise, there is a triage process to tailor the level of their involvement.” Areas of the audit where forensic specialists are involved can also vary.

Forensic specialists may assist when assessing high-risk criteria on journals, when reviewing an audit entity’s anti-bribery and corruption policies and processes, and considering whistleblowing matters. They can also bring first-hand experience of how frauds are perpetrated to audit risk-assessment planning discussions, informing engagement teams on areas of risk and vulnerability, helping to make risk assessments more robust.

“They provide an informed, independent and objective challenge to us as an audit team on what we consider to be the fraud risk factors and ensure that any assumptions around management integrity are really challenged and thought through,” says Royle. This can have a positive impact on how an audit progresses, affecting how auditors assess fraud risks and the procedures they perform.

Mindset matters

When Brendan Weekes, an Associate Director in Forensic Services at Evelyn Partners, considers a set of accounts, he is looking for how this might potentially be fraudulent and who the perpetrator might be. “I’m thinking, how could somebody create a misstatement that is significant enough for auditors to be concerned about and who would create that misstatement,” he says, noting that auditors may not always do this.

“I think there’s a scepticism gap, where auditors have not considered the possibility that senior management may be responsible for the misstatement,” he adds. Weekes works with auditors to close this gap. During training and planning meetings, for example, he talks at length about ISA (UK) 240 para 16 and the need – during engagement team discussions about how financial statements could be manipulated or misstated due to fraud – to put aside the assumption that management will act with integrity.

If auditors want to enhance their professional scepticism when considering the potential for fraud, taking a more forensic-like perspective could include: 

• accepting that anyone can commit fraud, regardless of their background, personality, position and reputation, and that anyone including an auditor can be deceived;
• understanding, managing and mitigating biases that may shape intuitive judgements and hinder objective reasoning and professional judgements;
• avoiding overreliance on a ‘same as last year’ approach and on checklists;
• being inquisitive and not relying on easily available information and explanations; and 
• exploring fully what’s possible using general-purpose and audit-specific data analytics tools and new tech that can help auditors and forensic specialists to apprehend fraud.

Tech tools and forensic techniques

Use of specialist technology by forensic specialists during financial statement audits is increasing. During our webinar, Jonathan Middup, a Senior Partner in EY’s Forensic and Integrity Services team, shares examples of what is already being achieved and offers insights into some of the new possibilities that are being enabled by emerging generative AI technologies and tools.

In one case, his forensic team was asked by an audit team to examine a contract their client said had been transacted just before the year end, making a significant difference to the profitability. The audit team had spotted a date-related anomaly, asked management about it, and been told the date differences were due to the contract being physically posted. 

Putting it through a suite of document authenticity tools proved that the contract was created after the year end. “Their whole explanation dropped to bits,” says Middup. After management were challenged and eventually admitted that the contract date had been changed, all the implicated members of management were dismissed or left the organisation.

“These tools can have a major impact,” says Middup, because they can spot things that are invisible to the human eye. EY has been seeding a pattern recognition tool with anonymised data from real fraud examples. “It’s improving with each piece of data we supply,” he adds.

It isn’t just forensic specialists who are increasing their use of specialist forensic tools, but members of audit teams too. For example, where there are large volumes of data and low transaction values, auditors are looking at those datasets and using forensic tools to identify outliers that may be areas of interest from an audit perspective, so that these can then be investigated by the audit team – and the webinar highlights what’s possible with a series of examples.

Auditors and forensics specialists have much to learn from each other and increasing opportunities to do so. The more forensic specialists, tools and techniques are involved in audit, the more knowledge audit teams will have of forensic red flags, and the better forensic specialists will understand what’s important from an audit perspective.