What is a Forensic Audit vs an Internal Audit?

Many organizations view auditing as simply a financial requirement to ensure compliance. However, a financial audit is just one of many types of audits your organization can undergo. Other audit options can help you review and report on your organization’s health, uncover potential vulnerabilities and ensure proper controls are in place.

By understanding the different types of audits available, such as internal and forensic audits, you can choose the most effective services to meet your unique needs and goals.

Forensic Audit vs. Internal Audit: Understanding the Difference

An audit is defined as "a formal examination of an organization's or individual's accounts or financial situation." Typically conducted by a public accounting firm, it provides assurance regarding an organization's financial statements. However, specialized audits like internal and forensic audits serve distinct purposes and can offer valuable insights beyond standard financial reviews.

Many organizational leaders, including audit committee members, board directors, owners, managers, and other individuals in supervisor positions, may have limited experience with specialized audits. As a business owner or leader, understanding the differences between a forensic audit vs an internal audit is crucial to choose the right option for your organization’s needs.

What is a Forensic Audit?

The forensic audit definition is “an examination of financial records to find any illegal financial activity.” The term "forensic" in this context means "suitable for use in courts or public discussion and debate." This definition often surprises people who associate "forensic" only with crime scene investigations.

Key aspects of forensic audits:

• Conducted by Certified Fraud Examiners (CFEs) or forensic accountants*
• Designed to investigate potential crimes or assist with legal cases
• Often used when financial crimes are suspected
• Can help identify fraudulent activities or prepare for legal proceedings
• Results are prepared with the understanding that they may be presented in court

*A forensic accountant is defined as "someone whose job is examining financial records to help find out whether a crime has been committed, or help with a legal case."

When you might need forensic auditing:

• Suspicions of fraud or theft arise
• Account balances are unexpectedly different from projections
• Reconciliation procedures result in unexplained differences
• Theft of personally identifiable information has occurred or business systems have been hacked 
• A whistleblower has reported potential financial misconduct

Organizations that might have been involved in financial crimes could need a forensic audit, meaning that it can be a key part of either identifying specific circumstances when fraudulent activities might have taken place, or help prepare for legal proceedings through a detailed financial analysis.

What is an Internal Audit?

The internal audit definition is “an examination of a company's accounts or activities by its own accountants or managers.” It focuses on improving internal processes and controls.

Key aspects of internal audits:

• Often conducted by Certified Internal Auditors* (CIAs) or other accounting professionals
• Designed to assess the organization's financial health and internal processes
• Helps identify areas for improvement within the company
• Results are typically presented to the company's governing body or owners

*An internal auditor is defined as "a person who does internal audits for a company."

When you might need an internal audit:

• Ethical or accuracy lapses have occurred
• Specialized expertise is required for projects beyond regular operations
• Risks in operations, compliance, or reporting are increasing
• Existing policies and procedures are not being followed
• Information technology data breaches have occurred
• Compliance with laws and regulations is a significant burden
• Communication issues are affecting morale or stakeholder trust

An internal audit provides a comprehensive picture of how the organization operates and where it needs to improve policies, procedures, and practices. By regularly conducting internal audits, companies can proactively address issues, enhance efficiency, and maintain a robust control environment.

Forensic Audit vs Internal Audit: Key Differences

While both types of audits examine an organization's financial records and processes, they differ significantly in their objectives and approaches:

1. Purpose:
   • Forensic Audit: Investigates financial matters to find evidence for potential litigation or mediation
   • Internal Audit: Assesses financial health and identifies areas for operational improvement
2. Scope:
   • Forensic Audit: Focused on specific financial transactions or areas of suspected fraud
   • Internal Audit: Broader review of overall organizational processes and controls
3. Timing:
   • Forensic Audit: Often reactive, conducted when fraud is suspected or has occurred
   • Internal Audit: Proactive, typically conducted regularly as part of ongoing operations
4. Outcome:
   • Forensic Audit: Produces evidence that can withstand legal scrutiny
   • Internal Audit: Generates recommendations for improving organizational efficiency and effectiveness

As you can see, one of the key differences between an internal vs forensic audit is that an internal audit helps to identify areas for improvement within the company, while a forensic audit helps gather evidence when you suspect fraud and need to prepare for legal disputes.

How to Determine if You Need a Forensic or Internal Audit

Choosing between a forensic vs internal audit depends on your organization's specific situation and goals:

• Consider the trigger: A forensic audit is likely necessary if you're responding to suspected fraud or preparing for potential legal action. An internal audit is more appropriate if you're looking to improve overall processes and controls.
• Assess the timeframe: Forensic audits often focus on past events, while internal audits can be more forward-looking.
• Evaluate your resources: Internal audits can often be conducted by in-house staff, while forensic audits typically require specialized external expertise.
• Think about the potential outcomes: A forensic audit is crucial if you need evidence for legal proceedings. An internal audit will be more beneficial if you're seeking operational improvements.

When in doubt about which type of audit your organization needs, we can help. Our team of forensic accountants and internal auditors can help you determine the most appropriate service for your specific situation. We'll ensure that you have the most qualified professionals on your engagement team, tailored to your unique needs and objectives. Contact us today to discuss how we can help safeguard your organization's financial health and integrity.