An Investigation of the Role of Forensic Auditing in Uncovering Financial Misstatements and Irregularities

Posted: Sep 29, 2022

• Phoebe Parker
• Tucker Jenkins
• Kelsey Rivera

Abstract

The landscape of financial reporting has undergone significant transformation in recent decades, characterized by increasing complexity in business transactions, globalization of corporate operations, and rapid technological advancement. Within this evolving context, the detection of financial misstatements and irregularities presents a persistent challenge for stakeholders ranging from investors to regulatory bodies. Traditional auditing approaches, while foundational to financial oversight, have demonstrated limitations in identifying sophisticated financial manipulations, particularly those involving intentional deception or complex transaction structures. This research addresses these limitations by investigating the enhanced capabilities offered by forensic auditing methodologies when systematically integrated into financial examination processes. Forensic auditing represents a specialized approach that extends beyond conventional audit procedures through its emphasis on investigative techniques, legal standards of evidence, and proactive fraud detection. Unlike traditional audits that primarily focus on compliance and financial statement accuracy, forensic auditing employs a hypothesis-driven approach that specifically targets potential irregularities. The distinction lies not only in methodology but in fundamental orientation: where traditional auditing seeks to provide reasonable assurance that financial statements are free of material misstatement, forensic auditing actively pursues evidence of intentional misrepresentation. This study examines the proposition that the integration of forensic auditing techniques enhances the detection of financial misstatements and irregularities beyond the capabilities of traditional audit approaches. The research is situated at the intersection of accounting practice, corporate governance, and financial regulation, addressing a critical need for more effective mechanisms to ensure financial reporting integrity.