Basic Responsibilities & Liabilities of Forensic Auditor

Forensic Accounting and Investigation Standards (FAIS) issued by ICAI

The Institute of Chartered Accountants of India (ICAI) has issued the Forensic Accounting and Investigation Standards (FAIS) through its Digital Accounting and Assurance Board (DAAB). These standards provide a comprehensive framework for conducting forensic accounting and investigation engagements in a consistent, professional, and legally sustainable manner. The revised FAIS was released on 1 July 2023 and became mandatory for forensic engagements undertaken by ICAI members from that date onwards.

Forensic Auditing Standards issued By ICAI

The Institute of Chartered Accountants of India (ICAI) has released a set of forensic accounting and investigation standards in an effort to stop the growing problem of accounting, financial, and lending irregularities.

The auditor’s responsibilities in negotiating the details of the audit engagement with management are addressed under this Revised Standard on Auditing. The SA establishes the requirements for a forensic accounting and investigation audit and the terms of an audit engagement and amendments therein and separates the management’s and auditors’ responsibilities, among many other issues.

Purpose of FAIS

FAIS were introduced in response to the increasing incidence of:

• Accounting irregularities
• Financial frauds
• Loan defaults and fund diversion
• Corporate misconduct
• Money laundering and related financial crimes

The standards establish a structured methodology for carrying out forensic investigations and ensure that evidence collected during such assignments can withstand scrutiny by courts, regulators, and enforcement agencies.

Key Objectives of FAIS

The primary objectives of FAIS are:

1. To establish minimum standards for conducting forensic accounting and investigation engagements.
2. FAIS develops to enhance the quality, consistency, and credibility of forensic reports.
3. To provide guidance to forensic professionals in planning, executing, documenting, and reporting investigations.
4. FAIS originated to ensure uniformity in forensic practices across industries and sectors.
5. To facilitate the collection and preservation of legally admissible evidence.
6. FAIS to act as a benchmark for evaluating the performance of forensic professionals.

Stakeholders Benefited by FAIS

The standards are useful for various stakeholders, including:

• Banks and Financial Institutions
• Reserve Bank of India (RBI)
• Securities and Exchange Board of India (SEBI)
• Enforcement Directorate (ED)
• Serious Fraud Investigation Office (SFIO)
• Central Bureau of Investigation (CBI)
• Economic Offences Wing (EOW)
• Corporate Entities
• Insolvency Professionals
• Courts and Tribunals

These stakeholders rely on forensic investigation reports for decision-making, regulatory actions, and legal proceedings.

Structure of FAIS

The standards are classified into six series:

The framework covers the entire lifecycle of a forensic engagement, starting from acceptance of the assignment and ending with the issuance of the final report.

Significance of FAIS

FAIS is significant because it:

• Promotes professional skepticism and objectivity.
• Establishes systematic procedures for fraud investigations.
• Enhances the reliability and defensibility of forensic reports.
• Provides consistency in investigation methodologies.
• Strengthens confidence among regulators, lenders, courts, and other stakeholders.
• Assists in uncovering fraud, corruption, asset misappropriation, fund diversion, and financial statement manipulation.

FAIS 100 Series: Key Concepts

These standards establish the fundamental principles governing forensic accounting and investigation engagements.

FAIS 110 – Nature of Engagement

Objective: Defines what constitutes a forensic accounting and investigation engagement. following are key points:

• Distinguishes forensic engagement from statutory audit.
• Focuses on fact-finding and evidence gathering.
• Findings may be used in courts, tribunals, regulatory proceedings, and arbitration matters.
• The forensic professional reports findings and conclusions, not an audit opinion.

How is a forensic audit different from a statutory audit?

A statutory audit expresses an opinion on financial statements, whereas a forensic engagement investigates suspected wrongdoing and gathers legally defensible evidence.

FAIS 120 – Fraud Risk Assessment

• Objective: Identify fraud risks and red flags before commencing investigation.
• Covers: Risk identification, Fraud scenarios, Control weaknesses, likelihood assessment, and Impact assessment
• Practical Examples: Related-party transactions, Round-tripping, Bogus purchases, Diversion of funds and Fake vendors
• Importance: Acts as the foundation for planning the investigation.

FAIS 130 – Laws and Regulations

• Objective: Ensure compliance with applicable laws.
• Relevant Laws: Companies Act, 2013; Prevention of Corruption Act; PMLA; Indian Evidence Act; Information Technology Act; GST Laws; and FEMA
• Requirement: The forensic professional should understand the legal implications of evidence gathering and reporting

FAIS 140 – Applying Hypotheses

• Objective: Use investigative hypotheses to direct forensic procedures.
• Example: Hypothesis: “Management diverted company funds through shell companies.”
• The professional gathers evidence either to prove the hypothesis or to disprove the hypothesis.
• Benefit: Ensures a scientific and unbiased investigation approach.

FAIS 200 Series: Engagement Management

These standards deal with acceptance, administration, and management of forensic engagements.

FAIS 210 – Engagement Objectives

• Objective: Clearly define the Purpose, Expected outcomes, scope, and Deliverables
• Examples: Objectives may include Determining fraud amount, Establishing diversion of funds, identifying responsible persons. Quantifying damages.
• Importance: Prevents scope creep.

FAIS 220 – Engagement Acceptance and Appointment

• Objective: Determine whether to accept the assignment.
• Areas Evaluated: Independence, Competence, Resources, Conflict of interest, Ethical considerations
• Documentation: An engagement letter should contain scope, responsibilities, deliverables, timeline, and limitations.

FAIS 230 – Using Work of an Expert

• Objective: Guide use of specialists.
• Experts May Include cyberforensic experts, Handwriting experts, Valuation experts, Legal experts and Data analysts
• Responsibility: Even when experts are used, ultimate responsibility remains with the forensic professional

FAIS 240 – Engaging with Agencies

• Objective: Interaction with external agencies.
• Agencies like Banks, SFIO, CBI, ED, police authorities, and Regulators
• Focus: Proper communication, coordination, and evidence sharing.

FAIS 250 – Stakeholder Communication

• Objective: Manage communication with stakeholders.
• Stakeholders: Audit Committee, Management, Regulators, Banks and Law enforcement authorities
• Requirement: Communication must be factual, objective, and confidential.

FAIS 300 Series: Executing Assignments

Often considered the most important series for practical forensic work.

FAIS 310 – Planning the Assignment

• Objective: Develop an effective investigation plan. Includes: Investigation strategy, Resources, Timelines, evidence sources, and Risk areas
• Outcome: A documented investigation plan.

FAIS 320 – Evidence and Documentation

Objective: Obtain sufficient, reliable, and admissible evidence. The following are types:

• Documentary Evidence: Ledger accounts, vouchers, and Contracts
• Digital Evidence: Emails, server logs, and Mobile records
• Third-Party Evidence: Confirmations, Bank records
• Core Principle: If it is not documented, it is not done.

FAIS 330 – Conducting Work Procedures

• Includes Data analytics, Trend analysis, Ratio analysis, transaction tracing, and Beneficial ownership analysis
• Example: Tracing loan proceeds from Bank A → Company B → Related Party → Promoter Account.

FAIS 340 – Conducting Interviews

• Objective: Obtain information through structured discussions.
• Types: Witness interviews, employee interviews, and Suspect interviews
• Best Practices: Prepare questionnaires, document responses. Maintain neutrality and avoid intimidation.

FAIS 350 – Review and Supervision

• Objective: Ensure investigation quality.
• Includes: Review of evidence, Review of findings, Team supervision and Resolution of inconsistencies
• Importance: Reduces risk of incorrect conclusions.

FAIS 360 – Testimony

• Objective is to provide guidance when appearing before courts, tribunals, or arbitrators.
• Requirements: Present facts clearly, remain independent, support conclusions with evidence, and withstand cross-examination.

FAIS 400 Series: Specialized Areas

Designed for special and emerging forensic situations. The following are common areas covered:

• Digital Forensics: Mobile devices, Email evidence, server logs, and Cloud records
• Asset Tracing: Tracking Diversion of funds, Layering transactions, Benami holdings and Shell entities
• Anti-Money Laundering Investigations: Identification of Placement, Layering and Integration
• Litigation Support: Assistance in Damages claims, Arbitration and Commercial disputes
• Expert Witness Services: Professional opinions before legal forums.

FAIS 500 Series: Quality Control

The objective is to maintain consistency and reliability in forensic engagements. Key Components

• Leadership Responsibilities: Management should promote quality culture.
• Ethical Compliance: Ensure integrity, Objectivity, confidentiality, and Professional behavior
• Human Resources: Team must possess Skill, training, and Experience
• Monitoring: Periodic review of completed engagements.
• Documentation Review: Ensure all conclusions are properly supported

FAIS 600 Series: Reporting

The final output of the forensic assignment. This series governs reporting of findings and conclusions. Key Elements of Report

• Executive Summary: Why the assignment was conducted.
• Scope: What was examined.
• Methodology: How the investigation was performed.
• Findings: Facts identified.
• Evidence: Support for findings.
• Limitations: Restrictions encountered.
• Conclusions: Reasoned conclusions based on evidence.
• Annexures Like Interview notes, Transaction trails, and Supporting documents

Quick Revision Chart

The Forensic Accounting and Investigation Standards (FAIS) issued by ICAI represent a pioneering initiative in the field of forensic accounting. They provide chartered accountants with a structured framework for conducting forensic engagements with professionalism, independence, objectivity, and due care. The standards serve as an important tool for combating corporate frauds and financial irregularities while ensuring that investigative findings are credible, consistent, and legally sustainable.