Accounts Notes: Procedure for investigation of frauds

Friday 25 March 2011

Procedure for investigation of frauds

1. Cash Receipts – The probability of cash being diverted before being entered in the books is very high and hence
(i) Income received from different sources should be scrutinized.
(ii) Carbon copies of receipts marked ‘duplicate’ should be scrutinized.
(iii) The record of small or negligible sources of income such as sales of scrap or sale of waste paper.
(iv) Recoveries from customers and sundry parties along with deductions on account of cash discounts should be reviewed and checked thoroughly.
2. Cash Payments –
1) Acknowledgement for payments has to be carefully scrutinized
2) Care is required where a figure appears to have been erased on altered on such acknowledgement.
3) Payment by bearer Cheques should be checked.
4) Payment as regards wages should be examined for possible over totaling of wage sheets and entries regarding dummy workmen.
5) Check whether payment has been made in respect of supplies which have not been received.
6) Petty Cash Book itself should be vouched and totaled.
3. Balances in customers’ ledger – The first steps is to find out
(1) Whether the customers are properly debited in respect of goods received.
(2) Test the entries in the order book with those in the sales daybook.
(3) Amounts adjusted on account of goods returned or difference in price as well as amounts written off as bad debts should be checked.
(4) Balance confirmations from customers.
4. Balances in Suppliers ledger –
(1) The Bought Journal should be vouched by reference of Goods Inward Book.
(2) Amounts have been correctly credited in respect of goods duly received or not.
(3) Request the supplier to furnish statements of their accounts to find out whether or not any balance is outstanding or due and
(4) Confirm that allowances and rebates given by them is correctly adjusted.
5. Defalcation of stock –
(1) The defalcation of trading stock, etc. is usually possible through a collusion among a number of persons.
(2) Check whether there is
(a) A system of stock control, and existence of detailed record of the movement of stock, or
(b) Availability of sufficient data from which such a record can be constructed.
(3) Physically check the quantities in stock and those shown by the stock book.
(4) Shortages observed on physical verification of stock should be reconciled with the discrepancies observed on checking the books.

 Investigation for Review of Profit / Financial Forecasts [Guidance note on Profit Forecast]
Chartered Accountants are required to investigate into the profit forecasts of a business for various purposes like purchase of a business or sanction of loan etc. As per guidance notes issued by the ICAI a Chartered Accountant should consider the following aspects while conducting review of profit forecasts.
1. Preliminary considerations
(i) Obtain in writing the scope of work
(ii) Procure the following information in written from
(a) Period covered by forecast
(b) The assumptions used
(c) The purpose of forecast
(d) The ultimate user of the forecast.
2. General considerations
(i) Obtain a clear understanding of client’s business and its environment.
(ii) Review the accounting policies.
(iii) Check the reasonableness of various assumptions.
(iv) Review the method of forecasting.
3. Specific considerations
(i) Check whether correct accounting policies have been consistently applied over the period of forecast.
(ii) Ensure proper disclosure of extra ordinary items.
(iii) Incase where purpose of forecast is to estimate fund requirements, ensure that proper bifurcation has been made between working capital and long term capital requirements.
(iv) Proper investigation into the current status of the entity should be made.
(v) Evaluate the opinion of other exports.
(vi) Ensure the proper explanatory notes supplement the forecasts.
(vii) The investigator should properly adjust inflationary factors and make reasonable inter firm comparisons.
The report of the investigator should cover the following aspects.
(i) The assumptions used
(ii) The forecasts made
(iii) Conclusions of the review.