Frauds and Manipulation of Accounts
In considering the possibility of commercial fraud in accounts, an auditor should be concerned more with the prevention of irregular practices than with the detection of fraud which might have already reached at an advanced stage.
As a rule, fraud can be easily detected in its early stages but when it has become very involved, it may defy detection. Hence is absolutely essential that there should be an effective system of internal control which will reveal any irregularity at an early stage. It is much better to remove temptation and opportunity for fraud rather than to detect fraud. The fraud connected with accounts may be put in the following main division.
Misappropriation of Cash
Cash is misappropriated by dishonest employees is concealed either by omitting to enter receipts or by entering fictitious payments.
The following are the main principal ways in which this can be done
- An omission of sales and misappropriation of cash received from customers.
- False credits passed in the customer account in receipts of discounts, returns, allowances or bad debts for the purpose of stealing equivalent cash receipts.
- A number of cash sales may not be recorded in the books and the corresponding cash may be misappropriated.
- Misappropriation of the proceeds of bills discounted, the bills being shown as being in hand.
- Theft of unusual receipts of cash e.g. sales of waste, recovery of bad debts written off in the past etc.
- Misappropriation of cash received on account of goods sent on sale or return, the goods being shown as having been returned.
- Recording fictitious purchases or expenses for the purpose of misappropriating the corresponding cash payment
- Misappropriation of wages cashes by putting in the wages sheets, dummy names or by overcasting the sheets.
Misappropriation of Goods
Unless there is an efficient system of internal control over the stock of goods and stores, theft thereof by the employees may be quite common, particularly where the goods are less bulky but more valuable.
Manipulation of Accounts
- Recording fictitious sales over the omission of sales
- Recording fictitious purchases of suppression of purchases
- Overvaluation or undervaluation of the stock
- Recording of fictitious expenses or omission of expenses
- Taking credit or accrued income not likely to be received or omission of income
- Revenue expenditure changed to a capital or vice versa.
