2.1 Frauds _ its types.pdf

Auditing

2. Fraudisdeliberateandmalafidemistake.It
meansintentionalmisrepresentationoffinancial
informationbymanagementoremployeesor
thirdparties.Itisdeliberatemistakecommitted
intheaccountstodeceiveothersandget
personalgain.

3. FRAUDS
I. Manipulation of Records II. Misappropriation
a) Not recording Transaction
b) Recording Dummy Transaction
c) Misapplication of Accounting
Policies
d) Window Dressing & Secret
Reserve
A. Misappropriation of Cash
A. Cash Receipts
B. Cash Payments
C. Cash Balance
A. Misappropriation of Goods
A. Goods Received
B. Goods Dispatched
C. Stock in Hand

4. Manipulation of Records
A]Notrecordingthetransactions:
Sometransactionsmaynotberecordedatallinthebooks.Theyaretotally
omittedfromthebooksofaccount.Forexamplecashreceivedfromacustomer
maynotberecordedinthebooksatall.itwillnotaffectthetrialbalance.This
typeoferroroccurredwhenerrorofomissionisintentional.
D]Windowdressing:whenbooks
ofaccountsaremadeinsuchaway
toshowmuchbetterconditionthan
theactualconditionitiscalledas
“windowdressing”
SecretReserve:whenbooksof
accountsaremadeinsuchawayto
showmuchworseconditionthan
theactualconditioniscalledas“
SecretReserve”.
C]Misappropriationofaccounting:
Accountingpoliciesmaybeapplied
wrongly.Forexampleincomemay
beshownasliabilityinthebooks.
Thistypeoffraudoccurswhenerror
ofprincipleisintentional.
B]Recordingdummytransactions:
Bogustransactionsmaybe
recorded.Thisalsocanbedonein
twoways.
1.Transactionswhichhavenot
occurredmayberecordede.g
cashnotpaidtoacustomer
maybeshownaspayment
madetocustomer.
2.Transactionsoccurredmaybe
recordedwronglyinthebooks
e.g.Goods senton
consignmentmaybeshownas
actualsalesinsalesregister.

5. Manipulation of Records
A]Notrecordingthe
transactions:
Sometransactionsmaynotbe
recordedatallinthebooks.They
aretotallyomittedfromthebooks
ofaccount.Forexamplecash
receivedfromacustomermaynot
berecordedinthebooksatall.it
willnotaffectthetrialbalance.
Thistypeoferroroccurredwhen
errorofomissionisintentional.
D]Windowdressing:whenbooks
ofaccountsaremadeinsuchaway
toshowmuchbetterconditionthan
theactualconditionitiscalledas
“windowdressing”
SecretReserve:whenbooksof
accountsaremadeinsuchawayto
showmuchworseconditionthan
theactualconditioniscalledas“
SecretReserve”.
C]Misappropriationofaccounting:
Accountingpoliciesmaybeapplied
wrongly.Forexampleincomemay
beshownasliabilityinthebooks.
Thistypeoffraudoccurswhenerror
ofprincipleisintentional.
B]Recordingdummytransactions:
Bogustransactionsmayberecorded.Thisalsocanbedoneintwoways.
1.Transactionswhichhavenotoccurredmayberecordede.g.cashnot
paidtoacustomermaybeshownaspaymentmadetocustomer.
2.Transactionsoccurredmayberecordedwronglyinthebookse.g.Goods
sentonconsignmentmaybeshownasactualsalesinsalesregister.

6. Manipulation of Records
A]Notrecordingthe
transactions:
Sometransactionsmaynotbe
recordedatallinthebooks.They
aretotallyomittedfromthebooks
ofaccount.Forexamplecash
receivedfromacustomermaynot
berecordedinthebooksatall.it
willnotaffectthetrialbalance.
Thistypeoferroroccurredwhen
errorofomissionisintentional.
D]Windowdressing:whenbooks
ofaccountsaremadeinsuchaway
toshowmuchbetterconditionthan
theactualconditionitiscalledas
“windowdressing”
SecretReserve:whenbooksof
accountsaremadeinsuchawayto
showmuchworseconditionthan
theactualconditioniscalledas“
SecretReserve”.
C]Misappropriationofaccounting:
Accountingpoliciesmaybeappliedwrongly.Forexampleincomemaybe
shownasliabilityinthebooks.Thistypeoffraudoccurswhenerrorof
principleisintentional.
B]Recordingdummytransactions:
Bogustransactionsmayberecorded.
Thisalsocanbedoneintwoways.
1.Transactionswhichhavenot
occurredmayberecordede.g.cash
notpaidtoacustomermaybe
shownaspaymentmadeto
customer.
2.Transactionsoccurredmaybe
recordedwronglyinthebookse.g.
Goodssentonconsignmentmay
beshownasactualsalesinsales
register.

7. Manipulation of Records
A]Notrecordingthetransactions:
Sometransactionsmaynotberecorded
atallinthebooks.Theyaretotally
omittedfromthebooksofaccount.For
examplecashreceivedfroma
customermaynotberecordedinthe
booksatall.itwillnotaffectthetrial
balance.Thistypeoferroroccurred
whenerrorofomissionisintentional.
D]Windowdressing:whenbooksofaccountsaremadeinsuchawaytoshow
muchbetterconditionthantheactualconditionitiscalledas“window
dressing”
SecretReserve:whenbooksofaccountsaremadeinsuchawaytoshowmuch
worseconditionthantheactualconditioniscalledas“SecretReserve”.
C]Misappropriationofaccounting:
Accountingpoliciesmaybeapplied
wrongly.Forexampleincomemaybe
shownasliabilityinthebooks.This
typeoffraudoccurswhenerrorof
principleisintentional.
B]Recordingdummytransactions:
Bogustransactionsmayberecorded.
Thisalsocanbedoneintwoways.
1.Transactionswhichhavenot
occurredmayberecordede.g.cash
notpaidtoacustomermaybe
shownaspaymentmadeto
customer.
2.Transactionsoccurredmaybe
recordedwronglyinthebookse.g.
Goodssentonconsignmentmay
beshownasactualsalesinsales
register.

8. Misappropriation of cash
Cashmaybemisappropriated,embezzledorstolenoutof
1.Fromcashreceived:
A]bynotrecordingcashreceivedatallorrecordingonlypartamountasreceivedand
pocketingthebalance.Thisisanintentionalerrorofomissionandoccursincaseofa)cashsale
,b)saleofscrap,c)saleofassets,d)windfallgaine.g.recoveryofbaddebts,damages,
discountfromcreditors.
B]byteemingandlading
2.FromcashPayment
Cashmaybemisappropriatedoutofcashpaymentbyrecordingdummyorexcesspayments.
Salariesorwagesmaybeshownaspaidtodummyemployeesoramountpaidmaybeshownas
higherthantheactualpayment
3.Fromcashbalance
Cashmaybeactuallystolenorembezzledoutofthecashinhandlyinginthecashbox.

9. Misappropriation of goods
Goodsmaybemisappropriatedoutof
1.Goodsreceived:Goodsreceivedmaybemisappropriatedbynotrecording
goodsreceivedatallorrecordingonlypartquantityasreceivedand
misappropriationthebalance.Thisisanintentionalerrorofomissionand
occursincaseofweakcontroloverpurchaseandstorage.
2.Fromgoodsdispatched:
Goodsmaybeappropriatedoutoddispatchedbyrecordingdummyorexcess
sales.
3.Fromstockinhand:
Goodsmaybeactuallystolenoutofthestockinhandlyinginthewarehouse.

10. circumstances indicating
errors or frauds
Thefollowingindicatethattheremayexisterrorsorfraud
I.QualityofManagement
1.Managementisdominatedbyonepersonorasmallgroup
2.Internalcontrolisabsentorweak
3.Thereishighturnoverofaccountingstaff
4.Theaccountsdepartmentisunderstaffed
5.Auditorsandlawyersarechangedfrequently

11. circumstances indicating
errors or frauds
II.UnusualPressureontheConcern
1.Theworkingcapitalisinadequate
2.Creditsalesaremadetoshowmoreincomeignoringtheriskofbaddebts
3.Thereisneedtoshowbetterfinancialpicturetosucceedinshareissue
4.Thereisheavyinvestmentinaproductwhichissubjecttorapidobsolescence
5.Thereisheavydependenceonfewproductorcustomers

12. circumstances indicating
errors or frauds
III.UnusualTransaction
1.Therearemanytransactionsneartheyearendaffectingamountofprofit.
2.Therearemanytransactionswithassociatesrelatedpartiesetc.
3.Thereareexcessivepaymentforservices.
IV.ProblemsinAudit
1.Thereareinadequaterecords,incompletefiles,untalliedtrialbalance
2.Vouchersarenotavailableornotonlyauthorizedorsupportingdocumentsare
altered.
3.Thereisabsenceofordifferenceinpartyconfirmation
4.Thereislackoforinadequateexplanationfrommanagement