What is Fraud | Manipulation of Accounts | Misappropriation of Assets

Fraud means intentional misrepresentation of financial information by one or more individuals among management, employees or third parties. It may involves

• Manipulation, falsification or alteration of records or documents
• Misappropriation of assets
• Suppression or omission of the effects of transaction from records or documents
• Recording Of transactions without substance
• Misapplication of accounting policies

The responsibility of fraud rests with management. The effective internal control system can reduce but cannot eliminate the possibility of frauds.

Manipulation of Accounts

1. Omission Of invoices for purchases in the books of accounts
2. Entry of false purchases in the accounting books,
3. Omission of invoices for sales in the books of accounts
4. Entry of false sales in accounting record
5. Value of stock may be .inflated or deflated,
6. Goods on consignment may be recorded as actual sales.
7. Goods on sales or return basis can be passed through sales book.
8. Omission of outstanding liabilities
9. Omission of advance payments
10. Capital expenditure may be charged to revenue
11. Revenue expenditure may be treated as capital

Misappropriation of Assets

A. Misappropriation of Cash

1. Cash sales may not be recorded.
2. Fictitious allowances and returns given to customers
3. Omissions of miscellaneous receipts like of scrap.
4. Teeming and lading may be followed.
5. Dummy names of workers may be stated to misappropriate cash.
6. Overcast of wages sheets leads to misappropriation of cash.
7. Omission of credit notes for purchase returns in order to steal cash.
8. Fictitious purchases and expenses are recorded to take away cash.
9. Goods sent on sales or return may be sold for cash and return recorded.
10. The goods may be sold for cash under value post paid and post and returns inward is stated.
11. Personal expenses may be recorded as business expenses.
12. Omission of amount of bill collected on due date.
13. Understatement of cash in hand at the time of balancing cash book
14. Voucher may be used twice for making payment.
15. Recovery of bad debts written off in the past may be omitted to record.

B. Misappropriation of Goods

The employees may steal stock of goods. The misuse of assets is a part of fraud. The management can keep proper record of stock, purchases, sales and returns.

See Also: Audit of Journals and Its Different Types

There is need of effective internal control to protect the goods. The auditor can find out the misappropriation of goods through physical verification.

Teeming and Lading

Teeming means take out money from one account and jading means put back money in the same account after some time.

It is a method of misappropriation of cash received by falsifying record of subsequent transactions. It is a fraud and it can be worked in this way.

‘A’ debtor pays cash of Rs.500. The cashier takes this and no entry is recorded in the account of ‘A’, later on ‘B’ pays cash of Rs.500. The cashier can make an entry of Rs.500 in A’s account.

At this stage no entry is made in B’s account, After that ‘C’ can make a payment of Rs.500, The entry can be recorded in B’s account at this time no entry is made ‘in C’s account This process may continue for many transactions.

See Also: Qualification and Disqualification of an Auditor

The process explained is simple for the sake of understanding. It may be complex due to splitting of amounts over various accounts. More than one misappropriation may be in process at the same time.

Duties of Auditor

1. The auditor should know internal check system of cash. The weak points must be examined in detail. The cashier has no right to make entries in the ledger.
2. He should check counter-foils of receipts with cash book. He must pay attention to the date.
3. He can check the counter-foils of paying-in-book; cash book entries, bank statement and rough cashbook, if any. He must check the date of entries.
4. He can compare the cheques received and sent to bank and accounts of debtors to see that splitting up of cheques has not been done.
5. He can examine debtors’ balances in ledger to see the accounts overdue.
6. He can see accounts of customers being settled in installments.
7. He must examine the accounts of customers who have been settling their accounts in one installment on due date but not in installments.
8. He can call for the statements of accounts from debtors and compare such balances with balance in ledger accounts.