CASE STUDY OF RED FLAGS & FRAUD

Facts of the Case: The Company is a manufacturer of Textile Products. The company had incurred a
Loss and a Reduction in Turn-Over that year and they intended to reduce their Losses by deflating
their Cost of Purchase by way of Unnecessary Debit-Notes and increasing their Turnover by shifting
the sales of the next year to the previous year. The CFO was advised to do the same without the
auditors finding them the same.

Red Flags (Purchase): While auditing the Purchases, we had to compare the Purchases with the Sales
Tax Returns and we found that there were some omissions in the Inter-State Purchases. It was later
explained as Manual Returns were filed for the purpose of C-Forms and the copies of the Returns
and C-Forms were provided to us. The process of accounting Purchases is that, First when the Raw-
Material is delivered to the factory they make a GRN, which captures the actual Quantity and the
Quality and the deviations in the Parameters, if any. The GRN has an effect in the Stock Records and
simultaneously it creates a PROVISIONAL entry in the Raw-Material purchase ledger. The entry being
provisional is marked as provisional and the same is reversed when the purchase invoice is
accounted. The provisional Entry is for the Net Value of the goods received. However the Purchase
Invoice is for the Invoice value and then an Automatic Debit Note is raised for the value difference
between the Provisional Purchase Value (NET) and the Invoice Value. HOWEVER in this case the
Invoices were unaccounted and only the provisional entries were accounted. The client had
manually calculated the deviation and had accounted a manual Debit Note thereby reducing the
purchases.

Red Flags (Sales): While auditing the Sales, we found some year-end sales were not shown in the
Sales Tax Returns. We were explained that those were shown in the April Month’s returns. We
found the Invoices were accounted on 31 st March however the deliveries were made only in April 8 th.
We were explained that their customer wanted their stocks to reach their factory only after 9 th of
April and hence they delayed the delivery. When we saw the PO, it was clearly mentioned that the
Goods are to be taken delivery by the Customer at their cost and risk. The delivery documents also
were matching the same and the Company Incurred no cost in making the delivery. Hence the Risk &
Reward was passed on to the customer only on 8 th April, until then the goods were lying in the
Godown and the same need to be classified as Closing Stock. It was later found that the Customer
actually received the Invoice only on 10 th of April. Which confirms the stand taken by the auditors.