Monday, 07th February 2023
To
The Managing Director
Mr. XYZ
ABC Automobiles Private Limited
New Delhi
Subject: ABC Automobiles Private Limited Forensic Audit of the Accounts Receivable
Dear Sirs:
Thank you for the opportunity to work with you and complete this forensic engagement for ABC Automobiles Private Limited (or ABC). We have conducted our investigation pursuant to our engagement letter dated 01.01.2023 between the ABC and our firm.
We have performed the procedures enumerated below, which were agreed to by the Mr. XYZ-Managing Director, ABC. This report summarizes our procedures, findings, and recommendations as it relates to our assistance with the evaluation of bookkeeping, records and internal control irregularities at Company in determining the fraud risk and the amount involved therein.
This Forensic engagement was conducted in accordance with The Forensic Accounting and Investigation Standard and Laws and Regulations established by the Institute of Chartered Accountants of India. The scope of this engagement is outlined in the body of our report. The sufficiency of these procedures is solely the responsibility of those parties specified in this report. Consequently, we make no representation regarding the sufficiency of the consulting procedures described below either for the purpose for which this report has been requested or for any others purpose.
This Report is intended solely for the Office of the ABC Automobiles Private Limited, for their internal use and benefit and are not intended to nor may they be relied upon by any other party (“Third Party”).
We appreciate the opportunity to assist you with this matter.
For ZZZZ & Associates
Chartered Accountants
CA PQR
Membership No. xxxxxx
Date: 07-02-2023
A. BACKGROUND SUMMARY
ABC Automobiles Private Limited is a Private Limited Company having its registered office at 96/A1, New Delhi-110034, are an multi brand second-hand card dealer and also authorised to run an Authorised service station for the servicing and maintenance of multi brand cars.
The Organisation structure of the company was as follows:
|
Sr. No |
Name | Position | Division |
| 1 | XYZ | Managing Director | Operation |
| 2 | Harpreet Jain | Directors | Finance |
| 3 | Sudhir Sethi | Head of Department (HOD) | Finance |
| 4 | Madan Kumar | Head of Department (HOD) | Sales |
| 5 | Ankita Mittal | Head of Department (HOD) | Human Resources |
| 6 | Manish Thukral | Head of Department (HOD) | Information Technology |
| 7 | Rajkumar | Head of Department (HOD) | Admin |
Company was incurring loss since last 2 years and Promoter were infusing fund in the company to fill the fund gap. Despite the several infusions, and company being turning out to be profitable in the year under audit, the fund gap was still visible on the Fund Flow Statement.
And it was affirmed in November 2021, when a party, who booked a car from our showroom, had approached the company for cancellation of their booking and requested to refund the booking amount after deducting the charges if any. On perusal of records from the department, it was observed that the payment details of said debtors was adjusted with some other debtors, which resulted into susceptibility of Receivables lapping.
When they asked the accountant to submit his report on such matters, he failed to submit the reply and stopped coming to the Company. This raised a red flag on accountant authorities. Later on, Finance Director was also made aware by the Banker about the company low bank balance and that were insufficient fund to honour the payment.
A meeting of the Board of the Company was called for by the Director Finance to update about the financial irregularities at Company. Director Finance also informed that the accountant had left the job and did not return to his duties and based upon their preliminary investigation, they are of the view that the matter needs to be investigated. Accordingly, it was decided in the meeting to investigate the matters and the Secretary was instructed to freeze the related bank account as a precautionary measure and to appoint a Forensic Auditor to investigate and in determining the fraud risk and value of funds involved, and the causes of fraud.
B. PURPOSE / SCOPE OF ENGAGEMENT
Our firm ZZZZ & Associates, Certified Forensic Auditor was engaged on 14th January 2023 by Harpreet to investigative and conduct forensic audit into the alleged possible fraud and its impact upon the company financial position.
The purpose of this engagement was
- to conduct a limited scope forensic examination of the Company’s funds flow statement
- to find the reason for shortage in cash flows
- to determine whether the Company had suffered from theft, fraud, or embezzlement by their former ACCOUNTANT and to what extent, for the period covering approximately 2 years (Jan 1, 2021 through December 31, 2022)
- Auditor will also provide all other observations relevant to cash flows and operations of business along with recommendations.
C. AUDIT METHODOLOGY:
I. Audit Process
The Process of forensic audit was:
1. Interviewing with employees, meetings with management personnel in order to develop an understanding of the significant processes and workflows in these departments as related to the objective of our audit.
2. Collecting & reviewing all document and evidence including:
a. Cash book and Bank Book.
b. Bank reconciliations.
c. Credit Card Sales and its Reconciliation
d. General ledger detail and year-to date trial balances
e. Investigate and Analysis of remittance to company’s Accounts
f. All daily sales report
g. Customer File
h. Relevant policies, procedure manuals, and organizational charts
i. Annual Sales Tax & Service Tax returns
j. Access to computers, telephone records and emails of all personnel
3. Identify fraud risks at the Company’s for the Period.
4. To provide management with facts and provide evidence for litigation
II. Team Members
Fraud Examination Team Members
|
1. Mr. PQR |
Certified Fraud Examiner & Chartered Accountant |
| 2. Mr. A Shukla | Computer Expert and Certified Microsoft Expert |
| 3. Mr. D Bhatia | Handwriting Expert |
| 4. Dr. Lav Gupta | Acclaimed Psychologist |
| 5. Mr. Prasad | Advocate, Legal Expert |
| 6. Mr. Piyush Tyagi | Other working staff |
III. Individuals Interviewed:
The following individuals were interviewed in person by members of the Fraud Examination Team:
- Harpreet Jain – Director finance
- Sudhir Sethi – HOD finance
- Madan – HOD Sales
- Ankita – HOD HR
- Manish Thukral – HOD IT
- Rajeev Chaudhary – Administration Head
- Rajkumar – HOD Admin
- Mr Grunish – Cashier
- Since the accountant had already left the job and was not available at the time of interview, therefore, our procedure did not include an interview of accountant.
- We conducted our interview on 21st & 22nd Jan 2023.
IV. Collecting & reviewing all document and evidence including:
- The audit team took digital image of the system hard disk in presence of Mr. Principal and Admin Head. It was kept securely in sealed bag and signatures were taken of the 2 witnesses. The same were preserved with the audit team office in a safe locker.
- The audit team also made clone of the hard disk so that it can be checked and verified later on.
- The Audit team also collected the following documents:
– Audited annual financial statements
– General ledger detail and year-to date trial balances – Complete Books of Accounts Master file
– Relevant policies, procedure manuals, and organizational charts
– Access to computers, telephone records and emails of all personnel
– Petty Cash Receipts/Payment Vouchers/ and cheque leaf
– HR Records of Accountant for background screening
– Credit Card Sales and its Reconciliation
– All daily sales report
– Annual Sales Tax & Service Tax returns
– Bank reconciliations.
V. Audit Implementation Approach
- Transaction Mapping
- Interviews of various employees, vendors and management
- Data Mining
- Review of cash book, bank book, and financial statement
- Expert Opinion
- Fund flow and cash management
D. KEY FINDINGS
- We started with background check and found that he was also involved in the financial frauds at the previous job and his case was pending indictment and all the police investigation process was still going on. In the absence of proper background screening, the same things were gone unnoticed. Thus, his motive was very clear to defraud the company and gain as much as he can.
- While reviewing the policy, we found that person who received the cheque/cash receipts also deposited the same into Bank was same i.e. Accountant. It showed lack of control in place to ensure proper segregation of duties.
- Case of receivables lapping
While reviewing the bank reconciliation, we observed following discrepancies:
| Sr. No | Bank Details | Received from Party | Adjusted against | Amount |
| 1 | Cheque No 00056 dated 15.01.2021 | Mr. Amit having invoice no MAPL/2020-21/985 | Mr. Kundan having invoice no MAPL/2020-21/969 | 500000 |
| 2 | RTGS dated 30.04.2021 | Mr. Raghav having invoice no MAPL/2021-22/78 | Mr. Jatin Kr having invoice no MAPL/2021-22/69 | 250000 |
| 3 | Cheque No 82556 dated 25.11.2021 | Mr. Dev having invoice no MAPL/2021-22/568 | Mrs. Revti having invoice no MAPL/2021-22/512 | 150000 |
| 4 | Cheque No 71520 dated 17.1.2022 | Mr. Sanjeev having invoice no MAPL/2021-22/985 | Mr. Kamal having invoice no MAPL/2021-22/890 | 175000 |
| 5 | Cheque No 54512 dated 27.05.2022 | Mr. Raj Kumar having invoice no MAPL/2021-22/149 | Mr. Dhirendra having invoice no MAPL/2021-22/125 | 55000 |
| 6 | Cheque No 00056 dated 15.04.2022 | Mr. Manohar having invoice no MAPL/2021-22/52 | Mr. Mukesh Aggarwal having invoice no MAPL/2021-22/42 | 500000 |
- Cases of Dishonor Cheques
We have also observed few cases where cheque received from Debtors were dishonored / bounced and returned back to the accountant, but Accountant did not report the same to Management or HOD-Finance and Sales Department and retained the same and adjusted the receivables’ part against the amount received from Management as capital infusion.
| Sr. No | Amount received from Promoter as unsecured Loan | Adjusted against | Cheque Details |
| 1 | Rs. 500000 dated 27.07.2021 | Mr. Manish having invoice no MAPL/2021-22/349 | 154520 dated 15.07.2021 |
| 2 | Rs. 1000000 dated 27.02.2022 | Mr. Neeraj having invoice no MAPL/2021-22/952 | 698540 dated 27.02.2022 |
| 3 | Rs. 450000 dated 15.11.2022 | Mr. Shashi Mathur having invoice no MAPL/2021-22/768 | 545542 dated 15.11.2022 |
- Cases of Credit Card Fraud
During our investigation process of Credit card reconciliation, our observations were listed as below:
| Sr. No | Invoice No | Date | Received in Cash | Shown Received against credit card | Remarks as per reconciliation |
| 1 | MAPL/2020-21/925 | 01.01.2021 | 25450 | 25450 | Amount received only 2452 and rest is adjusted against insurance proceeds. |
| 2 | MAPL/2020-21/1125 | 05.03.2021 | 58920 | 58920 | Amount received only 5820 and rest is adjusted against insurance proceeds. |
| 3 | MAPL/2021-22/869 | 26.11.2021 | 67580 | 67580 | Amount received only 6700 and rest is adjusted against insurance proceeds. |
| 4 | MAPL/2021-22/963 | 31.12.2021 | 76981 | 76980 | Amount received only 7620 and rest is adjusted against insurance proceeds. |
| 5 | MAPL/2021-22/1251 | 17.03.2022 | 16520 | 16520 | Amount received only 6520 and rest is adjusted against insurance proceeds. |
| 6 | MAPL/2022-23/525 | 16.09.2022 | 31206 | 31206 | Amount received only 3120 and rest is adjusted against insurance proceeds. |
- Irregular cash receipts for money collected and lack of control over cash receipts
The Bookkeeper did not retain evidence that receipts were issued for all monies collected. Receipts were sometimes duplicated, as he used two receipt books – one to be audited and one for people who gave her cash and checks. HOD does not specifically track the issuance, use, completion, and inventory of pre‐numbered receipt books and reconcile those to the Fund reconciliations. Additionally, the receipts were not kept in‐tact as required.
On examination of books of accounts and other records, we found record’s to be incomplete and inaccurate. We relied substantially on records from the bank to complete our engagement.
- The same person that received the invoices for goods or services delivered and followed up on vendor calls, created POs, wrote the checks, obtained the principal’s signature, sent checks, and reconciled the bank account. There is a lack of controls in place to ensure separation of duties at the Company’s. This lack of checks and balances allowed the accountant to maintain a “second set of books” and seemingly mislead her co‐workers, superiors, vendors, and even parents.
- Using Find duplicate, the auditor came to know that there were 2 parties having same mobile number.
1. Namita Jain Amount involved Rs. 75000
2. Kamal Prasad Amount Involved Rs. 125000
On examination of records, we found that we supplied goods without ensuring that 100% payment had been received or not. When we tried to reach out said parties, we found that telephone number so mentioned in the bill, was of Accountant wife.
- No records being maintained by the accountant for receipt of Company’s consumables, for issuance of goods, closing consumables in hand.
E. CONCLUSION
The Fraud Triangle, showing that there must be three factors that must be present at the same time in order for an ordinary person to commit fraud i.e. Pressure, Opportunity, and Rationalization.
We would like to discuss below possible factors contributing to the Fraud Triangle from the information available to us.
Pressure – On verification of Accountant office, we noted that there were many credit card and loan statement and past due notices of recovery, tempered or altered documents, paper with principal signatures. It appears these were used to try to “prove” that certain bills had been paid. There were also lottery tickets within his office contents. All these factors contributes that the accountant had financial pressure. An inability to pay ones’ bills can become a motivation to solve this problem through illegitimate ways.
Opportunity – The Accountant had the opportunity to skim activity funds from the Company’s Lack of controls, absence of maker and checker check, improper delegation of authorities can lead to the method by which one can abuse their position of trust to solve his or his financial problem with a low perceived risk of getting caught.
— – After the breakout of news of financial fraud and accountant, being one of the suspected party, the accountant stopped coming to office saying that I will not come to office as you people have set up ready to trap me. If you people force me intensively, ill suicide and will name the company’s people.
Normally, offenders do not see themselves as criminals, they view themselves as ordinary,
honest people who are caught in a bad set of circumstances. Consequently, He will justify
their actions to themselves in a way that makes it an acceptable or justifiable act.
F. AUDIT RECOMMENDATIONS
1. Perform surprise audits.
2. The Director Finance should maintain strong controls over receipts for money collected and track the prenumbered receipt books. These should also be reconciled to the monthly reports Accountant submit to HOD Finance and to the HOD Sales approves.
3. Receipt books must be pre‐numbered and in triplicate.
White – to person turning in money
1st Copy – attach to backup documentation
2nd Copy – stays in receipt book
4. Attach bank receipts to the deposit slip for reference.
(Amount on bank receipt and deposit slip must match)
5. Separate cash receipts and reconciliation responsibilities.
6. Contacting the customer if they were receiving the statement post their transaction and were they also reconciling the payment transaction.
7. We shall also request to have inhouse or third-party telephonic verification to ensure reconciliation of our book ledger with what customer had been served.
8. Keep close track of the use of credit memos (The person committing fraud may try to end a lapping situation by writing off a receivable in the amount of the missing funds.)
9. HR must be instructed to have employee background screening before issuing the Offer letter or we may hire a service of third-party consultants for said task.
G. DISCLAIMER
We were not engaged to, and did not conduct an audit examination, the objective of which would be the expression of an opinion on the accounting records of the Company. Accordingly, we provide no opinion, attestation or other form of assurance with respect to our work or the information upon which our work is based. The procedures performed do not constitute an examination in accordance with generally accepted accounting principles and auditing standards. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.
This report is intended solely for the information of the parties specified above and their designated legal counsel, and law enforcement agencies. This report should not be relied upon by any other party. ZZZZ & Associates accepts no responsibility to any other party to whom this report may be shown or who may otherwise gain access to this report.
Please do not hesitate to call if you have any questions or need further assistance regarding this important matter.
We would like to sincerely thank the Mr. XYZ, Director -ABC, and Company staff for their support in assisting us with our procedures.
For ZZZZ & Associates
Chartered Accountants
PQR
Partner
Membership No xxxxxx
Gurgaon, 07.02.2023
*******
I have made an attempt to present a draft of forensic audit report on Receivables Lapping with every care to ensure its accuracy. The views contained in this article are personal and the contents of this document are solely for informational purpose and it does not constitute professional advice that may be required before acting on any matter.
The Learner can also be reached at [email protected]. Any resembles with any name is purely imaginary in nature. So please better excuse.
Author Bio
amazing information provided by CA Praveen Singh Bisht , thank you