OBJECT OF AN AUDIT(2)

2.      Detection and prevention of frauds:
Fraud means false representation or entry made intentionally or without belief in its truth with a view to somebody.

Detection of fraud is considered to be one of the important duties of an auditor. As a matter of fact, originally audit was conducted mainly with a vies to detect fraud whenever it was suspected. The system of internal check aims at the prevention of fraud. If the auditor finds that the internal check system is defective and will no prevent the commission of frauds, he should suggest a better system.

The followings are the chief ways in which fraud may be perpetrated:

(a)    Embezzlement of Cash:

There is a greater possibility of defalcation of money in a big business house than in the case of a small proprietary business where the proprietor has a direct control over the receipts and payments of cash. Cash may be misappropriated by:

• Omitting to enter any cash which has been received; or
• Entering fictitious entries on the payment side of the cash book; or
• Entering less amount than what has been actually received; or
• Entering more amount on the payment side of the cash book than what has been actually paid.

In order to discover fraud under (a) and (b) above, the auditor should check the debit side of the cash book with rough cash book, salesmen's reports, counterfoils of the receipt books, agent’s returns and other original records while the fraud under (c) and (d) can be discovered by reference to the vouchers, wage sheets, salary book, invoice, etc.

(b)   Misappropriation of Goods:

Fraud may be in respect of good, i.e., misappropriation of goods. This type of fraud is very difficult to detect especially when the goods are less bulky and are of higher value.

(c)    Fraudulent manipulation of Accounts:

This type of fraud is more difficult to discover as it is usually committed by directors or managers or other responsible officials with the object of:

(1)  Showing more profits than what actually they are:

=> So that if they get commission on profits, they may get more commission; or

=>Their service may be retained by showing to the shareholders of the shareholders; or

=> If they hold shares, they may sell them at high price by declaring higher dividends; or

=>To obtain further credit by showing the financial position of the business better that what actually it is; or

=>To attract more subscribers for the sale of the shares of the company, etc.

(2) Showing less profit than what actually they are:

=>In order to purchase shares in the market at a lower price; or

=>To reduce or avoid the payment of income tax; or

=>To give a wrong impression about the success of the business to the competitors, etc.

Falsification of account may be resorted to:

(a)  By not providing any depreciation or providing less depreciation or providing more depreciation; or

(b)   By under-valuation or over-valuation of assets and liabilities; or

(c)    By showing fictitious sales or purchases or returns in order to show more profits or less profits whatever the case may be; or

(d)   By the utilization of secret reserves during a period when the concern has made less or no profit, without disclosing that fact to the shareholders; or

(e)    By sharing revenue expenditure to capital account, or vice versa; or

(f)     By crediting the revenue account with the income which will be received next year or not crediting the profit and loss account with the income which has accrued but which has not been received.

III.    Specific objectives:

The audit may encompass such other areas like review of operations, performance management policy, cost records and so on. Accordingly, there sill be specific objective in respect of each type of such specific audits.

For Example:

In operational audit, the aim of audit is to evaluate the existing operations of the entity in order to give expert advice to improve their efficiency.

The cost audit is to check the cost records of the entity in order to make a report on the proper ascertainment of cost of production of goods or services.

Depending upon the nature of specific audit engagement and terms of engagement, there may be different objective in respect of each specific audit.