Forensic Audit Report of ABC Automobiles Pvt.

Ltd on
Receivables Lapping
taxguru.in/chartered-accountant/forensic-audit-report-abc-automobiles-pvt-receivables-lapping.html

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.

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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.

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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)

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 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

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 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

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– 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. Bank Details Received from Party Adjusted against Amount

No

1 Cheque No Mr. Amit having invoice Mr. Kundan having invoice 500000
00056 dated no MAPL/2020-21/985 no MAPL/2020-21/969
15.01.2021

2 RTGS dated Mr. Raghav having Mr. Jatin Kr having invoice 250000
30.04.2021 invoice no MAPL/2021- no MAPL/2021-22/69
22/78

3 Cheque No Mr. Dev having invoice Mrs. Revti having invoice 150000
82556 dated no MAPL/2021-22/568 no MAPL/2021-22/512
25.11.2021

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 4 Cheque No Mr. Sanjeev having Mr. Kamal having invoice 175000
71520 dated invoice no MAPL/2021- no MAPL/2021-22/890
17.1.2022 22/985

5 Cheque No Mr. Raj Kumar having Mr. Dhirendra having 55000

54512 dated invoice no MAPL/2021- invoice no MAPL/2021-
27.05.2022 22/149 22/125

6 Cheque No Mr. Manohar having Mr. Mukesh Aggarwal 500000

00056 dated invoice no MAPL/2021- having invoice no
15.04.2022 22/52 MAPL/2021-22/42

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. Amount received from Adjusted against Cheque

No Promoter as unsecured Loan Details

1 Rs. 500000 dated 27.07.2021 Mr. Manish having invoice no 154520 dated
MAPL/2021-22/349 15.07.2021

2 Rs. 1000000 dated Mr. Neeraj having invoice no 698540 dated

27.02.2022 MAPL/2021-22/952 27.02.2022

3 Rs. 450000 dated 15.11.2022 Mr. Shashi Mathur having invoice 545542 dated
no MAPL/2021-22/768 15.11.2022

Cases of Credit Card Fraud

During our investigation process of Credit card reconciliation, our observations were listed
as below:

Sr. Invoice No Date Received Shown Remarks as per

No in Cash Received reconciliation
against
credit card

1 MAPL/2020- 01.01.2021 25450 25450 Amount received only 2452

21/925 and rest is adjusted against
insurance proceeds.

2 MAPL/2020- 05.03.2021 58920 58920 Amount received only 5820

21/1125 and rest is adjusted against
insurance proceeds.

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 3 MAPL/2021- 26.11.2021 67580 67580 Amount received only 6700
22/869 and rest is adjusted against
insurance proceeds.

4 MAPL/2021- 31.12.2021 76981 76980 Amount received only 7620

22/963 and rest is adjusted against
insurance proceeds.

5 MAPL/2021- 17.03.2022 16520 16520 Amount received only 6520

22/1251 and rest is adjusted against
insurance proceeds.

6 MAPL/2022- 16.09.2022 31206 31206 Amount received only 3120

23/525 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

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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.

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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.

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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 capraveenbisht@yahoo.in. Any resembles with any
name is purely imaginary in nature. So please better excuse.

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Name: CA Praveen Bisht
Qualification: CA in Practice
Company: Bisht Gupta & Associates
Location: Gurugram, Haryana, India
Member Since: 04 Apr 2020 | Total Posts: 13
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