Page 16 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes disclosed only a fake picture not the true picture. Some of the ways used in
manipulating the accounts are as follows:
(i) Inflating or deflating expenses and incomes.
(ii) Writing off of excess or less bad debts.

(iii) Over valuation or under valuation of closing stock.
(iv) Charging excess or less depreciation.
(v) Charging capital expenditures to revenue and vice-versa.

(vi) Providing for excess or less doubtful debts.
(vii) Suppressing sales and purchase or showing fictitious sales and purchases, etc.
(d) Window Dressing is the way of presenting the financial data in a much better position
than the original position. It is known as window dressing. Some of the reasons for
doing window dressing are as follows:
(i) To win the confidence of shareholders.

(ii) To obtain further credit.
(iii) To raise the price of shares in the market by paying higher dividend so that
shares held may be sold.

(iv) To attract prospective partners or shareholders.
(e) Secret Reserves: In secret reserves, accounts are prepared in such a way that they
disclose worse picture than actually what they are? The objectives of preparing
accounts in this way are:

(i) To conceal the true position from the competitors.
(ii) To avoid or reduce the tax liability
(iii) To reduce the price of shares in the market by not paying dividend or paying
lower dividend so that the shares may be bought at a much lower price.
It is very difficult to detect such frauds since these frauds are committed by those persons
in the organizations who are at the top positions like directors, managers, financial
controllers etc. To detect these kinds of frauds, the auditor must be vigilant and should
make searching inquiries to arrive at the true position.

Task Elaborate misrepresentation and misappropriation of accounts with few examples
and how audit can help in curbing fraud and errors?

Self Assessment

Fill in the blanks:
11. An audit of an organization performed by a body that is independent of the organization
being audited is called ...........................

12. The ........................... object of auditing is to detect and prevent errors and frauds in the
books of accounts

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