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Unit 1: Introduction to Auditing

original records, bills register, invoices, vouchers, counterfoils or receipt books, wage Notes
sheets, salesman’s diary, bank statements etc. in order to discover such frauds.
(b) Misappropriation of Goods: Companies handling with high value goods are prey to
this kind of misappropriation. Without proper records of stock inward and stock
outward, it is difficult for the auditor to find out such fraud. Periodical and surprise
checking of stock and maintaining the proper record of inward and outward
movement of stock can reduce the possibility of such fraud.
(c) Falsification or Manipulation of Accounts: In order to achieve certain specific objectives,
accounts may be manipulated by those responsible persons who are in the top
management of the organization. They prepare accounts such a manner that they
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?

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