Ledger Keeper and Frauds

For studying the various avenues which are open to a ledger-keeper to commit a fraud, the auditor should find out whether the ledger-keeper extracts balances of customers and creditors from the ledgers and agrees their totals with their balances in the Total Accounts; also whether the balances when they have been extracted, are subsequently checked some other official; further, whether he has access to the debtors and creditors; also if he meets them, does he do so on his own or in the presence of responsible official? Some of the frauds which may be committed a ledger-keeper are stated below :

1. In the Bought Ledger :

  • Crediting the account of a supplier on the basis of a fictitious invoice, showing that certain supplies have been received from the firm, whereas in fact no goods have been received or on the basis of duplicate invoice from a supplier, the original amount whereof has already been adjusted to the credit of the supplier in the Bought Ledger, and subsequently misappropriating the payment made against the credit in the supplier’s accounts.
  • Suppressing a credit note issued a supplier in respect of return or an allowance and misappropriating an amount equivalent thereto out of the payment made to him. For if a credit note issued a supplier either in respect of goods returned to him or for an allowance granted him, is not debited to his account, the balance in his account in the Bought Ledger would be larger than the amount actually due to him. The ledger-keeper thus will be able to misappropriate the excess amount standing to the supplier’s credit.
  •  Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance.

2. In the Sales Ledger :

  •  Teeming and lading method.
  • Adjusting an unauthorised credit or fictitious rebate, allowance, discount, etc. in the account with a view to reduce the balance and when payment is received from the debtor, misappropriating an amount equivalent to the credit.
  •  Writing off the amount receivable from a customer’s bad debt account and misappropriating the amount received in payment of the debt.

3. In the Nominal Ledger :

  •  Allocating an item of income or expenditure wrongly, e.g., an item of capital expenditure being charged as revenue and vice versa; and
  • Understating or overstating the value of stocks, amount of prepaid expenses or liability.

4.Verification of Posting :

  •  The selection of accounts for checking postings should be made on the same consideration as that accounts, the balances whereof require to be confirmed directly as stated hereinafter. Moreover, either all postings should be checked for only a part of the period covered the audit or only a few accounts selected for the whole period.
  •  Subsequently, when the closing balances in a ledger are checked, it should be confirmed that postings in the ledger to the extent specified in the Audit Programme have been checked; also that the totals of the balances have been checked. If there is any item in any account in a ledger, the posting whereof has not been checked indicated absence of the relevant tick against the item, the reason thereof should be ascertained.
  •  Each ledger account should be seen through to confirm that all the entries therein are posted in a chronological order; no entry has been made in between two entries and the figures of an entry have not been altered; also that there is no entry which has been posted directly into the ledger before being recorded in a book of original entry. In each such case, the genuineness of the entry or entries should be verified, for these could be the results of attempts made the ledger-keeper with an ulterior motive.

Finally, it should be confirmed that all the ledger balances are linked. As a safeguard against the ledger- keeper making an entry in a ledger after the same has been checked, it is usually advisable that until the audit has been completed all the ledgers should remain in the custody of the auditor. The opening balances should be checked, wherever practicable, with the balances shown in the auditor’s own copy of trial balance, schedules and groupings of the previous year. Alternatively, these should be checked with the balances shown in the Balance Sheet, as at the end of the year. While checking the closing balances or the groupings of balances, a memo should be prepared as regards particulars of various balances which need to be disclosed in the Balance Sheet, as well as of matters in respect of which either sanction has to be obtained or adjusting entries have to be passed.

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