Forensic Audit Report -I

Report By:
Yash Thakkar
This Report is Strictly Private & Confidential; it is
mockup investigation into allegations of Unremitted, Membership No:
Missing Funds and Profitability Erosion from MRA /CPA(Australia) 00001
Company Accounts. The sole purpose of preparation
of this report is to submit a sample Forensic Audit
Report to ICAI to obtain certification of Forensic
Audit & Fraud Prevention. All the names are fictional
and shall not be correlated to living non-living
person or business or organization.
Sample Report Private & Confidential Report By: Yash D. Thakkar

Table of Contents

1. EXECUTIVE SUMMARY................................................................................................................... 3
1.1 Background ....................................................................................................................... 4
1.2 Origin of the Audit ............................................................................................................ 4
1.3 Audit Objective ................................................................................................................. 5
1.4 Proposed Audit Outputs .................................................................................................... 5
1.5 Audit Implementation Approach....................................................................................... 5
2. RISK ANALYSIS ................................................................................................................................. 6
3.1 Internal Environment Risk ................................................................................................ 6
2.1.1 Financial Management .................................................................................................. 6
2.1.2 Customers, Products & Competitors ............................................................................. 6
2.1.3 Business Process ........................................................................................................... 6
2.1.4 Human Recourses Management .................................................................................... 6
3.2 External Environment Forces............................................................................................ 7
3.2.1 Influence of Economics and Relevant Market .............................................................. 7
3.2.2 Political and Legal Scenario.......................................................................................... 7
3.2.3 Technology in the Sector .............................................................................................. 7
3. AUDIT PROCESS ................................................................................................................................ 7
3.1 Preliminary Understanding of Scope and Incident Coverage ........................................... 7
3.1.1 Identification of all Related Data Elements .................................................................. 8
3.1.1 Preparation of a List of “Persons of Interest” for Interview ......................................... 8
3.1.2 Obtain Management Approval for Scope ..................................................................... 9
3.2 Collect Evidence ............................................................................................................... 9
3.2.1 Analyze Findings .......................................................................................................... 9
3.2.2 Validate Inferences & Conclusions ............................................................................... 9
4. EVIDENCE OF RISK EVENTS ........................................................................................................ 10
4.1 Conflicts of Interest ..................................................................................................... 10
4.2 Bribery ........................................................................................................................ 10
4.3 Theft ............................................................................................................................ 10
4.4 Fraudulent Transactions .............................................................................................. 11

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4.5 Inventory Frauds ......................................................................................................... 12

4.6 Misuses of Assets ........................................................................................................ 12
4.7 Financial Statement Frauds ......................................................................................... 12
5. AUDIT RECOMMENDATIONS....................................................................................................... 13
5.1 Logical Frame Approach............................................................................................. 13
5.2 Preconditions and Risks .............................................................................................. 14
6. GOVERNANCE ON RECOMMENDATION IMPLEMENTATION .............................................. 14
6.1 Stakeholders ................................................................................................................ 14
7. ANNEXURE....................................................................................................................................... 15
7.1 Annexure I................................................................................................................... 15
7.2 Annexure II ................................................................................................................. 15
7.3 Annexure III ................................................................................................................ 15

Disclaimer

This Report and all deliverables are intended solely for the Office of the Board of Directors of GSL ,
for their internal use and benefit and are not intended to nor may they be relied upon by any other
party (“Third Party”). Neither this deliverable nor its contents may be distributed to, discussed with, or
otherwise disclosed to any Third Party without the prior written consent of Shirish Desai & Co. Shirish
Desai & Co., accepts no liability or responsibility to any Third Party who gains access to this
deliverable.

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1. EXECUTIVE SUMMARY

Shirish Desai & Co., conducted a forensic audit for Gold Stand Limited. The purpose of the audit
was to ascertain the factor or factors that resulted in the profitability being eroded, shortage of
cash flows , over runs of project costs and expenditures for the financial year ended March 31,
2016 . The scope of our examination was the period beginning 1 April, 2015 and ending 31st
March, 2016

Our procedures included conducting meetings with management personnel from the project
management team, human resources (HR), payroll, information technology (IT), and finance
departments in order to develop an understanding of the significantprocesses and workflows in
these departments as related to the objective of our audit. Additionally, weobtained several
hundred pieces of documentation from finance and management in the form of general ledger
details,budget to actual reports, various registers, human resources, and other information in order
to develop and perform our analyses. Our analyticalprocedures included budget to actual analysis
project cost, vendor payments year-over-year analysis, comparison of material rates,
consumptions, rate to approved schedules, analysis of payments, and analysis of receipts of
payments

The results of our procedures resulted in the identification of certain issues, including, but not
limited to, thefollowing:

 Favoring of contracts of Rs. 4 Crores.

 Factious Vendors and numerous Payments
 Capitalization of revenue expenses by Rs. 8 Crores
 Various instant of cash withdrawals for bribery
 Lapping of cash deposit of sale proceed
 Inflated work in progress
 Overstatement of inventory by Rs. 1.15 Crores

In addition to presenting our findings, we have included certain recommendations for

improvement to processes and strengthening of controls. Among our recommendations is that the
management continue its efforts to appropriately staff and structure the department to achieve an
appropriate model of governanceand implement sound IT controls.

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1.1 Background

Gold Stand Limited “GSL” (Made-up Company) is engaged into various businesses such as
Constructions, Real Estate Developers, Investments in Immovable Properties, Renting & Leasing,
Brokerage and Consultancy for Land/Real Estate.

Given the nature of services and businesses engaged by the GSL, industry involves dealing with
various stakeholders including but not limited to Farmers, Labors, Contractors, Consumers,
Investors, Business, MNC and Governmentetc.It is normal practice of industry to have large sum
of cash involved in transactions which increases the level of risk.

Construction projects are initiated in complex and dynamic environments resulting in

circumstances of high uncertainty and risk, which are compounded by demanding time
constraints. Construction industry has changed significantly over the past several years. It is an
industry driven primarily by private investors; the presence of securitized real estate has increased
considerably. It is vulnerable to the numerous technical & business risks that often represent
greater exposures than those that are traditional. Thus risk assessment need arises. Forensic
assessment is a tool to identify those risks in a project and once identified it accordingly with
proper treatment. Forensic Audit is defined in this study as a technique that aims to identify
possible frauds and its impact upon company and its project.

1.2 Origin of the Audit

Our firm Shirish Desai & Co., Chartered Accountants were engaged on 2nd May 2016 by board of
directors of Gold Stand Limited – (“GSL”) (Made-Up Company) to investigative and conduct
forensic audit into the alleged unremitted/missing funds of the company.

Company profitability is decreasing on each projects when compared to year on year basis and
company is margin are significantly lower than average of industry.

Management had received anonymous tip which claimed, embezzlement of company’s funds,
huge discounts offered to selected customers, preferred vendors,falsification of expenses, based
on which some vendor accounts were reconciled and major discrepancies were found. Finding of
which had raised questions on integrity of financial statements and of various stakeholders of the
company following which our appointment was made.

The procedures we performed did not constitute an examination or a review in accordance with
generally accepted auditing standards or attestation standards. Accordingly, we provide no
opinion, attestation or other form of assurance with respect to our work or the information upon
which our work was based our engagement was limited to forensic audit and submission of our
investigation and not to comment on impact or integrity of financial misstatements.

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1.3 Audit Objective

The objective of Audit was to determine whether the allegations made by the Whistleblower in
various letters to the management were true or false and, whether we could collect the evidence
which would support our findings. Following are key objectives;

 Analysis of remittance to and from GSL Accounts.

 Investigate payments made to various vendors.
 Investigate suppression of sales/discounts.
 Investigate alleged dealings in cash.
 Analysis of submissions made by key stakeholders in relation to these alleged
shortfalls/missing/off the books transactions.
 Collecting & reviewing all evidences and Documentary.
 Producing an independent Forensic report detailing our findings.

1.4 Proposed Audit Outputs

To conduct an investigation into alleged area’s and submit key findings of facts, observations,
evidences and based on the findings prepare case files pertaining to individuals or companies
where questionable transactions and potential criminal activity has been identified and have been
referred to the Management.

1.5 Audit Implementation Approach

The methodology used to undertake the investigations were as follows;

 Transaction Mapping
 Interviews of various personnel of the company
 Interaction with Company’s Internal & External Auditors
 Data Mining
 Use of CAAT to analysis of the data.
 External confirmation and Experts opinions.
 Independent verification of End Use of Funds
 Identify all related party and nexus transactions
 Ratio Analysis

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2. RISK ANALYSIS

3.1 Internal Environment Risk

The construction companies need to include risk as an integral part of their project management.
Decision making such as risk assessment in construction projects is very important in the
construction management hence increases pressure to perform. The identification and assessment
of project risk are the critical procedures for projecting key areas where procedure and system are
overruled. Following determines the key factors of risk in construction industry;

2.1.1 Financial Management

 Delay in payments from clients

 Remote site locations
 High volume of Cash Transactions
 Increment for labour/ staff cost
 Unprecedented price in raw materials
 Fluctuations in Estimated finance than expected

2.1.2 Customers, Products & Competitors

 Late changes of design from client side

2.1.3 Business Process

 Changing sequences in construction activity

 Non availability of resources
 Revision of design

2.1.4 Human Recourses Management

 Disputes between labours

 Availability of camp for labours
 Change in quantities of work

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 In Time work permissions for executing work

 Safety of workers
 Stoppage of work due to Holiday/Festival

3.2 External Environment Forces

The following are various risk associated with Construction/Real Estate Industry:

3.2.1 Influence of Economics and Relevant Market

 Interest Rate on borrowing

 Negative growth rate
 Development of public infrastructure

3.2.2 Political and Legal Scenario

 Pressure from any political party

 Local bodies compelling to use their resources
 Union Issue
 Obtaining permission from various local bodies

3.2.3 Technology in the Sector

 Knowledge on equipment’s
 Service for damaged equipment’s
 Loss of data or software/hardware of computer

3. AUDIT PROCESS

3.1 Preliminary Understanding of Scope and Incident Coverage

Shirish Desai & Co., team have been working with GSL and have conducted various data
analyses, interviews and collected evidences.

The agreed scope of the work required us to:

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 Follow the money in various bank accounts through which funds may have flowed
 Identify all entities that may have received such funds, including vendors who may have been
paid without supplying legitimate goods and services, and in case of businesses, their owners,
shareholders, directors, etc;
 To ascertain the integrity of Whistleblower Information whether true or false
 Identify, quantify and evidence alleged misappropriated funds;
 If fraud is ascertain than to identify the culprits and modus operandi
 To provide management with facts and provide evidence for litigation

3.1.1 Identification of all Related Data Elements

From the information we gathered during the preliminary planning stage of our
examination, we identified the relevant documentation needed to proceed. Such
documentation included followings;

 Audited annual financial statements

 General ledger detail and year-to date trial balances – Complete Books of
Accounts Master file
 All Sales Contracts and Vendors Contracts
 Vendors Master File
 Projects master files including budget and cost
 Relevant policies, procedure manuals, and organizational charts
 Internal Audit Reports
 Access to computers, telephone records and emails of all personnel
 Petty Cash Receipts/Payment Vouchers
 Personnel HR files

3.1.1 Preparation of a List of “Persons of Interest” for Interview

Based on the information presented to us and after careful analyses of documents,

papers, details we interviewed following personnel of the company;

I. Managing Director – Mr. ABC

II. Chief Financial Officer – Mr. X
III. Project Heads – Mr. C & Mr. G
IV. Finance Manager – Mr. E
V. Cashier – Mr. C, Mr. B & Mr. E
VI. Purchase Officers – Mr. PO, Mr. J, Mr. W & Mr. H
VII. Accountant - Mr. D & Mr. F
VIII. Architect – Mrs. A
IX. Chief Engineer – Mr. C E

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X. Internal Auditor – Mrs. V

XI. Security Guards – Mr. A, Mr. , Mr. C, Mr. F
XII. Office Clerk - Mr. BB, Mr. AA, Mr. AB

3.1.2 Obtain Management Approval for Scope

Prior to commencement of the forensic audit we have submitted our Scope and
detailed audit plan which was duly approved via letter dated 23rd May 2016.

3.2 Collect Evidence

3.2.1 Analyze Findings

Using the data contained in the sources noted in the documentation gathering / processing
section above, we performed analyses including the following:

 Budget to actual comparison of general ledger expenditure accounts year-over-year

by fund, location, function, and object
 vlookup for search in Vendors Data Files
 Access of Controls into system
 Scheduled vs. non-scheduled payment run of vendors
 Lumpsum Cash deposit on sales proceed
 Accounting Entries on Holiday/Non-Working Hours
 Petty Cash Expenses
 Ratio Analyses
 Physical verification of Inventory/Stock
 Vetting of contracts

3.2.2 Validate Inferences & Conclusions

From the performance of the procedures outlined above we arrived at initial conclusions and
identified certain “outliers” or other instances that required additional vetting of documents.
Post review we concluded and identified exception which outlined in details of “Evidence of
Risk Events”. These events are fraudulent and have caused financial loss to the company.

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4. EVIDENCE OF RISK EVENTS

4.1 Conflicts of Interest

Nexus between two project managers and Finance Manager with 2 Vendors.

 Riya Construction is partnership firm where Brother in Law of Mr. a

Project Manager is major stakeholder.
 Favoring of contracts to Riya Constructions for civil work at Kandala
Project of Rs. 4 Crores.
 Loose contracts with Riya Constructions when compared to contracts
with other contractors.
 Various double payment for same work repeatedly done as an extra work
 No site inspection report and post work completion reports
documentation not is order.
 M/s. World Traders Private Limited in which Mrs. B & Mr. C who are
of close keen to Finance Manager.
 There company has appointed M/s. World Traders Private Limited as
Sales & Marketing Agents for sale of properties on which Company is
paying them commission of 2.5% where else when compared to other
broker/commission agents company is paying commission fees of 1 – 2
% maximum.
 There is no contract which exists between World Trade Private Limited
and narration in accounting entries is very poor to trace how
commissions paid have been calculated or relates to which property.

4.2 Bribery

On reviewing physical 12 boxes of petty cash vouchers for the year we have found
various cash payments being made to various government officials who have
specially marked as approved by management for additional labour or soil extra work
paid in cash. To further investigate we had obtained access of emails between project
head and cashier where such expenses were authorize by project managers stating
that this are kickbacks to expedite various legal permissions. Copies of emails founds
are annexure herewith.

Further no supporting documents or evidence was presented to us of such

requirements being made from site office or demand for addition work was made by
project manager. In number of cases we have found that such payment was made post
completion of site/projects or at projects levels where such work is not justifiable.

4.3 Theft

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We have made preliminary review of the deleted transactions and total of 346 entries
from Accounting Software using the User ID Finance Manager.

Upto the time of this report we have identified payments to 6 companies where no
evidence such as Invoices, Purchase orders, Delivery Challans, Contracts etc has
been provided to support the provision of goods or services in relation to the payment
made as such of Rs. 2,18,45,000/-. This payment should be classified as theft of
Funds and subject to appropriate legal action.

4.4 Fraudulent Transactions

4.4.1 We have identified funding misappropriation and theft of GSL funds. Following
funds have been transferred between unrelated companies, individuals withdrawing
funds from unconnected organizations and inflated prices paid to companies with
limited or no trading history and very large cash withdrawals. We do not believe the
receivers of these funds are therefore the ultimate beneficiary in all cases.

4.4.2 We have reviewed the Accounts Payable Master File which constituted of 18546
Vendors and found following :

Sr. Particulars No of
No Vendors
1 Vendors with Same PAN 38
2 Duplication in Name of Firm 138
3 Vendors with Same Address 22
4 Vendors with Two/More Different Bank Accounts 745
5 Inactive Vendors 1265
6 Vendors with Same Email Add/Contact No 144
7 Vendors without PAN/ST NO/VAT NO 1682

4.4.3 Duplication of Vendor

On sampling of fictitious vendors have been created in case of proprietary vendors

where duplicate non approved vendors have been entered into the system with same
firm name but with different proprietor and banking details and later bogus invoices
have been entered and paid to fake vendors.

Sr. No Vendor/Party Remarks/Comments Amount Invoice No

1. SaiInfoTech Prop. Mr. J K Shah Approved Vendor 77,64,895 Various

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SaiInfotech Prop. Mr. S B Patel Non Approved 18,45,777 88, 91/A, 109,
Vendor 166, 199
2 MD Build Con Prop. Mrs. A. Approved Vendor 18,11,471 Various
Jivani
MD Buildcon Prop. Mr. H B Jain Non Approved 7,51,825 108, 109, 465,
Vendor 889, 10855
3 GurudevTransport Prop. B. Approved Vendor 44,87,633 Various
Pathan
Guru Dev Transports Prop. Mr. K Non Approved 5,34,120 2234, 2235,
. Diwani Vendor 2236, 9341
4 HB Lease & Rental Services Approved Vendor 8,81,140 Various
Prop.Mr. H. Samani
H.B. Lease & Rental Services Non Approved 1,51,825 1/15-16/11,
Prop. Mr. BK Goyal Vendor 5/15-16/88,
7/15-16/45

4.5 Inventory Frauds

Inventory is over stated on Kandala Site Project particular to inflate amount of work completed.
Further non receipt of goods and inventory has been reflected as received and consumed.

4.6 Misuses of Assets

To verify the cash receipts of various sales a detailed statements from 50 customers of various
projects have been obtained by us and we have reconciled the same with cash deposit entries in
books and in bank accounts. On reconciliation of customer cash payment ledgers we have found
more 649 receipts were collected but deposited on much later stage into company’s bank
accounts. This is case of lapping and to ascertain the amount of funds all cash sales accounts
needs to be reconciled with customers ledgers.

On interviewing the cashier Mr. C & Mr. B it was found that

4.7 Financial Statement Frauds

We have physical visited project site of Kandala and found that percentage of completion of
grossly overstated when compared with actual work done. Particular adjustment is made in stock
to inflate higher percentage of work done as per independent certified Chartered Engineers

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appointment by us (Report enclosed as Annexure) confirms that work completed is inflated by

almost 18% percent. Cost as per the books is 52,51,76,700/- where else actual cost of project is
Rs. 44,50,65,000/- hence in books revenue expenditure which have been capitalized is to the
extended of Rs. 8,01,11,700/-

Further, we have come across various revenue expenditure being capitalized which has caused to
over stating of Assets. Following are expenses being revenue in nature but being capitalized;

Type of Revenue Expenses Amount In

Rs.
Consumables Spare Parts 40004560
Indirect Professional Fees 20644567
Food & Travelling Cost 9876000
Audit & Compliance 6755450
Stationery 986756
Repairs Cost 1844367
Total 80111700

Sr. No Particulars of Misstatements Amount In Rs.

1 Closing Stock Actual 5,65,55,370
2 Closing Stock As per Books 6,81,31,137
3 Difference (1,15,757,58)
4 Revenue Expenditure Capitalization 8,01,11,700

5. AUDIT RECOMMENDATIONS

5.1 Logical Frame Approach

I. Company need to undertake further work to continue the investigation into the
remaining area.
II. Setting a code of conduct regarding standard operating procedures, fraud policies and
punishments and communicating those to employees;
III. Adopting physical safeguards such as installation of a video camera;
IV. Company need to have mechanisms in place for daily cash reporting and depositing
the same into bank.

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V. Segregating duties regarding recording sales, completing the daily sales report,
making bank deposits and reconciling bank statements.
VI. Company should introduce centralize sales depositing system and encourage
customer to pay in form of cheque/NEFT/RTGS.
VII. Duplication of vendors should not be permitted by the system
VIII. Vendor system should run an check of inactive and updating of all details should be
mandatory
IX. Also system should limited access for addition and change of vendor details by
purchase officers
X. No payment should be made without adequate supporting documentation including
actual final invoice not pro-forma invoices.
XI. Project Manager’s performance and daily reporting should be monitored.
XII. Efforts should be enhanced to locate the cash disbursed to sham vendors and also
recollect cash.

5.2 Preconditions and Risks

This findings expressed in this report are based on the documents and explanations provided to
us. Should further information become available, we reserve the right to modify our findings
where necessary and acknowledge that we have a duty to do so.

This report only refers to our findings & observation it should not be taken as expressing any
formal opinion whatsoever.

This report is based on the facts established from documentation provided by the various
representatives of GSL, Management, Bankers, Employees, Vendors, Customer and Other
Stakeholders.

There are documents and information that may exist which we have been unable to locate, which
were not handed to us or were not provided in the time that was available to us.

As part of the audit methodology, sampling techniques have been used and as such we cannot
provide assurance that the procedures applied will have detected all potential anomalies or
irregularities.

6. GOVERNANCE ON RECOMMENDATION IMPLEMENTATION

6.1 Stakeholders

GSL should develop a centralize system to monitor and control all projects.

A robust IT system should be adopted and it should be at par COBIT 5 framework.

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7. ANNEXURE

7.1 Annexure I

7.2 Annexure II

7.3 Annexure III

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