FORENSIC AUDIT REPORT

BACKGROUND:
XYZ Industries P Ltd is a company engaged in whole sale dealers of Tyres. The company has
business presence in the south India. The company has direct business connections with all the tyre
manufacturers in India and the company directly sources from the manufacturers.

The company operates at a Gross Profit Margin of 13.50% as compared to its peers who operate
at a GP margin of 18.50%. The reduced margin is due to the reduced selling price of the company. The
company has a similar Net Profit as compared to its peers. The same is achieved through reduction in
Employment Cost by employing only Skeleton Crew of employees and retaining only cutting down on
External Audit and other related costs. The company believed in ethical values and trained the staffs for
ethical business practices. The company banked mainly on the individual ethical/moral values of the
employees.

INVESTIGATION OBJECTIVE:
There were no significant pilferage in stock in the company. The Erode branch which used to perform
well was constantly underperforming in the last FIVE years.

We were appointed as new Stock Auditors. Our scope of appointment was to find the level of stock in
the company and if there was any pilferage.

AUDIT METHODOLOGY AND EVIDENCE COLLECTING PROCEDURE:

1. Verification of Inventory:
We started with the physical verification of inventory at 37 warehouse locations through
TEN two member teams. The audit was scheduled to be completed within the weekend. Since it
was a surprise verification, we took the stock details from the systems of the Head-office.
We had TWO teams on standby, if there were some pilferages with some branch, the
team present there would investigate the same and the Stand-by team would proceed with the
verification of other warehouses.
We collected the Internal Inspection report of the warehouse from the branch and take
the branch-in-charge to the location to do the verification.
We had been given a tolerance limit of 2% reduction in the warehouse stock as the
same would be kept at the Showroom. Most of the locations were within the tolerance limit.
However in Erode branch we noticed a massive shortfall in stocks to the tune of almost 22% of
the value of stocks lying the warehouse stock report. The same was not reported in the internal
verification report.

2. Updating HO:
Since there was a shortfall in the stocks at Erode Branch, as per mandate we had to inform the
HO about the shortfall and do an investigation on the same. While updating the HO about the short-
fall in one of the locations, the MD asked whether it was Erode branch. It was corresponded with
underperformance over the years.
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Opinion Taken: Somehow there was a doubt about the branch in the mind of the MD.

3. Interrogation with Branch Manager:

While the Branch Manager was confronted he confessed that he and a friend of him were
responsible for the shortfall.
A. Scheme of Fraud:
Since the company only had skeleton crew there was not much of a dual role to play and
most of the transactions are authorized by the maker and hence in many instances the maker
and the checker are same persons.
The BM noticed on his several visits to the warehouse that many stocks were slow-
moving and he came up with a novel idea to undercut the prices and sell them at cash.
He used his long-term friend who is a retailer of automobile parts and tyres to fence the
goods pilfered by him from the warehouse.
He cloaked the goods as stock clearance sale and got CASH for the sales, which he
pocketed himself.
B. Lacuna in Internal Control:
The internal inspection proved useless because the team consisted of juniors from other
location and a concerned Branch Manager as the senior. The BM has the stock statement, which
he ticks irrespective of the stock count given by the junior staffs.
The stock registered was not computerized and the non-moving stocks were not
monitored or transferred to the central location.

MOTIVE:
The branch manager was fully aware that there was a weak control and the stocks were not thoroughly
verified. Hence he had an outrageous plan to take advantage of the same for his financial gains.

RECOMMENDATION:

We recommend the following to the management:

1. To fire the Branch Manager and sue him for pilferages.

2. Bring the stocks records on system.
3. To install CCTV cameras at the warehouses.
4. To install a Private security at each warehouses who rotates on a weekly basis.
5. The Branch to generate a stock request and the head-office should verify and accept the validity
of the same and generate a gate-pass in the system.
6. The security to verify the gate-pass and allow access to the branch manager to take the goods
mentioned in the gate-pass out of the warehouse.
7. Any such movement out of the warehouse should be accompanied by a Sales Invoice raised by
the branch.
8. Such invoice should be authorized by the head office for correctness of Sale Price and Quantity
as per the gate-pass.
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9. The internal stock inspection team should comprise the concerned warehouse security, two
juniors and a Branch Manager both from separate branches who are not connected with the
branch under audit. The team shall be accompanied by a junior from the concerned branch for
ease of identification of stocks.