1. Briefly outline the relevant events of the case.
During the audit of the company the Senior Auditor came across various false and incorrect practices that were conducted by the company. The matter was brought to the notice of the vice president Mr Krishnan after which it was taken to the Board audit committee headed by Mr Chris.
a) The receivables by the company were highly manipulated and less stated then actual.
b) The sales figures of the company are not true and highly inflated
c) The revenue expenses by the company had been understated
2. What is your diagnosis of the case, what went wrong?
There were certain irregularities and improprieties in the divisional operation which came to light during the recent audit exercise.
There were 3 areas of major irregularities:
a) Sales have been inflated in the last two years by about 30% each year by deliberately false revenue recognition practices
b) Revenue expense have been understated in both the years, again , by deliberately capitalising some of them
c) Receivables have been understated to a significant extent at quarter and year ends, using the ruse of classifying unrealisable instruments as cash and cheques in hand on such closing dates
3. Has the company suffered any loss?
In the recent audit exercise, bewildering irregularities and improprieties have come to light which had gone unnoticed by the corporate office for nearly two years. Sales personnel were indulging in over-invoicing at year ends of the order of 30%. There was Cash-and-Cheques-on-Hand racket which facilitated understating receivables and overstating unrealisable sales. Revenue expenses were being capitalised by saving on capital expenditure and inflating the outgo.
This led to a substantial loss in the cash flow of the company. Universal is a tax paying company and due to overstating of the profit it had to incur additional tax liabilities... [continues]
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