Royals India Ltd. (RIL) is an Indian sports equipment manufacturer based in Delhi. RIL makes equipment for multiple sports, among them basketball, football, volleyball, handball, cricket, tennis, rackets, table tennis an

CS Professional · Internal and Forensic Audit · PYQS · June 2024
Royals India Ltd. (RIL) is an Indian sports equipment manufacturer based in Delhi. RIL makes equipment for multiple sports, among them basketball, football, volleyball, handball, cricket, tennis, rackets, table tennis and roller skating as well as fitness equipment. Company has four subsidiaries outside India and regular sale/purchase transactions takes place between RIL and its subsidiaries. One of its subsidiaries, based in Unites States of America, handles retail sales also in USA. The main raw material used for manufacturing equipment is wood which is supplied by Fair Supply Ltd. (FSL) based in Tamil Nadu. Besides this, other raw material like rubber, latex, cotton, wires for badminton racket etc. are procured from various other vendors as per requirement and using Non-PO route basis. Analysis of last three years' procurement data shows that major quantity of badminton wires has been supplied by only one company TAR Ltd. (a distributor of different types of badminton wires). Total business obtained by TAR Ltd. from RIL in last three years has increased from ₹25 crore to ₹100 crore. Board of Directors came to know of this and are suspicious as to why same company is getting repeated orders. Their suspicion got confirmed when one whistleblower raised issue that payments to TAR Ltd. is being made on priority basis and that too with little credit period as against normal credit period of 30 days availed from other suppliers. Possibility of collusive bidding also cannot be ignored in this case. As per consensus, forensic auditor was appointed to investigate in detail the purchases made from TAR Ltd. to identify any fraudulent purchases and review the procurement process in detail to identify the risk associated with procurement process. For the same period of three years, supplies of various sports equipments's manufactured to US subsidiary amounts to ₹750 crore. Analysis of consolidated financial statements for said three years show that the operating margin earned by US subsidiary on same products is more than the margin earned by RIL. Internal Auditors also included the same fact in their audit report and advised the company to check its pricing policy for the future. Management is of the view that no change in pricing is required. In the meantime, Income Tax department after analyzing the exports of same type of goods by other companies has initiated scrutiny for its financial dealings with its subsidiary. Considering the facts above, answer the following: Independent forensic auditor appointed by Income Tax Department to identify siphoning of funds to its offshore entity to evade taxes. What areas will forensic auditor look for to identify siphoning of funds through transactions with US subsidiary ?

Answer & Explanation:

There are several ways in which a company can siphon off funds, including: Over-invoicing: A company may inflate the cost of goods or services purchased to receive a higher amount of money from the purchaser. The excess amount paid is then siphoned off for personal gain. Under-invoicing: A company may undervalue goods or services sold to reduce the amount of tax payable. The difference between the actual value and the undervalued amount is then siphoned off. Ghost employees: A company may create fake employees and pay them a salary, but in reality, the money is siphoned off by the company's management. Round-tripping: A company may create fictitious transactions with a third party to show an increase in revenue. The third party then returns the money, and the company's management siphons off the amount. Transfer pricing: A company may manipulate prices when transferring goods or services between its subsidiaries to reduce tax payable. The difference in prices is then siphoned off. Misappropriation of funds: A company's management may directly take money from the company's accounts for personal use, without any legitimate reason or business purpose. Offshore entities: A company may transfer funds to an offshore entity to evade taxes or hide illegal activities. The money is then siphoned off by the company's management.

Topics: Forensic Audit

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