A public limited company had done the following transactions: Got a Term Deposit Receipt (TDR) from A Bank or ₹ 1 crore by debiting its current account. After some time, the company requested its banker to issue duplicat

CS Professional · Forensic Audit · PYQS · June 2021
A public limited company had done the following transactions: Got a Term Deposit Receipt (TDR) from A Bank or ₹ 1 crore by debiting its current account. After some time, the company requested its banker to issue duplicate TDR, since the original was misplaced (but actually the original TDR was with the company). The bank after doing necessary formalities, issued the duplicate TDR. After some time, the company raised loan against that duplicate TDR and the bank granted loan of 90% of the value which was ₹ 90 lakh. From this ₹ 90 lakh, the company approached another bank say, B Bank and got TDR for ₹ 90 lakh. Again, the company pretending that the original has been lost and requested for issue of the duplicate. The Bank issued the duplicate TDR after doing certain formalities. The company then asked for loan against the said duplicate TDR and availed loan of ₹ 80 lakh from C Bank. The same story was repeated by the company with total 5 Banks as following: Bank Original TDR Amount (in lakh) Loan amount raised by pledging the duplicate TDR (pretending that original has been lost) (in Lakh) A Bank 100 90 B Bank 90 80 C Bank 80 70 D Bank 70 60 E Bank 60 50 Total 400 350 By inflating the sales amount, the company showed wrong figures in the financial statement and the proceeds of the same were shown as placement of deposits with various bank. The company was having original TDR of all the 5 banks, while on the duplicate TDR the loan amount was raised. For the satisfaction of the auditor the company showed all the 5 TDR in original and the auditor also didn't get suspicious and relied on the primary evidence showed by the company. Based on the above facts, narrate the deficiencies you observe on the part of the auditor.

Answer & Explanation:

In the instant case, the auditor should have the following strategy: Primary Evidence: The primary evidence, which the company has shown to its auditor was the entire 5 TDR issued by the 5 different banks. The auditor shall have challenged the management intention for opening TDR's in various accounts and around 10% reduction each time the TDR was made. Additionally, the auditor shall have challenged the source of such collection by tracing the bank statements for receipts from customers. Secondary Evidence: The auditor failed in its responsibility to discharge the duties in a prudent manner. He should have asked from all the 5 banks independently by confirming through a letter that all 5 TDR have been issued by them and no duplicate TDR against these have been issued and also no loan have been given to the company by keeping the said TDR. The auditor should have also asked for the duplicate TDR which was submitted in place of the original. If the auditor had demanded for the secondary evidence, the fraud would have been unearthed.

Topics: Audit Deficiencies

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