Investigation of frauds by using unconventional techniques

Use of techniques which would not ordinarily in an audit 
Each investigation is unique. Techniques fit the circumstances. The investigator may have to employ techniques which he would not ordinarily use in an audit situation. 

• “Investigator’s Bluff”-For example, decoy customers may be used. Audit personnel of CA firm posing as customers purchase from the shop of the client and observe whether receipt/cash memo is issued etc.
• Dimensional Analysis-When investigating  for an insurance company a claim for loss of stocks, it may be useful to ask a question like “How many TV sets can be stored in this godown even if all TV sets stored are of the smallest model?”

Case study illustrating the use of Investigator’s bluff

Facts of the case-A trading concern, dealing in chocolates and sweets and having a chain of retail outlets in all the metro cities announced an incentive scheme to induce shoppers to visit its shops again. The scheme provided that if a shopper made a purchase of more than Rs. 1,000, he would be  entitled to  a 10% discount coupon for his next visit. The guidelines framed by management required the  prominent display of  a placard at each of the shops to advertise the discount scheme. Appropriate internal controls in the form of pre-numbered receipt books and discount coupons were also introduced. As a result of  the scheme, sales of all the metros increased  as expected, except in one city. In that city,  even after the introduction of the discount scheme, the sales had not increased, though large values of discounts had been availed of. The management was intrigued by this and appointed an investigator to look into the matter.

Investigator’s routine examination-use of audit procedures-The investigator’s routine examination of Sales, purchases, cash and bank transactions, salaries, journal entries, other  books of account did not reveal anything untoward. The serial numbers controls, cash totals and cash registers appeared to be satisfactory. So, the investigator decided to personally visit the shop.

Investigator’s personal visit to the shop-On  personal visit, the first thing he noticed was that the placard regarding the scheme was not displayed. Therefore, shoppers would not  know that the discount  scheme was in force unless the cashier was, as a matter of routine, informed shoppers purchasing chocolates worth Rs. 1,000 or more, of the discount entitlement and furnishing discount coupons. He went through all the past discount coupons encashed by customers. The investigator observed the unusual trend that  a lot of shoppers had visited the shop again on the same or the very next day to purchase chocolates. This led the investigator to believe that the discounts claimed were not genuine. However, since the names and addresses of the shoppers were not available, it was not possible to confirm directly with the shoppers and  proving any foul play was difficult.

Use of Investigator’s bluff-The investigator adopted the  “Investigator’s bluff’ technique. He  sent  a decoy customer who purchased chocolates worth Rs. 2,500. As expected, the customer did not get the discount coupon. He was given a receipt of Rs. 2,500, numbered 20026. The spaces relating to information of discount coupon as well as the net payment amount were left blank in the receipt. At the end of the day, the cashier reported his total cash sales for the day and a statement of account coupons issued, which showed that discount coupon number 2113 had been issued against the receipt 20026. The investigator confronted the cashier about the discount coupon, who confessed that he had fraudulently retained the discount coupon himself.

Investigator’s findings-The cashier explained how he went about encashing such discount coupons, as follows:

Step 1: Receipt say 2XX1 was issued to ABC for Rs. 2,000/-

Step 2: Daily Cash Receipt and Discount Coupons Statement would disclose: A discount coupon say 2XX1 issued to the shopper ABC against Receipt 2XX1, though the discount coupon 2XX1 was actually in possession of the cashier himself.

Step 3: When another customer making a purchase of Rs. 1,200/- did not ask for a cash receipt, the cashier would make out a receipt for Rs. 1,200/ with Rs. 120/- entered in the discount column, and attach coupon 2XX1 to that receipt as if that customer was ABC who had returned to purchase chocolates again with the discount receipt 2XX1.

Step 4: The cashier would pocket Rs. 120/- and put Rs. 1,080/- In the cash box.

In this manner, he had siphoned off an average of almost Rs. 20,000 per week. Thus, the discount scheme, in fact, had never been in operation at all. This explained why the sales at the concerned metro had not increased even after the introduction of the scheme.

Lessons to be learnt-Very often the conventional procedures(routine audit tests)  do disclose weaknesses in controls and anomalies in findings. However, these procedures may, at times, fail to discover or bring to light the actual damage done and the nature of deceit or trickery. It is, therefore, essential for an investigator to adopt effective fact-finding techniques to determine whether all policies and control procedures are being implemented or not. That is also why personal inspection, visits and ‘walk-through tests’ are very meaningful, and where situation so demands, an “investigator’s bluff”, as shown above, can be used.