Watch the tutorial on Introduction to Auditing-Part D, Purposes of showing more or less profits, Ways to falsify accounts.
Purposes of showing more or less profits than what actually they are:
Purposes of showing more profits:
1. To get commission on profits,
2. To retain their services by showing their efficiency in boosting profit for the shareholders,
3. To sell the shares hold by them at a high price by declaring higher dividends,
4. To obtain further credit (bank loan) by showing the financial position of the business better than what actually it is,
5. To attract more subscribers for the sale of the shares of the company, etc.
Purposes of showing less profit:
1. To purchase shares in the market at a lower price,
2. To reduce or avoid the payment of income tax,
3. To give a wrong impression about the success of the business to competitors.
Possible ways to falsify the accounts:
1. By not providing any depreciation or providing less depreciation or providing more depreciation.
2. By under valuation or over-valuation of assets and liabilities
3. By showing fictitious sales or purchases or returns in order to show more or less profits whatever the case may be,
4. By the utilization of secret reserves during a period when the concern has made less or no profit, without disclosing that fact to the shareholders,
5. By sharing revenue expenditure to capital account, or vice versa,
6. By crediting the revenue account with the income which will be received next year or not crediting the profit and loss account with the income which has accrued but which has not been received.
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