Use of the juxtaposition test in audit to detect fraud
Conventional audit tests look for reasonable evidence to
support the financial statements being audited. Vouching, tracing, casting and
scrutiny of accounts, whether in manual or soft data form, usually include
examination of records or documents, but they are seldom penetrative enough to
detect duplication, falsification,
manipulation and forgery. In this regard, the additional use of a juxtaposition
test may be very useful in many audit situations to directly ferret out fraud.
What exactly is this juxtaposition test? It is a simple common sense test of
comparison, by placing side by side, two or more pieces of evidence. In simple
words, to juxtapose means to put adjacent to, or to place side by side to
facilitate comparison. It can be used either to detect similarities where none
are expected or differences where there should be none.
Usually in the course of day-to-day business, senior
management executives have to review, sign, or approve various documents,
invoices, even agreements and contracts with external parties such as vendors,
customers, etc. Even within an organisation, there are documents
constantly floating around for approval, such as vouchers, letters, minutes of
meetings. In almost every such situation, the relevant document (say for example
a vendor’s bill), will be seen or examined only one at a time. Two or
more documents (or any other evidence such as CCTV, Audio recordings, pictures
etc) from a particular party will seldom be examined together for comparison.
Usually only very important details, computations, amounts, or specific clauses
are examined and scrutinised more carefully. Consequently a fraud like a
duplicated letterhead bill from a vendor can easily escape detection because
one may not remember what exactly the original letterhead looked like. This
kind of fraud and many other frauds in evidence relied upon can perhaps be
detected by applying this simple juxtaposition test.
This juxtaposition test can be used in myriad number of ways,
in different situations, on different objects. Let us consider the various
places where such a juxtaposition test can be used:
1. Comparison of external letters / documents for
inexplicable similarities indicating that the source is the same. Eg, multiple
quotations may not be from different parties but actually the same. Similarly
reference letters from two different employers may have some unique
similarities where there should be none. For example the following instances of
two such reference letters from totally different organisations indicate
exactly the same grammatical mistakes, spelling mistakes and english sentences.
These can be easily spotted only by juxtaposition and are outlined below.
(Above names,
addresses, are purely for academic and demonstrative purposes. Any resemblance
to any entity is purely co-incidental. Nowhere is any fraud suggested or
implied)
2. Approval signatures. Just as a bank manager
compares a signed cheque or an RTGS form with the specimen signature, it is
imperative for an auditor to see hard copy documents such as vouchers,
agreements, bills, minutes etc., with the specimen signature of those
who have signed. In one case, an auditor specifically asked for a list of
specimen signatures of the approving authorities on agreements, important
documents, records and vouchers. The company initially resisted but relented
and provided him such signatures. There were some sarcastic remarks about him
conducting an investigation instead of an audit. However the auditor was
unruffled and took this step as a routine control testing procedure and his
effort paid rich dividends. He meticulously conducted a sample check comparison
of approval signatures on payment vouchers with specimen signatures provided by
the company to him. He found some signatures which did not match with any
signature on the list given to him. He then went to the CFO of the company to
inquire about these unidentified signatures. The CFO was also surprised because
he too could not identify any of those signatures. After making detailed
inquiries with all departments, it was eventually established that they belonged
to no one and were mere scribbles. There were no such authorised
signatories and approvals for such vouchers were fictitious and invalid
authorisations. No one bothered to inquire who had authorized them and the
cashier presumed that these were genuine authorisations. In a year almost Rs 80
lacs were so paid through multiple small value vouchers. All that was required
was someone to see whether such signatures were known and valid before permitting
such expenditure. It is important to note that one need not be a signature
verification technical expert. A simple comparison with given signatures is
enough to detect fraud.
Example of an unidentifiable signature
3. Juxtaposition check can be even within a
document. In the above case, the cashier did not have readily all the specimen
signatures. The juxtaposition test is sometimes missed out even when it is
possible on one single document. A huge purchase order of over Rs. 60 lakh was
executed without anyone realising that all the three signatures of the buyer,
checker and approver were the same. The human mind becomes so cluttered with
other information on any given document that focus is given only on critical
information such as value, rate, date, vendor, description of the material and
the existence of approval signatures. The human mind gets switched off beyond
that to examine deeply by applying any test for deception or wrongdoing. In
this case since the three signature were side by side (juxtaposed) on the
voucher. Just by looking at the three signatures, one could easily see that
they were by the same person.
(above is just an imaginary voucher with assumed names,
product and signatures for demonstration purposes; any resemblance is
co-incidental and unintentional and nowhere is any such person or entity
connected with fraud).
In the same manner, the juxtaposition test can be used to
compare:
(a) Vendors’ bills. Usually printing and stationery
bills, transport bills, courier charges, and similar regular expenditure
related bills are the ones most likely to be duplicated or replicated. By
juxtaposing these expenses, we will be in a position to identify anomalies and
perhaps spot a fictitious bill.
(b) Agreements and contracts lying between two or
more departments such as legal department, commercial department, purchase
department etc. It is expected that these are identical copies, but
wrongdoers even make alterations in copies of different departments for ulterior
motives of facilitating fraud.
(c) Documents with different ages. A two year old
document when compared with a recent document will have a difference in the
physical condition. Over a period of time, paper yellows out, creases, smudges
with handling and even tears a little.
However, new documents have a crisp, whiter look and usually do not have
many smudges. In one case an auditor compared bills from a suspected supplier for a two year period and
applied a juxtaposition test. Though he did not find anything anomalous in the
content matter, he noticed that one of
the oldest bills was absolutely white and crisp. This stood out in complete
contrast with all the bills of that year. On a detailed investigation, it was
revealed that the bill was inserted recently because the original one had been
removed for a wrongful purpose of alteration.
There are many such examples of the juxtaposition test on
documents; but one may well ask whether
this test is going to be useful in the paperless environment with soft data,
spreadsheets, data on audio recordings, videos, CCTVs etc. The answer is
yes, very much. In some of the future articles in BCAS journal, further examples and illustrations of usage
of juxtaposition test will be given. _
