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(Professional scepticism – continued)
Arjun (A) — Hey Bhagwan,
in our last meeting, you were telling me about professional scepticism.
You mean, we need to always proceed with suspicion?
Shrikrishna
(S) —No, my dear! Scepticism does not mean suspicion always. It only
means, you should not accept anything at its face value blindly.
Howsoever clean a thing may appear, you cannot rule out a possibility of
something wrong or foul.
A — I understood. We were taught in
the very first year of B. Com that merely because a trial balance is
tallied, it does not mean that all accounts are right and flawless.
S
— Exactly. After all, you are supposed to be the financial police. A
policeman need not consider every man to be a thief; but at the same
time, he cannot close his eyes merely because a person appears to be a
gentleman.
A — But we were taught that an auditor is a watchdog and not a bloodhound.
S
— Agreed! But even a watch dog constantly smells something and barks
when a stranger comes. He promptly wakes up even if there is a soft
sound around.
A — And he stares at us!
S — Even the
presence of a dog puts one on one’s guard. It acts as a deterrent. That
kind of an image an auditor should develop. He should not be taken for
granted.
A — I see your point.
S — Moreover, the times
have changed. The concept of watchdog and bloodhound is also getting
diluted. In the good old days, manipulation in accounts used to be
apparent if there were scratches, erasures or shabbiness in manual
records.
A — Yes; now in a computerised set-up, everything appears to be clean!
S
— If you start signing the accounts on oral or even written assurances
of a client, then the very purpose of audit is defeated! You should
never sign without proper verification. And you should not be shy of
asking questions.
A — Agreed. But the records are so voluminous and time is so short, we cannot verify everything. The work is endless.
S
— That calls for experience and insight. You should know your client –
by KYC! You should have properly trained assistants. You should devote
adequate time to satisfy yourself as to the veracity of financials. And
you should always be updating your knowledge and not merely gathering
CPE hours!
A — I remember, one CA signed the tax audit of
another CA firm, his close friends, and it transpired that there was a
negative cash balance of a few hundred rupees on one particular day!
S — See! You have all technology at your command. Even a cursory glance at accounts would have revealed this discrepancy.
A
— Poor fellow! That other firm’s accounts were verified in a scrutiny
assessment. The Assessing Officer noticed this error and informed it to
the Institute! He had to face the music for four years!
S — Many
times, your people sign the accounts ‘at a previous date’. Quite often,
there is contrary evidence that you have sent queries even after that
‘back date’. One needs to be very vigilant.
A — You had told me
the case that an auditor signed the accounts when only one director of a
private limited company had put his signature. And later on, the other
director refused to sign and filed a complaint on a technical ground!
S
— Many times, the client or his accountant avoids to produce bank
statement of a particular account. They say, the account is either
inoperative; or the statement is not traceable. In one case, they told
the auditor that a bank account was used only for paying Government dues
like PF, ESI, TDS and so on; and there were only contra entries!
A — Then what happened?
S
— Later on, it was revealed that the Government dues were not paid at
all. There were bogus stamps on challans; and money was fraudulently
withdrawn. So, if somebody is avoiding giving details, it triggers
suspicion.
A — The best example is non-verification of bank
fixed deposits! An independent verification of debtors, creditors and
even bank balances. We simply write year after year that the balances
are subject to confirmation.
S — While in reality, you do not even attempt to get a third party confirmation.
A
— Now, the scepticism is getting clearer! Good faith is dangerous. S — T
here are many such instances that call for scepticism. We will discuss
them next time. But I suggest, you inculcate this attitude right now!
You are supposed to sign many balance sheets in the coming weeks.
A — Yes, My Lord!
Note: This dialogue is based on the same simple but basic principles which we professionals should religiously follow.
