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Forensic Audit Report on Weakness in Internal Control FAFD Project 1​

M/s PQW & Associates

Chartered Accountants

101, Ramashraye Chambers, Mahabali Road, Churchgate, Mumbai -400002


  • M/s PQR Limited is a colour pigments manufacturing company in India. The company manufactures pigments i.e. colour powder which is used in various industries across India. The company is also involved in export of pigments due to its high-quality produce. The company produces 4 colour pigments mainly yellow, red, blue and green. Yellow pigment is the highest selling product of the company.
  • PQR Limited has 3 manufacturing unit at Aurangabad, Vapi and Chhattisgarh. It has 5 storage units in India situated at Vapi, Aurangabad, Chhattisgarh, Delhi and Mumbai. The company manufactures pigments and sends it across its stockyards. The reorder level of Inventory of pigments is maintained at 50 kg for all the colours across all the locations. The head office of the company is situated in Mumbai.
  • M/s RST Limited is one of the customers of M/s PQR Limited. It normally orders around approx. 100 kgs of Yellow pigments a month from Delhi’s stockyards at various interval of time in a month. Normally they order 15 kg in a single order.
  • On 10th June 2018 M/s RST ordered 40 kg of yellow pigment in a single order as an urgent delivery to be made from Delhi Stockyard. The order placed was received by RST in two instalments, first on 12th June 2018 of 30 kg and second one on 19th June 2018 of 10 kg.
  • It used to take maximum 3 days for the order to be delivered to RST Limited. But in current case out of 40 kgs 30 kgs were delivered before time as it was an urgent request by RST Limited but the balance 10 kgs was delivered after 8 days from the day of placing the order. Due to this M/s RST lodged a complain to the head office of PQR Limited as they suffered loss due to non-availability of raw material on time.
  • PQR Limited was excellent with its logistics department and hence knew that their logistics would not have made the order delayed. For this purpose, the operational manager at head office asked the logistic department to give the reason of such delay.
  • The logistic department with their proper documents replied that they were given the package to delivered on 17th June by stockyard manager and the same was delivered in due course to the party within 3 days.
  • Operation Manager also asked Delhi’s stockyard manager to report on the issue. The stockyard manager replied via mail that the stock position as on 10th June was 30 kg which was delivered to the customer and 20 kg was stock in transit and hence it took time for them to deliver it.
  • As per the accounting software the Inventory position of Delhi stock yard as on 10th June 2018 was 50 kg i.e. at reorder level which was enough to fulfil the order of RST Limited in a single order. The Operation Manager thought that even after having the capacity to deliver all the goods in one delivery why the same was delivered at different point in time, also why the stockyard manager lied that the stock was in transit, which was already delivered to the stockyard and was lying in the stock as per accounting system.
  • With these doubts operation manager went to CEO of the company who appointed M/s PQW & Associates to conduct Forensic Investigation of this transaction to come out with the reason of delay in delivery to the customer.

Scope of Forensic Audit

  • To audit and investigate the reason behind the delay in delivery of Pigments to the customer.
  • To find out the weakness in internal control applicable to stockyards and logistics


    • Data & Evidence Collection – The audit team collected information about normal procedures and internal controls followed by the company to deliver the goods from manufacturing unit to stockyard. As per the procedure whenever inventory level at any location falls below reorder level, an automatic message is sent by the system to the operation manager at head office. Order for manufacturing to one manufacturing unit out of three is given depending on the availability of resources at the manufacturing units. It takes maximum 4 days to deliver the order from any manufacturing unit to any stockyard.
    • Audit team collected duplicates of original transport documents for the last reorder level maintained at Delhi’s stockyard. As per the document the last delivery was done by Vapi unit on 8th June 2018 to maintain the reorder level.
    • Audit team took digital image of inventory movement ledger of Delhi’s stock from 8th June to 19th June 2018 and the copy of inward & outward register maintained at Delhi stockyard for the same. As per the inventory report, inventory was stated back to reorder level on 8th June 2018 which matched with the transport documents and inward register of Delhi stockyard.
    • As per the Inventory register till 10th June inventory was lying at reorder level and none of the order was pending on 10th June or placed between 8th June and 10th Order of M/s RST Limited was processed and only 30 kg of goods were delivered as per inventory report but still 20 kg of goods were lying in the inventory.
    • To get more accurate evidence audit team obtained approval from management and got the digital image of data in the laptop of Stockyard Manager and Logistic Manager at Delhi Stockyard.
    • At the time of verifying the deleted mails audit team found that certain deleted mails were marked to logistic manager and Mr A (unknown person) stating transfer of 20kg of goods on 9th June 2018.
    • Based on the above evidences audit team got written permission from management to conduct interview of Stockyard Manager and Logistic Manager of Delhi’s stockyard.
    • Interview – The first person interviewed by audit team was Logistic Manager. After showing the evidence to the manager he informed the audit team that 20 kg yellow pigment was delivered to Mr A on 9th June 2018 who is another manufacturer of pigments. This transaction was not recorded in the system nor any delivery challans were made for the same, also no entry was made in outward register of stockyard. Hence the inventory as per inventory movement ledger on 9th June 2018 was still available at 50 kg.

    Afterwards, 20 kg of order was returned by Mr A on 16th June 2018 due to which delivery to M/s RST was delayed. Logistic manager accepted that he was part of this deal and wanted to make profits out of such transactions, however he informed audit team that his part was just to deliver the goods and get it back from Mr A.

    • With evidence collected from Logistic Manager, audit team interviewed Stockyard manager. On confronting stockyard manager, he accepted that he was involved in manipulation of excess stock lying in the stockyard. He sold the pigments to Mr A who was in urgent need of 20 kg yellow pigment to fulfil another order of its customer. As the inventory lying in stockyard was at reorder level, stockyard manager opted to make some external gains by entering into an out of the books fictitious transaction by providing 20 kg of yellow pigment to Mr A on commission basis to earn profit out of the stock lying in inventory. In return the same quality goods with the same packaging was supposed to be returned in 7 days to the stockyard by Mr A.

    In case of M/s RST the order for 40 kg came as an urgent requirement, whereas the actual stock available at stockyard was just 30 kgs which was supplied instantly to the customer on 10th June 2018. The PQR at least takes 7 to 8 days to manufacture and deliver 10 kg of any pigment to Delhi stockyard. Therefore, even to get new stock on 10th June was not possible and hence stockyard manager had to wait for the stock which was to be returned by Mr A on 16th June. As soon as the stock arrived from Mr A, Stockyard manager made the delivery to M/s RST immediately.

    Also, he accepted that such out of the books transactions were made many times to earn income out of unutilized stock lying in stockyard.

Executive Summary of Audit

  • Due to insufficient inventory at stockyard, delivery of order to M/s RST was delayed. The unavailability of sufficient inventory occurred due to manipulation of inventory done by stockyard manager and logistic manager of Delhi.
  • The stock was diverted to an external party Mr A on commission basis. As per the agreement with stockyard manager Mr A returned goods to stockyard with 7 days on 16th June 2018 and the same day stock was dispatched for delivery to RST Limited.
  • The stockyard manager had complete control over the inventory as the stockyard was at a location where neither company has its corporate office nor any manufacturing unit. This gave him the opportunity to manipulate stock.
  • People involved in manipulation were Stockyard Manager and Logistic Manager and the external party Mr A.

Conclusion and Recommendations

  • Company should train their staff at all the stockyards to educate them with such manipulation and ask them to inform management of smallest possibility of any manipulation when it comes to their notice.
  • No stock should be allowed to get in and out of stockyard without proper invoice and documentation.
  • Company should have a system to track incomplete order so as to ensure that deliveries are made in time to the customer.
  • Company should conduct surprise physical verification at various interval of time to verify the inventory and to catch hold of any ongoing manipulation.
  • It is advisable to carry out an Independent investigation on work of Stockyard Manager and Logistic Manager of Delhi.

For M/s PQW & Associates

Chartered Accountants

CA Rajat Agrawal