Audit Purchases to Check Revenue

BY GARY M. BARNBAUM

I just took your test, “What Is Your Fraud IQ?,” (Dec. 07, page 56). I received a score of 90%.
 
However, I do want to take issue with the wording in one of the questions. In 10(a), you described “Cost of Goods Sold” as an account. Technically, that’s not ­accurate. Cost of goods sold is a subtotal made up of a number of accounts, including the account “purchases.” (Although, oftentimes, cost of goods sold is reflected as one number on a published condensed financial statement.)
 
Therefore, one way to validate fictitious revenues (and also unrecorded revenues) is to audit purchases. This type of so-called “backward auditing” is not only commonly used for the purpose of validating sales, it is commonly used by government agencies for the same purpose, especially with sales tax audits.
 
Gary M. Barnbaum, CPA
Woodland Hills, Calif.

SPONSORED REPORT

How to make the most of a negotiation

Negotiators are made, not born. In this sponsored report, we cover strategies and tactics to help you head into 2017 ready to take on business deals, salary discussions and more.

VIDEO

Will the Affordable Care Act be repealed?

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.

COLUMN

Deflecting clients’ requests for defense and indemnity

Client requests for defense and indemnity by the CPA firm are on the rise. Requests for such clauses are unnecessary and unfair, and, in some cases, are unenforceable.