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.

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