Evidence Gathering

By Theresa Lo, CPA, CGA

Posted on October 8, 2019

Edited on November 13, 2019

Few months ago, I joined a Facebook group and posted an article regarding evidence gathering.  Although now I deleted the post and left the group already, I decided to repost the article here again with some revisions to the original posting. 

However, please note that this is just an overview of audit procedures and it is purely for educational purpose only.  There are a lot more things involved in evidence gathering and auditing than just the information shared below.  In addition, it is not meant to replace the audit itself and still necessary to hire licensed chartered professional accountants to help organizations with official audits.  If necessary, you may need to hire a forensic accountant to help you examine the records.

The original article was posted in that group on September 30, 2019 at 6:44am.  For confidentiality purpose, I will not mention which Facebook group I posted the original article to.

Evidence Gathering

Quite often, the arguments surrounding within organizations tend to be both legal and financial in nature.  As I’m not a lawyer, I'm not going to comment anything about how the law should be interpreted and how to use the law to argue with the organizations as it is a lawyer's job. However, as a financial auditor myself, I'll share some of my experiences in evidence gathering from the financial perspective as many of situations, especially frauds, involve money.

But first thing first, if it is your rights to obtain the financial information from the organization but yet you have no way of getting such information using normal methods, I suggest you to go see a lawyer immediately so the lawyer may help you legally enforce the organization to release the information.

Assuming you can request the financial information from the organization and the organization is willing to provide such information, here are the general things you should request if you want to do a simple audit on your own for the periods in question:

1. Comparative Financial Statements

2. General Ledger

3. Bank Statements and Related Bank Reconciliations

4. Cleared Cheques

5. Invoices relating to the expenditures and incomes

6. Correspondence relating to your case

Once you received the above documents, here are the things you should look for at first just to ensure you are getting the right set of financial information:

1. Matching the financial statements you received from your request with the financial statements you received during the AGM (Annual General Meetings) to see if you are getting the same financial statements before and now.

2. Matching the account balances in the financial statements to the general ledgers to ensure you are getting the right set of general ledgers

3. Pick an account from the general ledger and add all the items up within the account to ensure the total match with the balance in the ledger.

Then you can start examining these documents by looking at the following:

1. Date of the relating transaction occurred

2. To whom the cheque was issued to

3. The exact amount written on the cheque

4. Invoices supporting the cheque payment

5. Authorization signatures relating to the payment

6. Correspondences including Meeting Minutes, Annual General Meetings and Special General Meetings meeting minutes to see when and what they have discussed about the issue and who make the decision to do the payment in question.

After that you search your own records to see if there’s anything contradict with the information you gathered above. If you find any discrepancy, you may start questioning them based on the above information and request them to provide additional supports to their arguments if necessary.

In many cases, the events may have been staged for a very long time.  However, timing and relevancy are important issues in evidence gathering.  Unless stated in the law otherwise, in common accounting practice, the financial data are kept around 6 - 7 years.  My personal preference is up to 10 years.  Per CRA’s website at the time of writing, they advise all the taxpayers, including businesses, that they keep all the supporting for about 6 years.  After that time, the taxpayers need not to continue to keep the data.  Though, there are some exceptions such as loan agreements.  These agreements have the characteristics of both short-term and long-term components since the repayments keep occurring every year until the entire loan is paid off while the initial deposit of the loan may have occurred few years ago.  Therefore, it is important to watch out for the timing issue when doing evidence gathering.

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Disclaimer: What I’m sharing here is for general knowledge and general purpose only.  As each case is unique, information shared above may not be relevant to your situations. For specific cases, it is necessary to consult with professionals, including lawyers, accountants, insurance agents etc., to help with your cases.

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Reference:  CRA - How Long Should You Keep Your Income Tax Record (https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/long-should-you-keep-your-income-tax-records.html)