Professional Documents
Culture Documents
CA. Ranajit Kumar Pramanik
Topics Covered
Vouching
Audit of Payments
Documentary Evidences
Safeguards
Audit of Cash Transactions
Verifications
Audit Check Points
Enquiries for Internal Check System
Cash Receipts from Cash Sales
Receipts from Customers
Sale of Investments
Rental Receipts
Loans
Sale of Assets
Topics Covered ‐contd
Income from Investments
Royalties Receipts
Insurance Claims
Sales Process of Junk Materials
Audit of Purchases
Control expenditure on Purchases
Vouching entries for purchasing with invoices
Purchase Return
Verification of Purchase Return
Audit of Sales
Verification of Credit Sales
Sales Categories
Revised schedule
Audit of Ledgers
Audit of Bought Ledgers
Audit of Sales Ledgers
Audit of Impersonal Ledgers
‐ Verification a transaction recorded in the books of
accounts
‐ Confirmation that the amount mentioned in the
voucher
‐ Primary document of an entity based on which
primary books of accounts is maintained.
Voucher is the foundation for maintenance of
transactions in the books of account.
Points to Note:
1. The date of voucher falls within the accounting
period.
2. The voucher is made out of in the client’s name.
3. The voucher is duly authorized.
4. The voucher is complete in all respects.
5. Account for voucher amount adjustment
Audit Of Payments
The process of verification of entries in the books of
accounts with the documentary evidence is referred to as
vouching.
Documentary Evidences:
(i) Internal & External. ‐the payments can also be cash
payments
In the event of payment payees acknowledgment of
receipts should be properly stamped under the Indian
stamp act, 1899.
To safeguard that the payments not been made to
wrong person ,cheque forms should have on ‘account
payee’ only printed on them
Refer other connected documents, viz invoices, debit notes
etc. against which payments have been made before accepting
such receipts as evidence of payment of money.
Detailed checking of the record of transactions for verifying
that entries have been made in the books of account
according to the system of accounting which is being
regularly followed.
c) Observance of accounting principles:
‐ The transaction should be recorded in the books of accounts
having record to the principles of accounting; the principles
include
Distinction being drawn between capital and revenue
expenditure.
Distinction being drawn between capital and revenue receipts.
The expenses or cost should be matched to the income or
benefit.
The expenditure and income should be treated on accrual
basis.
That the fixed assets should be depreciated on a consistent
basis.
That fictitious assets are written off at the earliest, and
Outstanding Assets and liabilities have been properly adjusted
d) Evidence of transactions:
‐ Two kinds of evidence
‐ Internal Evidence – the one generated within the
organization
‐ External Evidence – the one obtained from parties
with whom, the entity enters into transactions.
e) Validity of Transactions:
Reference to documentary evidence which may exist in any
of the following forms:
the legal provision, if any having bearing of the
accounts of the entity under audit;
the rules or regulation governing the internal working
of the organization eg. Articles of association,
Partnership deed, Trust Deed etc.
minutes of the proceeding of a meeting of members of
the company, or that of the Directors or that of the
Managing Committee.
copy of agreement eg. Managing Director Agreement,
Lease Deed, Vendor’s agreement, Agency agreement,
Contract with an employee etc.
f) Disclosure in the final accounts
Audit of Receipts
1. The function of audit in respect of cash receipts being almost
the same as that in the case of cash payments; the procedure for
verification as stated shall be applied.
i) Who opens letter, what record is kept, and whether all cheques or postal orders are
immediately endorsed to bankers and crossed “Account Payee Only”.
ii) Whose duty is to enter cash, cheques and other form of receipts /remittance in the
pay‐in‐slip and who deposited it in the bank?
iii) Are all receipts banked daily?
iv) Who prepares receipts and who counter signs the same before these are issued to
the parties from whom the amount have been received?
v) Whether printed receipts with counterfoils, numbered serially
by a machine are used and who maintains the stock of unused receipts?
vi)Are the receipt books kept in safe custody and are they issued only when the
current receipt book has been used up?
vii)What internal check is being exercised over the collection of cash sales and
miscellaneous income?
viii) Are travelling salesmen allowed to collect any advance against order booked and
what control exists over such collections?
ix) How often are the banks statements checked and compared with the cash book?
x) Who controls the preparation and despatch of monthly tatements of accounts to
customers?
xi) Are ledgers posted by the cashier or some other persons?
The system of internal check should be examined;
Cash memos to be verified with carbon copies of cash memos and
traced in the summary book if cash sales are voluminous and
thereafter in the cash book;
Dates on the cash memos should tally with those on which cash
collected in respect thereof has been entered in the cash book.
If a cash memo has been cancelled, its original copies should be
inspected, for it could be that the amount has been misappropriated.
1. The cash receipts from the customers should be checked with the
counterfoils of receipt issued to them.
2. Verification of a system of internal check in operation which acts
as a safeguard against the amount collected being
misappropriated.
3. Teaming and Lading
4. To safeguard the loop‐wholes, customer should be requested to
send statements of accounts from their books. On comparing
items in each statement in the entries in the customer’s account, it
would be possible to locate amounts which were not deposited on
the day these were collected but subsequently.
The income from investments can be vouched by reference to the
dividend warrants and the interest on securities by reference to the
tax deduction certificates.
In case of a company, the board of directors are authorize to sale
investment and in case of trust, by the board of trusties. The normal
method of selling investment is through stock broker. The sale
proceeds of investments are vouched by reference to broker’s sale
note.
• Copies of rental receipts, Copies of bills issued to the tenants
should be checked by reference to copies of tenancy agreement and
bill of charges paid by the land lord on behalf the tenants, ie.
House tax, water tax, electricity etc.
• The amounts collected from tenants on account of rent should be
checked by reference to receipts issued to them and thereafter
these should be traced into rental register.
The authority under which the loan has been raised should be
verified.
A copy of the loan agreement should be referred to find out the rate
of interest, the terms of repayment and the condition as to the
security agreed by the client.
If any guarantee has been provided for the repayment of the loan,
the particulars thereof should be ascertained for the purpose of
disclosure in the balance sheet.
The authority for sale is most important, which should
receive the attention of the auditor :
The basis of sales, whether by auction or by negotiation for
purpose of determining that the assets were sold at the
maximum price that could be obtained.
It should further be confirmed that the sale proceeds have
been credited to an appropriate head of account and the
amount of profit arising out of it has been segregated between
revenue profit and capital profits, if any accordingly appropriate
accounts are credited, where there is a loss the same should be
written off.
The auditor should see the relevant contract and examine the
important provisions relating to the conditions of payment of royalty.
In particular, the rate of royalty, mode of calculation and the due dates
should be noted.
If there is any deduction on account of recoupment of royalty for
the past period, the records for earlier royalty receipts should be seen
to ensure that the amount of deduction is as per the contract.
Royalties due but not yet received should have been properly
accounted for.
While vouching the receipts of the insurance claims the auditor
should examine a copy of the insurance claims lodged with the
insurance company. Correspondence with the insurance company
and insurance agent should also be seen.
A counterfoil of the receipts issued to the insurance company
should also be seen.
The auditor should also determine the adjustment of the
amount received in excess or short of the value of the actual loss as
per the insurance policy.
The copy of certificate/report containing full particular of the
amount of loss should also be verified.
The accounting treatment of the amount received should be
seen particularly to ensure that revenue is credited with the
appropriate amount and that in respect of claim against an asset,
the profit and loss account is debited with the shortfall of the
claim admitted against the book value.
i) Review the internal control on junk materials as regards its
generation, storage and disposal and see whether it was properly
followed at every stage.
ii) Ascertain whether the organization is maintaining the reasonable
records for the sale and disposal of junk materials.
iii)Review the production and cost records for the determination of
extent of junk materials that may arise in a given period.
iv) Compare the income from the sale of junk materials with the
corresponding figures of the preceding three years.
v) Check the rates at which different types of junk materials have been
sold and compare the same with the rates that prevailed in the
preceding year.
vi)See that all junk materials sold have been billed and check the
calculations on the invoice.
vii)Ensure that there exists a proper procedure to identify the junk
materials and good quality materials are not mixed up with it.
viii)Make an overall assessment of the value of the realization from the
sale of junk materials as to its reasonableness.
Audit Of Purchases
Verification by reference to the suppliers invoices supported by
copies of delivery notes disclosing the dates and particulars of
goods received and acknowledged by the receiving department are
also attached.
Classification under the following heads:
Purchases of raw materials, for each material separately
Purchases of finished goods.
Purchases of consumable stores, fuels etc.
Purchases of packing materials etc.
Purchases of articles likes stationary for office use
Purchases for making additions to assets.
Points to be noted:
That the date of invoice falls within the accounting period
That the invoice is made out in the name of the client
That the suppliers account has been credited with the full amount
of the invoice and that the deduction in the amount of the invoice
if any has been made on a proper basis.
That the goods purchased are those that are regularly dealt in by
the concern or required for the process of manufacture and that
the price payable has been correctly arrived at.
That the cost of purchases has been debited to appropriate
accounts.
That the invoice is signed by the accountant to show that he has
verified it as well as the store–keeper to indicate that the delivery of
goods have been taken by him.
That the manager or some other official competent to sanction
payment has authorized its payment.
If a part or whole of consignment of goods found to be
defective or of a poor quality, the goods some times are
returned to the supplier and his account is debited. The
debit is raised in the purchase return book on the basis of
debit notes.
Verification of Purchase Returns
Examine debit note issued to the supplier, which in turn may
be confirmed by the corresponding credit note issued by the
supplier. The relevant correspondence may also be
examined.
Verify by reference to relevant corresponding record in
goods outward book or stores record. Figures in the
documentary evidence should be compared with the
supplier’s original invoices for rates and other charges and
the calculation should also be checked.
Examine in depth to eliminate the possibility of fictitious
purchase returns for covering bogus purchases recorded
earlier.
Cross‐check with reference to original invoices any rebates
in price or allowances if any , given by suppliers on the
strength of their credit notes.
Audit Of Sales
The internal check system of credit sales should be exercised
The sales price has been correctly arrived at and the copy of the
requisition slip issued by the sales department and the copy of the
despatch note showing the date and mode of despatch of goods are
attached with the invoice
That the sale has been authorized by a responsible official and in token
thereof he has initialized the invoice
An alteration in the invoice has been attested by the same person.
i) Sale of raw materials.
ii) Sale of finished goods.
iii) Sale of empties and packing materials.
iv) Sale of assets.
a)In respect of company other than Finance company, sales revenue
shall be disclosed separately in notes form under “Statement of Profit
& Loss Account”:
Sale of products
Sale of services
Other operating revenues
Less excise duty.
Finally the auditor should insist on periodical and also yearly statement of accounts
and balance conformation certificates from each party so as to ascertain the
correctness of the creditor’s balance.
Debtor’s ledger.
The structure of each account in the sales ledger is opening balance,
debits representing values of goods sold, payments made for goods
returned and transfers, credit representing amounts received for
good sold, advances received against order, discount and allowances
allowed, value of goods returned back and debts written off.
If the amount paid by a debtor has been misappropriated, though the
balance in the account would be outstanding for payment, it would
not be recoverable.
Finally, the composition of balance outstanding of recovery should be
examined. In every case where the composition of balance is not clear,
the copy of the statement of the account received from the party
should be referred to.
When any bad debt is written off, the client should be advised that a
record thereof should be kept in the bad debt register in order that if
subsequently any recovery is made out of it, may be possible to
identify the amount.
Audit Of Impersonal Ledgers
Has two kinds of accounts, viz. nominal accounts which relate to the
Trading & Profit and Loss Accounts and Real Accounts which records
assets.
If the accounts in the general ledger are incorrect, they will affect the
Profit & Loss account and the balance sheet.
It is the final review of balances which on inclusion in the final
account, cumulatively reflect the financial position of the concern.
The certificate which an auditor will sign, will, therefore, be incorrect
in the event the final accounts do not reflect the true financial
position of any concern.
Entries in the general ledger usually are posted in a summary form
from the cash book, the journal, and other subsidiary books like
purchase book, sales book etc.
1. Balances in all the income and expense accounts have been adjusted
i) According to standard accounting practices, and
ii) Consideration of the legal provisions which are applicable to the
concern.
2. Each ledger balance finally should be examined on a consideration
of its position in the final accounts to see how the financial position
of the concern would be affected by the inaccuracy in the balance.
3. Balances in the general ledger should be traced simultaneously on to
the trial balance, grouping schedules and the final accounts.
4. Accounts have been kept according to the accepted accounting
principle and the balance sheet and the profit & loss account have
been drawn up on the same basis as in the previous year.
5. Clause 3 (XV) Part – II of the Schedule VI to companies act is
invited.