Chapter No.

10
Scrutiny of Revenue
Account
 Scrutiny Scrutiny of Revenue
•
Account
The rates of gross profit to turnover should be
computed for the previous year and current year.
• Any abnormal increase in the ratio of gross profit to
sales may be due to:
– Purchase price may remain constant and sales price
increased during the year.
– Sales may have been inflated; goods entered in books as
sold but not delivered and included in stock.
– Stock might over valued due to different basis of valuation.
– A portion of some obsolete stock may have written off
during the preceding year, but no such adjustment may
have been effected in the current year.
• An abnormal decrease in the ratio of gross profit may
be due to any or more of the following reason:
– Purchases may have been inflated; goods entered as
bought may not have been received and thus not reflected
in closing stocks.
– Sales price of goods dealt in may have remained constant
during the year as compared to the previous year, but the
purchase price may have increased.
– Stock may have been under valued; there may have been
pilfering of stocks; the accumulated, obsolete and
unusable stock may have all been written off or sold at a
loss during the year; some of the items been omitted from
the list.
Scrutiny of Profit and Loss Account
• For a satisfactory verification of the profit and
loss account, the auditor should carry out the
following work:
– See that the requirement of the standards and
GAAP in respect of the disclosure of information
have been complied with .
– While examining the profit and loss account,
exercise care to ensure that a strict distinction
between capital and revenue is maintained.
• The auditor should see that only expenses and
income of the year under audit are included in
the account.
• Ensure that various adjustments relating to
outstanding expenses, income received in
advance, unexpired discounts, provisions for
depreciation, unexpired reserve for doubtful
debts etc have been properly made.
• See that all accrued and anticipated losses
relating to the year under audit have been
provided in the accounts.
• Ensure that profit and loss account items were
computed on a consistent basis. Make a note
of any changes.
• Compare expenditure with that of the
previous year and note reasons for material
variations.
• Disclose correctly any transaction in respect of
previous periods.
• Verify satisfactorily that dividend, investment
income, commission earned have been
reflected in accounts.
 Scrutiny of profit and loss
appropriation account
• The auditor should see that:
– All appropriations of net profits are in accordance
with the resolutions of the shareholders in general
meeting and provisions of Memorandum and Articles
of Association.
– All reserve required under tax laws or any other
legislation have been created.
– Dividend appropriation is out of divisible profits.
– Ultimate net balance on this account is shown in the
balance sheet.