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Unformatted text preview: I Revised Syllabus of M. Com. PART - II
1. Audit of Ledgers
Scrutiny of Ledgers of Assets, Personal, Revenue
Accounts. 2 The Company Audit
General consideration in a company audit
Special requirements of company audit
Audit report: Basic Elements of the Auditor’s Report,
Format of Audit
Report.(Including -Companies (Auditor’s Report) Order,
2003) 3. New Standards on Auditing (SAs)
SA 200 (Revised) :Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing
SA 210 (Revised): Agreeing the Terms of Audit
SA 220 (Revised):Quality Control for an Audit of
SA 230 (Revised): Audit Documentation
SA 240 (Revised): The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements
SA 500 (Revised):Audit Evidence
Considerations for Selected Items
SA 505 (Revised): External Confirmations
SA 510 (Revised):Initial Audit Engagements—Opening
SA 610 (Revised):Using the Work of Internal Auditors
SA 200 A- Objective & scope of audit of Financial
SA 300 Planning and Audit of Financial Audit
SA 520 Analytical Procedure II 4 Special Consideration in
Audit of a sole trader
Audit of a firm
Audit of a small company
Audit of educational institutions
Audit of Hospital
Audit of Club
Audit of Hotels
Audit of Insurance company
Audit of Banks PATTERN OF QUESTION PAPER Maximum Marks 100 Duration 3 Hours No of questions to be asked
No of questions to be answered
Question No.01 Compulsory question
Question No.02 Compulsory
Question No. 03 to Question No. 09 (Any 4) 9
16 Marks each Notes:(1) From Question No. 03 to Question No.09 not more than one
question may be theory including short problems/questions. (2) Student to answer any four out of Question No. 03 to
Question No.09 . (3) Objective questions to be based on all topics and include
Inter alia questions like :(a) Multiple choice (b) Fill in the blanks (c) Match the columns (d) True or False 1 1
AUDIT OF LEDGERS
Steps Involved in the Audit of Ledgers
Audit of Bought Ledger
Audit of Sales Ledger
Audit of Main Journal
Balance Sheet Audit
Questions for Exercise 1.0 OBJECTIVES After studying the unit the students will be able: To Provide Classified Financial Information To Provide Check On Arithmetical Accuracy To Help Ascertain Profit Or Loss To Help Reveal The Financial Position 1.1 STEPS INVOLVED IN THE AUDIT OF LEDGERS
The audit of ledgers normally involves the following steps:
(i) Internal check - Test the quality of internal check-regarding
timely and correct entries in the ledger.
(ii) Opening balances - Trace the opening balances from previous
year's audited balance sheet. In case, the entity is getting its
accounts audited for the first time since inception or it was audited
in previous year by some other auditor, follow the procedures given
in AAS-22"Initial Engagements - Opening Balances "issued by
(iii) Postings - Check postings from cash book and other books of
prime entry (i.e., purchases book, sales book, journal, purchase
returns book, sales return book, bills receivable book, bill payable
(iv) Control accounts - Total up the balances in the subsidiary
ledgers. Tally the totals with those in the control accounts.
Verification of personal account balances - Verify
personal account balances with statements of account received
from the parties or by arranging direct confirmation. The procedure
of direct confirmation should be applied in the manner stated in
AAS-30 External Confirmations issued by ICAI.
(vi) Verification of Real accounts - The real account balances
should be verified by physical verification (as in the case of cash and
checking the working papers of physical verification exercise
conducted by the management (as in the case of fixed
assets and inventories),
inspection of documents (as in the case of intangible assets
such as patents and trade marks), and
direct confirmation (as in the case of stocks lying with third
parties). (vii) Scrutiny of individual accounts - Scrutinize individual
accounts. Examine the composition of balances. Examine age
analysis of various items outstanding.'
(viii) Totals - Check totals of ledger accounts, schedules of
balances, groupings etc.
(ix) Tracing into the final accounts - Trace the balances in
individual accounts on to the schedules, from thereon into the
groupings-and from the groupings into the final accounts.
( x ) Analytical Review - Examine the reasonability of balances by
applying analytical procedures e.g. comparison with opening
balances, debtors turnover ratio, creditors turnover ratio, current
ratio, fixed assets turnover ratio, working capital turnover ratio etc. 1.2 AUDIT OF BOUGHT LEDGER Following is the procedure of the Audit the Bought Ledger
(Creditor's Ledger) 3
Audit of bought ledger should be taken up only after vouching of
Purchase Journal, Purchase Returns Journal, cash book and
Journal and verification of bank reconciliation statement have been
completed and all the queries arising from these have been
satisfactorily resolved. The steps in audit of bought ledger are
generally the following:
( a ) Opening balances - Check the opening balances of all
suppliers accounts from the last year's audited schedule.
( b ) Postings - Check the postings from the books of prime entry
(i.e., purchase journal, purchase returns journal, cash book, bills
payable book, main journal).
(c) Totals - Check the totals of individual accounts of suppliers.
( d ) Agreement with control account - The total of balances of the
individual suppliers' accounts agree this total with the control
account of sundry creditors in the general ledger.
(e) Debit balances♦ Pay special attention to debit balances in suppliers' accounts.
Enquire into the reasons for such debit balances. These may be
advances against which supplies are yet to be received or they may
represent advances not adjusted against billing. Another possibility
could be that the payment to the supplier has been posted to his
debit but the entry for purchases (i.e., by debiting purchases and
crediting his account) has been omitted.
♦ Scrutinize advances against which deliveries are pending for long
time. See that these are genuine advances and not merely financial
accommodation of a favoured party. Whether the advance is a
genuine one or merely for financial accommodation should be
judged keeping in mind factors such as :
• the value of purchases;
• the proportion of value of purchases given as advance;
• the normal lead time for delivery;
• the normal trade practices; and
• whether the party is a sister concern.
These debit balances should not be netted off from credit
balances but shown separately on Assets side of the Balance
( f ) Composition o f balances - Scrutinize the composition of
balances by matching each credit (for supplies) with the
corresponding debit entry (for payment of bills). The unmatched
items should be enquired. If not, there may be cases where the 4
opening balances or earlier credits are unpaid but the later ones
are paid. This may reveal any of the following possibilities:—
( i ) Remittances to creditors misappropriated.
(v) Disputes regarding previous balances.
Liability regarding the amount no longer exists.
Fictitious liability created to suppress profits.
Payment entry omitted from the books. (g)
Direct confirmation - The auditor should apply direct
confirmation procedures for creditors balances (at least a sample of
them) in the manner stipulated in AAS-30
External confirmations issued by ICAI.
Tracing into the final accounts - Trace the balances from
the ledger accounts into the schedule of creditors and from
thereon into the groupings and then on to the final account 1.3 AUDIT OF SALES LEDGER Following is the procedure of conducting the Audit of Sales
Ledger (Customer's Ledger)
The audit of the sales ledger (customer's ledger) should be
taken up only after the books of prime entry i.e., sales day book,
sales return book, main journal and cash book have been vouched,
Bank. reconciliation statement has been examined and queries
arising out of vouching and examination of BRS have been
satisfactorily resolved. The following steps will be generally
required in the audit of sales ledger:
( a ) Opening balances - Check the opening balances with the
audited balance sheet of last year.
( b ) Postings - Check the postings from sales day book, sales
return journal, credit notes register, debit notes register, main
journal, bills receivable book.
(c) Totals - Check totals i.e., castings of accounts of individual
( d ) Agreement with control accounts - Check the total of
balances of individual customers account. Tally this total with the
control account in the general ledger.
(e) Credit balances - Pay special attention to credit balances. It
may be that money has beet received in advance from a customer 5
or that the sales entry (debiting customer and creditors: sales) must
have been omitted.
(f) Composition o f balances - Match each debit for sales to
customer with corresponding collection on the credit side. Many
customers (particularly big companies) send the remittance advices
showing the invoices against which payments have been made.
Refer to these while matching the payments against the respective
invoices. Unmatched items should be followed up with
management for explanations. Observe the patterns and enquire
about any change in it. For example, a customer who was making
payments in full in one stroke is now making part payments. This
may reflect that customer is having financial difficulties or that
teeming and leading is being practized.
( g ) Long outstanding balances - This has been listed as a
fraud risk factor by AAS-4 (Rev.). This could mean any of the
following possibilities :
♦ Bad debts requiring write-offs.
♦ Fictitious sales booked in previous year to bolster profits.
♦ Misappropriation of collections.
♦ Omission of postings for collections.
♦ In case of closely-held companies or firms, the money has been
paid to proprietor it partner or director who has deposited it in his
( h ) Foreign currency debtor balances - See that these are stated
in the balance sheet by converting the foreign currency receivable
into rupees by applying the closing rate (i.g., exchange rate on
balance sheet date). The differences arising i.g., exchange
differences should be adjusted in profit and loss account as per AS11 (Rev. 2003).
(i) Subsequent Collections - Verify the genuineness of the debtor
balances by checking whether they have been collected in the
(j) Direct confirmations - Obtain direct confirmations of debtor
balances by sending out confirmation requests in the manner
stipulated in AAS-30 External confirmations.
(k) Tracing into the final accounts - Trace the debtors balances
into the schedules of balances from thereon into groupings, from
thereon into final accounts.
( l ) Credit card receivables - In case company accepts payment
by credit cards, check reconciliation of receivables as per books
with credit card company's statements. 6 1.4 GENERAL LEDGER The General Ledger contains individual accounts of assets,
liabilities, income and expenses. Let us study (a) Why scrutiny of
general ledger is done (b) What is done before such scrutiny (c)
how scrutiny of general ledger is done. Why Scrutiny is Done The objective of the scrutiny of general ledge is to obtain audit
evidence in the following matters.
Actuality: The assets and liabilities shown in the general
ledger actually exist at the year end. The transactions giving rise to
income and expenses recorded in the general ledger actually
Complete Record: The general ledger records all the assets
legally owned by the concern at the year – end; all the liabilities
legally payable by the concern at the year – end; all the income
earned by the concern during the year; and all the expenses
incurred by the concern during the year.
Value: The closing balances of assets and liabilities are
properly valued. The transactions giving rise to income and
expenses have been recorded at the proper amounts.
Disclosure: The closing balances of assets and liabilities are
properly classified and disclosed in the balance sheet. The
amounts of income and expenses are properly disclosed in the
profit and loss account. What is done before scrutiny: Before making a scrutiny of General Ledger, auditor should ensure
that the following audit procedures have been duly completed:
Study of Internal Control: Auditor should have studied and
evaluated the accounting system and internal audit
Vouching of Transaction: Then, based on the results of the
above study, the auditor should have vouched the transactions
which occurred during the year. How Scrutiny is done: Audit of general ledger involves the following:
Checking opening Balances.
Checking posting from Registers, Books and Journals. 7
5. Checking Castings and Totals of the ledger Accounts.
Scrutiny of Ledger Accounts.
Checking Summary and Groupings. These steps are explained in detail below.
1. Checking opening Balances: Opening Balances of the General Ledger should be verified
with reference to the audited accounts, the General Ledger and the
schedule of balance for the previous year.
In vouching, auditor checks the entry in the original books
such as Cash Book, Sales register, Bills Receivable Register,
Purchase Register, Bills Payable Register, Debit Note/ Credit Note
Register, Journal etc. The next step is to check the postings from
these books into the General Ledger. Auditor should check that the
correct amount is posted in the correct account on the correct side
of the account.
Posting may be checked on sample basis. Auditor may
check either all the postings for say 3 months or check posting into
selected accounts for the whole year.
3. 2. The following aspects should be checked –
a. All entries are posted in sequences of dates i.e.
b. No entry is inserted in between two entries afterwards.
c. No entry is altered.
d. Against each entry, there is reference of the folio of the
original book or register.
Checking Casting Auditor should check the totals of the ledger accounts. If an
account runs into many pages, he should check that the total of one
page is correctly carried forward to the next page.
3. Scrutiny of Ledger Accounts: General Ledger contains accounts of Income, Expenses,
Assets or Liabilities. The scrutiny of Income and Expenses
Accounts is described below.
In – depth Checking: Sales Account being the main source
of income is scrutinized in depth. The monthly summary is checked
from the Sales Register Debit / Credit Note Register. Posting from
cash / bank / journal are individual and not summary postings.
These are checked on sample basis. 8
Cross – Checking: Sales amount is cross – checked with
figures of sales in the Sales Tax Returns, Excise Registers,
Returns with Government authorities like import and Export
Cut – off Transactions: The cut off transactions are
checked in detail to ascertain whether (a) all goods dispatched
have been billed and (b) bills are raised only against goods
Transactions after balance Sheet date: The transactions
after the balnce sheet date e.g. goods retuned etc. are checked to
find out if they affect the sales account of the year under audit.
Analytical Review: The sales account should be
analytically reviewed; if the products and prices are standard and
constant during the year, sales should be equal to Quantity Sold x
a. Sales for the current year should be compared with the
of the previous year. Any abnormal difference should
be b. Sales Quantity should be reconciled. Thus, Sales Quantity
= Opening Stock + Production – Closing Stock.
c. Input – output ratio should be checked.
d. Various Turnover Ratios should be computed and compared
Viz. (a) Sales to Net Capital employed. (d) Sales to
Assets Employed. (c) Stock Turnover Ratio. (d)
Turnover Ratio etc. Further, the profitability ratios viz. (a) Gross
Profit to sales and (b) Net profits to sales should
computed and investigated.
Book Entries: Auditor has to enquire (u/s 227) whether
transactions of sales etc. are not mere book entries. Thus, if large
sales are made to a concern towards year end and these goods are
returned immediately in the beginning of the next year, these may
be fictitious sales to inflate profits.
Sales to Group Concerns: Auditor has to ascertain whether
total sales to a group concern during the year exceed Rs. 50,000. if
so, he has to report whether the rates charged are reasonable
compared to the market rates for similar items.
Checking Trial Balance and Grouping: Auditor should
check the balance of Sales Account into the Trial Balance and the
Grouping. He should see that – 9
b. No account in the nature of Miscellaneous income e.g.
Scrap sales is grouped under sales.
The debit balance in the Sales Return Account, if any, in
the ledger is deducted form the gross sales amount. 9.
Schedule VI: Auditor should see that the sales are
classified as required by schedule VI of the Companies Act. The
value and quantities of major items are to be disclosed separately.
Earnings in foreign currency from export of goods on F.O.B. basis
should also be disclosed by way of a note to the final accounts.
Other Income Account:
Sample Checking: Other Income accounts e.g. Scrap
Sales, Rent Received, Dividends Received etc. being the incidental
and not the main sources of income are scrutinized on sample
Cross – Checking: Income amount is cross – checked with
details available from other memorandum registers such as Scrap
Sales Register, Property Register (for rent), Investment Register
(for dividends, interest etc.) etc.
Cut – Off transactions: The Cut – off transactions are
checked in detail to ascertain whether (a) income revised in
advance and (b) income accrued are adjusted.
Transaction after Balance Sheet Date: The transactions
after the balance sheet date e.g. sale of shares cum – dividend etc.
are checked to find out if they affect the income account of the year
analytically reviewed i.e. The income account should be If the items of scrap and prices are standard and constant
during the year scrap sales should be equal to Quantity
sold x standard price. Scrap Sales for the current year should be compared with
the scrap sales of the previous year. Any abnormal
difference should be investigated. Scrap Sales Quantity should be reconciled. Thus scrap
sales quantity = Opening stock + Generation of Scrap –
closing Stock. Input – Output ratio should be checked from the Production
and cost records, to ascertain whether scrap generated is
normal or not. 10
Book Entries: Auditor has to enquire (u/s 227 of the
companies act) whether transactions are not mere book entries.
Checking Trial Balance and Grouping: Auditor should
check the balance of the income account into the trial balance and
the grouping. He should ensure that any major item in the nature of
miscellaneous income is shown separately.
Income Accrued / Received in Advance:
Accrual Accounting: ‘Accrual” is the fundamental basis of
accounting. A limited company must maintains its accounts on
accrual basis. Under this basis, (a) income which has accrued is
booked even if not actually received and (b) amount which is
received in advance is not treated as income. This gives rise to (a)
Income Accrued and (b) Income Received in Advance.
Accounting standard: Auditor sho...
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