Advanced-Auditing.pdf - I Revised Syllabus of M Com PART II Advanced Auditing-IV Sr.No Topics 1 Audit of Ledgers General Considerations Scrutiny of

Advanced-Auditing.pdf - I Revised Syllabus of M Com PART II...

This preview shows page 1 out of 358 pages.

You've reached the end of your free preview.

Want to read all 358 pages?

Unformatted text preview: I Revised Syllabus of M. Com. PART - II Advanced Auditing-IV Sr.No. Topics 1. Audit of Ledgers General Considerations 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 Engagements SA 220 (Revised):Quality Control for an Audit of Financial Statements 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 SA 501 (Revised):Audit Evidence Specific Considerations for Selected Items SA 505 (Revised): External Confirmations SA 510 (Revised):Initial Audit Engagements—Opening Balances SA 610 (Revised):Using the Work of Internal Auditors SA 200 A- Objective & scope of audit of Financial Statement. SA 300 Planning and Audit of Financial Audit SA 520 Analytical Procedure II 4 Special Consideration in Government audit Miscellaneous audits 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 Tax Audit 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 Objective Question No. 03 to Question No. 09 (Any 4) 9 6 20 Marks 16 Marks 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 Unit Structure 1.0 Objective 1.1 Steps Involved in the Audit of Ledgers 1.2 Audit of Bought Ledger 1.3 Audit of Sales Ledger 1.4 General Ledger 1.5 Practical Illustrations 1.6 Audit of Main Journal 1.7 Balance Sheet Audit 1.8 Summing Up 1.9 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 ICAI. 2 (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 book). (iv) Control accounts - Total up the balances in the subsidiary ledgers. Tally the totals with those in the control accounts. (v) 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 investments), 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 Sheet. ( 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. (ii) (iii) (iv) (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. (h) 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 customers. ( 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 personal, account. ( 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 following period. (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. 1. 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 occurred. 2. 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. 3. 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. 4. 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: 1. Study of Internal Control: Auditor should have studied and evaluated the accounting system and internal audit 2. 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: 1. Checking opening Balances. 2. Checking posting from Registers, Books and Journals. 7 3. 4. 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. 1. 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. 2. 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. chronological order. 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. Sales Account: 1. 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 2. 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 authorities etc. 3. 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 dispatched. 4. 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. 5. 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 Standard Price. a. Sales for the current year should be compared with the of the previous year. Any abnormal difference should investigated. sales 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 Fixed Assets Employed. (c) Stock Turnover Ratio. (d) Debtors Turnover Ratio etc. Further, the profitability ratios viz. (a) Gross Profit to sales and (b) Net profits to sales should be computed and investigated. 6. 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. 7. 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. 8. 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 a. 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: 1. 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 basis. 2. 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. 3. 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. 4. 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 under audit. 5. Analytical Review: 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 6. Book Entries: Auditor has to enquire (u/s 227 of the companies act) whether transactions are not mere book entries. 7. 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: 1. 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. 2. Accounting standard: Auditor sho...
View Full Document

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture