IPCC Paper 6 Chapter 5 (Vol 1) CA. Ranajit Kumar Pramanik

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1 IPCC Paper 6 Chapter 5 (Vol 1) CA. Ranajit Kumar Pramanik

2 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

3 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

4 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.

5 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

6 Audit Of Payments The process of verification of entries in the books of accounts with the documentary evidence is referred to as vouching.

7 Documentary Evidences: (i) Internal & External. the payments can also be cash payments (ii) Payment through bank which are payments through cash/bank transactions.

8 Payments by cash or by cheque should be acknowledged by the payee In the event of payment payees acknowledgment of receipts should be properly stamped under the Indian stamp act, To safeguard that the payments not been made to wrong person,cheque forms should have on account payee only printed on them

9 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. The auditor would be well advised to obtain confirmation of balances of personal accounts, wherever possible/ practicable, these should be obtained directly by him.

10 Audit Of Cash Transaction

11 The system of accounting and internal control operating in the organization should be reviewed The recording of each transaction should be checked ; Each relevant voucher should have valid documentary evidence The statement is authorized by a competent official Its nature would be truly disclosed on inclusion in the final accounts,.

12 (a) Internal control system : It is a combination of several procedures adopted by an entity designed ; To give protection against losses through fraud, waste, mistakes etc. To ensure that the transaction entered into shall be correctly recorded To enable the concern to take policy decisions as regards to planning and operation of the business at the appropriate time.

13 b)correctness of book keeping records : 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.

14 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. Theexpensesorcostshouldbematchedtotheincomeor 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

15 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.

16 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.

17 f) Disclosure in the final accounts

18 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. 2. The internal check in respect of cash receipts should be closer and stricter, primarily because these have to be verified generally only with reference to the internal evidence, eg. if in respect of sale proceeds of goods or an item of miscellaneous income no bill or voucher has been prepared, audit would not disclose that the amount has been misappropriated. 3. Cash receipts are usually checked with counterfoils of the receipts issued, but the issue of receipts with counter foil in respect of amount collected by it would not ensure that all the amounts collected have been fully accounted for or have been correctly adjusted.

19 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?

20 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.

21 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.

22 Theincomefrominvestmentscanbevouchedbyreferencetothe dividend warrants and the interest on securities by reference to the tax deduction certificates.

23 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.

24 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.

25 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.

26 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.

27 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.

28 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.

29 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.

30 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.

31 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.

32 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.

33 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.

34 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.

35 Audit Of Sales

36 The internal check system of credit sales should be exercised Each item of sales relates to period of account under audit. The goods are to be normally dealt in by the concern. 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 The amount of the invoice has been adjusted in an appropriate account 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.

37 i) Sale of raw materials. ii) Sale of finished goods. iii) Sale of empties and packing materials. iv) Sale of assets.

38 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. b)in respect of Finance company, revenue shall be disclosed separately in notes form: Interest Other financial services The auditor should see that a separate record in respect of these items has been maintained for purpose of disclosure.

39 Ledgers are the secondary books of accounts in which posting are made from the primary books of account. The audit of ledgers is thus an important step in the process of verification of the correctness of the final accounts. It is an occasion to review the transactions entered during an accounting period, duly classified in the totality

40 1. Creditor s ledger. 2. The structure of every account in the bought ledger; opening balance, credits on account of goods purchased and debits raised in respect of return, allowances and discount receivable, advances paid against goods payments and transfers. 3. The accounts in the bought ledgers usually are in credit.

41 4. When the amount of the opening balance of the account of the cost of goods purchased earlier has not been paid for the goods purchased subsequent thereto have been paid, the reasons for the non payment of the amount or amounts should be enquired into. 5. An account in bought ledger may be in debit. 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.

42 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.

43 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.

44 Audit Of Impersonal Ledgers

45 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.

46 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.

AMIT BACHHAWAT TRAINING FORUM VOUCHING EXTRA QUESTIONS

AMIT BACHHAWAT TRAINING FORUM VOUCHING EXTRA QUESTIONS Q. A trader is worried that in spite of substantial increase in sales compared to earlier year, there is considerable fall in Gross Profit after satisfying