See, we have different technical defination and process, but What I will tell to understand the practical requirement...
First check whether head come under expense or income. Secondly check whether expenses accounted for are well documented with supporting or not and all the expenses are booked in books.
All the income have been documented in the books are well documented. Also check for whether income have been overstated. Check for the consistency of process and documents.
Few of the income and expenses have been stated for your persual..
(1) Rental Receipts (i) Check copies of bills or rent receipt issued to the tenant with reference to tenancy agreement and bills of charges paid by the landlord on behalf of tenants. (ii) The entries in the rental register in respect of rent accrued should be traced with reference to copies of rental bills. (iii) Scrutinize the account of collecting agent when the rent is collected by such agent. (iv) Vouch the entries for rent received in advance and ensure proper adjustment is made. (v) Investigate into abnormal rent outstanding. (vi) Reconcile the outstanding rent and see that proper provision is made if unrecoverable. (vii) If rent is received net of TDS, see that rent income is shown at gross and TDS is shown in Balance Sheet as advance Tax.
(2) Assets acquired on Hire purchase (i) Inspect the hire purchase agreement to ascertain the terms and condition, the installment and amount of interest included in the installment. (ii) Ensure that these are treated as assets acquired under finance lease as per AS-19. (iii) Verify that initial recognition of lease should be as an asset and a liability at equal amounts. (iv) If it is reasonably certain that lessee will get ownership at the end of the term, see that asset is depreciated over its useful life. Otherwise confirm that asset is depreciated over the shorter of its useful life and the lease term. (v) Ensure that it is shown separately in the Balance Sheet.
(3) Cash Sales (i) Examine the system of internal check to ascertain any loopholes therein. (ii) Ascertain the practice followed in the matter of issuing cash memos and trace the memos into cash sale summary. (iii) Ensure that the date of cash memos tally with the entry in the cash book/summary. (iv) Verify that prices of goods sold have been correctly recorded and check the calculation. (v) Verify the entry in the goods outward book with the sales summary. (vi) See that the cancelled cash memos are not removed from the receipt book.
(4) Contingent Liabilities. (i) Review minutes of the meetings of the Board of Directors or other similar bodies. (ii) Review contracts, agreements and arrangements. (iii) Review list of pending law suits and obtain a certificate and opinion of the lawyer dealing with the cases. (iv) Review of records relating to contingent liabilities maintained by the company. (v) Review of terms and condition of grants and subsidy availed. (vi) Obtain representation from the management. (vii) Ensure that proper disclosure is made of all the contingent liabilities.
(5) Advertisement Expenses. It should be vouched on the following basis : (i) Verify the bill/invoice from advertising agency to ensure that rates charged for different types of advertisement are as per contract. (ii) See that advertisement relates to client’s business. (iii) Inspect the receipt issued by the agency. (iv) Ascertain the nature of expenditure – revenue deferred and see that it has been recorded properly. (v) Ascertain the period for which payment is made and see that pre-paid is carried forward to balance sheet. (vi) Compare the statement of account with the ledger account. (vii) See that all outstanding advertisement bills have been provided for.
(6) Work in progress. (i) Involve a technical expert in verification and valuation of WIP, if necessary. (ii) Ensure that cost sheets are duly attested by the works manager. (iii) Test the correctness of the cost sheet by verification quantities, Cost of material wages and other charges with reference to the record. (iv) Verify stage of completion with component of cost involved with underlying records. (v) Compare the unit cost as shown by the cost sheet with standard cost for any large variations. (vi) Ensure that the allocation of overhead expenses has been made on reasonable basis and is same as used in earlier period. (vii) Compare the cost sheet with that of the previous year and if there is any large variation, investigate the reason thereof.
(7) Payment of Retirement Gratuity to employees. This may be vouched in the following manner:- (i) Examine the basis on which gratuity payable is worked out-actuarial or agreement or on the assumption that all employees retire on the balance sheet date. (ii) Ensure that the basis of computing gratuity is valid. (iii) Verify computation of liability of gratuity on aggregate basis. (iv) Check the amount of gratuity paid to employees who retired during the year with reference to the no. of years of service rendered by the retiring employees. (v) If the concern has taken an insurance policy see that the annual premium has been charged to Profit & Loss account. (vi) Ensure that the concern has adhered to the accounting treatment in accordance with AS-15 (revised).
(8) Trade creditors : (i) Check the adequacy of cut off procedure to ensure that transaction of next period are not accounted and all transactions of year end are accounted. (ii) Check posting in the bought ledger from books of prime entry. (iii) Compare the balances in the schedule of creditors with balances in bought ledger. (iv) Compare the balances with the confirmation or statement of account received from trade creditors. (v) Pay special attention to long outstanding items and enquire about the reason thereof. (vi) Verify subsequent payments and reversal entries in the bought ledger of year end entries. (vii) See that trade creditors are classified and shown in the balance sheet as per requirement of Schedule VI of the Companies Act. 1956.
(9) Recovery of bad debts written off (i) Verify the relevant correspondence with the debtor whose accounts were written off as bad. (ii) See that the amount recovered is credited to a separate account recovery of bad debts written off. (iii) Verify the acknowledgement receipt issued. (iv) Examine notification from the court, bankruptcy trustee, collecting agencies. (v) Check credit manager’s file for the amount received and see that the amount has been deposited in the bank promptly. (vi) Review the internal control system regarding writing off and recovery of bad debts.
(10) Advances to suppliers (i) Examine the bought ledgers to ascertain the debit balance of creditors and trace the corresponding entry to the cash/bank book. (ii) Obtain a schedule of advances to suppliers and verify it with balances in bought ledger. (iii) Assess the possibility of delivery of goods against advance payment and examine whether provisioning is required. (iv) Obtain/resort to direct confirmation procedure. (v) Ensure proper classification in the balance sheet as per requirement of Schedule- VI. (vi) Pay special attention to long outstanding advances and enquire about the reason thereof.
(11) Insurance Claims: Insurance claims may be in respect of fixed assets or current assets. While vouching the receipts of insurance claims, the auditor should examine a copy of the insurance claim lodged with the insurance company correspondence with the insurance company and with the insurance agent should also be seen Counterfoils 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 particulars 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 asset, the profit and loss account is debited with the short fall of the claim admitted against book value, if the claim was lodged in the previous year but no entries were passed, entries in the profit and loss account should be appropriately described.
(12) Trademark and Copyright : The existence of a trademark is verified by an inspection of the certificate as regards grant of the trademark. Where it has been purchased, the agreement surrendering it in favour of the client should be examined. It must also be observed that the rights are alive and legally enforceable. Copyrights are also acquired by surrender of rights and they also should be verified similarly. The auditor should obtain a schedule of trademarks and copyrights and verify that renewal fee have been paid and charged to revenue. The last renewal receipt should, in each case, be examined to ascertain that the trade mark has not lapsed. Copyrights and trademarks are generally revalued at cost less amortization charges till date. If copyright and trademarks are generally revalued at cost less amortization charges till date. If copyright and trademarks were purchased, the cost includes purchase price and registration charges. If it has been developed by the client, the cost should include cost of developing outlays, design costs and other associated direct cost. The cost of trademarks and copyright should be amortized over the period of legal validity or useful commercial life, whichever is short. Where auditor finds that any publication has ceased to command sale, he should have the amount of its copyright written off to revenue. AS 26 has suggested a useful life of 10 years unless and until there is clear evidence that useful life is longer.
(13) Preliminary expenses: The auditor takes following steps to vouch preliminary expenses: 1. All such kind of expenses should be related to the formation of the enterprise. 2. With all preliminary expenses, relevant supporting documents should be there. 3. He should examine company’s minute’s book to determine the pattern of writing off of the preliminary expenses over the period. 4. He must check that if such kinds of expenses are incurred by the promoters or they have been reimbursed to the promoters, it is as per the instructions of the BOD and the powers in AOA. 5. He should make a cross check of the amount of preliminary expenses with that of amount mentioned in the prospectus, statutory report and balance sheet.
(14) Custom Duty 1. Examine the cash book to ensure payment of custom duty with reference to Bill of entry to check whether the amount was calculated correctly. 2. If the duty has been paid by clearing and forwarding agent, examine bill of entry with reference to agent’s bill. 3. If the duty has been paid by the client directly, examine bill of entry together with receipt evidencing payment of custom duty. 4. Make a list of disputed cases to have knowledge of the amount of duty payable and the provisional payment. The auditor should determine the duty payable and ensure any additional duty to be paid or refund expected should have been adjusted. 5. Lastly, the auditor verifies the duty drawback.
(15) Goods Sent on Consignment (i) Verify the accounts sales submitted by the consignee showing goods sold and stock of goods in hand. (ii) Reconcile the figure of the goods on hand, as given in the last accounts sales, with the proforma invoices and accounts sales received during the year. If any consignment stock was in the hands of the consignee at the beginning of the year, the same should be taken into account in the reconciliation. (iii) Obtain confirmation from the consignee for the goods held on consignment on the balance sheet date. Verify the terms of agreement between the consignor and the consignee to check the commission and other expenses debited to the consignment account and credited to the consignee’s account. The accounts sales also must be correspondingly checked. (iv) Ensure that the quantity of goods in hand with the consignee has been valued at cost plus proportionate non-recurring expenses, e.g., freight, dock dues, customs due, etc., unless the value is lower. In case net realisable value is lower, the stock in hand of the consignee should be valued at net realisable value. Also see that the allowance has been made for damaged and obsolete goods in making the valuation. (v) See that goods in hand with the consignee have been shown distinctly under stocks
(16) Sale Proceeds of Scrap Material (i) Review the internal control on scrap materials, as regards its generation, storage and disposal and see whether it was properly followed at every stage. (ii) Ascertain whether the organisation is maintaining reasonable records for the sale and disposal of scrap materials. (iii) Review the production and cost records for determination of the extent of scrap materials that may arise in a given period. (iv) Compare the income from the sale of scrap materials with the corresponding figures of the preceding three years. (v) Check the rates at which different types of scrap materials have been sold and compare the same with the rates that prevailed in the preceding year. (vi) See that scrap materials sold have been billed and check the calculations on the invoices. (vii) Ensure that there exists a proper procedure to identify the scrap material and good quality material is not mixed up with it. (viii) Make an overall assessment of the value of the realisation from the sale of scrap materials as to its reasonableness.
(17) Bank Balances (i) Verify bank balance by reference to bank statements. (ii) Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a) cheques issued by the entity but not presented for payment, and (b) cheques deposited for collection by the entity but not credited in the bank account have been duly debited/credited in the subsequent period. (iii) Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period. The auditor should ascertain the reasons for such outstanding items from the management. He should also examine whether any such items require an adjustment! Write off. (iv) Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by bank advices. (v) Check the form of Balance Sheet as per Part I of Schedule VI which requires that the bank balance should be segregated as follows: (i) With Scheduled Banks. And' (ii) With others. In the last mentioned case, the nature of interest, if any, of a director or his relative with each of the bankers should be disclosed. The nature of deposit in each case should be stated, e.g., current, fixed, call, etc. in case of a non-scheduled bank, its name and the maximum balance that was held by it during the year should also be disclosed.
(18) Sales Commission Expenditure (1) Ascertain agreement, if any, in respect of sales transaction actually occurred during the year carried out by authorized parties on its behalf. If yes the commission should be in accordance with the terms and conditions as specified. (2) Check evidence of services rendered by the party to whom commission is paid with reference to correspondence etc. (3) Ensure that the sales in fact have taken place and the same has been charged to profit and loss account. (4) Compare the amount incurred in previous years with reference to total turnover.
(19) Purchase Return (i) Examine debit note issued to the supplier which in turn may be confirmed by corresponding credit note issued by the supplier acknowledging the same. The relevant correspondence may also be examined. (ii) Verify by reference to relevant corresponding record in good outward book or the stores records. Further, the figures in these documentary evidence should be compared with the supplier’s original invoices for rates and other charges and calculation should also be checked. (iii) Examine in depth to eliminate the possibility of fictitious purchase returns for covering bogus purchases recorded earlier when such returns outwards are in substantial figure either at the beginning or end of the accounting year. (iv) Cross-check with reference to original invoices any rebates in price or allowances if any given by suppliers on strength of their Credit Notes.
(20) Assets Abroad (i) Examine the title deeds of immovable properties abroad. (ii) Ensure that the immovable properties abroad have been properly classified and disclosed. (iii) Where documents of title relating to assets held abroad are not available for inspection, a certificate should be obtained from the agent or any other party holding the document. (iv) Ascertain that certificate has been obtained disclosing unequivocally that they are free from any charge or encumbrance.
(21) Plant and machinery: (i) Verify the existence of plant and machinery by reference to documentary evidence available and by evaluation of internal controls. Plant and machinery in existence at the commencement of the year is normally verified by examining the schedule of plant and machinery and the fixed assets register. Acquisition during the year can be verified by reference to the Board’s minutes, purchase invoice and entry in the fixed assets register. (ii) Vouch the cost price of any plant and machinery including freight and insurance plus any cost of installation with relevant invoices, etc. The auditor should verify that due provision for depreciation has been made. When an asset has been revalued, depreciation should be provided on the revised value and not on the historical value. The mode of disclosure in the balance sheet should also be seen. Check that requirement of relevant accounting standards, viz., AS 6, AS 10, etc. regarding accounting treatment, presentation and disclosures have been followed. (iii) See that the various items of plant and machinery possessed by the client at the year end are recorded in the financial ledger and in the fixed assets register. Proper inquiry should be made to ensure that plant and machinery scrapped, destroyed or sold during the year has been properly adjusted in the books of account as also in the fixed assets register. If on physical verification material discrepancies are found, the auditor should see that the discrepancies have been properly adjusted in the books of account. (iv) Comment on physical verification made by the management. Under the Manufacturing and Other Companies Auditor’s Report Order applicable to companies, physical verification of the fixed assets including plant and machinery is the responsibility of the management. This they can do by examination of physical verification instruction programme and working papers.
(22) Machinery acquired under Hire-purchase system (i) Examine the Board’s Minute Book approving the purchase on hire-purchase terms. (ii) Examine the hire-purchase agreement carefully and note the description of the machinery, cost of the machinery, hire purchase charges, terms of payment and rate of purchase. (iii) Ascertain that the machinery has been included in the related assets account at its cash value. Also installments due have been paid and the hire-purchase charges applicable to the period from the commencement of the agreement to the end of the financial year have been charged against current profits. (iv) Ensure that machinery acquired on hire purchase basis has been included at its cash value in the balance sheet and depreciation has been calculated on the cash value from the date of the purchase. The amount due to the hire purchase company in respect of the capital outstanding has either been shown as a deduction from the machinery account or as a separate amount under current liabilities.
(23) Borrowing from Banks: Borrowing from banks may be either in the form of overdraft limits or tern loans. In each case, the borrowings should be verified as follows: (i) Reconcile the balances in the overdraft or loan account with that shown in the pass books and confirm the last mentioned balance by obtaining a certificate from the bank showing the balance in the accounts as at the end of the year. (ii) Obtain a certificate from the bank showing the particulars of securities deposited with the bank as security for the loans or the charge created on an asset or assets of the concern and confirm that the same has been correctly disclosed and duly registered with Registrar of Companies and recorded in the Register of Charges. (iii) Verify the authority under which the loan or overdraft has been raised. In the case of a company, only the Board of Directors is authorized to raise a loan or borrow from a bank. (iv) Confirm, in the case of a company, that the provision contained in section 293 of the Companies Act, 1956 as regards the maximum amount of loan that the company can raise has not been contravened. (v) Ascertain the purpose for which loan has been raised and the manner in which it has been utilized and that this has not prejudicially affected the concern.
(24) Discounted Bills Receivable Dishonoured: (i) Obtain the schedule of discounted bills receivable dishonoured. (ii) Check the entry in bank statement regarding the amount of bills dishonoured and see that the bank has debited the account of client. (iii) Verify the bills receivable returned by the bank along with bank’s advice. (iv) See that the dishonoured bills have been noted and protested by following the proper procedure and the account of the drawee or the debtor is also debited. (v) Check that bank commission, if any, charged by the bank has been recovered from the party.
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