HOW TO START AN AUDIT AND TAKE IT TO A CONCLUSION
Being in professional field like Chartered Accountancy or professional course like C.A. C.S or C.W.A we all know the importance of Practical Training. On professional course the practical knowledge is as important as theoretical knowledge. By Common Definition, a “Professional is someone who possesses the skills and knowledge –whether a prestigious university degree or simply years of on the job training necessary to do a job,” So I am going to talk about the process of acquiring the knowledge of training .Hope all those who would be passing IPCC in February would find this article is of some help to them, hope what I had learned through my practical experience may help others in their Article ship. It is not detail process its just the guidelines on how we can start an audit.
Step wise Guidance on HOW TO START AN AUDIT AND TAKE IT TO A CONCLUSION.
Step 1. The First Step on any audit is to check the Opening Balances. Take the Print of Trail Balance and Take the Balance Sheet of the Previous Year or Previous Quarter which is audited (as relevant to you) and Tick the Opening Balances. This is the first and crucial step to ensure that the last audited Balance sheet Figures have been kept intact and that we do not need to match the figures of previous year. If Opening Balances Tallies with the Balance sheet then we can move on to conduct the audit of this year or this period if not the first step would be to make the balance sheet tally with the Trail Balance.
Step 2. Vouching/Verification: Vouching is a Crucial Step in any audit. It is during Vouching that we can track the major frauds or the major variances. Normally we all are feed up with the Vouching claiming it to be a monotonous process but in my opinion Vouching means not just the arithmetical accuracy of
Invoices with the Books of Accounts but also the process of recording the entries in the books of Accounts. If we just tally the invoice amount with the books of accounts then it is a boring job and nothing major can be tracked but vouching if done properly can give us the whole idea about how the books of accounts have been maintained. In addition to just tallying the Invoice amount with the Books what we can check is whether invoices numbers are being properly recorded or not so that not even a single invoice is not booked twice. Whether the invoice date matches with the entry date or not and whether the Invoice is being booked in correct head or not. In addition to this we can also check whether the Invoices produced are original or fake invoices. This is also the scope of our audit to catch the fake bills or invoices.
Practically 100% vouching is impossible and boring, so the trick out here is to do the vouching of few selected months but the months which we choose to do vouching we need to do 100% vouching of that month because the bills which appear normally in 1 month same bills appear throughout the year in this way we can track the frauds or mistakes. If non material mistakes are observed then those can we recorded and brought to the knowledge of management which in turn will correct it but if material mistake is noticed with particular head or Particular Vendor then we need to check all the Invoices of that vendor or head. Similarly in the process of Vouching we need to take a notice whether TDS are being deducted or not or whether Service tax have been booked or not and other Statutory Dues Liability that may arise are properly accounted or not.
Ok so vouching is necessary and 100% vouching is not to be done, and then what is the way out? The way out is to choose the month of which the vouching is to be done. Depending upon the materiality and time you have been provided to do a audit vouching can we done maximum of 12 months or minimum of at least 3 months if audit is of whole year. Among 3 months don’t forget to do the vouching of April since it is the beginning of Financial Year and so there is high probability that there is mistake in booking the prepaid amount or the Annual Maintenance Contracts (AMC) is made in this month so if we do vouching of this month then most probably we can look after most of the prepaid calculations and AMCs Invoices (In Indian context, its April as per relevant country do check the month which is the opening month of the financial year.) Similarly do the vouching for the month of March (or the financial year ending month). Now the third month which we need to choose depends upon the information as reviled by trail balance that is the month with maximum number of transaction is to be choosed. If we have time we can do vouching of alternative months.
Step 3: Checking of the Fixed Assets Register: Another most important step in the auditing is checking the Fixed Assets Register to check whether proper recording of Fixed Assets have been done or not (i.e. the date of purchase, the date of put to use) . If Fixed Assets register is not mentioned then also we need to check all the additions made to fixed assets in that period with all the invoices and supporting and other necessary details like whether the trail run expenses have been capitalised or not, similarly if vehicles have been purchased whether the insurance made before bringing the vehicle on road whether that have been capitalised or not. Same way we also need to check whether revenue expenditure like repair or maintenance have been capitalised, if capitalised they need to be reversed since revenue expenditure can’t be capitalised. If time allows we can conduct the physical verification of the purchased assets as well.
Similarly if Assets is being sold then we need to see whether the assets were sold in profit or loss and whether the proper accounting has been done or not. Similarly we need to see from the point of view of TAX as well like whether there was capital gain and if yes has tax been paid on capital gain or not.
Step 4: Another step in auditing is checking the Bank Balance from Bank statement. Firstly check the number of banks appearing in trail balance and then check the Balances of each bank. Normally the bank’s balance may not tally with Book’s balance then in that case do check the Bank Reconciliation statement (BRS).While checking the BRS do check the clearing dates of the Cheques from the bank statement of another month. For
Example: If we are checking the bank balance of March and cheques which are not cleared is kept in BRS then we need to check the clearing dates which are appearing in BRS from the Bank Statement and Those cheques which are older than 3 months they need to be reversed on the same date on which they were firstly made.
Similarly if there are Fixed Deposits (FD) in Books we need to reconcile the amount with the FD’s Statement and check whether the interest earned in FDs are properly booked or not and whether TDS as deducted by the banks or financial Institutions are appearing in 26 AS or not.
Step 5 Payment of Statutory Dues: Statutory dues are the dues which are compulsory to pay to the Government. Depending upon the type of industry where we are doing or conducting our audit there may be applicability of various kinds of Statutory Dues. So before we start the audit we need to know the applicability of statutory dues in that particular client and the due dates of payments and returns. Normally every industry has Statutory Dues Like:
Employees Provident Fund(EPF),Employees' state Insurance Corporation, Income Tax, TDS ,Service Tax, VAT, Excise ,Luxury tax , Enter tax, Municipal taxes Payment, Cable tax, WCT and other similar kinds of payments of statutory fees . We need to check whether these taxes are being regularly paid or not and if paid if these payments are on due date or not and if these are on due dates whether proper returns are being filed or not as required by laws.
Statutory payments are to be checked in details and deviations even of small amount are to be corrected. So you all might be asking how what to do. For what to do question do go to Google and type the relevant key words then we will get the rates of taxes, due dates of taxes, etc. In order to check the Statutory dues we need to know the exact amount of or % of deduction that is to be made or paid .For Example : If we have a doubt that in the bills provided by Advocate TDS of 10% is to be deducted as it is a Professional Charges and if the client claims that since it is contract we can deduct TDS at 2% then we need to look into the nature of service and nature of agreement and if we think the rate of TDS is 10% we should make it 10%,( For various rates do visit Google and learn Rates of Normally Applicable Taxes before you go for Audit ,Note it down in your diary and keep the diary with you).
Step 6: Checking of Loans. Loans both secured as well as unsecured is to be checked and while checking secured loans do check the papers of Loans, loan sanction letter, loan disbursement letter, do check the closing balance as appearing in books with the Loan Repayment Schedule. Check whether loans are being paid as per repayment schedule or not. Whether there is any personal guarantee of directors or any other employees, what are the assets those are pledge and its papers. Similarly in case of Unsecured Loans do check the rate of interest and whether or not TDS is being Deducted or not.
Similarly if Company is granting loans do check that it does not grant loans to directors or share holders as it may come under secton 22(2) e deemed dividend.
Step 7: Checking of Inventory is possible depending upon the industries where we are going for audit. But for most of the clients there are inventory. While checking inventory do check the Physical stock as well as the papers whether any claims stands against those goods or are they pledge in the banks for loans and all. Do proper documentation like taking management confirmation letter on Proper Physical Verification of Inventory at Regular Intervals if we haven’t checked it physically.
If the Industry is Manufacturing Unit or Consumption Based Unit or a Hotel Do check Monthly Consumption in books with Stores. Now the Question may arise what is the process? The Process is simple, as we use to find COGS (Cost of Goods Sold)
COGS=Opening Stock + Purchases – Closing Stock, in the same way
Consumption =Opening Stock of that month + Purchases made in that month-Closing Stock of that Month.
Step 8: Revenue Vs Sales: While a little earlier we checked whether statutory dues were being paid on time or not and if paid what were the rates and whether returns were being filed or not. But it was only a step, the main step is to determine the amount on which statutory taxes were to be paid and for this purpose we need to look into the various ledgers like Sales ledger or purchases ledger .Employees Salary ledger and other similar ledger as we go on checking the Statutory Dues. For Example: If our concern is a manufacturing or trading concern and there is applicability of VAT then we need so see the ledger like sales ledger and determine the amount of VAT liability depending upon the % of VAT Rate applicable like1% ,4% 12% or 20 % and whether any input credit are being availed or not. If availed then whether such input credit can be availed or not. All these information will be there in Government Site’s, we just need to search it and use it.
Step 9: Ledger Scrutiny. It is the most important step as it is the step which determines the accountability of the books of accounts. Basically Ledger scrutiny is a vast process and it depends upon industry to industry on how the books of accounts are being maintained. It depends upon us how we use our analytical skills. In order to show it in simplest way let us go by an example. Suppose we are checking the ledger of Rent. You see 15 entries in this ledger .At first instance we may not find it unusual but when we think that a year has 12 months how can we have 15 entries in rent’s ledger. When we open it we find that Rent is given in advance and so booked in advance and indeed there were 3 entries by mistake which were to be posted somewhere else were by mistake posted here. If our mind doesn’t click at having 15 entries in the ledger which need to have 12 entries then we can’t find the mistake but we our mind gets clicked at this instance then we can catch that error. So Ledger scrutiny is a analytical process which develops as the experience grows.
Similarly in ledger scrutiny we need to check the nature of ledger and see whether the ledger which is having the same nature of balance or not. Like loan accounts must have credit balance if it has debit balance then we need see what is causing it to have debit balance. Same is the procedure with other ledgers.
Step 10: Creditors Ledger Scrutiny: While doing the ledger scrutiny of creditors we need to look into the comparatives of the last 6 months or a year and analyse the ledger. For Example: If there is no change in balance outstanding since last 6 months or 1 year then we need to check the ledger whether this creditors is still standing or has they been paid and entry is not booked because creditors won’t keep silent if there payment is not being made.
At Last but the most important of all .Basically these were the guidance steps on starting and concluding an audit for a normal industry. I have not gone in detail explaining the rates of taxes or the applicability as I suggest for this do visit Sites (mentioned below) and maintain a diary and note the things which you need or which is relevant for you. Similarly every time management tells the things which you have a doubt please ask them to give that in writing. If we say so then even if that is correct in their part they will check twice before giving it to you in writing. Never Communicate with client in verbal words regarding the things you need always mail them and if possible do keep your Principal in cc so that everything is in writing. Do keep you queries in mail and discuss the queries firstly with your team then with your CA and with client and always learn from the queries.
www.incometaxefilling.gov.in For Income tax Return, Pan Status and 26 AS.
www.mca.gov.in For Matter Related to Companies and Companies Act
www.aces.gov.in /www.cbec.gov.in For matter related to Service Tax and other Notifications on Indirect Taxes
www.dvat.gov.in For matter related to Vat.
This is just a draft .Hope this might give you an idea into the process of how to start the audit for further information do ask your senior or colleagues and the ones working in clients places since knowledge grows by sharing.
(I am very thankful to my principal,C.A., seniors ,my colleagues and to all my friends which with whom i work ,i am indebt to all of you ).