Ledger scrutiny is part of audit procedures, like vouching, posting etc.The scrutiny is required in all type of audit whether the same is Internal Audit, Statutory Audit. Ledger scrutiny is to be done for all type of clients whether the same is Pvt Co., Public Ltd, or a concern. The ledger Scrutiny is also required irrespective of whether the accounts are maintained manually, on Tally, or SAP or customized accounting software. Where ever there is a ledger, whether the same Stock Ledger, Accounts Ledger,Drs, Crs, Exp. Ledger, Ledger scrutiny is must.
Though, we have carried out ledger scrutiny as a part of audit process since last so many years the word has not explained in simple terms stating the steps involved in it. We used to do the ledger scrutiny at the end of the audit and the same is generally carried out by a senior assistant or a partner of the firm.
There is no audit without the ledger scrutiny. One may surprise why the ledger scrutiny is necessary after all the audit techniques and procedures are carried out. The answer lies in the importance of the ledger scrutiny in any audit.
There are no standardized, procedures for a ledger scrutiny however, I try to summarized the steps as what we are doing the same in last twenty five years.
Reconciliation of Opening and Closing Balance:
The opening and closing balance in a particular ledger account should be reconciled to find out that the balance includes only entries pertain to the said account and each and a very amount in the balance is identifiable with the said account.
The Drs. Ledger of a particular customer shows opening & closing bal. with outstanding ascertainable against specific sales invoice, debt or credit note. The balance outstanding is on the correct side of the account for which the same is maintained.
All the entries in the opening and closing balances, which are not identifiable as above, must be looked after and an audit query is to be raised.
Journal Entries in the Account:
The journal entries, in the account, including the transfers to and fro from the account to be traced and the reasons for passing a journal voucher to be ascertained. The transaction flow of the journal entries to the various accounts should be ascertained and verified for a particular account. The necessity for passing the journal voucher for particular transaction is also to be verified.
Amounts & Transactions in the account follows a specific charters tics of the said account:
This can be explained by an example of say The ledger account of Electricity Expenses. Their are monthly bills to be posted and the payment if paid against the particular bill both the entries are twelve in number including provision for the last month. The opening provisions to be paid or reversed as the case may be. The charters tics of the said accounts are:
1. Number of entries twelve for due.
2. Average amount of bill has some range say between Rs. 4000 to Rs.5000/-
3. This account has opening as well as closing provision.
4. Payment entries may vary.
5. If payment entries vary it must contain interest and or penalty for delayed payment.
6. There are same number of entries for each location.
It is necessary to write-down and understand all the specific characteristics of a particular account before starting the scrutiny of the said account as all the ledger account has specific characteristics.
If an amount of say Rs.15000/- is debited to account, it may be a deposit or on account of repairs and not electricity charges. A deviation with the specific charters tic of account will be an audit query.
Transactions in the Account are nearest with the Head of the Account:
Repairs and maintained account has feature of repairs with major repairs and minor repairs. Major repairs which does not increase the life of the asset still be a part of the repairs and maintained account however, where the life of the asset increases due to major repairs, the the account head nearest for the particular Fixed Asset Account.
Combo ledger accounts has different characteristics for different type of transactions:
Repairs and maintained account has regularity for maintained charges as we observed in electricity charges above, while repair transaction has no such regularity and entered as and when occurred or entered in to.
In the combo account head ledger accounts we have to ascertain the specific charters tics of the type of transaction then the ledger account.
Type of Transaction whether Capital or Revenue, Recurring non-recurring in the Ledger:
There are specific account heads for Capital transactions and for Revenue transactions, the same be looked in to in the particular account with the nature of transaction.
The nature of transaction form a basic charters tic for a particular ledger account. The deviation form the nature in the ledger will be a audit query.
Period of Transactions in the Ledger:
There are three basic periodicity of the transactions. The transactions as on Opening date of the books or ledger that is as on 01st April, the transaction as on the closing date of the financial year i.e. 31st March, and the rest of the transactions which are entered in to and squared up in the same financial year between 01st April, and 31st March, they are incurred and paid and show no tendency of carried forward, and brought down.
The peculiarity of the transaction w.r.t. period will also help in understanding the transactions in a particular ledger account and form part of the ledger Scrutiny.
Transactions in the ledger having arithmetic calculation:
For such transactions in the ledger, the calculation part form the basics in scrutinizing the said ledger. The Depreciation, Interest of loans, Capital, ledgeraccounts form the part of such transaction.
Cross Verification for the Gross check:
This Step in the ledger scrutiny will help in verifying the arithmetic accuracy as well as gross correctness of a particular ledger account.
The examples are Interest on unsecured loan paid account will be exactly propionate to the Unsecured Loans Account. If the Loans are increased the interest on loans will also increased proponately. A micro scrutiny will also undertaken w.r.t. charges in the rates of borrowings in comparison to the previous year.
Checking of Corresponding Account or Related Account:
The ledger of taxes direct as well as indirect will generally form in this type of corresponding or related account.
If We calculate the Service tax of professional fees account both these account will reflect matching results. Sales Account with VAT Account and Input Credit account. Salary and TDS deducted on Salary. The variation if any can be reconciled w.r.t where the TDS is not deducted.
This step as a tool will serve a vital part in the ledger scrutiny.
These are the basic steps of ledger scrutiny, the list may increase as we go to the micro level and each step will be a vital part of audit.
The Ledger Scrutiny will be essential part of any audit process whether the same will be done on system with the help of software of Excel tool. It will be easy to apply a particular method of verification once the steps are understood correctly.
CA.Satish C Badve.