How to vouch the bill received book and bill payable book?

Bill receivable book:

At the time of vouching the bill receivable book, auditor should take the following steps.

1.      Verifying of balance:

The auditor should verify the balance of the bills receivable with the bills in hand and the bills not over due.

2.      Verify the posting:

Auditor should verify or check the posting of bills receivable in the book.

3.      Check the proceeds:

Auditor should trace the carryon or proceeds of matured and discounted bills which have been paid or discounted through cash book/bank book.

4.      Checking of bank certificate:

Auditor should check the certificate acquired from the bank for the collections of the bills sent to the bank.

5.      General checking :

Auditor is responsible to check the casts, cross casts, and carry forwards.

Bills payable book:

The auditor when vouching the bills payable book will perform the following work.

1.      Checking against cashbook:

Auditor should verify or check the bills paid during the period and compare it with the cashbook and bills returned.

2.      Checking of bills not matured:

Auditor should responsible to check the total bills not matured and should see that these should agree with the credit balance on the bills payable account in the ledger.

3.      General checking:

Auditor should check the pasting of the bills payable. He should also check the casts, cross costs and carry forwards.

Internal check over postal sale

For the postal sale following system internal check is very important.

1.      V.P.P record:

These goods should be maintained in the V.P.P. register which are being sent by post. The following amount of those goods should be also written against their Column.

2.      Receipt of cash:

The amount of cash received through the post office should be recorded in the v.p.p register against the goods.

3.      Deposit of daily cash in bank:

Received cash must be deposited in to the bank daily. If it not possible on that day then on next day it must be deposited.

4.      Recording in cash book:

All the cash which is received in one month should be recorded from the v.p.p. register to main cash book and sales account.

5.      Recording of returned V.P.P:

Those items which were sent to the customer but they refused to accept them, and returned it such returned items must be recorded in the v.p.p register.

6.      Checking of register:

There should be a frequent checking of v.p.p register by responsible official. Such examination will also clear the position of payment made by the cashier

Internal check for sales over the counter

There are following system can be recommended for the sales over the counter.

1.      Duties of sales man:

·        Only the sales man should make the sale.

·        Sales man should not receive the cash from the customer.

·       Sales man should prepare the duplicate copy of cash memo. He should give both the copies to customer  for payment to the cashier.

          2.     Duties of cashier:

·        Cashier wills only received the payments and sign on both the copies of the memo.

·        He will return the original copy to the customer and retain the carbon copy.

·        He will not make the sale.

3.      Checking of cash:

A responsible official will daily check the amount of cash sales over counter. He will also compare it with the summaries of sale prepared by the sales man and cashier.

4.      Cash deposit:

All the received daily must be deposited in the bank on the same day or next morning.

5.      Entry in cash book:

When the cash received over the sales counter must be entered in the cash book.

6.      Use of cash register:

To record the daily cash sales over the counter cash register can also be maintained. It will be helpful for effective internal control.

How journals and trial balance are vouched ?

Journals:

Journal is basically used for recording, opening, adjusting and closing entries and also those transactions which could not be recorded in any other book of original entry. The evidence to vouch the entries would be in the form of vouchers, correspondence, contracts, minutes etc.

There are Following journal entries could be vouched.

1.      Opening entries:

These should be checked with reference to previous years audit working papers or audited balance sheet.

2.      Closing entries:

These should be checked with reference to the audited closing balances of the general ledger.

3.      Transfer entries:

Authority should be seen for the transfer from one ledger account to another ledger account. The auditor must see that direct transfer from one, account to another account is not made.

4.      Adjusting entries:

The auditor should see that all outstanding liabilities in respect of expenses relating to period under audit, income received in advance and income corned and not received are fully made. Adjustments in respect of expenses prepaid should also be closely scrutinized.

5.      Rectification entries:

The details of actual mistakes should be scrutinized and transactions must be thoroughly checked with reference to the available evidence. The necessary entries must be authorized by a responsible official.

6.      Transactions for which there is no other book of original entry:

Reference must be made to correspondence, minutes of board/ shareholders and other relevant documentary evidence to vouch the transaction for which there is no other book of prime entry e.g. bad debts, bills dishonors, acquisition of different assets and liabilities taken over.

7.      Casts & postings:

The auditor also checks the casts of the journal vouchers and journal entries and then the pasting to the respective ledger accounts should be checked.

Vouching of trial balance:

The statement of balance extracted from ledger accounts is called trial balance. The trial balance object is to see the arithmetical accuracy of the transaction and to check the comprehensive balance of the accounts ledgers. The auditor should check the following things in the trail balance.

1.      Checking of trial balance:

In the trail balance the both sides are check that is equal or not.

2.      Accuracy of balance:

Examine that all balance have been accurately recorded in the trial balance.

3.      Proper head:

Verify that the entire amount has been recorded in its proper head.

4.      Inclusion of adjusting entries:

Check that all the adjusting entries have been properly included in it.

5.      Transfer of balance to ledger:

Verify that all the balances of ledger accounts have been transferred.

Steps of vouching a petty cash book kept on imp rest system ?

Petty cash book:

It is usually kept on the imp rest system. The auditor should ascertain that the system of petty cash is maintained on the imp rest system and note the amount of imp rest should be consistent and in line with the requirements of the company although it should not necessarily be rigid.

After examining the adequacy or otherwise of the system of internal check, the following should be performed for vouching the petty cash book.

1.      Checking of amount drawn:

Checking the amount drawn for petty cash with reference to cash book or bank statement.

2.      Casts & carry forward:

Check the cast, cross forwards of the petty cash book.

3.      Check of vouchers:

Tests check the petty cash vouchers with the supporting evidence.

4.      Signature:

It should be seen that the petty cash book has been signed by cashier at the end of the month.

5.      Pasting:

Pasting should be checked in to the general ledger.

6.      Surprise/physically counting:

A surprise count of the cash kept with the petty cashier is also suggested. At the end of financial closing the cash in hand must be physically counted.

7.      Allocation:

Expenditure Allocation should be properly verified.

8.      Authorization of payment:

It should be seen that payment vouchers are properly authorized.

In auditing the cash book, what use would you make of the bank statement? How would you check the bank reconciliation statement?

Audit of bank statement:

The bank column of the cash book should be verified with the bank statement or bank pass book according to the following procedure.

1.      Debit side of the cash book:

The amount shown as deposits in to the bank should be checked with the credit side of the bank statement. The date entries in both the above records should be compared and it should be noted that they do not materially differ from each other. The corresponding entries which do not appear in the bank statement, pay in slips should be examined to ensure that the amounts were in fact deposited in to the bank.

2.      Credit side of cash book:

All entries in respect of payments by cheques dishonored cheques relating to bank collections, interest and bank charges, or any other amounts charged by the bank should be checked with the debit side of the bank statements.

3.      Casts:

A test check of casts, cross casts and carry forwards of bank statements is also suggested.

Check of bank reconciliation:

The bank reconciliation should be checked as under:

a.     Bank balance as at closing date should be verified from the bank certificate directly received from the client’s banker.

b.    Amounts deposited but not credited by the bank should be verified from the pay in slips and with the subsequent realizations noted in the bank statements of subsequent period. Entry by debit to the respective debtor and credit to the bank account should be made relating to those cases of dishonored cheques which were returned with the remarks of insufficient funds or refer to drawer etc.

c.     Subsequent clearance of all cheques issued but not presented for payment as at the closing date should be traced in to the bank statement of subsequent period.

d.    The closing balance in respect of cash book shown on the bank reconciliation statement should be checked with the closing balance indicated on the cash book.

Various kinds of Errors in accounts. their Effect on trial balance. how auditor will detect them?

Generally in books of accounts we find the following types of errors. Detection of errors is the main advantage of auditing.

1.      Errors of omission:

When the transaction has been either omitted wholly or partially. It is called an error of omission. Such an error does not affect the accuracy of the trial balance and will be difficult to detect, so the error will not be disclosed by the trial balance. For example a credit purchase is omitted to be record in the purchase book or by mistake a smaller amount is recorded in the book of original entries and posted as such there from. These are the error of omission. An auditor may have detected the error by comparing the data of previous period with this item so the critical analyses of the auditor locate such type of errors.

2.      Errors of commission:

When a transaction is incorrectly recorded, either wholly or partially is called error of commission. For example wrong posting from original books to ledger, incorrect entries in the original record and addition, such errors will affect the trial balance. Such errors can be detected by checking the arithmetical accuracy of the original entries and posting from the ledger and original books. It can also be find when somebody challengers the transaction. Such errors are discovered at the time of extracting the trial balance. It should be corrected then and there but in certain cases they are not detected and the trial balance remains out of balance.

3.      Errors of principal:

This is an error where no proper distinction has been made between the accepted accounting principles. Such errors may be committed intentionally or unintentionally. For example ignoring the outstanding assets, wrong allocation between revenue and capital valuation of assets on wrong principle. Such an error shall affect the profit and loss account and balance sheet. It can be detected by independent checking and searching inquiry. Because such errors are not found by the trial balance or routine checking.

4.      Compensating errors:

It is an error which is counter balance by another error of same amount in the opposite direction. For example an error on the debit side of the account may be balanced of another error with the same amount on the credit side of some other account or an over casting of an count by Rs. 1000 may be counter balanced by under casting of an account of the same amount. Such errors will not affect the trial balance and can be detected by intelligent and arithmetical checking of books.

5.      Trial balance errors:

While preparing the trial balance some error may happen called trial balance errors. These may consist of

·        Entering an amount incorrectly.

·        Errors casting in the trial balance.

·        Wrong addition of the trial balance columns.

·        Omission of cash and bank balance.

·        Balance Omission from the trial balance.

Such errors can be detected by routine checking. An auditor will locate the difference in the trial balance keeping in view the following points.

                               i.     Checking of total:

The auditor should first of all check the total of the trial balance.

                              ii.      Compare the names:

He should compare the names of the accounts in trial balance with the ledgers. Some times in case of cash book balance of some accounts may not be transferred to the trial balance.

                             iii.       Compare debtors and creditors:

The auditor should compare the list of the debtor’s accounts with the creditor account.

                             iv.      Locate the ledger:

Auditor should try to detect the errors in a particular ledger.

                              v.     Divide the difference by two:

Auditor should separate the difference of trial balance by two and check that is there any items of this value.

                             vi.       Checking of positing:

He should check all those amounts of posting which are corresponding to the difference or half of the difference.

                            vii.        Checking of exact amount:

Auditor should verify the exact corresponding amounts which are equal to the difference or half of the difference.

                           viii.        Importance to the totaling:

He should pay special attention on the checking of total. If the difference of the trial balance is separate by the error then it will be due to misplacement or figure transposition. For instance 65 for 56.

If all the above tests are applied and error is not located then all the accounts should be checked thoroughly.

Discuss three basis used for calculating predetermined factory overhead rates?

 FOH predetermined rate is calculate on five bases some of these are follows:

1. Materials costs
2. Direct labor cost
3. Direct labor hours

1. Materials costs:

                                  We can calculate predetermined FOH rate on the bases of materials cost by the following formula:

                       Predetermined FOH rate= Estimated FOH ×100

                                                                    Materials cost

2. Direct labor cost:

                                    We can calculate FOH predetermined rate on the bases of direct labor cost, the formula is:

                           Predetermined FOH rate= Estimated FOH ×100

                                                                         Direct labor cost

3. Direct labor hours:

                                        If we calculate FOH rate predetermined on the bases of direct labor hours. The formula is:

                          Predetermined FOH rate= Estimated FOH ×100

                                                                         Direct labor hours

     

Procedure of Vouching the Purchases Ledger, Sales Ledger and General Ledger ?

Audit of purchases ledger/Book:

After the books of original entries have been vouched and pasting there from fully checked, the following further steps should be taken in connection with the audit the purchases ledger which is also called Sundray creditors ledger or accounts payable ledger.

1.      Casts:

The casts and carry forwards of the purchases ledger should be checked.

2.      List of balances:

The list of closing balances of creditors should be checked with the purchases ledger and the control account of the above ledger in the general ledger should be tallied with the total of the list of balances. The casts of the schedule of creditors should also be checked.

3.      Confirmation:

The purchases ledger balances should be compared with the confirmation or statement of account received. Any differences must be sorted out and reconciled.

4.      Old balance:

The amount remained arrogate or unclaimed for a long time, should be noted and those which do not represent payable, should be suggested for write off.

5.      Dispute cases:

If certain amounts due to the creditors are in dispute, it should be seen that they are shown as contingent liability and are adequately provided for in the accounts.

6.      Debit balance:

In the case of debit balances on any of the accounts, the auditor must satisfy himself that they are really recoverable.

7.      Scrutiny:

Scrutiny should be made to make sure that no item is left unlike.

Audit of sales ledger/Book:

Sales ledger is also called sundry debtors ledger or accounts receivable ledger. After the books of original entries have been vouched and pasting checked, similar work as explain under the audit of purchase ledger should be carried out for the audit of the sales ledger.

Further, the list of debtors must be thoroughly scrutinized. Any legally time barred debts must be written off. Steps should be taken to ensure that adequate and proper provision for doubtful accounts.

Audit of general ledger/Book:

After the pasting in to general ledger has been checked, the following work should be done to audit the general ledger.

1.      Casts:

Casts and carry forwards of the accounts of the general ledger should be checked.

2.      Scrutiny:

The general ledger should be scrutinized to ensure that no entry remains unlike. This would assist in uncovering the cases of entries which did not exist in any of the books of original entries.

3.      Trial balance:

The closing balances of the general ledger must be checked with the trial balance.

Define Prime cost and Conversion cost?

    1. Prime cost:

                                  It is the combination of direct materials cost and direct labor cost. Prime is derive from primary which means primary cost which occurs in the start of the process so its called prime cost. It is also called flat cost or basic cost.

                               Direct materials + Direct labor =Prime cost 

2. Conversion cost:

                                   It is the combination of direct labors cost and factory overheads cost. Direct labor and FOH are the two costs which convert raw materials into finished goods therefore it is called conversion cost.

                          Direct labor + FOH =Conversion cost 

Define joint product and By-product?

  1. Joint cost:

                                Joint product represent two or more products separated in the course of the same processing operation( derived from a common source of materials) each usually requiring further processing and each product having such relative volume that no one product can be designated as a major product.

2.      By- product:

                             A By-product is an article relatively minor in the term of total value and is derived incidental to the production or manufacture of one or more major products.