Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

How would you vouch and verify the following?
a) Capital work in progress
b) Advertisement expenses
c) Gratuity to employees
a) Answer
Capital work in progress generally consists of two accounts namely capital stock and work in progress. Capital stock is the stock held for the purpose of use or consumption in the construction, erection or installation of any type in order to create fixed asset.
Work in progress is the part of work completed or uncompleted which will be eventually capitalized after complying with certain conditions.

The auditor should examine the following to verify the capital work in progress:
 Examine the capitalization policy of the company
 Evaluate the internal control systems relating to the capital stock stores and ensure that the stores records are separately maintained.
 Examine the process and internal control systems as to the capitalization of fixed assets
 Obtain the capital work in progress sheet and ensures that the total agrees with the capital work in progress account i.e. control account.
 Test examine the capital stores ledger with receipt and issue notes
 Obtain the physical verification report if the stores have been physically verified otherwise obtain the stock statement duly certified the competent personnel of the capital stores
 Ensure that there is underlying policy for valuation of work in progress and it
 Capital work in progress should be certified the concerned technical staffs of the company.
 Ensure that no depreciation has been charged on the capital work in progress

b) Answer
 Ascertain the nature of advertisement expenses to ensure that the same have been charged properly.
 Obtain the complete list of advertisement, media wise, i.e., newspapers, slides, hoardings, magazines, television, radio, etc. showing the dates, exact location, timings, etc., along with the amounts paid in respect of each category.
 See that advertisement expenses relate to the client‟s business.
 Ascertain whether there is a regular contract with an advertising agency. See that regular statements are obtained from the agency showing the advertising media and amounts debited to the client. Discount, if any, should be properly adjusted and disclosed in the bills.
 Check the receipts for amounts paid for the advertising expenses incurred.
 See that outstanding advertising expenses have been properly disclosed on the liabilities side of the balance sheet.

c) Answer
 Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity may either be worked out on actuarial rules or agreement or on the presumption that all employees retire on the balance sheet date.

 Ensure that the basis of computing gratuity is valid.
 Verify computation of liability of gratuity on the aggregate basis.
 Check the amount of gratuity paid to employees who retired during the year with reference to number of years of service rendered them.
 See that the annual payment has been charged to profit and Loss Account in case the concern has engaged other retirement benefit administrator.
 Ensure that the accounting treatment is in accordance with set standards “Accounting and Reporting Retirement Benefit Plan”.

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