Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Describe the manner of checking the following schedules prepared the management at the end of the year and indicate in detail, how such verification would assist the auditor in his work:

a. Schedule of Outstanding Liabilities
b. Schedule of Advances Recoverable
a. Answer
i) Manner of checking:
 Compare the outstanding liabilities of the current year with those of the previous year.

 Scrutinize the outstanding liabilities list of the previous year to determine whether all items appearing therein have been paid or otherwise adjusted;

 In respect of recurring expenses, ensure that expenses for the full period of the account have been provided for.

 Verify subsequent payments from the cash book for the next few weeks and see whether any payment relates to the period under checking.

 Refer to the minute books, contracts, legal correspondences etc. as these may give a clue as to the possible existence of outstanding liabilities, including those for goods-in-transit.

 Refer to goods inward book, R/R register etc. towards the end of the year for determining liabilities on account of purchases. The auditor should examine the cut-off arrangements and the system of internal control in respect of expenditure incurred and payments made.

A certificate from a responsible official to the effect that all outstanding liabilities have been provided should be obtained.

ii) Importance of verification to the auditor:
The incorrect provision for outstanding liabilities would vitiate the results of the company’s operations in as much as the expenses would not have been properly accounted for and accordingly, the verification of outstanding liabilities is important. An examination of old outstanding items may reveal that excessive provisions exist which require adjustment and, in the absence of such an adjustment, liabilities would needlessly stand over-stated and profits under-stated. With a view to ascertaining a true and fair view of the profit or loss or of liabilities, the correct recording of the outstanding liabilities is essential. Verification of outstanding liabilities list may also corroborate the capital asset acquisition programme undertaken the directors.

b. Manner of checking:
First of all, the auditor should ascertain the system of internal control in respect of advances, particularly the system of authorizing the payment of the advance and its subsequent recovery or adjustment, the security that there may be for the purpose etc. The following further steps should then be undertaken:

 Verify the purpose of advances and whether the purpose is such for which an advance is legitimate.

 Determine the manner in which the advance is to be recovered and/or adjusted.

 Where it is to be recovered in cash, ensure that recoveries are being promptly made.

 Where the advances have been given against goods or services to be received, ensure that the necessary adjustments are made as soon as goods or services have been received.

 Consider the security obtained, if any, and whether it is good and adequate.

 In case of slow recovery, inquire into the reasons and ascertain whether the amount can be considered as fully recoverable.

 In case of advances to staff, consider whether the persons to whom advances are given are still in the employment of the concern.

 In the case of advances given the company to concerns in which it is Directors are interested or to companies under the same management, ensure that all legal formalities have been properly complied with and the necessary disclosures have been made in the accounts.

 Ensure that the provision for doubtful debts is adequate and at the same time is not excessive.

iii) Importance of verification to Auditor:
Advances constitute an important item on the assets side of the balance sheet and its verification is, therefore, of considerable importance. Furthermore, if advances have been given against goods or services to be supplied, it is essential that adjustments are made on receipt of such goods or services as, otherwise, the assets and profits would stand inflated.
The verification of the legal formalities is also important to ensure that there is no violation of the Companies Act. The verification of provision for doubtful debts ensures that the accounts show a true and fair view in respect of this item. It is also necessary from the balance sheet point of view that advances and book debts are not mixed up. Further, for the same purpose, particulars as regards advances have to be given for advances that are considered good (secured and unsecured) and those that are doubtful, advances including to companies under the same management, advances due from directors or other officers of the company etc.

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