Mention the special points in case of an audit of the entity from incomplete records

Auditing and Assurance Revision Questions and Answers


Audit of the entity from incomplete records:

The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. As mentioned in Nepal Standard on Auditing on Audit Evidence NSA 04,

audit evidence is obtained from an appropriate mix of tests of control and substantive procedures. In some circumstances, evidence may be obtained entirely from substantive procedures. “Audit evidence” means the information obtained the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence will comprise source documents and accounting records underlying the financial statements and corroborating information from other sources. The examination of records and documents is one of the most important techniques through which an auditor collects evidence. Therefore, in case the records and documents maintained an enterprise are incomplete, it would prove to be a great handicap to the auditor. Hence the auditor needs to take special care while auditing in the circumstance of incomplete records.
An auditor may face the situation of incomplete records under the following circumstances:

i. Where records are kept on single entry basis; or

ii. Where records are kept on double entry basis, but some of the records are destroyed accidentally, or are seized authorities or are otherwise not available for the auditors’ examination due to similar reasons.

Under the second circumstance, an ideal approach for carrying out audit would be that the auditor may direct the management of the enterprise to complete or reconstruct the accounting records, e.g., if the vouchers are available but the cash book, journal and the ledger are not maintained, then the cash book, journal and ledger should be written up. However, if vouchers are also not available, then cashbook / journal / ledger will have to be prepared correlating the evidence available, e.g., memoranda records, bank statements, statements from outside parties, etc. Even though such books which are prepared may not be complete, but may still contain useful information for the auditor.

On the other hand, when books are maintained on single entry basis, the management of the enterprise would be asked to write up the books, to the extent possible, as they would have been written up under double entry system.

In any case, the following steps would be required to conduct an audit;

i. Ascertain that the balance sheet or statement of affairs as at the beginning of the year should be prepared and all the relevant accounts should be opened in the ledger. Normally, under the single-entry system, cash, bank and personal accounts are maintained.

ii. Confirming that all entries on receipt side of the cash book are posted in the ledger, even opening new account(s) wherever necessary.

iii. Check that all entries on the payment side of cash book are posted in the ledger.

iv. Confirming that all entries appearing in bank account are posted in ledger.

v. Analyze personal accounts of debtors. This will provide vital information regarding credit sales, sales returns, discount allowed, and bills received, and bills dishonored etc. It would be necessary to post such items to relevant accounts to complete the double entry from the debtors‟ accounts.

vi. Similarly, it would be necessary to analyze the creditors‟ accounts and post entries relating to credit purchase made, discounts earned, purchase returns, bills payable issued to suppliers, bills payable dishonored etc. to relevant accounts.
From an auditor‟s view point, the supervisory controls exercised the owners are generally less reliable and hence while auditing incomplete records, auditor will largely depend on extensive substantive procedures and obtain external evidence, physical examination / observation, management representation and perform analytical procedures. The auditor should also pay due attention towards the provisions made in NSA04 Audit Evidence.

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