Question

Briefly describe the principal audit work to be performed in respect of the carrying amount of the following items in the statement of financial position.

(i)   Inventories

(ii) Cash and cash equivalents

(iii) Receivables

N.B "describe"

Answer 1

The principal audit work to be performed in respect of carrying amount of following items are as follows:

(i)Inventories: It means tangible assets that are held for sale or use in the production of goods and services. Inventory includes-a)Raw Material. b)Work-In-Progress. c)Finished Goods. d)Stores, Supplies and Spare parts.

Points: a)Examine internal control for stock movement and ensure that the same has been operating effectively throughout the period.

b)Examine various stock records like receiving reports, inspection reports, material issue notes,etc.

c)Attend and observe physical count of recovery conducted by management.

d)Enquire about charges on inventory.

e)Ensure that a proper cut-off procedure has been followed.

f)Perform Analytical Procedure.

g)Ensure the compliance with International Accounting Standard 2 (IAS 2).

h) Ensure that inventories have been properly classified and disclosed in the Statement of Financial Position as per recognised accounting principles and statutory requirements.

i)Ensure that inventories have been valued at cost or net realisable value whichever is lower.

(ii)Cash and Cash Equivalents: The cash and cash equivalents have been divided into two parts for audit purposes i.e. A)Cash at Bank B)Cash in Hand.

A)Cash at Bank :

a)Compare the entries in the ledger of the client with entries in cash book/bank statement.

b)Examine Fixed deposits receipts and bank advices for verification of fixed deposits made.

c) Cash in transit should be verified with reference to their subsequent credit in bank account.

d)Examine the Bank Reconciliation Statement to ascertain the differences.

e)Examine th total number of bank accounts mantained by the entity.

e)Obtain balance confirmation from bank.

B)Cash in Hand:

a)Auditor should carry out physical verification of cash in hand at the year end.

b) He should also carry out surpise check on cash anytime during the year.

c)Examine all items of cash balance e.g. Main cash, petty cash, imprest balace with the employees,etc simultaneously. This is required to rule out the possibility thst the shoprtage in one balace is made good by transfer of amount from others.

d)Ensure disclosure of cash in the statement of financial position as per recognised practises and relevant statutory requirements.

e)Ensure that temporary advances are not included in cash in hand.

f) If pastage and revenue stamps are exist in substatial amount, then they should be shown separatelyand not included in cash in hand.

g)A cash summary should be prepared on verification date which should be signed by both cashier and auditor, and auditor should keep one copy.

(iii) Receivables: Receivables are simply known as bills receivables. Audit points are as follows:

a)Examine opening balance of bills receivable with respect to last year's audited statement of financial position.

b) In case of bills which have been matured but the amount in respect there of has not been received, ensure that these have been renewed susequently.

c)Examine reason for any long outstanding or overdue bills and enquire the reason thereof.

d)Obtain a confirmation certificate from the bankers for bills hel by them for collection.

e)Examine that adequate provision has been made for dishonoured bills.

f)Examine that these have been properly shown in the statement of financial position.