Question

Explain in your own words how you would test/audit the following accounts: a. Cash b. AR c. Inventory

Answer 1

CASH

1. First of all, Internal control over the cash payments and cash receipts should be carefully examined to ensure that they are properly authorized and accounted for

2. Petty cash expenditure should be checked thoroughly as there are high chances kf missappropriation in these.

3. Any unusual payment or receipt and exceptional items which are inconsistent with previous year should be carefully examined.

4. Seggregation of duties shall be made for example petty cashier and person maintaining cash book shall not be the same person as this will increase the chances of fraud or errors.

5. There are possiblity of fake payments or fake expenditures eg dummy bills, wages to dummy workmen, hence carefully examine internal controls over cash expenditure.

6. Small cash receipts like sale pf old newspaper, sale of discarded machine items or parts etc shall to be accounted for.

7. Obtain Written Representation from Management about adequacy of controls over cash and confirming the closing balance.

INVENTORY

1. First of all, Internal control over the issuance and receipt of inventory should be carefully examined to ensure that they are properly authorized and accounted for.

2. Conduct an stock audit or Inventory counting and match the balance with store book.

3. If the inventory counting has been made on a date other than Balance sheet date, then perform additional audit procedures wrt changes in inventory. Eg adjust any sales or purchases made from balance sheet date till the counting date in closing stock so ascertained.

4. Obtain Confirmation Letter if Inventory is under control of a third party. Example : stock may be in transportation process hence transporter can confirm the same.

5. Sometimes inventroies are pledged as a collateral for loan hence to verify the same, request confirmation letter from such party where collateral is held.

6. Inventory imported from foreign country is stocked at custom warehouses. Check warehouse receipts or attend pysical inventory check at warehouse to confirm the same.

7. Seggregation of duties shall be clearly made such as production manager, who requires inventory and finance manager, who pays for such inventory.

ACCOUNTS RECEIVABLE

1. Obtain Direct or Indirect confirmation from third parties from which amount is due. Confirmation letter can be in positive or Negative formats depending on the requirements of audior.

2. Check high amount AR and such AR which are due for a very longtime as there are high chances of misappropriations there.

3 Payments are made by Debtors eg $100 but employees of the company shows as amount received as $95 and balance shown as Bad debts or Discount and in this manner frauds are conducted. Hence proper attention should be given tothem

4. Amount shown as Bad debts shall clearly be examined. Before writing them as Bad debts, please check if there any reminders were sent to the person/entity for recovery pf dues and was there any follow up process on non payment of dues or any legal process for recovery pf dues was considered or not?

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