a) (i) Short term deposit from the bank.
• The main concern in this area is to establish the existence of the balances and more recently due to failures in banks in Kenya, valuation of these balances.
• Check the cashbook and bank statement reconciliation statement paying particular attention to the reconciling items. These should be genuine reconciling items.
• Unpresented cheques and uncleared lodgements should appear in the bank statements early in the new year say within 2 weeks of the year end. If they do not appear this should be investigated as manipulation fraud could be indicated.
• Uncleared lodgements present more fraud or distortion. Banks normally clear lodgements within a week, therefore if after a week we have uncleared lodgements the position may probably be fictitious.
• The creditor should obtain direct confirmation from the bank confirming the balances at that time. The main purpose is to confirm that the bank statement is not fraudulent.
• The client will write to the bank requesting them to provide the auditor with any information the that auditor would require. So the confirmation is sent directly to the auditor.
• The auditor must carry out a further test to establish that the balances are maintained in a reputable bank that is still a going concern.
(ii) Motor vehicle
The only issue of concern here is existence and ownership. Motor vehicles being mobile may not be available for the auditor to physically verify when he pays his visit.
Existence: related evidence can suffice however to prove existence for example if we own the motor vehicle we expect that if it is being used, it will incur costs such as insurance, repairs, fuel and maintenance. The engine and chassis numbers should be checked against the log books to ensure that it is the same vehicle that we are looking at as clients have been known to change the registration number plates from one vehicle to another.
Ownership: ensure that the log book is in your clients name.
Cost and Authorisation: motor vehicles are vouched to the supporting documentation such as invoices, cash books, approved budgets, etc.
Valuation: valued at depreciated historic costs. Auditors responsibility is to ensure that the
accounting policy for depreciation is appropriate.
(iii) Disposal of Plant
The issue here is authorisation for disposal and the elimination of the costs concerned from the
records. The auditor also tries to ensure that the value obtained was reasonable either by looking at valuations obtained independently from professional valuers before the disposal and looking at the book value of the asset and related values for assets of that nature. Ensure that this plant is removed from the records that is both the residual value and the depreciation. Check the recording of the profit/loss in the profit and loss account.
(iv) Loans given to employees
These are not usually material assets to the company if it is not in the business of giving loans. The verification work will involve:
• Determining, evaluating and testing the systems of internal control. Particular attention being paid to authorisation.
• Obtaining a schedule of the debtors and testing it for accuracy and completeness.
• Obtaining certificates direct from the debtors concerned.
• Preview of agreements and ensuring that the terms are being followed.
• The debt maybe secured in which case, the security is examined and consideration given to its value and realisability.
• The loan may be guaranteed in which case the status of the guarantor must be examined.
• Provision for bad and doubtful debts must be reviewed for adequacy. Where loans have been made to employees they usually become bad if the employee leaves the company before repayment is completed.
c) Items to be recorded in the resolutions of the shareholders are:
• The appointment of auditors
• The election of directors
• Acceptance of accounts and auditors’ reports
• Approval of payment of dividends
• Approval of investments proposed.
• Approval of increase in share capital.
Musyoxx answered the question on March 14, 2018 at 16:20
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