Explain how you would verify the following: a) Investment income. b) Bank balances. c)...

      

Explain how you would verify the following: a) Investment income.
b) Bank balances.
c) Contingent liabilities.
d) Petty cash balances.

  

Answers


johnson
a) Bank balances
i) The auditor should obtain the bank reconciliation statement as at the end of the period and perform the following procedures:
? Verify that the reconciliation is accurately prepared;
? Ensure that the correct balances as per the bank statement and the cash book have been picked in the reconciliation;
? Verify that the reconciling items have subsequently cleared;
? Ensure that there are no unexplained variances;
? Verify that all un-presented cheques had been dispatched to the payees and that all un-credited deposits have cleared.
This will assist the auditor in testing for window dressing. Window dressing in this context refers to attempts to overstate the liquidity of the company by keeping the cash book open such that money received after year end is credited to the cash book increasing the cash balance and reducing debtors. It could also take place by debiting cheques paid in the period under review but are not dispatched until after year- end. This procedure of inspecting the bank reconciliation statement assists in verifying the completeness and accuracy of the bank balance.
ii) The auditor should obtain a direct confirmation from the bank of the amount holding on behalf of the client. The auditor should obtain the clients consent to communicate directly with the bank. Where consent is granted a standard letter of request should be sent to the bank. The reply to this request is a good source of corroborative audit evidence to confirm the existence of the bank balance and other information such as the interest earned, any loans granted to the company or any restrictions placed on the operation of the account.

b) A contingency may be defined as a condition which exists at the balance sheet date where the ultimate outcome (gain or loss) will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events. Probable losses should be accrued, possible losses should be disclosed and probable gains should be disclosed.

1. In relation to pending legal matters, I would:-
a. Review the clients system of recording claims including the procedure for bringing them to the attention of management.
b. Discuss with the legal department or company secretary the procedures for instructing solicitors.
c. Examine board or management minutes for indications of possible claims
d. Examine correspondence with solicitors, including bills rendered

e. Obtain a list of matters referred to solicitors with the company's estimates of possible liabilities.
f. Obtain a letter of representation from the relevant directors that he is not aware of any other matters referred to solicitors

2. Letter of representation: - The knowledge of contingent liabilities may be confined to management and is therefore a suitable matter for inclusion in such a letter.

3. In relation to guarantees: - Examine the memorandum and articles of association of the company to ascertain whether the company's directors have: - i) Powers to give this guarantee to other parties.
ii ) The maximum amount they can guarantee
iii)The parties they are allowed to guarantee.
a)Read through minutes of directors and ascertain whether a resolution was passed providing for this guarantee b)Examine correspondence between the lender and client to ascertain:-
? Amount of loan guaranteed
? Interest on this loan
? Date when due
? Any special terms
c) Write to the party guaranteed and request his confirmation regarding the discharge of this liability. In case this is doubtful request client to provide for this liability


c) Petty cash
1) Examine the strength of the Internal Control System regarding petty cash payment.
2) Ensure that petty cash is maintained on an imprest system.
3) For all petty cash payments, a petty cash voucher should be raised and signed by the person using this amount and the authorization by a responsible officer and for this reason the auditor should take a sample of this vouchers and ensure that they are genuine.
4) The auditor should count petty cash at hand using surprise visits and should add back the amount spent to ensure that both items agree with the float.
5) For any deficit, the auditor should obtain a certificate of shortage from the petty cashier.
6) The auditor should not accept IOU'S except if these were authorized by a responsible officer
Note: The key audit procedure is to carry out a cash count and to ensure the physical balance is reconciled to the ledger (testing for completeness, accuracy and existence).

d) Investment Income
This is received mainly from two sources i.e. fixed interest deposits and shares in listed companies.
(i) For fixed interest deposits, verify the overall income in the accounts by analytical review. In overall terms as the income is fixed, the expected income can be calculated. It is necessary to consider withholding tax deducted on the income. (ii) For fixed interest deposits, test individual receipts to the cashbooks to ensure that the expected interest was received and check the calculations. (iii) For shares in listed companies select a sample of investments and obtain from the company details of dividend payments made during the year or the dividend warrants.
(iv) Trace receipt of these dividends to the cashbook via dividend warrants.
(v) For shares in listed companies reconcile total income in accounts to total income in cashbook.
(vi) For shares disposed or purchased in the year check to clients broker note that all dividends to which the client was entitled have been received in the year.
johnson mwenjera answered the question on August 8, 2018 at 19:15


Next: A manufacturer makes two products, product Q and product M. The cost of making 15 units of product Q and 10 units of product M is sh...
Previous: Discuss the determinants of the foreign policies of African state

View More Accounting Questions and Answers | Return to Questions Index


Exams With Marking Schemes

Related Questions


  • Audit planning process allows the audit senior to acquire adequate knowledge about the entity. This process ensure an effective control of audit work. ...(Solved)

    Audit planning process allows the audit senior to acquire adequate knowledge about the entity. This process ensure an effective control of audit work.
    Required:
    a) Explain the auditor's planning process when planning for an audit of a new client. b) How does audit planning assist in the conduct of an audit?
    c) Explain the following controlling procedures in a well planned audit:
    i. Direction and supervision of work. ii. Review and co-ordinating of work. iii. Quality controls

    Date posted: August 8, 2018.  Answers (1)

  • You are the manager responsible for the audit of ABC Company, which has...(Solved)

    You are the manager responsible for the audit of ABC Company, which has a turnover of KShs 750 million. The company has been audited by your firm for a number of years and this is the second year you have been responsible as manager for the audit. However, owing to your responsibilities for other audits you are only intending to make periodic visits to the company during the course of the audit and you will not be involved in any of the detailed audit work.
    Required
    a) State the matters you would consider in planning the audit, prior to the commencement of the detailed audit work. b) Describe the way in which you would control the audit from the commencement of the work by the audit staff to the review stage by the partner immediately prior to him signing the audit report

    Date posted: August 4, 2018.  Answers (1)

  • a) In the context of a computer based accounting system, explain the meaning of the following terms: i. Application controls; ii. ...(Solved)

    a) In the context of a computer based accounting system, explain the meaning of the following terms:
    i. Application controls;
    ii. General controls
    b) Explain the importance of having proper systems documentation
    c) A Company wishes to change from an old computerised system to a new computer based accounting system. Explain how and why both systems should run parallel prior to the change over to the new system.

    Date posted: August 4, 2018.  Answers (1)

  • (a) Briefly explain the meaning of the term "control procedures". (b) What is the importance of...(Solved)

    (a) Briefly explain the meaning of the term "control procedures".
    (b) What is the importance of segregation of duties as a control procedure'? (c) In carrying out an audit, the auditor appraises and tests the system of internal control in order to ascertain that it is capable of processing transactions or determining quantities and values completely and accurately. The auditor further carries out substantive tests in an attempt to ensure that the transactions, assets and liabilities recorded in the accounting records upon which the figures in the financial statements are based, are completely and accurately recorded. Required: List and briefly explain the substantive tests the auditor would carry out to verify the values attributed to: (i) Trade debtors in a company's financial statements.
    (ii) Trade creditors in a company's financial statements.

    Date posted: August 4, 2018.  Answers (1)

  • Your firm is the auditor of Shah Engineering Ltd, and you have been...(Solved)

    Your firm is the auditor of Shah Engineering Ltd, and you have been asked to suggest the audit work you will carry out in verifying trade creditors and purchase accruals at the company’s year-end of 31 December 2003. You attended the stock take at the year-end. The Company operates from a single site and all raw materials for production are received by the goods inwards department. When the materials are received they are checked for quantity and quality to the delivery note and purchase order, and a multi—part goods received note is made out and signed by the storekeeper. If there are any problems with the raw materials, a discrepancy note is raised which gives details of the problems (e.g., incorrect quantities or faulty materials) The purchase accounting department receive the purchase invoice, check them to the purchase order and goods received note and post them to the purchase ledger. At the end of each month, payments are made to suppliers. The purchase ledger is maintained on a microcomputer. The main sundry creditors and accruals at the year-end include:
    a) Wages accruals and PAYE;
    b) VAT;
    c) Interest on loans overdrafts, telephone and electricity. Most employees’ wages are paid weekly in arrears.

    You are required to describe in detail the audit work you will carry out to:
    a) Check suppliers’ statements to the balances on the purchases ledger;
    b) Verify that purchases cut-off has been correctly carried out at the year end.
    c) Ensure that sundry creditors and accruals are correctly stated;

    Date posted: August 4, 2018.  Answers (1)

  • You are carrying out the audit of ACB Computers limited for the year...(Solved)

    You are carrying out the audit of ACB Computers limited for the year ended 31 December 2003. The company assembles microcomputers purchased from the Far East and sells them to retailers, and to individuals and other businesses. In the current year, there has been a recession and strong competition, which has resulted in a fall in sales and the profits. This has led to a trading loss and the company is experiencing going concern problems.
    Required:
    a) Describe the factors, which indicate that a company may not be a going concern. Your list should include all factors and not just those, which relate to ACB Computers Limited.
    b) Consider the form of audit report (i.e. qualified or unqualified) you would issue of ACB Computers limited if you conclude that the company is experiencing serious going concern problems, in the following two situations: I) You conclude that the financial statements give sufficient disclosure of the going concern problems.
    II) There is no disclosure of the going concern problems in the financial statements and you believe there is a serious risk that the company will fail in the foreseeable future.

    c) State the parties who may successfully sue you as auditor for negligence, and consider the arguments you could include in your defense when: I) The financial statements of ACB Computers Limited for the year ended 31 December 2003 do not mention any going concern problems and your audit report on these financial statements was unqualified and II) The company fails on 15 February 2004

    Date posted: August 4, 2018.  Answers (1)

  • The responsibilities of external auditors are not always well understood, especially with regard to the detection and reporting of fraud. When external auditors provide non-audit...(Solved)

    The responsibilities of external auditors are not always well understood, especially
    with regard to the detection and reporting of fraud. When external auditors provide
    non-audit services to their audit clients, it is essential that the auditors make a clear
    distinction between their audit and non-audit responsibilities.
    Required:
    a) Explain the responsibilities of external auditors to directors and shareholders
    b) Describe the limitations of the external audit in relation to the detection and
    reporting of fraud.
    c) Explain why it is essential for external auditors to be independent of their clients.
    d) Explain the advantages and disadvantages of external auditors providing
    consulting services to their audit clients.

    Date posted: August 4, 2018.  Answers (1)

  • Towards the end of an audit, it is common for the external auditor to seek a letter of representation (written representations) from the management of the...(Solved)

    Towards the end of an audit, it is common for the external auditor to seek a letter of
    representation (written representations) from the management of the client company.
    Required:
    (a) Explain why auditors seek letters of representation.
    (b) List the matters commonly included in the letter of representation.
    (c) Explain why it is important to discuss the content of the letter of representation at
    an early stage during the audit.

    (d) Explain why management is sometimes unwilling to sign a letter of representation
    and describe the actions an external auditor can take if management refuses to sign
    a letter of representation.

    Date posted: August 4, 2018.  Answers (1)

  • a) Internal control systems are designed, amongst other things, to prevent error and misappropriation. Required: Describe the errors and misappropriations that may occur if the following are not properly...(Solved)

    a) Internal control systems are designed, amongst other things, to prevent error and
    misappropriation.
    Required:
    Describe the errors and misappropriations that may occur if the following are not
    properly controlled:
    (i) Receipts paid into bank accounts;
    (ii) Payments made out of bank accounts;
    (iii) Interest and charges debited and credited to bank account
    (b) A book-selling company has a head office and 25 shops, each of which holds cash
    (banknotes, coins, and credit card vouchers) at the balance sheet date. There are
    no receivables. Accounting records are held at shops. Shops make returns to head
    office and head office holds its own accounting records. Your firm has been the
    external auditor to the company for many years and has offices near to the
    location of some but not all of the shops.
    Required:
    List the audit objectives for the audit of cash and state how you would gain the audit
    evidence in relation to those objectives at the year-end.

    c) The external auditors of companies often write to companies’ bankers asking for
    details of bank balances and other matters at the year-end.
    Required:
    Explain why auditors write to companies’ bankers and list the matters you would
    expect banks to confirm.

    Date posted: August 4, 2018.  Answers (1)

  • Citing six reasons, justify why an accounting officer of a procuring entity, may, at any time, prior to notification of tender award, terminate or...(Solved)

    Citing six reasons, justify why an accounting officer of a procuring entity, may, at any time , prior to notification of tender award, terminate or cancel procurement or asset disposal proceedings without entering into a contract.

    Date posted: July 23, 2018.  Answers (1)

  • What is cost accounting?(Solved)

    What is cost accounting?

    Date posted: July 11, 2018.  Answers (1)

  • List the purposes of the trial balance(Solved)

    List the purposes of the trial balance

    Date posted: June 25, 2018.  Answers (1)

  • What are the setbacks associated with group incentive schemes?(Solved)

    What are the setbacks associated with group incentive schemes?

    Date posted: June 24, 2018.  Answers (1)

  • From the following information prepare a cost statement clearly showing the various components of the cost of production (20 Marks) Sh. stock on 1st January 2007 48,000 Raw materials 9,800 work in...(Solved)

    From the following information prepare a cost statement clearly showing the various components of the cost of production (20 Marks)

    Sh.
    stock on 1st January 2007 48,000
    Raw materials 9,800
    work in progress 120,000
    finished goods 148,000
    wages paid to the factory workers 52,000
    factory insurance 400,000
    plant balance on 1st January 2007 180,000
    factory rent 200,000
    cleaning costs 350,000
    purchase of raw materials
    stocks at 31st December 2007
    Raw materials 21,000
    work in progress 6,000
    carriage on raw materials 42,000
    return of raw materials to suppliers 6,200
    salary of marketing manager 200,000
    fixed admission expenses 140,000
    salesman commission 60,000

    Date posted: June 20, 2018.  Answers (1)

  • Define managerial accounting(Solved)

    Define managerial accounting

    Date posted: June 16, 2018.  Answers (1)

  • What are the transactions to be excluded in computing national income?(Solved)

    What are the transactions to be excluded in computing national income?

    Date posted: June 11, 2018.  Answers (1)

  • What are the differences between ledger entries of cash transaction and ledger entries for credit transactions?(Solved)

    What are the differences between ledger entries of cash transaction and ledger entries for credit transactions?

    Date posted: May 25, 2018.  Answers (1)

  • Auditors carry out various audit assignments. In relation to the above statement, explain four non-assurance assignments that auditors undertake(Solved)

    Auditors carry out various audit assignments. In relation to the above statement, explain four non-assurance assignments that auditors undertake.

    Date posted: May 22, 2018.  Answers (1)

  • Discuss the problems of Cross Sectional Analysis in accounting.(Solved)

    Discuss the problems of Cross Sectional Analysis in accounting.

    Date posted: May 22, 2018.  Answers (1)

  • Outline the limitations of financial ratios.(Solved)

    Outline the limitations of financial ratios.

    Date posted: May 22, 2018.  Answers (1)