(a) Distinguish between vouching and verification
Vouching
Vouching is checking the authenticity of recorded transactions. It is proving that the transactions
occurred, they are complete correctly measured and-they relate to the correct period if they are of
a revenue or expense nature.
Is defined as an independent detailed examination of the source documentary evidence purposely
to establish whether these transactions (in source documents) have been properly authorized by
rightful authority, vouchers have been properly recorded in the books of accounts, vouchers are
in the names of the client business dates in vouchers do agree with current financial period of the
client and the amount included in the vouchers do agree in both words and figures
Verification:
Verification is proving the authenticity of a recorded balance. This is achieved through
attempting to prove the assertions made by management in preparing financial statements.
ISA 500 Para 12 "when obtaining audit evidence from substantive procedures, the auditor should
consider the sufficiency and appropriateness of audit evidence from such procedures together
with any evidence from tests of control to support financial statement assertions"
The auditor must substantiate all the relevant management assertions for each outstanding
account balance. He Must obtain evidence that the accounts give a true and fair view.
(b) Audit procedures you would carry out to verify the following items appearing in the
financial statements of a client
(i) Cash in hand
• Obtain analysis of cash balances and reconcile them to the general ledger. The primary
objective is to ascertain clerical accuracy.
• To select standard confirmation forms to financial institutions to verify amounts on
deposits.
• Obtain or prepare reconciliation of bank accounts as at the balance sheet date and
consider the need to reconcile bank activity for additional months
• Obtain a cut off bank statement containing transactions of at least seven business days
subsequent to balance sheet date
• Count and list the cash in hand.
• Verify the client cut off of cash receipts and cash disbursements
• Analyze bank transfer for last week of audit year and first week o [the following year.
(ii) Loan to employee
• Obtain an aged trial balance of loan account and analysis or other account receivables and
reconcile the ledgers.
• Obtain analysis of accounts receivable.
• Inspect notes on loans in hand and confirm those with holders.
• Confirm the loan with employee. The primary objective is existence, occurrence, rights
and valuation.
• Review the year end cut off of loan transactions. The primary objective is completeness_
• Perform analytical procedure for loans, notes receivables and revenues.
• Review significant year end loans, contracts for unusual terms.
• Verify interest earned on notes and accrued interest on loans..
(iii) For insurance premium on the factory building:
• Obtain the insurance policy to assess the total premiums payable for the cover taken. This
enables to assess valuation.
• For the premiums paid to the insurer check the receipts obtained which should be in the
company's name (completeness)
• Obtain the direct confirmation from the insurance company on premiums outstanding for
the period. Is to assess the cut offs of premiums.
• Check the entries in the insurance premium account and the cash hook or bank statement
for completeness.
• Chock on the prepaid premiums which should be deferred to the next period.
(iv) Sales commission paid to an agent
• Obtain the agreement reached between the company and an agent to establish the basis
upon which the commission is payable.
• Obtain direct confirmation from the agent on the commission outstanding. This is to
determine the cutoff of balances.
• Check the entries for the commission paid in the cash book and commission payable
account for completeness.
• Checks the basis of commission paid and relates it to the benefits obtained by the
company for the reasonableness.
Kavungya answered the question on May 15, 2019 at 07:52
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a) During the audit of cash in bank, an auditor should seek to obtain standard bank
confirmations from each-hank with which the client conducted business during the period
under audit.
Required;
i) Explain the importance of an auditor obtaining confirmations from the client's bank.
ii) Outline the steps followed by an auditor when obtaining confirmations from the
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Date posted: May 14, 2019. Answers (1)
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