In this article we will discuss about:- 1. Meaning of Routine Checking 2. Auditor’s Duties in Routine Checking 3. Routine Checking of Particular Books 4. Routine Checking of Final Accounts.
Meaning of Routine Checking:
Routine checking means the checking of entries as they appear in the books of account to see whether the routine mechanism of book-keeping has been properly used and to establish the arithmetical accuracy of accounting records.
It involves a stereotyped work including the checking of:
(a) Posting from books of original entry to ledger accounts,
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(b) Castings or totaling of journals and ledgers,
(c) Balancing of ledger accounts,
(d) Carry forwards,
(e) Drawing up of the trial balance, and
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(f) Preparation, casting and balancing of final accounts.
Auditor’s Duties in Routine Checking:
It should be remembered that this type of work can never establish the correctness of the accounts in all respects as it does not go behind the entries appearing in the books and cannot be expected to substantiate the transactions fully. As such, routine checking is not generally regarded as a very important part of audit work, especially when self- balancing ledgers are maintained and a trial balance has been duly agreed.
An auditor should not, however, neglect routine checking; it has got its own usefulness in detecting minor mistakes. He should particularly guard against the possibility of this type of work becoming monotonous and being skipped or neglected by audit clerks.
The extent to which routine checking may be conducted should be determined by reference to the system of accounting and of internal checking in force. In case of a small business where the number of transactions is small and there is practically no internal check, whole of the castings, postings etc., should be verified.
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On the other hand, if the business is a large one having a large volume of transactions and also a fairly reliable system of internal control, it may be sufficient to carry out test checks or selective checking, i.e., in-depth checking of certain transactions selected carefully.
An auditor should, however, always bear in mind that test checks are done entirely at his own responsibility and that he will always be liable for any mistake that may go undetected, irrespective of the nature and efficiency of the internal checking system.
Routine Checking of Particular Books:
Within limits of detailed checking as may be determined by an auditor having regard to all relevant factors discussed above he may adopt the following procedure in respect of routine checking of the different books of account:
(a) Cash Book:
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When a business is small in size the entire volume of castings and postings should be checked, but in case of a large undertaking utilising the self- balancing system only postings to nominal or private ledger and a portion of those to personal ledgers may be verified.
Where, however, the cash book is provided with analysis columns, cross totals of various columns should be compared with grand totals and the totals of debtors’ and creditors’ ledger columns checked with the total debtors and total creditors’ accounts.
(b) Petty Cash Book:
Receipts from the general cashier should be thoroughly checked as also the postings of totals of analysis columns to impersonal and personal ledger accounts. The castings and cross-castings of the total column as well as a proportion of the various analysis columns are to be checked.
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(c) Sales, Purchase and Returns Inward and Outward books:
Postings of totals to impersonal ledger and to total accounts as well as a portion of postings to personal ledger accounts should be verified. Castings and certain portion of calculations should be checked. Where separate analysis columns are provided for departmental accounts or as a part of self-balancing system a portion of analysis columns is to be cast and the cross-casts agreed with total columns.
(d) Bills Receivable and Payable Books:
All postings and castings should ordinarily be checked since the number of transactions is usually small. In the event of self-balancing ledgers being in use, totals should be checked with entries in total accounts or adjustment accounts.
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(e) Journal Proper:
As this book records transactions of miscellaneous and important nature, e.g., adjustments, depreciation, provision for bad debts, opening and closing entries etc., it is desirable to conduct a detailed checking of the postings and castings.
(f) Debtors’ and Creditors’ Ledgers:
Postings to these ledgers will have already been checked while checking subsidiary books, but the accounts should be scanned once more to locate unpicked items, if any. Either the whole or a portion of the castings should be verified having regard to the size of the business.
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Balancing of individual ledger accounts should be verified and a list of all balances for each ledger should be carefully checked. Where the self-balancing system is in operation the total of each list should be compared with the respective total or adjustment accounts in the general ledger.
(g) Impersonal or General Ledger:
Postings would have already been checked while checking subsidiary books but finally the accounts are to be scrutinised to find out un-ticked items, if any. Castings and balancing should be carefully checked.
(h) Miscellaneous Books:
An auditor should carefully check calculations, castings and entries in certain important memorandum books like postage books, wages sheets and salary books, stock ledger etc., the actual extent of detailed checking being determined on the basis of the internal checks that may be in force.
Routine Checking of Final Accounts:
(a) Trial balance and Difference in Books:
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When the checking of all subsidiary books and ledgers is complete, totals of the schedules extracted from debtors’ and creditors’ ledgers and the balances of individual accounts in the general ledger should be checked with respective entries in the trial balance and the casting of the trial balance should be verified.
Ordinarily an auditor should not start work unless the books of accounts are completed and a trial balance is prepared and duly agreed. In some cases, however, a trial balance may not agree in spite of the best efforts of the clients’ staff while the audited accounts may be required urgently; in such circumstances, if the auditor is convinced that a good system of internal check is in force making it difficult for any major error to remain undetected—and that the difference in the trial balance is small resulting from minor errors, he may pass over the said difference for the time being and allow it to be shown in the balance sheet as a difference-in-books or suspense account.
If, however, there is the slightest doubt about the nature and extent of the errors contributing to the difference, a thorough scrutiny on the following lines may be made by an auditor until the causes of the difference are found out:
(i) If the self-balancing system is in use, check the trial balance of the particular ledger which shows a difference.
(ii) Check the castings of debit and’ credit columns of the trial balance.
(iii) As a short-cut method, halve the amount of difference and see if any identical sum has been put in a wrong column.
(iv) Compare each figure of the trial balance with the respective ledger balance.
(v) Check castings and balancing of each ledger account.
(vi) If all the aforesaid measures taken step by step fail, all entries and postings should be checked in details until the cause of the difference is discovered.
It should, however, be remembered that it is no part of an auditor’s duty either to prepare a trial balance or to reconcile a difference therein and that if he is ever asked to do so he would act as an accountant and not as an auditor.
(b) Profit and Loss Account:
Whenever possible the profit and loss account should be divided into certain convenient and standard sections, viz., manufacturing account, trading account, profit and loss account and profit and loss appropriation account according to the nature of business and the needs of owners thereof or requirements of law, if any.
It is desirable that all sections of the profit and loss account are so drawn up as to disclose the fullest information and also facilitate comparison of various items of expenses and income with those of previous years.
For this purpose it is preferable to classify expenses into standard groups e.g., manufacturing, productive or direct expenses; establishment, management or administrative expenses; financial expenses; maintenance expenses and depreciation; selling and distribution expenses etc.
It should, of course, be understood that an auditor cannot insist on a particular form of profit and loss account being adopted by a business unless required by any statute, but he should be careful to see that correct financial result is disclosed by such an account. He is also expected to see that legal provisions, if any, with regard to this account are fully complied with.
The Royal Mail Steam Packet Co. case clearly revealed that an auditor runs the risk of being charged with negligence if he does not report to share holders inclusion of any abnormal item in the profit and loss account. Lastly, it is desirable that whatever form of presentation may be adopted the same should be consistently followed every year.
(c) Balance Sheet:
A balance sheet should aim at exhibiting a true and fair view of the financial state of affairs of a business and for that purpose not only all assets and liabilities are to be taken into account at proper values but they should also be displayed under some properly classified heads.
There is no hard and fast rule in respect of the contents of a balance sheet or the order of arranging assets and liabilities in it except as per provisions of the Companies Act or under the Insurance and Banking Regulation Acts and the Indian Electricity Act. It is one of the auditor’s duties to see that whatever method of marshalling assets and liabilities is adopted the same is consistently and uniformly followed every year.
It should be noted that a balance sheet is not merely a statement of assets and liabilities ns is often commonly thought but a sheet showing in a classified form a summary of all balances appearing in books of account including the balance of the profit and loss account in one form or other, and also containing other items which cannot, strictly speaking, be classed as assets, viz., debit balance of profit and loss account, deferred revenue expenditure etc.
An auditor’s report on the accounts of a company should state whether the balance sheet exhibits a ‘true and fair view’ of the state of affairs of the concerned business.
In this connection he should be careful to see that there is no mis-description or mixing up of assets or liabilities; otherwise he may be charged with negligence in duty vide City Equitable Fire Insurance Co.’s case, Supdt. & Legal Remembrance of Bengal vs. Akhil Bandhu Guha & Others, Institute of Chartered Accountants of India vs P.K. Mukherjee.
(d) Simplified Presentation of Accounts:
In the modern world, with increasing emphasis on the social outlook of business activities, many other classes of people apart from the owners or shareholders are interested in the working results and financial state of affairs of industrial and business undertakings as set out in their final accounts, particularly the published accounts of companies e.g., debenture-holders, prospective investors, taxation authorities, creditors, customers, banks and financial institutions, employees and trade unions, investment consultants, stock- and share-brokers, economists, legislators and different government departments concerned with regulation of economic activities.
With the exception of experts, many of the aforesaid people are unable to understand the accounts, which are too technical for them. Besides, there is an ever-growing use of new accounting techniques and expanding vocabulary of financial and accounting terms.
Thus the final accounts published in the prescribed form seldom serve the purpose for which they are wanted, viz., to exhibit a ‘true and fair’ picture with regard to the financial aspects of a business.
The aforesaid consideration has in recent years led to the recognition of the need for presentation of accounts in non-technical and readily intelligible manner, highlighting, the major phases of activity during a period, viz. in the form of summarised explanatory balance sheets, profit and loss accounts, illustrative charts, graphs and diagrams etc.
This practice is becoming increasingly popular, particularly with the management of progressive organisations who want to tell the story of their activities, progress and prospects to everybody concerned.
As per stock exchange regulations, where applicable, half-yearly unaudited (estimated) financial results are required to be published in newspapers.
The following special factors may, however, be borne in mind with regard to simplified presentation of accounts:
(i) This is supplementary and not alternative to final accounts in statutory and standard forms.
(ii) The supplementary information should be in simple, non-technical language and be easily reconcilable with the statutory accounts.
(iii) Such information need not be audited.