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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 37
VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
Stock-In-Trade
Following are the substantive procedures to be carried out in the verification of Stock in trade:
1. Examine stock taking instructions issued by the client and assess their adequacy for a proper
stock count.
2. Observe counting of inventory at the selected location.
3. Check that slow moving, damaged and obsolete inventories are segregated.
4. Check final summary of stocks prepared from the stock count sheets.
5. Check cut-off.
6. Check calculation of rates to be applied for inventory valuation.
7. Check valuation.
8. Ensure that inventories are presented in accordance with the requirements of the law and IAS-2.
Stores and Spares
Following are the substantive procedures to be carried out in the verification of Stores and Spares:
1)
Verification of Opening Balance from previous year's balance sheet and audit working papers file.
2)
Review and checking of Stores Record Keeping.
3)
Reconciliation of closing balance i.e. Opening balance + Purchases -Purchases Return - Cost of Sales
(Consumption).
4)
Observation of physical counting done by the client.
5)
Checking the source documents for purchases, purchase return and consumption.
Verification of certain expenses items:
a.
Director's Fee
1. Examine the Articles of Association of the company to ascertain mode of determining rates of fee.
2. Examine the minutes of meeting to ensure that only the fee rates agreed are paid to the directors.
3. Where fee is payable according to attendance at meetings, examine attendance to ensure that only
attendance is paid.
4. Ensure that proper receipt is obtained from the payees.
5. Check that proper disclosure is made in the accounts as required by the Companies Ordinance 1984.
b.
Interest on Long Term Loan (Foreign Currency)
i)
Obtain loan agreement and read its terms and conditions.
ii)
Check interest rate mentioned in the agreement.
iii)
Check calculation of interest according to specified rate.
iv)
Check accrual of interest in case of non-payment.
v)
Check payment voucher with bank advice.
vi)
Ensure that any gain or loss resulting from the translation has been properly accounted for.
vii)
Ensure the following are properly disclosed:
1)
Amount of interest;
2)
Interest rate;
3)
Penal interest, if any; and
4)
Interest capitalized.
viii)
See that whether any interest has been capitalized. If so examine that requirements of IAS-23
have been fully met and disclosure has been made accordingly.
c.
Depreciation on Fixed Assets
i)
Check opening balances of the cost of assets and accumulated depreciation with the last
year's audited accounts.
ii)
Ensure that depreciation policy is appropriate and applied consistently i.e. there is no change
in policy as compared to last year.
iii)
Verify that the depreciation calculations for additions and disposals during the year are in
accordance with the accounting policy.
iv)
Analytical Review
120
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Fundamentals of Auditing ­ACC 311
VU
Check that depreciation for the year is reasonable in relation to book value, stated policies
and previous years.
d.
Staff Loans
i)
Examine the services rules and regulation of the company, note major particulars regarding
staff loan.
ii)
Examine and evaluate internal control. Authority in particular important.
iii)
See application form for loan.
iv)
Ensure loan is properly authorized, see Board resolution.
v)
Examine agreement with the staff and ensure terms are being adhered to.
vi)
Obtain certificate direct from staff.
vii)
If loan is secured, examine the security.
viii)
See that adequate provision for amount of doubtful recovery is made in the accounts.
121
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT