THE SIGNIFICANCE AND OBJECTIVES OF SOURCE DOCUMENTS IN AUDIT INVESTIGATION (A CASE STUDY OF THOMAS GAMBLE & CO. CHARTERED ACCOUNTANTS)

THE SIGNIFICANCE AND OBJECTIVES OF SOURCE DOCUMENTS IN AUDIT INVESTIGATION

 (A CASE STUDY OF THOMAS GAMBLE & CO. CHARTERED ACCOUNTANTS)

ABSTRACT

          The concept “source document” is a familiar term with those involved in keeping accounting records or watch dogs of limited liability and public liability companies and organizations.  From time to time, most often on annual basis, the independent auditors call to review the accounting record kept by their clients this they do by studying and evaluating the internal control systems in the company.  This approach makes it  possible for lapses, discrepancies, deficiencies and bottlenecks to be discovered if any do exist.

However, most people do not really understand the role of the auditors in public practice.   To the layman, it’s a matter of detecting for fraud, which is more or less a secondary object of fraud.

This research set out to review the role of the auditor in public practice, the statutory and regulatory frame work under which they operate and the procedures adopted in the course of their duties, to meet the standard required to them.  This task has been carried out with a special references to Thomas Gamble and Co.  charted Accountants a relatively small firm of charted accountants located at Bank  of the North Building, 6^th floor, Ahmadu Bello way, Kaduna,

Chapter one of this work, takes a critical loot at the background information relating to the concept of auditing and investigation  procedures in          auditing, while chapter two gives a detailed look at the concept of auditing and all other related issues under literature review.

Chapter three, Research methodologies, reviews the procedures used in carrying out the research  with brief comments on the facts that could be deducted there- from.

Chapter five look at the inferences drawn  from the analysis of data obtained, while the last chapter summarizes the results of research findings in more general terms.

CHAPTER ONE

BACKGROUND

• INTRODUCTION 1


• THE FIRM 5


• STATEMENT OF THE PROBLEMS 8


• SOURCES DOCUMENT AND INVESTIGATION RELATED TO CAPITAL RESERVES ,

DIRECTORS AND WORK                                 9

• SOURCE DOCUMENT AN INVESTIGATION RELATED TO DEBENTURE  TAXATION, CREDITORS, AND ACCRUED CHARGE                                                               17


• SOURCE DOCUMENT AND INVESTIGATION RELATED TO HP CREDITORS AND SHORT TERM LOANS 19


• SOURCE DOCUMENT AND INVESTIGATIONS TO FIXED ASSET                                                 26


• SOURCE DOCUMENT AND INVESTIGATION RELATED TO CURRENT ASSET 33


• SOURCE DOCUMENT AND INVESTIGATION RELATED TO GROUP AND ASSOCIATE COMPANIES 48
  
  
  
  • SOURCE DOCUMENT AND INVESTIGATION RELATED TO PROFIT AND LOSS OR INCOME
  
  
  
  

AND EXPENDITURE                                                            51

 

CHAPTER TWO

LITERATURE REVIEW                                                        58

• RELATIONSHIPS BETWEEN AUDITING 58


• LEGAL FRAMEWORK OF AUDITING 62


• REGULATORY FRAMEWORK OF AUDITING 64

CHAPTER THREE

• RESEARCH METHODOLOGY 67

3.1     SOURCE OF  DATA                                                    67

3.2     DETERMINATION OF SAMPLE SIZE                       68

3.3     DESCRIPTION OF THE INSTRUMENT OF DATA COLLECTIONS                                                              69

• METHOD OF ANALYSIS 70

CHAPTER FOUR

• PRESENTATION AND ANALYSIS  OF DATA                  71

4.1     RESPONSES TO THE QUESTIONNAIRES               72

CHAPTER FIVE

FINDINGS, RECOMMENDATION AND CONCLUSION    87

• FINDINGS 87

5.2     CONCLUSION                                                              90

BIBLIOGRAPHY                                                                   93

LETTER OF RESPONDENT QUESTIONNAIRE       94

 




CHAPTER  ONE

BACKGROUND INFORMATION

INTRODUCTION

RELEVANCE OF INVESTIGATION

Every business entity, be nit  profitable for which they were established.  Example, most limited liability companies are established for profit optimization and chartable or non-profit organizations, example,  government parastatals are established  to subsidize costs to the governed.

However, its pertinent to note here that whether established upon  profitable or non profitable basis, its relevant that accounting  is records must be maintained.  Accounting is broadly defined as a process of recording, summarizing, analyzing and interpreting of business transactions in such a systematic and concise manners as t give full and detailed explanation to related parties who are interested in the financial statement.  In every business transactions  of the organization.  However, it this records  must be  kept,  it must follow norms, principles, conventions and standard set out by various professional accounting bodies.  In Nigeria,  the Nigeria Accounting standard  Board (NASB)  is in- charge of this  duty.

Subject to the forgoing, section 357 of the company and Allied Mattes decree, makes it mandatory for every limited liability company to appoint an auditor to examine its accounts.  This now brings us to the questions, who is an Auditor? With reference to Walter  W. Bigg, he sees an Auditor as  a person appointed by the directors (share holder authorize the directors to appoint) of a company to examine it’s book of account, and states whether it gives a true and fair view of the financial position of the entity, and also see that there is compliance  with statute, and that accounting standards are strictly adhered to.  In the light of the above, the auditor should be a professional and used in the accounting filed, with high integrity profile, and must be a member of a recognized professional body, and must be licensed to practice.  In Nigeria to day, the institute of chartered accountants of Nigeria takes care of this.  If the auditor  as a professional, is aware of the fact  that his work is relied upon by related third  parties,  he owes it a duty, so as not to expose himself to liabilities associated with negligence  out of misfeasance proceedings.

In the light of the above, for the auditor to accept assurances, or to  given an opinion, he must certify himself beyond all to him gives a true and fair view of the financial position of the entity  as at the date of this audit.

In these regards, he has access to al the company books, and has unreserved rights as to question any maladministration, and gather al such information that would assist him in his work.  However, for the auditor to formally accept assurances, his basis of acceptance must be dependent on the availability of reliable source of documents and explanations produced by the entity in question.  At diverse levels of investigation, Associates source documents checks, and test are applied, and evidences shown must be very authentic and satisfying.  For example, where Bank Balances are investigated, for the auditor to accept the stated figures, the certifying evidences should be, Bank statements, check stumps, cash books, authorization vouchers, etc and all such reconciliation that would enable him accept the presented to note that the presentation of  figures without satisfactory evidence, or source document, is like a student graduating without a certificated, and this brings us to one of the objective  of his text.

The investigation process involves making independent confirmation, example, and circularization of debtors, creditors, and other related third parties to the entity in question.  Generally, so many factors which includes: cost consideration, time factors, unavailability of data, Distance, and prevailing socio –economic and political climate.  In as much as this factors  are highlighted and noted, the Auditor must  not fail to certify himself beyond all reasonable doubts.  This should be done by disclosing all lapses and discrepancies, and must not  fail to give qualifications when need be.  In all circumstances,  he, the auditor should try to avoid damages  associated with negligence’s as number of  cases related to auditors liability has been recorded.  Some of the cases includes.  CAPRO Industries Vickman (1989) see SCOH GROUP VMC Farlance (1972) see JEP Fastaners Vmarts Bloom & co (1981), also see security pacific Business Credit V PEAT MARWICK MAL & CO (1`992).

 

THE FIRM

This study is designed to examine the activities, responsibilities and legal framework under which the auditor in public practice operate.  This is with the appraisal of a relatively small  firm of chartered accountants in Nigeria today, Thomas Gamble House, Floor 6, Kaduna, and other offices in Calabar, Lagos and Abuja.

Thomas Gamble & co, is a relatively small firm of chartered Accountants, founded in Nigeria  in the year 1985 as a partnership between Thomas Ephraim I and I. J. Gamble.  The firm today has offices in about five states of the federations and offices are gradually being erected to cover other states.  In its early years, its main objectives, was centered on Audit and investigations, but today it has grown both in size and scope of services rendered.  It is interesting to know that the following range of services are now available at  Thomas Gamble and co Chartered Accountants:

1. a) Audit and Business Advisory services


2. b) Information Technical (management)


3. c) Tax consultancy


4. d) Financial Management consultancy.

STAFFING

In each states, the firm is headed by

1. a) Resident partner (a qualified Accountant) and two assistants also qualified person


2. b) 5 Senior audit staffs


3. c) 7 Junior audit staff


4. c) Corpers


5. e) Industrial Trainees


6. f) Office Assistants

in the whole, the firm has  about 52 staffs, and efforts are on to recruit more employees to enable the firm meet with increasing client ship.

Below, is the organizational chart of Thomas Gamble and Co.

 

Senior partner

 

 

 

1.3     STATEMENT OF THE PROBLEM

          As has been mentioned earlier, there is a legal dimension to the auditor job.  The duties of the auditors are outlined in section 360  (1) of the company and Allied Decree attracts a penalty.  Again the report of the auditor is an important document, not only to the shareholders of a company, but also to related third parties.  Cases have been recorded, where auditors have been convicted by courts of law for negligence resulting from misfeasance proceedings.  Consequently, it sis very important that an auditor should exercise due professional care in the discharge of his duties to minimize his exposure.

The problems now faced by auditors in public practices, is how they can attain this standard required of them, and also the needs of others parties who may be interested in the financial statements they a re auditing.   This study aims at striking out the various source documents, Tests, and checks to be applied during the investigation on process.  So as to guarantee the completeness of the audit investigation, and the financial report there-on.

• SOURCE DOCUMENTS AND INVESTIGATION RELATED TO CAPITAL, RESERVES, DIRECTORS AND STATUTORY WORK

OBJECTIVES OF THE AUDIT INVESTIGATION

The objective is to form an opinion as to whether:

1. The share capital has been properly classified and described in the  accounts


2. The Reserves have been properly described and only applied for the purposes permitted by the company’s Articles, or companies Act.


3. Movements on reserves and correctly shown and described


4. Dividends paid and payable are correctly stated in accordance with the appropriate resolutions.


5. Directors remuneration in correctly disclosed in the accounts, and is in accordance with the articles, board and members resolution or any services  agreements, that  is, (PPIB)


6. The information required by companies act has been correctly recorded in the statutory books kept by the company for that purpose.


7. Resolutions are in accordance with the Articles, and the Accounts reflect the decisions

SOURCE DOCUMENT TO BE VERIFIED OR INVESTIGATED

1. Make a summary of authorized and issued share capita


2. Summarize the share holding


3. Directors share holding


4. List of Directors, Secretaries, and Principal Officers


5. Annual Returns summarized


6. Extract from minutes, that is, Directors meetings, AGM, and other meetings


7. Movement on reserves and profits and loss account


8. Dividends proposed and paid, gross tax deducted


9. Directors Emoluments


10. Preliminary expenses list

1        CAPITAL

1. Prepare a schedule showing opening and closing position and movement in share capital


2. Vouch movement with minutes


3. Bring up to date, the history of share capital in the paramount file


4. Ensure that the authorized capital accord with the memorandum  and Articles of association, or amendment there-to (see registrars, registration of increase).


5. DIVIDENDS


6. Prepare statement of dividends paid and proposed, showing payment dates


7. Agree to appropriate Board, AGM, resolution


8. Ensure it is within statutory income guidelines limits


9. Non-Compliances or (b) OR (c) should be noted as points on account


10. Check calculations, ensure that proposed dividend are shown in accounts


11. Verify that withholding tax has been accounted for appropriate revenue authorities


12. Check total dividend paid in cash book and posting to nominal ledger

DIRECTORS

1. Examine Register of Directors, and prepare list of Directors and their share and debenture holdings, showing the corresponding holding for previous year


2. Confirm new appointment and re-election of Directors with Board and members resolutions


3. Verify that Directors qualifying shares are held in accordance with Articles of Association of the company


4. Verify that the number of directors complied with the Articles


5. Verify that section of CAMD related to Age limited of Directors are  complied with


6. Verify that returns of all secretary have been made to the registrar of companies

PRELIMINARY EXPENSES SHARE AND DEBENTURE ISSUE EXPENSES

1. Prepare a schedule reconciling opening and closing position of issuing share and debentures


2. Preliminary Expenses


3. Commission paid in respects of shares, or debentures

iii.      Discount issue of shares of debentures

1. Vouch with invoices, etc, see that commission paid are in accordance with the terms of issue and section 54 of the companies Act 1968

1. Vouch entries in cash book and nominal

ANNUAL RETURNS

1. Verify that return made up of 42^nd day after AGM  has been filed with the Registrar of companies


2. Inspect copy and filing receipts


3. Confirm accounting references date, and if it has changed,  ensure that  appropriate  notice has been given to the Registrar of companies.

RESERVES

(A)         Prepare a schedule reconciling the  opening  and closing position of reserves

1. Share premium account


2. Revolution surplus reserve account

• Other reserves

(B)         Vouch movements during the year, and confirm with   minutes

1. Source (s) of any  increase  and applications of any decrease

(C)        Bring up to date the history of reserves in the permanent files

(D)      See         that  any restriction on the  application  of reserves are compiled with by  reference to section 57  of companies Act 1968, the guidelines of the PPIB, the company’s  Articles, Debenture Trust Deeds, etc

TRANSFER OF SHARES

1. Check to Board Resolution


2. Ensure that share  transfer  forms  have been witnessed


3. Check that correct entry has been made in the register of members

DEPOSIT FOR SHARES

1. Prepare detailed schedule and vouch items there-on


2. Check that they have been adopted by the board

REGISTER OF MEMBERS

1. List members and share holdings  where practicable, showing  percentage holding


2. Agreed –issued capital with register of members, and obtain certificate in a suitable form from the registrar


3. Check that share certificates have been issued to all members

DIRECTORS REMUNERATION

(A)       Obtain, or  prepare  a schedule of Directors remuneration under headings appropriate for inclusion in the accounts distinguish between the Emoluments paid by: Company and companies  subsidiary

1. Vouch emoluments paid by reference to:


2. Company’s Articles


3. Services agreement or other evidence as agreed

• Board members

1. The productivity prices and income Board guidelines

(C)       Obtain signed copy of statement from each of the Directors, setting out the information on “Directors emoluments.

BOARD AND MEMBERS MINUTES

1. A) Examine and make extract as necessary minutes of  Directors and members


2. b) Ensure AGM was held within  statutory period


3. c) Note if decisions had been implemented.

 

 

• SOURCE DOCUMENTS AND INVESTIGATION RELATED TO DEBENTURES, TAXATION, CREDITORS AND ACCRUED CHARGES

THE OBJECTIVE OF THE AUDIT INVESTIGATION

The objective is to form an opinion  as to whether

1. Debentures, mortgages and long term loans are fairly stated and are properly described and classified, as required by the companies Act


2. Disclosure has been made of these loans which are secured on the assets of the company

iii.      Aggregate borrowings (including  where appropriate,  overdraft and other  short term  loans)  are not in excess of the  maximum permitted according to the articles or  terms of any loans)  are not in excess of the maximum permitted according  to the articles or  terms of any loans  trusted.

1. The company has complied with the requirements of any sinking fund established  under the terms of loan,  or debenture true  .


2. The terms of conversion  of any  convertible  loan stock have  been  complied with.


3. The register of mortgages and charges correctly records the information required under  the Companies  Act

vii.     Interest  has been paid in accordance with the terms of loans agreements

viii.    The balance  sheet  fairly states  and properly describes the  company’s aggregate liability for tax, or the  extent  of  the tax recoverable at the accounting  date.

1. The Liability for deferred taxation is correctly


2. The P&L account fairly states the charge for taxation on profits  for the year, including any adjustment required to the charge for taxation  in prior years and properly reflects tax  attributable to extra  ordinary


3. All material liability existing as  at balance sheet date,  are all reflected in the

• The liability has been described and disclosed  on statute  basis


• Adequate disclosure has been made of any  loans or other short  term liabilities, which are  secured on the assets of the company.

 

SOURCE DOCUMENTS TO BE VERIFIED OR IVESTIGATED BORROWING

1. Reconcile the opening and closing  balance of debenture term loans


2. Vouch redemption repayment  during the year  and new loans


3. Note the volume of security given


4. Verify that borrowings powers per Article have been exceeded, other wise  note  as points on the accounts


5. Check that writer up to date


6. Ensure that all borrowings and charges are subject of an appropriate resolution


7. Check that the terms of the debentures deed/loan are complied  with


8. Obtain confirmation, where appropriate from leaders of the amounts outstanding and security held.

 

INTEREST

1a.            Prepare a  schedule of interest  payable correlate opening liability, payment  and closing liability.

1. Vouch amount paid, check calculations and treatment of interest in the accounts payment to appropriate Tax Authorities.

TAXATION  -CURRENT YEAR

1. Prepare provisional computation for;


2. Income tax, including capital allowance computation,   ensure  that analysis of expenditures  accounts,  generally requested by the  revenue  are in the file


3. Capital gains tax (statement) if  any

• Vouch payment made during the year

1970. Ensure that where expenditure on fixed assets exceeds N20, 000 in the year, an acceptance certificate has been obtained from the inspectorate division of the federal ministry of industries in compliance with the industrial inspectorate act, 1970.

TAXATION -CURRENT YEAR

1. Obtain a copy of previous year tax computations


2. Compare amounts provided in respect of previous years, with the computation sent to FBIR, and other provisions


3. Determine the extent of other tax liabilities


4. Verity that the taxation effect of any extra-ordinary or prior year item has been correctly isolated, and has been dealt with as part of extra –ordinary, or prior year items being separately disclosed.

DEFERRED TAXATION ON REVALUATION ASSETS

1. Prepare a reconciliation of the opening and closing prevision for tax equalization, taking account of the differences between :


2. Accounts and tax, written down of assets  ranking, for  capital allowance


3. Cost and value arising revaluation of any asset, example, property


4. Disallowable provisions and accruals in the accounts, allowable to different tax yearly

CREDITORS AND ACCRUED CHARGES

1. Prepare a summary of creditors and accrued charges, showing corresponding  amounts in the previous year.


2. prepare supporting schedules where necessary, and cross reference to summary


3. compare amounts in current year with the previous year, and engine into material variations or omission


4. note as point on accounts of provisional appear to be material excessive or inadequate for their purpose, or have been utilized for  other purposes.


5. Note whether particular liabilities are

TRADE AND SUNDRY CREDITORS

With regards to trade and sundry creditors;

1. Trace balances to the ledger


2. Agree with control accounts


3. Reconcile balances with suppliers statements.


4. Check payment thereon made after year end to cash book/ ledger of subsequent period


5. Select block of 25% of balances and analysis outstanding balances, as per supplier invoices, and in  particular enquire into: no account payment, payment into Recent bill


6. Select certain numbers of invoices receives a few days before year end and those received a few days after year and date, carry out cut off test, ensure that liabilities are correctly recorded in the appropriate

ACCURALS

Prepare or obtain a schedule of accruals at the year end.

1. Check the evidence supporting the figures


2. Ensure all accruals are included by examination of accruals in which they  normally occur


3. Enquire whether there are any actions pending against the company for which provisions should be made in the accounts


4. Consider whether confirmation should be sought from the company’s solicitors

CIRCULARISATION

Select balances at the year end and:

1. Prepare letters, and supervise reply


2. Send second request after three months to those whom no reply has been received


3. Reconcile replies to balances on control schedule


4. Prepare summary of circularization and conclusion, there on

1.6     HP CREDITORS, SHORT TERM LOANS

1. Obtain or prepare a schedule reconciling opening and closing position and stating the basis of accounting for interest”


2. Examine new agreements, and vouch entries in ledger accounts


3. Vouch repayments during the year, and note those falling into arrears obtain.


4. Obtain certificates for balances outstanding at the year end.


5. Ensure correct interest accrual of the year end.

BILLS PAYABLE

1. Prepare a schedule of bills payable at the year end


2. Ensure that correct accrual has been made for interest, and check payments in the year.


3. Obtain certificate, confirming bills outstanding from the banks


4. Inspect bills paid since the year end, and check entries in cash book

DIRECTORS CURRENT ACCOUNT

1. Prepare a schedule showing movement in the year


2. Vouch transactions with underlying document


3. Obtain confirmation of balance.

CONTINGENT LIABILITIES

Prepare a schedule of  contingencies

Correlate to the previous year

Obtain confirmation from outside agencies where necessary

Summarize contingent liabilities at the year, indicating their nature

Prepare notes for inclusion in the accounts compare with previous year

SOURCES DOCUMENTS AND INVBESTAGTIONS RELATED TO FIXED ASSETS

THE  OBJECTIVES OF THE AUDIT INVESTIGATION

Our objective, is to  form an opinion as to whether

1. The assets are properly stated in form required by companies act


2. The assets are still in existence and that the company has good title to them

• The balance of accumulated depreciation at the accounting date and the charge for depreciation for the year, are reasonable having useful life and residual value, and that depreciation has been provided in accordance with the requirements of IASU.

1. The additions for the year are proper capital items, and that no material capital items have been changed to revenue.


2. Disposal have been correctly eliminated from the accounts


3. The company’s committed and authorized capital expenditure, are correctly stated in the notes to the accounts

• Acceptance certificate has been obtained in respect of qualifying additions to Assets

SOURCE DOCUMENTS TO BE INVESTIGATED

1. Summary of fixed assets, cost valuation, depreciation and net book value


2. Additions during the year

iii.      Disposal and transfer during the year

1. Good will patents, Trade marks


2. Fixed asset at valuation

vi       Asset being acquired under hire purchase agreement

• Commitments for capital expenditure


• Depreciation summary of charge in the accounts

1. Summary of profits/losses on disposal of fixed assets

ASSETS SUMMARY

1. Prepare a summary of fixed assets, reconciling cost and depreciation at the beginning and end of the year


2. Note any assets used as security for  a liability

• ADDITIONS

1. Obtain of prepare a list of additions to fixed assets during the year. Showing the  date of purchase and also broken into various assets categories, detailed on the summary schedule.


2. Vouch the items or reasonable percentage there-of I with purchases invoice agreement contraction contract/ values certificate/ title, deeds, etc.


3. In respect of percentage of the  above items,  vouch further  with capital authority and board minutes


4. If company erects or manufactures its own plants, ensure that capitalization of overheads is on a reasonable basis, and  no profit is included –update permanent file  and ensure basis is consistent


5. Review the list of repairs and renewals expenses for items of a capital nature to additions for the year


6. If total addition exceed N20,000, ascertain whether acceptance certificate has been obtained

• DISPOSAL

1. Prepare a detailed statement of assets sold scraped/absolute.


2. Vouch sales proceeds and compute profit or loss on sales.


3. Check the authorization for disposal


4. Ensure they are appropriately dealt with in the accounts and deleted from the assets register and update payment records

4)     ASSET REGISTER

1. Ascertains relevant date


2. Ensure that all additions and disposal during the year  are  correctly recorded

 

5)     EXISTENCE AT YEAR END

1. Examine title deeds or certificate of occupancy for freehold and leasehold land and buildings, or obtain certificates form Bank, or other third parties. Ascertain whether deeds held by third parties  are for safe custody or to secure liabilities of the company or for some other persons.


2. Examine registration receipts, insurance, certificates, and license of motor vehicles


3. Reconcile assets register, if any, with fixed assets schedules, and carry out test physical inspection of selected items.

• ASSET REVALUATION

1. Obtain, or prepare schedule of assets revalued indicating separately, the revaluation surplus on each assets


2. Examine Board Resolution adopting the resolution


3. Examine expert report on the basis of the revaluation

 

7. DEPRECIATION


8. Enquire if there has been any change in the company’s depreciation policy since the last accounts,  consider if reasonable, and   up date permanent file.


9. Prepare a statement of the depreciation charge for the year by fixed assets category, and test as follows:


10. Compare rates with those laid down, and enquire into any variations


11. Test calculation and compare totals with calculation and enquire into any difference adjust accounts of material


12. Ensure that leases, including additions thereto, are written up over the unexpired period of the lease.


13. Test check individual items of depreciation to assets register where applicable


14. Ascertain that only additions brought into use are depreciated.


15. Ensure that additions are depreciated on a consistent basis example by months, six months average, or on a similar basis

Any change in the company’s rates must be disclosed by way of notes

1. in the accounts

CAPITAL COMMITMENT

1. Obtain, or prepare schedule of future capital expenditure, which has been committed at the Balance sheet date, but not provided for in the account distinguishing between:


2. Amount contracted for


3. Authorized by the Directors but not contracted for


4. Vouch with orders placed, quotation accepted, and Board minutes

GENERAL INVESTIAGTIONS

1. Consider in case, trading losses sustained by the company some provisions should be made to write down the value of fixed assets to breakup value

NB: This point need only be  considered where the company is in danger of becoming insolvent.

1. Where a revaluation of      fixed assets has taken during  the year, consideration  must be given to the taxation effect  of this   cross reference to section c.


2. Review insurance value, and coverage, and consider if adequate.

SOURCE DOCUMENTS AND INVESTIGATIONS RELATED TO CURRENT ASSETS

OBJECTIVES  OF THE AUDIT INVESTIGATION

1. Investments as shown, represent bonafide assets to which the company has good tittle


2. The investments are stated a s a fair value and on a basis consistent with previous years

• Disposal of investment have been properly recorded in the    book  on a basis consistent with previous year

1. The income from investments  has been properly accounted for.


2. Information required by the companies ACT concerning the valuation of listed, and unllisted investments is correctly stated together with the other  details  required for investments which exceed a certain size


3. The stated stocks, and work in progress belonging to the company have been included

• All stocks, and work in progress belonging to the company have been included


• Each item, or group of similar items been properly valued at the lower of its cost and not realizable value, and acceptable basis in   conformity with IAS2, and consistent with previous years.

1. Adequate provision has been made for expected losses no long term contracts, and for detective and obsolete items of stocks


2. All stocks held free from lien, or pledge, or whether all, or part is charge as security for liabilities


3. The amounts shown represent guanine debts due to the company, or the prepayment of expenses, and are correctly classified

• Adequate provision has been made for all amounts receivable,  whose collectable is in doubt


• The bank balances, and cash in hand, are correctly stated in the accounts


• The amount shown as a bank overdraft, correctly states the company’s indebtedness to the bank at the balance sheet  date

1. Proper disclosure is made of overdrafts that are

INVESTMENT HOLDINGS (STOCK AND SHARES)

1. Prepare a summary of opening, and closing holdings:


2. Vouch all purchases, sale, and bonus/right issues with support documents.


3. Ensure that al major additions/ disposal have been authorized by the board


4. Examine share certificates, or obtain confirmation from third parties regarding.


5. Name in which registered


6. Number of shares


7. Unit value


8. Ensure that the basis of arriving at the amount of the investment has been disclosed –cost valuations/ loss depreciation, etc


9. Obtain market value for quoted securities, and directors valuation for unquote investments


10. Compute the gain/losses on sale, estimate tax liability on investments realized during the year and consider whether tax should be provided on unrealized gains and investments which have been revalued.

DEPOSITS

1. Reconcile opening, and closing position, and obtain certificates at the year end.


2. Obtain passbook, or statement for year, and trace all amounts deposited, and withdrawn to cash book, ensuring that the dates correspond


3. Where interest is added to the deposit see that appropriate entries are made in the accounts

INCOME

1. Vouch dividends received with dividends warrants counterfoils, and see that the tax is properly dealt with in the account


2. Verify that all income to which the company is entailed has been received or   accounted  for

STOCK SUMMARY

1. Obtain or prepare a summary of stocks, and  work in progress, subdivided into major categories, appropriate to the business (as disclosed in the accounts), and showing corresponding amounts for the previous year.


2. Prepare supporting schedule as necessary, and cross-reference to summary


3. Compare summary of stocks, and enquire into any material differences in the amounts for corresponding items or items omitted and  no explanations therefore.

 

 

STOCK TAKING-PRE-ATTENDANCE

Ensure that adequate stock taking instructions are issued, and obtain copy of written instructions, or note verbal instructions

Verify that stock taking instructions include the noting of old, obsolete, and damaged stock.

ATTENDANCE AT STOCK TAKING

Attend physical  stock taking, where practicable, to ensure that the company’s stock taking procedure are being followed unless the engagement partner considers that stock in trade and  work in progress  are not material.

Ensure that all stock belonging to third parties are clearly marked, and excluded  form count

Note last despatch note, and goods received, note numbers for cut-off tests complete stock attendance report

WORK-IN –PROGRESS

Work in progress and  finished goods – check items

1. With costing records,  or calculations noting costs, costs of materials, labour, and overhead recovering rates used


2. By comparison with previous year for similar


3. By ascertaining that overhead recovery rates are consistent with earlier years, and in line with the circumstances prevailing in current years.


4. If finished goods are valued at selling price less deductions for selling, and distribution costs, check selling  price with sales invoices, and  ensure deduction is such that no element of profit remains in the stack so valued


5. Complete “cut off” tests for purchases in the case of raw  materials, select goods  received, notes issued during last few days of the new  period, and the first few  days have been dealt within the correct period, as regards purchases and stock, check the stock records  if available


6. Complete “cut off test” for In the case of finished goods, selected items dispatched on the last day of the period and the first of the period and see that they are within the correct period, as  regards sales, and  stock- check the stock records if available.

OBSOLESCENCE

1. Examine stock records generally, and mark items which appear to be slow moving, obsolete and verify that adequate provisions has been made.


2. Check additions, and calculations, that is, test additions on stock sheets, naira columns, only.


3. Track total of stock sheets to summary


4. Check additions of summaries, and  agree total with balance sheet.


5. Consider stock levels in relation to purchases, and compare these levels, and the rate of overall stock turnover against the previous three to five years.


6. Compare gross profit percentage with that of previous years, and obtain explanations for material differences


7. Obtain certificate singed by chairman, or managing Director in a form approved by the firm.

 

 

DEBTORS AND PREPAYMENTS

For each material item, prepare a  special prgoramme of  work designed to verify its completeness and  accuracy, working papers should indicate the  source of verification and give such other information last will  explain the nature of the item, and the conclusion drawn.

1. Prepare a summary of debtors and prepayments showing corresponding amount in the previous years


2. Prepare supporting schedules where necessary, and cross reference to summary


3. Compare amount in current year with the previous year, and equire into material variations, or omissions.


4. Obtain, or prepare a list of debtors, (other than sales ledger balances) and payments in advance, vouch material, or unusual items with involves, statements, or other suitable evidence. Note  if settlement has been made since the year.


5. Compare ratio of debtors/sales with that of the preceding year, and obtain explanation for material difference

TRADE DEBTORS

1. Obtain list of sales ledger balances, and check with ledger account, check additions of list, and agree total with the control account.


2. Investigate all credit balances appearing in debtor ledger


3. Mark list of balances for amounts received after year end date, scrutinize unpaid account , note dates from which debts  appear to be outstanding, and ensure adequate provision is made for doubtful debts.


4. Confirm that the client regularly reconcile cash received with the ledger made notes where round sum of payments on accounts are being received and account appears to be in arrears


5. Test additions of number of ledger accounts


6. Enquire into any unusual fluctuation in the level of discounts sales returns of bad debts

 

 

OTHER DEBTORS

1. Examine cash books, subsequent to your end, to ascertain if any substantial amount received after date for non routine item, example, scrap sales, insurance claims disposals of fixed assets, etc should be brought  back into year under review


2. Vouch as necessary, prepayment, and other


3. Director Account

DIRECTORS ACCOUNT

Prepare a statement showing the amount on Directors loan, and current accounts during the year, enquire into the circumstances of any loans to Directors

STAFF LOANS AND ADVANCES

1. Obtain or prepare a list of staff loans, and advances,


2. Check that the loans granted  during the year are duly authorized


3. Ensure that deductions are made in accordance with loan agreements.

• Obtain confirmation of balance

DEPOSITS

Obtain or  prepare a  schedule of customers deposit

1. Equire into the purpose


2. Vouch receipts into cash book land ensure proper classification in the accounts

 

CIRCULARIZATION

Select some balances  at the year end and

1. Prepare letters, and supervise mailing


2. Send second request after three weeks to those from whom no reply has been received


3. Reconcile replies to balances on control schedule


4. Consider whether provision should be made for disputed items


5. Prepare summary of circulars, and circularize related parties.

 

 

LEGAL COMPLIANCE

1. Verify whether the relevant guidelines of the productivity, prices and income board guidelines have been complied with.


2. Which audit, and /or accounting standards are relevant to this section and compliance there with.


3. Any limitations must be quantified, and fully explained as points or accounts


4. Senior to initial for satisfactory clearance of each review point.


5. Section clearance by manager

BANK BALANCES

1. Prepare summary of Bank, and cash balance at the year, obtain direct confirmation of bank balances, using standard letter.


2. Obtain, or prepare Bank reconciliation statement, particularly for the last month of the year


3. Check that all outstanding lodgments at year end,  have been cleared to Bank statement after date.  Note  it there is any delay between date of lodgment, and the date


4. Check that all unpresented cheques have been cleared after date, or note details of any material items still unpaid at date of audit.


5. Examine bank statements for dishoured lodgment in the week following year


6. Examine cash book for days preceding and succeeding year end, and verity that all cheques drawn were for normal requirements of the business.  Note all cheques drawn  to replenish cash  funds, transfers between bank accounts and group companies, and verify they have been properly dealt within both set of books


7. In case of bank overdraft, verify whether the overdraft is secured by a charge on any of the company assets, and it so, note particulars on working papers.

 

 

CASH BALANCES

1. Count all cash balance simultaneously, with cash records to any of the account. Examine cheque stubs to ensure that all cheques drawn for cash up to  date of count are duly recorded and taken into consideration

 

1. Ensure that no law interim of the funds, such as unclaimed are included in  cash and that all cheques from employer and payable to company are dated.  Note any undated cheques which appear to have been held for all unreasonable time

• Bring to attention of responsible officials of company any loss for cash drawn by employees. Notes any loss which are undated or which appear to have  outstanding of an unreasonable time

1. If cash is not counted at year end obtain certificate for balance

 

SOURCE DOCUMENT AND INVESTIGATIONS RELATED TO GROUP , AND ASSOCIATE COMPANIES

THE OBJECTIVE OF THE AUDIT INVESTIGATION

The objective is to form an opinion as to whether:

1. The investment in subsidiary companies is worth not less  than book value, the cost of shares, being shown separately form loans to subsidiaries


2. Amounts due to subsidiaries are correctly identified and stated.

• If amounts due to company subsidiaries correctly identified, and

1. The aggregate amount of the company’s indebtedness to from these  companies are fairly states, and that shares in fellow subsidiaries, and the amounts owning in the form of debentures are shown separately


2. The name of each subsidiary, and associated company, the country in which it is incorporated, or registered as appropriate, and the description, and proportion of the shares held are correctly stated in the notes to the account.

GROUP COMPANIES

1. Prepare schedules of shares held in subsidiary companies or fellow subsidiaries, and their lost or book value, reconciling opening, and closing position.  Vouch movements during the year.  Inspect share certificates


2. Prepare summary, and note method of agreement of inter-group company balances. See that balance are confirmed by letter where possible.


3. Scrutinize accounts, and vouch any unusual


4. Check all transactions involving the  transfer of funds in holding/ subsidiary companies books, and verify that the dates correspond, especially at the year end.

 

ASSOCIATED COMPANIES

1. Agree with partner, and client which (if any) investments should be accounted  for  as associated companies


2. Prepare schedule setting out particulars of associated companies, and reconciling opening, and closing position.  Vouch movements  during the year.  Inspect shared certificates.


3. Prepare summary of amounts due to/from associated   Obtain confirmation of balances at year end.


4. Scrutinize current accounts, and vouch an unusual transactions


5. Note large transactions involving the transfer of funds, and check authority


6. Consider whether, in view of losses subsidiaries stained by particular subsidiaries/associated companies.

Also some provision should be made in respect of:

1. The book value of investment


2. Amounts due on loan or current accounts.

 

 

SOURCE  DOCUMENTS AND INVESTIGATIONS, RELATED TO PROFIT AND LOSS ACCOUNT

The objective  of the Audit investigation is to form an opinion as to whether:

1. The profit and loss account fairly states the results for the period, and has been  prepared on acceptable prudent basis consistent with the companies Act.


2. The accruals concept has been properly applied, and that except for  immaterial items relating to prior years,  reported revenue, costs  and expenses are properly attributable to the period under review, and.

• Unusual, prior period items, and changes in accounting policy have been presented in accordance with IAS8.

TRADING TRENDS

1. Examine the trading and profit and loss account generally


2. Gross profit percentage


3. Items of incomes

• Items of expenditure

1. Compare monthly sales, particularly, the last months with the corresponding months in the preceding year and obtain explanation for any unusual fluctuations.


2. See that figures for income, and expenses appear reasonable in the context of the business as a whole

INCOME AND EXPENSES ANALYSIS

1. Obtain or prepare a schedule, explaining source, and composition of items, which are required to be disclosed under the requirements to be disclosed under the requirements of the companies Act or IAS”S


2. Other explanatory schedules as appropriate


3. Scrutinize expenses accounts generally and vouch as appropriate, major items, and ensure  that no material items of a capital nature have been written off  as expenses.

 

AUDITORS APPOINTMENT AND FEE

1. Ensure that the provisions in the accounts is adequate to meet audit cost


2. Ensure that the agenda for next AGM                includes resolutions to reappoint the auditors, and to confirm or enable the directors to fix  the auditors remuneration’s.

INSURANCE

1. Ascertain whether the client carries out a periodic review to ensure that there is adequate insurance cover over significant areas, example, (major fixed assets, stocks and loss to profits employed and public liability ) taking into account current replacement cost


2. Updates current cover and if the client appears to be substantially under insured


3. Consider current cover and if the client appears to be substantially under-insured.

 

UNUSUAL AND PRIOR PERIOD ITEMS

1. Examine the working of the accounting policy note to ensure that it’s the same with previous year


2. Accounting treatment is in conformity with the note.

SCOPE  AND LIMITATION

This project covers the areas of auditing  in public practice and the necessary pre-requisite to attain an effective audit.  As in  usual with most other projects, this research  into the necessary source documents that would guarantee the completeness of an audit assignment has its own share  of constraints and limitations which range from financial constraints, time factor, distance factor, cost and inadequacy of available data.  However, this constraints  were far out weighed by the importance and benefits derivable from a successful execution of the research.

 

DEFINITION OF TERMS

1. Audit –An examination into the financial statement by an Auditor


2. Acts – This refers to the company Acts 1968


3. Annual Returns – Returns accruing to the company at the end of a  fiscal year  which has to be filled with the commission


4. CAMD – This refers to company and Allied Matters Decree 1990


5. Circularization – passing  and retrieving information from  related third parties


6. Current Assets – Assets that are of liquid nature, eg. Bank balance, debtors etc


7. Dividend- An amount disbursed to members of a company out of the company’s yearly earning


8. Debenture – A loan of relatively long span, example, 5 years


9. Fixed Assets – Assets used by a company in the production process that are not convertible in nature, example Building, plant machine


10. Group companies account- A company consisting of holding, subsidiary and Associate, produces a group account


11. Minutes- Factors or facts highlighted in a company’s meetings


12. Management letter – A letter from the Auditor to the management of a company reporting on matters arising out of the audit assignment


13. Reserves – An amount set out of the company’s profit to take care of some problem that may spring out in future, example, sinking fund reserve, general reserve


14. Stock taking – An exercise taken to ensure that an adequate remuneration is given to stock at the end of a  trading period


15. IP “ Short for work in progress”  An asset that is gradually used up to attain a more complex Asset.


16. Depreciation – An amount written off on the historical and conventional cost of assets, so as to Carter for  wears and tears arising in the process.


17. Remuneration – A reward to the company’s employee, e.g. directors


18. Independence – The Auditor’s rights or liberty to the company’s books of account, and unreserved right as to question any conflict of interest.


19. Internal control : All systems of checks established by a  firm to safeguard its assets and promote operational efficiency


20. Balance sheet – A statement showing the financial position of a company at a particular period


21. Profit and loss Account – A run down of a company’s income and expenditure in a trading period.

 

 

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