What is Auditing
What is auditing?
A thorough review of a company's financial statements to ensure the financial records are fair and accurate. The main goal of auditing is to make sure that a company's financial statements are accurate and are following regulatory guidelines.
There are three main types of audits. They are given blew:
1. Process Audit
2. Product Audit
3. System Audit
Process Audit
This type of audit verifies that processes are working within established limits. It even evaluates an operation or method against predetermined instructions or standards to measure conformance to these standards and the effectiveness of the instructions. A process audit may
1. Check conformance to defined requirements such as time, accuracy, temperature, pressure, composition, responsiveness, amperage, and component mixture.
2. Examine the resources followed and the measures collected to determine process performance.
3. Check the adequacy and effectiveness of the process controls established by procedures, work instructions, flow charts, and training and process specifications.
Product Audit
System Audit
An audit was conducted on a management system. It can be described as a documented activity performed to verify, by examination and evaluation of objective evidence, that applicable elements of the system are appropriate and effective and have been developed, documented, and implemented in accordance and in conjunction with specified requirements.
A quality management system audit evaluates an existing quality management program to determine its conformance to company policies, contract commitments, and regulatory requirements.
Similarly, an environmental system audit examines an environmental management system, a food safety system audit examines food safety management systems, and safety system audits examine the safety management system.
Today we'll discuss the required steps or procedures for auditing a company's bank or cash accounts.
We need to follow these steps for auditing cash or cash equivalent accounts.
1. Agree the opening balances to last year's accounts
2. Obtain and check, or prepare, a lead schedule for the current year's figures and reconcile this to the nominal ledger.
3. Examine any material journal entries or other adjustments made during the course of preparing the financial statements.
4. Carry out analytical procedures such as:
a. Comparison of the current figures with those of prior periods,
b. Review of key ratios or other performance indicators,
5. Review the planned extent of reliance on internal controls in this area and consider whether this remains appropriate.
6. Assess whether the initial materiality and risk assessment should be revised in view of the audit evidence obtained. Record details of any necessary adjustments on B5 or B8. Consider the audit's impact on the remainder of the audit work and on any work undertaken to date.
7. Review for large and unusual items and verify. Valuation and existence
8. Obtain bank letters for all bank accounts open at any time during the year. Review the meeting minutes approving the opening of new bank accounts.
9. Obtain bank reconciliations for all accounts and verify.
a. Check bank balances against bank statements and bank letters.
b. Check bank book balance to nominal ledger
c. Check the casting of the reconciliations.
d. Check a sample of uncleared items through to the new period. Obtain reason why any item has taken longer than expected to clear
e. Obtain explanations and substantiate all adjustments on the bank reconciliation.
f. No long outstanding item should remain unfollowed.
g. No revenue nature item should be appearing
h. All deposits made should be cleared within two days.
i. No long-outstanding checks of significant amounts are unpresented. If so, then check their payment voucher and ensure that no discrepancy is involved.
10. Check whether the bank account are in the name of the company or not
11. Convert the FCY accounts into your native currency at the end of the year.
12. Ensure that all matters dealt with in the bank letters have been referenced to the relevant schedule/sections.
13. Ensure that bank balances and overdrafts are only netted off where a formal right of set-off exists.
14. Ensure that the company has not exceeded any restrictions on borrowing powers imposed in the Articles of Association or any loan agreement.
15. Cut test of Bank
Cash
16. For businesses receiving cash income, ensure unbanked takings before and after the year-end have been accounted for in the correct period.
17. For businesses receiving cash income, ensure that all unbanked takings before and after the year-end have been promptly banked in the new period.
18. Obtain certificates for all cash balances counted by management or surprise counted by the audit team.
19. Cut off test of cash
20. Confirm the petty cash balance of various depots or centers.
Collection in hand, Bank overdraft
a.Checking the bank reconciliation of the bank-wise overdraft balance.
. Checking the subsequent position of reconciled items.
c. Checking the bank sanctions letter for the overdraft facility and checking whether the limits of the overdraft exceed its limit.
d. Checking the terms and conditions of Bank overdraft and its payments
e. Checking the interest on overdraft and its payments.
21. Confirm that the disclosure checklist will be completed for this year. Where that is not the case, explain how the objectives relating to disclosure will be achieved.
22. Ensure that there is evidence on the file to support all disclosures made.
23. Review the bank letter and ensure that all necessary disclosures have been made
We'll discuss later the required documents needed for these procedures to be examined.
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