EM2916 - Examining Accounts: Records Examination - Planning: Understanding the Accounting System
In many ways the accounting system and the business are so interdependent, that an understanding of one is impossible without the other. Initial questioning of the accountant, proprietor or director will be to find out how the system is meant to run. Your consideration of the records will involve deciding whether the system as it is supposed to operate is adequate, and also how much in reality the actual system does operate as is supposed.
If there is a full double-entry system, it is worth considering the following action.
- Follow through the entire audit trail from goods in to goods out EM2917.
- Understand how the physical movement of items is recorded EM2917.
- Discover what records exist outside the accounting system, such as delivery notes, paid cheques, cheque counterfoils, paying in books, stock control, the ordering of materials, appointment diary etc.
This should give you an idea of how comprehensive the system is and the part played in it by those records kept for essentially commercial reasons rather than production of accounts, and which an accountant or auditor is unlikely to have seen.
Where there is not a full double-entry system, more basic questions will have to be asked to establish what exactly is recorded
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You may find the following questions useful. It is not an exhaustive list.
Receipts
A daily or weekly figure is entered in the book. From what evidence is this figure obtained?
How are takings recorded at the point of sale?
Does the accountant see those basic records? If so, what use does he or she make of them?
Are bills issued to customers? In what circumstances and in what form?
How are credit sales recorded?
How are customers’ orders processed?
How often are the records written up?
Expenditure
What documentation is there and is it examined by the accountant?
Proprietor
What is the proprietor’s practice concerning drawings?
What record is there of such drawings?
What goods are taken, and at what intervals, for private use? How are these items recorded?
Adjustments by accountant
Which figures in the accounts differ from the recorded figures and why?
Is any comparison made of bank paying in books with the records of banking?
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Are paid cheques compared with the cheque counterfoils and the cheque outgoings shown in the records, and with vouchers? (The likely costs of doing such a test mean this comparison is unlikely to have been made.)
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Balance sheet items
What is the source of the figures for debtors, creditors and stock? (Often these are estimated or are provided in list form by the proprietor.)