The Only Principles OF Auditing Resources You Will Ever Need


Auditing  is a multi-dimensional  and multi-functional   concept  in the  overall   auditing  and accounting perspective.  There are mainly two types of auditing,  internal audit and statutory audit. Internal audit encompasses  a detailed study of the  accounting  and internal control system  of the auditee entity  and  corresponding  evaluation  of the  internal check system in operation and whether it is in  continued  existence for the period under review.  Statutory Audit, on the other hand,  is to   check whether the auditee entity  has complied with various rules and regulations   under the relevant statute  and it has not defaulted on  statutory compliance and  reporting   formalities  under corresponding laws in force for the period under   review.  Another sub-group  under internal audit can be  divided into  tax audit  and   systems audit. 

Generally, an internal audit programme  is designed by the chief  auditor-in-charge and the audit schedule can run  from  a week to  around  30-60  days depending on the auditee entity,  it’s transactions  and the nature of the   industry. A programme of internal audit is set to include  the test check concept   detailing the nature of transactions to be checked  and the time-limit for completing   the audit  under review  and the tasks assigned  to each of the  audit  assistants   employed  for the specific purpose.  Mainly,  the areas of audit  in a programme of   internal audit are Cash, Bank,  Purchases, Sales, Journal and  General Ledger.

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In an audit  of the cash book,  physical cash verification has to be conducted  as  close  to the Balance Sheet Date.  But, an element of surprise has to be there  to  ensure that there is no wrong-doing  on the part of the main cashier.  It also has to be   ensured that  the person who approves the cash payment should not be the same  person who disburses the cash.  This is to ensure the existence of a proper system of  internal control.  It is to be ensured that there are no cash payments exceeding  Rs  20,000  on any given transaction.  It also has to be ensured that a  system of internal Check  is in operation whereby  work of one person is automatically  and   Independently checked  by another.  This will be in conformity  with the  overall   System of  internal control.  It is to be ensured that the  main cashier  talies the cash   Balance daily as per the cash book  with the actual cash-in-hand.

In case of bank book,  it is to be ensured that the  proper authority has approved  all   bank payments.  In case of statutory payments,  it has to be ensured that the  payments are made well before the statutory due date  to avoid penalties and  statutory defaults.  It also has to be seen that securities  like company seals,  cheque   books,  deposit receipts  are kept in the safe custody of an  independent person other   than the person handling the important functions  of accounting cash and bank.  It is  to be  ensured that cash is banked  daily to avoid  fraud and misfeasance.  The Bank   Reconciliation Statement  is to be prepared,  preferably,  every 15 days to ensure that    Unresolved entries  are accounted properly.

The purchases book  is to be handled by a person  other than the purchases officer.   Purchases have to be backed  by a purchase order  depending on the inventory level   in  the stores department.  There should be different layers  of authority approvals    depending on the quantum  and amount  of purchases made  , say, preferably, for a   month. 

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It is to be ensured that  there are no  old outstanding purchase orders  for more than 3   Months.  It is to be seen that every purchase  is backed up by a  Goods-receipt-cum-  Inspection report  from the concerned department, thereby ensuring that the quantity   Mentioned  in the purchase invoice  tallies with the quantity in the GRIN.  In case of   Purchase returns,  it is to be seen that  the amount is properly debited  to the party   Concerned and the amount collected back from him for the goods returned.   In case of sales,  it is to be ensured that the sales invoice  is backed up by an internal   Work order  or the party’s purchase order, as applicable in the circumstances.  Every   sale  should be delivered  to the party within the due delivery date, as applicable, to   avoid  the penalty of  liquidated damages.  In case of export sales,  it is to be seen   that   the sale proceeds  are received within the statutory limit  of 6 months  from the   date of sale.

In case of inventory,  it is to be seen that  the balance as per stock register  tallies  with the quantity  as per the purchase register.  It also has to be ensured  that slow  and non-moving items  in stock should be segregated  from the regular items in stock.  The auditee entity  should have a consistent policy on the time-horizon in case  of  slow  and  non-moving items(normally 3-6 months).  It also has to be ensured that  is   perpetual inventory count and physical verification to avoid fraud and misfeasance.

In case  of general ledger review,  it is to be ensured that exceptional  and non-  recurring  items  are adequately monitored  to prevent error and fraud.  Statutory   defaults and non-compliance with  attendant regulatory mechanisms  warrants the  auditor’s immediate attention  and reporting it to the highest  possible authority  with   adequate power in the entity concerned.

In the case of Debtor’s ledger,   it is to be ensured that  the sales made should be  Recovered  within the shortest possible time-frame, so that money is not locked in   Working-capital.  It is to be ensured that the  credit limits are carefully set,  keeping   in view the financial condition  of the customer concerned.

It also has to be seen that  in the case of creditor’s ledger,  payments have to be made   in time ,  so that too many creditors  are not made to wait  at the office-door   demanding their dues ,  which would put unnecessary  strain on  the company’s   finances.

The views expressed here are of the author, The Feelancer may not necessarily subscribe to them. 

The writer is Pritvi Kanchi.

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