The management prepares the books of accounts. In large-scale business journal is divided into various parts. There is purchase journal for recording credit purchases. There is cash journal or cashbook for recording receipts and payments of cash.
In a small business, there may be one cash journal’ for receipts and payments of cash, but in big business, there may be two journals.
One journal is cash receipt journal while other is cash payments journals. The purchase return journal is used for returns of damaged or subs standard goods to suppliers.
The sales journal is used for recording sates on credit to customers. The sales return journal is kept for recording goods returned by customers.
The bill receivable journal is used for recording billed received from debts. The bill payable journal is meant for recording acceptances given to creditors.
See Also: Types of Ledger Used in Auditing
The general journal is used for recording opening entries, closing entries, correcting entries, and adjusting entries and transfer entries.
Moreover, all other entries are recorded in it, which cannot be recorded in other journals. The audit of such journals is essential for the purpose of report about true and fair view of business matters.
The vouchers are the basis of entries in these journals. Such journals are also called books of original entries. The accounting principles, methods, and techniques are used to write up the books.
The entries appearing in books d accounts must tally with vouchers. The approval of management is essential otherwise the entry is not acceptable. The accuracy of various journals is necessary for audit.
Different Types of Audit of Journals
AUDIT OF CASH JOURNALS (CASH BOOK)
CASH MEMOS: The auditor can vouch cash sales with the help of carbon copies of cash memos. The total amount of cash memos usually tallies with entry in cash receipt journal.
SALES STATEMENTS: The auditor can vouch large-scale cash sales with sales statements. The total of cash memos should tally with amount recorded in cash receipt journal.
CASH COLLECTION TOTALS: The auditor can vouch cash collection totals. Such totals must tally with cash receipt journal.
NUMBER OF CASH MEMOS: The auditor should vouch cash memos. He must see that every voucher bears the number.
TRADE DISCOUNT: The auditor should note trade discount allowed to customers. The rate of discount must not exceed prescribed limits.
CANCELLED MEMOS: The auditor can check that management has approved cancelled memos. The cash memos must be placed in cash memos book.
See Also: Appointment & Removal of an Auditor
AUDIT OF PURCHASE JOURNALS
BUSINESS NAME ON INVOICE: The auditor can vouch the journal or purchase book. He can see that invoice is in the name business. The entry can be made if it is in business name.
INVOICE RELATE TO CURRENT YEAR: The auditor can purchase journal. He can check the date on the voucher. They relate to the current year. The date of past or next year is acceptable
ROUTINE PURCHASES: The auditor must know the business. He must vouch that purchases relate to the business. The routine items of purchases should be allowed to the books of accounts.
INVOICE APPROVED BY OFFICER: The auditor should purchase book. The officer can put his signature on every voucher. Signing of voucher means that the management has purchases.
ENTRY IN PURCHASE JOURNAL: The auditor can vouch the purchase book. Every approved voucher must be entered purchase journal for completion of record. The amount of voucher tally with cashbook
COMPARE INVOICE WITH GOODS INWARD BOOK: The auditor vouch purchase journal. He can compare invoice with goods book. The goods purchased journal.
He can compare invoice with inward book. The goods purchased must tally. In case of difference auditor can inquire from management.
NO INVOICE CAN BE RECORDED TWICE: The auditor must purchase journal with the help of invoices. He should make sure invoice has been recorded twice. Every voucher must be entered.
TRADE DISCOUNT IS DEDUCTED: The auditor should vouch discount. He can see the bill of goods purchased. The trade deducted from total amount. The entry should be for net amount.
NO OMISSION OF INVOICE: The auditor must vouch purchase He should take care that all Vouchers have been properly. There should be no omission of invoice otherwise the results misleading.
CAPITAL GOODS ARE NOT PURCHASES: The auditor must that capital goods or fixed assets are not purchased.
When fixed are purchased these are recorded as assets and not stock of routine purchased must be recorded as purchases.
FORWARD PURCHASE CONTRACTS: The buyer- can forward purchase contract. The auditor must see that purchase of the voucher must is not of nature of record in vouch the approved entry in the must inward goods the vouch that no once the trade discount is book recorded will be examine assets goods.
The entry can be recorded only when goods have been received, No gain can be taken unless goods are sold.
ERSONNEL USE OF GOODS: The auditor must vouch those goods used by directors, owners and employees must be recorded in their personal accounts. The total purchases must be deducted due to personal consumption; otherwise the results will be misleading.
CHECK TOTALS: There is a need to check the total. The management makes the casting. The auditor must make his own calculations checking the accuracy. The additions, deductions, totals and sub-totals are examined.
POSTING TO PURCHASE ACCOUNT: The total of purchase journal is posted to the purchase account. The auditors compare the total of purchase journal with that of purchase account. The posting is usually is made on monthly.
GOODS ON CONSIGNMENT: The goods may be sent on consignment. The auditor can examine the books that good on consignment ate not recorded in purchase account. A separate account is needed to record goods on consignment for full disclosure.
GOODS IN TRANSIT: The goods may be sent to branches. The goods may be in transit. The auditor vouch that goods in transit are include in purchases. It must be recorded separately.
INVOICE NUMBERING: The vouching requires that all invoices should be numbered. These should be placed in files according to serial numbers. The auditor can vouch the purchase journal with numbered vouchers for audit purpose.
See Also: Qualification and Disqualification of an Auditor
PURCHASES RETURNS JOURNALS
INTERNAL CHECK SYSTEM: The auditor should examine internal check system in operation. The purchases returns system must be effective to avoid any fault later on.
CREDIT NOTE: Credit note may be collected from seller after dispatch of goods. Such credit note is handed over to accounts department before making payments. The credit note must be vouched.
PURCHASES RETURNS BOOK: The purchases returns book should be vouched after entry of return of goods. All credit not received should be entered in it. The missing entry may show inflated purchases.
RETURNS OUTWARD BOOK: The gatekeeper’ returns outward book. All returns are recorded in it. The auditor can compare purchases returns with credit note to eliminate errors.
HEAVY RETURNS: The auditor must check heavy internally at start or end of year. There may be plan to inflate or deflate for the purpose of showing better performance.
FICTITIOUS PURCHASES: The auditor should check that there are fictitious purchases recorded in books. The purpose may be to higher or lower profit. The auditor can trace such purchases.
CHECK TOTALS: The auditor can check total of purchases returns book. The amount of credit note and returns outward book must tally. The rate per unit can be multiplied with units to check total amount
POSTINGS: The auditor can check that posting is correct. The total purchases returns can be examined in purchases returns account. The amount in returns account must tally with returns outward book.
See Also: Professional & Personal Qualities
AUDIT OF SALES JOURNALS
COMPARE INVOICE WITH ENTRY: The auditor compares invoices with entry in sales journal. Every entry in sales journal is supported by invoice or bill. Vouching of sales journal is essential for audit.
NO OMISSION OF SALES INVOICES: The auditor vouch sales journal. He can check that all sales invoices are recorded in preparing sales journal. The omission of sales invoices cannot provide true figures.
TRADE DISCOUNT: The auditor can check that trade discount is not in excess of discount rate. The trade discount is deducted from total amount in order to pass an entry in journal.
GOODS ON SALES OR RETURNS: The auditor should vouch goods sent on sales or returns basis at the end of the year. The goods cannot be recorded as actual sales without consent of customer.
SALE OF FIXED ASSETS: The auditor should vouch sales journal to check that sales of fixed assets is not recorded as sales. The sales of fixed assets should be recorded separately.
GOODS OUMARD BOOK: The vouching of sales journal is necessary for the audit. The auditor can compare entries with goods outward book. He can note true position of sales after checking goods outward book.
CANCELLED INVOICES: The auditor should check that cancelled sales invoices are not recorded as actual sales. He can examine cancelled bills. He can check signatures of officer on sales invoices.
GOODS ON CONSIGNMENT: The goods are sent on consignment to agents. These goods cannot be recorded as actual sales unless consignee confirms it. The auditor should examine such goods.
APPROVAL OF SALES INVOICES: The sales invoices are prepared for customers. The invoices require approval of sales manager: The auditor can check invoices that there is proper authority.
FORWARD SALES CONTRACT: The seller can make forward sales contract. The auditor must examine that no profit is recorded in advance. The sales are recorded after variety of goods.
SALES TAX: The government may impose sales tax on products. The sales tax is added to invoice price. Then it is paid to the government. The auditor should vouch sales collected and paid.
HIRE PURCHASE SALES: The goods sold under hire purchase are not regular sales. The unpaid amount is stock out on hire purchase. The auditor can check that these sales are recorded separately.
NO FICTITIOUS SALES: The auditor sh6uld vouch sales journal to see that there are no fictitious sales. Management may play trick to increase profit percentage. The auditor should make sure that sales are true.
TOTALS AND POSTINGS: The total of sales journal is posted to sales ledger. The auditor should vouch totals and posting to note that sales journal is accurate.
See Also: What are the Rights of an Auditor
SALES RETURNS JOURNALS
INTERNAL CHECK SYSTEM: The auditor should examine internal check system relating to sales returns. He should see that this system is operating effectively to avoid errors and frauds.
RETURNS INWARD BOOK: The auditor should vouch returns inward book to see that it accurate and complete. This book is maintained at gate of business. The gatekeeper records the entries in such book.
CREDIT NOTE ISSUED: A credit note is issued to customer after return of goods. The auditor should vouch such credit note. A copy of such note is handed over the accountant for record.
MISSING CREDIT NOTE: The goods returned by customers may be included in closing stock but credit note may be missing. The sales may have been recorded at increased prices to show high profits.
HEAVY RETURNS: There may be heavy sales returns during first month of next year. The sales returns may be kept pending in order to inflate or deflate sales. The auditor should check heavy returns.
CHECK TOTALS: The auditor can check totals of sales returns book. He can check it with rate per, unit and the number of units featured. Such calculations are helpful for vouching.
CHECK POSTING: The total of sales returns book is posted to the debit of sales returns account s in the ledger. The auditor can vouch such accounts to check that posting is complete.
UNRECORDED GOODS INCLUDED IN STOCK: The auditor must pay attention to unrecorded goods but included in stock. Such items cannot provide accurate results.
See Also: What Is Forensic Audit
AUDIT OF BILLS RECEIVABLE JOURNALS
BILLS COLLECTED: ‘The auditor can vouch bills receivable journal. He can examine amount of bills collected. The cashbook entries are compared with amount of bills collected.
BILLS DISCOUNTED: The bills may be discounted with bank for obtaining loans. The vouching of bills discounted entries can inform the auditor about loans obtained from bank.
OVERDUE BILLS: The bills receivable journal may show overdue bills. The overdue bills are a cause of concern because recovery of such bills may be doubtful.
DEBTORS’ ACCOUNT: The auditor cans vouch debtors’ accounts for accepting bills the debtors accounts show amount of bills receivable. Such amount is recorded in bills receivable journal.
BILLS NOT DUE: The auditor can vouch the amount of bills not due at the end of the year. He can examine bill in custody of business. The amount can be compared with schedule of bills receivable collected.
CHECK TOTALS AND POSTINGS: The bills receivable journal should be totaled at the end of every month. The total must be posted from journal to the ledger.
PROVISION FOR BAD DEBTS: The bills receivable may not be collected on due date. The auditor should examine true position. Provision for doubtful debts may be calculated on overdue bills.
See Also: What are the Duties of an Auditor
AUDIT OF BILLS PAYABLE JOURNALS
BILLS PAID: The auditor should check the amount of bills paid. He should check cash payments in order to note that bills payable have been paid to the payees.
BILLS UNPAID: The vouching of bills payable is necessary to note bills unpaid at the year-end. The amount can be vouched with bills payable journal, bills payable account, trial balance and balance sheet.
CASHBOOK ENTRY: The bills payable paid are recorded in cashbook. The auditor can examine payments made to payees during the year. Information may be available about missing entry.
CHECK TOTALS: The auditor can check total of bill payable journal. The total may be posted on monthly basis. The total of journal must be correct and same amount is posted to bills payable account.
CREDITORS ACCOUNTS: The auditor can vouch bills payable journal. He can see that creditors account shows true amount of bills payable. He should check that bills accepted and paid have been recorded.
CHECK POSTINGS: The total of bills payable journal is posted to bills payable account. The auditor can examine that same amount is posted from bills payable journal to respective account in the ledger.
AUDIT OF GENERAL JOURNALS
OPENING ENTRIES: Opening entries are passed at the start of year. The balance sheet accounts are basis of such entries. The auditor can vouch opening entries with last year balance sheet accounts.
CLOSING ENTRIES: The revenue accounts are closed to trading profit and loss account for the year. The auditor should compare accounts and amounts with items stated in trial balance.
CORRECTING ENTRIES: Journal entries are passed for correction of errors. The auditor should vouch the correcting entries in order to note that entries were wrongly recorded.
ADJUSTING ENTRIES: The auditor should see that adjusting entries are based on correct allocation between, capital and revenue. Such entries relate to income and expenses for more than one year.
TRANSFER ENTRIES: There may be transfer entry in case of debtors and creditors. One account is transferred to another account to know the final balance of customer. Auditor should vouch such entries.
BAD DEBTS: The debtors may fail to pay debt on due date. Bad debt entry is recorded after approval from management. The auditor should know the reasons for failure of debtor to pay amount.
BILLS DISHONOURED: The entry for bill receivable dishonored is recorded in general journal. The debtor account is debited and bill receivable account is credited. The auditor should vouch such entry.
ALLOWANCES: The allowances are given to debtors for sales promotion program. The auditor can trace this entry in general journal: The credit vouchers must be examined.
DEPRECIATION: The assets are depreciated every year. The depreciation entry is made in general journal. The auditor can vouch amount of depreciation. The depreciation method must be same.
PROVISION FOR BAD DEBTS: There is need of provision for bad debts due to credit sales. The auditor should vouch that amount provided for bad and doubtful debt is sufficient for the year.
ISSUE OF SHARES: The shares are ‘issued for collecting capital. Entries for application and allotment of shares are recorded in it. The auditor can vouch such entry with amount in cashbook.
ISSUE OF DEBENTURES: The directors can issue debentures for borrowing money. The permission of registrar, prospectus, and directors’ resolution is sufficient proof to check the amount of loan.
FORFEITURE OF SHARES: The shares may be cancelled due to non-payment of amount called up. The amount already paid is forfeited. The resolution of directors and information to defaulter must be vouched.
RE-ISSUE OF FORFEITED SHARES: The shares can be re-issued any other party. Cash received, share allotment: letter and general journal entry should be checked to note number of shares issued.
ASSETS OF VENDORS: The business of vendor may be purchased. The assets at agreed value are recorded in general journal. The purchase agreement should be checked to determine value of assets.
LIABILITIES OF VENDORS: The liabilities of vendors may be taken over. Such liabilities are recorded in general journal. The value of liabilities can be compared with agreement.
CONSIGNMENT OF GOODS: The owner may send goods on consignment: He can pass an entry in general journal. The auditor can vouch consignment contract and goods outward book.
CASTINGS: The auditor can examine total recorded in general journal. The correct totals are necessary for maintaining accuracy in books of accounts and other record.
POSTINGS: The auditor can post total of journal to the respective ledger accounts. The posting must be made at the same time in order to avoid errors and frauds.
