What is Ledger | Types of Ledger Used in Auditing

What is Ledger? Ledger is a book or place where classified, a record is maintained, the transactions relating to an account are posted from journals. When business is small one ledger is sufficient to keep a record of personal and impersonal accounts.

Personal accounts relate to debtors and creditors. The’ impersonal accounts relate to assets, liabilities, income, and expenses. In case of the large-scale business, ledger is divided into various parts.

First ledger relates to debtors who purchase goods on credit. The second ledger creditors who supply goods on credit. The third ledger contains other accounts of the business. Such ledger is also known as an impersonal or general ledger.

The entries appearing in purchase journal and purchases returns journal are posted to purchase (creditors) ledger. The entries appearing in sales journals and sales return journal are posted to sales (debtors) ledger. The remaining accounts are maintained in general ledger. The auditor can check that posting is complete in all respects.

Types of Ledger Used in Auditing

Purchase Ledger

1. OPENING BALANCE: The opening balance of purchase ledger is transferred from previous year. The auditor can vouch each account to see that opening balances are correct.
2. CREDITORS SCHEDULE: The schedule of creditors is compared with entries in purchase ledgers. The auditor can see that all accounts have been recorded,
3. VERIFICATION FROM CREDITORS: The auditor can send letters to creditors to note exact amount payable to them. The confirmation from other sources is essential.
4. Provision FOR DISPUTE: The auditor should note that management has created reasonable amount of provision for dispute. The audit of purchase ledger is necessary to check disputed amount.
5. ADVANCE PAYMENTS: Any creditor account may show a debit balance due to advance payments on accounts of purchases. The order letters, bills and correspondence may be checked to know the exact position of accounts.
6. GOODS IN TRANSIT: The goods may be in transit. The entry cannot be made unless goods and invoices are received. The auditor can check that goods in transit are not recorded in books of accounts.
7. BILLS ACCEPTED: The bills may be accepted for payment of debt. The bills can be examined in bills payable book and bills payable account.
8. GOODS RETURNED: The auditor can vouch goods returned recorded in purchases return journal. The purchase returns are posted to respective creditors account.
9. DISCOUNT RECEIVED: The creditor may allow cash discount for making payments before time. The auditor can vouch cash discount in cash journal, discount account, and creditors account in purchase ledgers.
10. CASH PAID: The auditor can vouch cash paid with receipt of seller, cash journal entry and posting in purchase ledgers. The auditor can see that there is no difference in books of accounts.
11. ALLOWANCES: The sellers can offer allowances for -promoting sales or avoiding sales returns. In both cases a note is received from sellers. The auditor should vouch such allowances in purchase journal and purchases account.
12. SELF-BALANCES SYSTEM: The purchase ledger may be kept under self-balances system. The purchase adjustment account should tally with account maintained in it.

Sales Ledger

1. OPENING BALANCE: The opening entry should be compared with last year figures of sundry debtors stated in books.
2. DEBTORS SCHEDULE: The auditor can collect schedule of debtors from management. He can compare it with sales ledger to determine amount due,
3. EXAMINE JOURNALS: The auditor can check sales journal, sales return journal, and bills receivable journal and cash journal.
4. CHECK POSTING: The total of sales journal is posted to the ledger. The auditor can see that pecking is regularly made to such ledger.
5. CONFIRMATION DEBTORS: The auditor can send letters to debtors for finding out the true amount due. The amount stated in debtors account should tally with confirmation letters.
6. AMOUNT DISPUTED: The auditor should check overdue accounts of debtors. Facts may be collected about disputed amount.
7. BAD DEBTS: The auditor should bad debts account in detail. The reasons may be collected for failure of debtors to pay amount due.
8. RECONCILIATION STATEMENT: The difference in debtors’ accounts and confirmation letters must be traced through reconciliation statement. There may some errors or frauds or goods in transit.
9. BILLS RENEWAL: The auditor must vouch bills renewed. The renewal may create doubtful debts. The regular renewal means bad debts.
10. CHEQUES DISHONOURED: The auditor must vouch cheques. There may be dishonor of cheques due to shortage of funds. The auditor must check past dealing of such customers.
11. OUTSTANDING DEBT: The auditor must examine debts outstanding for a period of three years. The debt outstanding for less than three years is doubtful.
12. SELF-BALANCES SYSTEM: The sales ledger may be kept on self balances system. The adjustment account must tally with the accounts kept in sales ledger.

General Ledger

1. POSTING OF CASH TRANSACTIONS: The auditor can see posting of cash transactions in general ledger. The items of receipts and payments are posted in it.
2. VOUCHING JOURNAL: The auditor can vouch Journal to ensure that a voucher supports every entry. When there is no voucher there is any no entry.
3. CHECK POSTING: The auditor can check posting of journals totals to ledger. He can examine that posting is complete in all respects:
4. CHECK TOTALS: The auditor should check totals to accounts kept in ledger. The difference in entry and posting can be pointed out for correction in books of accounts.
5. ACCURACY OF ACCOUNTS: The auditor can, maintain accuracy of accounts. All vouchers must be available to check the transactions.
6. DIRECT POSTING: The entry may be processed directly from the voucher to the ledger. The vouching of such entry can be traced as other routine ‘entries. The vouching procedure does not change for such entries.
7. CHECK ADJUSTMENTS: The auditor should vouch adjustments like outstanding expenses, prepaid expenses, accrued income and unearned income. In this way accuracy of adjustments is tested.
8. TRIAL BALANCE ACCOUNTS: The auditor can vouch accounts appearing in trial balance. Such accounts are transferred from ledgers. The balances must tally with accounts appearing in ledgers.
9. TRADING ACCOUNT ITEMS: The auditor can vouch items appearing in trading accounts. Such accounts are extracted from ledgers. Accurate balances can provide true and fair results.
10. PROFIT AND LOSS ITEMS: The general ledger provides accounts for preparing profit and loss account. The auditor can vouch general ledger balances with profit and loss account to test the accuracy.
11. BALANCE SHEET ITEMS: The items appearing in balance sheet are taken from ledgers. The auditor can compare balance sheet items with amounts appearing in ledgers to determine true and fair view.
12. CASTING OF GENERAL LEDGER: The auditor can check the total of general ledger. He can vouch total of it with adjustments made in order to check accuracy of accounts.

Outstanding Assets

1. PREPAID INSURANCE: The auditor can check insurance agreement. The auditor can note time period and amount of insurance. He should check that amount carried forward is correct.
2. PREPAID RENT: The auditor can examine amount of rent paid in advance. He can see the rent agreement to note the time period. He can check that amount for next period is correct.
3. PREPAID TAX: The tax can be paid in advance. The auditor can check the amount paid and actual tax liability at the year-end. He can see that prepaid tax is properly recorded.
4. RENT RECEIVABLE: The auditor can go through agreement for renting out asset. The amount of rent due must be calculated as per terms of agreement. The entry for rent receivable should be noted in books.
5. INTEREST RECEIVABLE: The interest may become due at the end of the year. Such interest is to be collected next year. The auditor can vouch that amount of interest receivable is justified.
6. DIVIDEND RECEIVABLE: The auditor can vouch the amount of dividend receivable at the end of the year. The amount of investment and rate of dividend can be checked to determine exact amount of dividend income.

Outstanding Liabilities

1. WAGES UNPAID: The auditor should examine the amount of wages due but not paid. The employees’ record should be checked to determine unpaid wages.
2. CARRIAGE OUTSTANDING: The amount of carriage outstanding can be checked with bill of carrier. Such carriage may be on purchase or sales of goods.
3. RENT PAYABLE: The auditor can examine the amount of rent due but not paid at the end of the year. The agreement should be checked to note the terms and conditions. The entry can show the amount of rent due.
4. TAX PAYABLE: The auditor should vouch total amount of tax for the year. The amount of tax paid should be checked. The tax payable can be determined. The entry for tax payable can be examined.
5. COMMISSION PAYABLE: The auditor should vouch the transaction of commission payable at the end of the year. The adjusting entry can be checked to see that exact amount is recorded.
6. INTEREST PAYABLE: The auditor can determine amount of interest payable with the help of agreement. The rate of interest and amount of loan can be used to calculate interest payable.
7. UNEARNED INCOME: The income may be received in advance for goods and services to be supplied in future. The auditor can determine the amount of income relating to coming years. The adjusting entry can be checked.

Contingent Liabilities

1. BILLS DISCOUNTED: The banker can be asked to confirm the amount of bills discounted. Such bills are considered contingent liability at the end of the year. The auditor should check amount of such liability.
2. LOAN GUARANTEE: Mine Company can provide a guarantee for others to provide loans. When principal debtor fails, the guarantor is asked to pay loan. The auditor should confirm actual amount of loans.
3. COURT CASES: There may be court case against, the company for breach of contract. The auditor can get advice from legal adviser to see that sufficient provision is made for it.
4. DEBTORS SOLD: Company may sell debtors for obtaining loans. The borrower and lenders can inform debtors for such deal. The auditor should check agreement for sale of debtors.
5. DEFERRED TAXATION: The tax case may be pending with tax department. The auditor can determine the amount of tax payable by company. He should check that proper provision has been made.
6. FORWARD DELIVERY CONTRACT: The auditor can examine forward delivery contract. He should check amount of expected loss from such contract. Such liability is to be stated in footnotes.
7. GRATUITY TO EMPLOYEES: The auditor must see the number of employees who can claim gratuity. Such amount must be disclosed in books of accounts as a contingent liability.
8. DIVIDEND IN ARREARS: The auditor can vouch the amount of dividend in arrears. Such dividend is to be disclosed in footnotes for information. The dividend may be in arrears on cumulative preference shares.
9. PARTLY PAID SHARES: The shares may be partly paid up. The remaining amount may be called up to creditors in case of winding up of a company. The amount boot called up so far should be disclosed in books.

Contingent Assets

A contingent asset is one that is not business asset at present. It can become business asset in future. The management has option to buy shares in another company. It can become asset after purchase. The company may have filed case in court of law against another company for infringement of copyrights or trademarks.

When the company will win the case it will become asset. Such contingent assets may be stated as footnote for disclosure requirements. It is not legal to show contingent assets. The general public can know about such assets.