General Considerations
The audit of ledgers generally involves the undermentioned steps :
- Testing the strength and quantity of internal check;
- Tracing the opening balances from the previous year’s records;
- Checking the postings from subsidiary books and, if they are kept on the self-balancing system, also tallying the totals of balances in subsidiary ledgers with those in the total of control account;
- Checking the closing balances of individual accounts on the balance schedules afterwards from the schedules on to grouping schedules and then into the final accounts;
- Checking the totals of ledger accounts, trial balance, schedules and groupings;
- Verifying the balances in personal accounts, either with the statements of account or confirmation of balances obtained from the parties; verifying the balances in impersonal accounts, viz., those of fixed assets, bank balances, etc. with the schedules containing details of assets and liabilities as
well as those of nominal accounts (featuring various items of income and expense by reference to the documentary evidence which may exist in a variety of forms to ensure that all the outstanding amounts, both receivable and payable have been properly adjusted); - Scrutinising the accounts generally and, in particular, examining the composition of final balances; and
- Ascertaining the extent of clearance of the balances brought forward from the previous year particularly those relating to receivables and payables, sale or disposal of fixed assets and of inventories.
The audit of ledgers is thus an important step in the process of verification of the correctness of Final Accounts. It is an occasion to review the transactions entered during an accounting period, duly classified, in the totality; also that of studying the relationship which exists between different sets of
figures. Ledgers, therefore, should be examined carefully and comprehensively. The composition of the balance of each account should be scrutinised and, if a doubt arises, the transaction or the set of transactions, which have given rise to the doubt should be examined in depth. When a comprehensive and effective system of internal control exists, it is possible to limit the routine checking of ledgers by the application of test checks as stated below :
- verifying the postings into the ledgers from the various books of prime entry;
- verifying the totals of the account;
- tracing the balances of the personal and nominal accounts from the ledgers into the schedule of balances ;
- comparing schedules totals with the balances in the Control Accounts; and
- checking the position of the daily entries into Control Accounts.
The foregoing audit tests be applied to a selected group of entries in the ledgers. Alternatively, stepsq 1 to 4 should be applied to accounts for parts of the year determined on a selection. However, the posting of the Control Accounts should be verified for the whole year. In selecting the period or periods of verification of posting and totals, preference should be given to the accounts the composition whereof is not clear or in which items on either side cannot be correlated. Moreover, instead of certain periods being selected for the application of test checks, a few accounts could be selected for being test checked for the whole of the year. If, however, the system of internal control on application of procedural tests is found to be ineffective, it would be necessary for the auditor to extend the programme of verification of balances of the accounts in the ledgers as aforementioned. In doing so, the auditor should take into account the existence of possibilities of frauds being committed through manipulation of entries in the ledgers, for example, the possibility of the ledger clerk colluding with others for misappropriating amounts collected from the customers and subsequently covering up misdeeds by adjusting fictitious credit in the customer accounts. Such a fraud in a ledger would not be disclosed merely on extracting balances from the ledger and agreeing their totals with the balance in the respective Control Accounts, since the balances, despite the fraud, would agree. It would be discovered either on postings being checked in detail, or on obtaining detailed statements of account from customers and comparing them with those stated in the books of account.
