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Monday, 26 September 2011

Explain the procedure of verification in the following cases 1. Profit and loss account 2. Balance sheet

VERIFICATION OF PROFIT AND LOSS ACCOUNT :-
The auditor should keep in view the following points, while verifying the profit and loss account :

1. Verify Transfer Of Profit :-
In the trade account gross profit must be checked by the auditor. This profit must be transferred to the credit side profit and loss account. If there is a loss then the same amount should be transferred to debit side of profit and loss account. The figures on both side should remain the same.

2. Verify Expenses :-
There are two types of expenses, current year and coming year expenses. The current year expenses should be treated as revenue and coming year should be treated as liability.

3. Matching Of Revenue :-
Those items appearing in profit and loss account should be verified as revenue nature. To determine the net profit revenue expenses must match with the revenue income.

4. Items Disclosed :-
The auditor should verify all the record and check that all the items have been properly disclosed for the shareholders or not.

5. Income Not Received :-
Sometimes income becomes due but it is not yet received. The auditor should verify such income. It should be also credited to profit and loss account.

6. Advance Received :-
Sometimes advance amount is received but it is not earned. The auditor must verify that is should be deducted from income in P/L account.

7. Previous Year Adjustment :-
It should be verified by the auditor that previous year adjustment has been made or not. Those items which were not recorded in previous year can be stated in current year P/L account.

8. Income On Investment :-
It should be verified by the auditor. It must be in recorded P/L account. The sale of securities at increased prices and interest due can be recorded as income.

9. Expected Loss :-
The fall in the value of investment and stock are called expected losses. The auditor should verify that these have been recorded in P/L account or not.

10. Expected Profit :-
The market price of assets may go up and expected profit may increase. The auditor should verify that such income may not be recorded as actual income unless it is realized.


VERIFICATION OF BALANCE SHEET :-
Following items must be verified by the auditor :

1. Assets :-
The assets shown in the trial balance can be verified by the auditor. In the balance sheet same value assets should be shifted. The differences in two balances should be verified.

2. Liabilities :-
The liabilities shown in the trial balance must be shifted to the balance sheet. Auditor should check that same amount has been shifted or not.

3. Purchase Of Fixed Assets :-
All the fixed assets purchased by the management must be stated in the balance sheet. The auditor should verify the value and price of such assets from the agent certificate or bill of vendors.

4. Closing Stock :-
At the end of the year stock in trade is given in the balance sheet. It should be confirmed by the auditor that this stock is not inflated. The cost or net realizable value which is lowest should be considered.

5. Assets Placement :-
The auditor should verify that assets have been placed in the balance sheet or not. He should also check that requirements of law have been followed or not.

6. Liabilities Placement :-
It should be also verified by the auditor that liabilities have been placed in the balance sheet or not.

7. Lease Agreement :-
Under the lease agreement assets are purchased by the owners. Finance lease asset is recorded in the balance sheet. The auditor should verify the lease agreement to know the type of asset.

8. Verify Cash :-
There are two types of cash. Cash in bank and cash in hand. The auditor can check the cash at bank by checking the cash book. He should also verify the cash in hand and it should tally with the cash book.

9. Security For Loan :-
The auditor can verify the security given against the loan. He can confirm from the lender about such assets. He can also confirm the assets physically.

10. Outstanding Liabilities :-
These should be verified by the auditor. The exact amount should be placed in the balance sheet. He should also verify the contingent liabilities.

11. Unsecured Loans :-
The auditor should verify these loans which are obtained without security. These are obtained on personal security. These are stated separately in the balance sheet.

12. Secured Loans :-
In the balance sheet these loans are stated as liability. The agreement may be mortgage deed or pledge.

13. Report :-
In case of complete satisfaction auditor submits the report.

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