Page 186 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes his client to supply him a list of good, doubtful and bad debts. He should scrutiny such a
schedule. He can verify this list by applying the following tests to each account:
1. If the account is regularly settled and the advantages of cash discount taken by the debtor,
the debt is good.
2. Whether the debt is outstanding beyond the period of credit allowed. If so, it may mean
that the debt is doubtful.
3. Whether the payments are on account and the balance tends to increase. If it so it means the
party is doubtful.

4. Whether an old balance is being carried forward and the new goods are supplied for cash.
If so, it means, the debt is doubtful.
5. Whether a cheque or a bill received against a debt balance has ever been dishonored. If it
has been the case, it shows the party is not financially sound, and that the debt may be
doubtful or prove bad some day.
6. The law of limitation allows three years to recover a debt and if the debt is outstanding for
a longer period, it means the debt is bad.
7. If the bills are constantly renewed, the party is financially weak and the debt may be
treated as doubtful.
8. If payments are irregular, the debt may not be good, and may become bad some day.
9. Whether there is any unusual item of discount or allowance. If so, he should enquire the
matter.

9.3.10 Total Accounts and Sectional Balancing

In big business house where there are large numbers of transactions, it will be difficult to prove
the accuracy of the balances of the Bought and Sales Ledger. To do so the Total Debtors and Total
Creditors Account with have to be prepared. The Total Debtors and Creditors accounts will
contain all the items spearing on the debit side and the credit side of the accounts in the Sales and
Purchase Ledgers. In case the client maintains the ledger on the self-balancing system, the
chances of error will be minimized. The auditors should apply a few test checks and if he finds
that there is no mistake, he may presume that everything is all right.

Self Assessment

Fill in the blanks:
10. After having satisfied himself that there is a good internal check system regarding the
purchase, the auditor should now proceed to vouch the ..........................
11. The auditor should vouch the Day Book or the Sales Book which records only .................
12. .....................is the ledger which contains the creditor’s accounts.

13. ..................can be vouched with the help of the audited balance sheet of the previous year
14. .................... is ledger which contains the accounts of the debtors.

9.4 Summary

The main objectives of vouching are: to examine the accounting entries recorded in the
books of accounts with reference to documentary evidence known as vouchers; to examine

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