(1) Opening Entries:
The opening entries may be checked by reference to the various relevant items on the previous Balance Sheet. If the business has been purchased from the vendor and then the opening entries have been passed, agreement between the client and the vendor, Articles of Association (if it is a company) and Director’s Minutes should be examined to ensure that correct records are maintained and there is no manipulation in the accounts.
(2) Closing Entries:
Such entries are those which are passed for closing and transferring balances from the nominal accounts to the Profit and Loss Account. It should be seen that balances have been correctly arrived at and carried to proper accounts.
(3) Adjusting Entries:
Adjusting entries include such items as provision for bad and doubtful debts, outstanding and prepaid expenses, accrued and unearned income, depreciation and reserves, allocations between capital and revenue, etc.
The auditor should check all the available evidences in order to ensure that such entries are accurately and correctly made. He should explore the chances for committing fraud through the journal and check them thoroughly.
Provision for bad debts should be based on the procedures followed in the past and its adequacy should be verified. Bad debts should be written off only under proper authority.
For outstanding and prepaid expenses and also for accrued and unearned income, the auditor should obtain schedules from the client and ensure that items have been correctly arrived at. Thus, he should not pass any entry until he is satisfied with regard to its validity and correctness.
To vouch entries for provision for depreciation, he should obtain information with regard to the nature of assets, their estimated effective life and also the bases upon which provision for depreciation have been made. Director’s Minutes should also be seen for the authority.
(4) Issue, Allotment and Forfeiture of Shares:
Entries relating to issue, allotment and forfeiture of shares are also passed through the Journal. For such entries, the auditor should study the Prospectus, Articles of Association, Director’s Minutes Book, Applications, Copies of Allotment Letters, Correspondence, etc. These items are dealt with in detail in the chapter of ‘Company Audit’.
(5) Consignment Transactions:
Consignment transactions are usually entered in the Journal but if the volume of such transactions is large, it would be advisable to maintain a separate book called ‘Consignment Outward Journal’.
The vouching of consignment transactions should be done with the copies of the Performa invoices, correspondence, account sales received and contracts with the consignees.
If the price quoted is higher than the cost, the necessary adjustment should be made before finding out the actual profit or loss. The goods unsold should be separately shown in the Balance Sheet as ‘Stock of Goods on Consignment’.
If goods are received on consignment from other parties, entries therefore will be passed through the Journal. Such entries should be vouched with the help of the copies of account sales submitted to the consignor. The sales of such goods should not be included in the ordinary sales but should be dealt with separately.