Role of Auditors in examining Sales Ledger
While examining the sales ledger, the auditor should make note of the following.
1. If the customer makes part payments, then the longest outstanding amount is to be adjusted first.
2. If the customer has made any payment in past, there are chances of misappropriation of amount collected by teeming and lading method. Therefore, the auditor should thoroughly investigate such accounts.
3. Cash discounts are to be allowed only if the bills are settled promptly. If the auditor is of the opinion that any allowance is unreasonable or if any allowance is adjusted against the amount that is outstanding, the same should be scrutinized for it could be a fictitious allowance created fraudulently by an employee who had misappropriated the amount collected from the customers.
4. Sometimes, unintentionally or fraudulently, sales may not be recorded. But the amount collected from the customer or discount allowed against the particular sales may be recorded. This can be easily unearthed if either side of each customer’s ledger account is verified with the corresponding amounts on the other side.
5. If there are any transfer entries from one ledger to another ledger account, the auditor should ensure that such transfers are duly authorized by the appropriate officer.
6. Before writing off any balance as bad debt, the organization should take adequate measures to recover the amount or the amount should have become time barred. Only the top management, i.e., Director in the case of a company, partner in the case of a firm or the proprietor can give up claim and decide the exact amount that can be written off as bad. Therefore, the auditor should thoroughly scrutinize the amounts that are written off as bad debts.
7. If there is any dispute with the customers regarding the amount due from them the auditor should thoroughly verify the nature of dispute and the amount involved. He should ensure that adequate provisions are made for the amount that are considered non recoverable.
8. The organization should maintain a register for recording the bad debts written off. This may be helpful in tracing the relevant account in case of subsequent recovery.
9. Obtaining direct confirmation of balances from the debtors by the auditor is the best audit practice that can be adopted to detect fraud and to trace out misappropriation of amount collected.
Disclosure requirements under Companies Act: Amount due from directors, managers or concerns in which they are interested should be listed out separately.