The audit of ledgers normally involves the following steps:
1. Internal Check
Test the quality of internal checkregarding timely and correct entries in the ledger.
2. Opening Balances
Trace the opening balances from previous year’s audited balance sheet. In case, the entity is getting its accounts audited for the first time since inception or it was audited in previous year by some other auditor, follow the procedures given in SA 510 “Initial Engagements Opening Balances “issued by ICAI.
Check postings from cash book and other books of prime entry (i.e., purchases book, sales book, journal, purchase returns book, sales return book, bills receivable book, bill payable book).
4. Control Accounts
Total up the balances in the subsidiary ledgers. Tally the totals with those in the control accounts.
5. Verification of Personal Account Balances
Verify personal account balances with statements of account received from the parties or by arranging direct confirmation. The procedure of direct confirmation should be applied in the manner stated in SA 505 External Confirmations issued by ICAI.
6. Verification of Real accounts
The real account balances should be verified by
- Physical verification (as in the case of cash and investments),
- Checking the working papers of physical verification exercise conducted by the management (as in the case of fixed assets and inventories),
- Inspection of documents (as in the case of intangible assets such as patents and trade marks), and
- Direct confirmation (as in the case of stocks lying with third parties).
7. Scrutiny of Individual Accounts
Scrutinize individual accounts. Examine the composition of balances. Examine age analysis of various items outstanding.
Check totals of ledger accounts, schedules of balances, groupings etc.
9. Tracing into the Final Accounts
Trace the balances in individual accounts on to the schedules, from thereon into the groupingsand from the groupings into the final accounts.
10. Analytical Review
Examine the reasonability of balances by applying analytical procedures e.g. comparison with opening balances, debtors turnover ratio, creditors turnover ratio, current ratio, fixed assets turnover ratio, working capital turnover ratio etc.