What is Ledger Scrutiny ?

Ledger scrutiny is an internal check and part of audit process.

The focus is to find any

• Erroneous errors or
• Frauds
• Intricacies involved in the Controls established
• Management override of frauds
• Expose any risks embedded
• Ledgers Scrutiny involves vouching for the Ledger transactions to ensure that those are actual business transactions, occur within the same period and are accurately recorded with no errors.

How to Perform Ledger Scrutiny?

The Process starts by scrutinizing each GL Account by considering the guidelines below.

Check if the Current Year’s Opening balance agrees with the Prior year’s Closing balances

Prior year closing balances are audited.

So, there shouldn’t be any change there.

In other words, no transaction will result in retrospective change. It’s a Frozen balance. So, the audit team need to check if those reconcile.

Verify if the Transaction Fits into this GL

For Example, consider that we are reviewing a business’s AMC Maintenance expenses GL. We expect transactions relating to the Various AMC for Software, Vehicles and office equipment; however, if we note a Software purchase recorded here.

It isn’t a good fit here. So, it’s an Alarm for improper accounting.

Check for the Consistency of Transactions 

Transactions recorded in a GL account need to be consistent with nature.

Consider Factory Rent Expense GL.

Rents are due each month, and payments happen on a particular day for this GL account.

We noted that the rent amount for August Month is double that of the remaining months’ rent. This is not right.

It is time for the audit team to track down the source documents (agreements) and bank statements to check the payments and inquiries with the management. Thus, it also helps to provide corroborative evidence.

Do an Arithmetical Check of taxes in Journal Entry

Arithmetical accuracy must be focused on transactions like Interest on Debt, Depreciation and Amortization of Fixed assets.

Be alert, considering the Nature of the Transaction 

We can see a lot of development in the software world. But humans need a little portion of involvement, which can result in errors.

How about an example?

Let’s say there are two items with different sales tax percentages.

Accounting staff should have selected the correct tax percentage when generating a sales invoice. This leads to the wrong tax amount; thus, the invoice must be corrected.

What if this continues for a couple of more invoices? It could lead to issues from tax authorities.

Special Focus on the number of transactions within a GL

There are instances where the number of journal entries is at most 12. Classic Examples are depreciation expenses, Loan repayments, Internet Charges, Communication expenses, Books & Periodicals, Subscription Charges etc.

Keep a check on that kind of Transaction to avoid surprises.

Why does an Auditor need to apply ledger scrutiny?

Audit Starts with understanding the business by obtaining the contracts such as Incorporation Agreements, BOD Minutes, Lease arrangements, Significant vendors and Customer Controls.

The Second step is to do Vouching, followed by Ledgers Scrutiny.

Vouching is checking if all the Transaction is appropriately recorded within a proper account, amount, and period.

The Focus of Ledgers Scrutiny shifts to GL-wise transactions.

When you are vouching, it’s hard to notice patterns across a specific GL.

We can do a quick analytical Year over Year comparison of the GL balance or Transaction. There will be a linkage between transactions in one GL and another. For Example, you notice there is an AMC expense for a Vehicle. It indicates the purchase of a vehicle for the business.

How to prepare for ledger scrutiny?

The audit team needs to understand the nature of the business and its environment. This is foremost for any audits. It helps the audit team to identify the significant areas of risk. Thus, the team can design appropriate audit procedures.

Here Audit procedures include performing 

• Test of details (including confirmation),
• Substantive analytical procedures or both;
• Design Testing of Controls,
• Operating effectiveness of Controls or both
• Types of Audit techniques to supplement with (Inquiry, Observation, Reperformance, Reconciliation, Confirmations, and Analytical procedures)

The auditor might determine to vary the nature, timing and extent of the above procedures.

Also Read: Journal Entry Testing

How about an example here? 

The auditor performs a risk assessment for each of the account balances and notes that there is a significant risk of material misstatement for Revenue GL in the current year. However, the prior year’s approach is Analytical Procedures.

Considering the risk, the Audit team did 100% testing by sending confirmations. Here, the audit team varied the extent of procedures to perform based on risk assessment.

Note: Auditors can send the confirmation through online tool.

Ledger Scrutiny Practical Scenario

How to carry out ledgers scrutiny?

The audit team must first determine Materiality and Performance materiality along with risk assessment. This helps them to prioritize the Material GL accounts.

Along with Materiality, the Audit team must understand the prior year’s errors and Industry factors to design appropriate audit procedures.

For Example, the entity provides electricity facilities to retail customers (households). It’s impossible to do a confirmation procedure to confirm the Revenue balance considering the huge volume of customers. Analytical procedures or another test of details may be a better fit here.

The audit team does have inherent limitations. So, they need to optimize the audit work.

Therefore, focusing on a GL whose year-end balance equals 1% of the business’s total assets is worthless.

Conclusion

Ledgers scrutiny adds value to the audit work by focusing on one GL at a time. Thereby, the Audit team can bring down the risk to an acceptable low level. So they can provide reasonable assurance that the Financials are free from errors or misstatements.

Thus, following the above guidelines gives auditors some handy tools for working on Ledger scrutiny.