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    What Is A Balance Sheet Audit

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    This document is an assignment that explains what a balance sheet audit is. It defines a balance sheet audit as the verification of all items in the balance sheet combined with an examination of related income and expense accounts. The purpose is to ensure assets and liabilities are correctly recorded and accounting principles are followed. Guidelines for auditors include examining organizational documents, verifying account ledgers, and ensuring cut-off procedures are followed to record transactions at the fiscal year end. Advantages of the balance sheet are that it provides important financial information, allows for ratio analysis, and is needed for obtaining credit. A disadvantage is long-term assets may be misstated if using historical costs rather than current values.

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    What Is A Balance Sheet Audit

    Uploaded by

    SOMOSCO
    1K views6 pages
    This document is an assignment that explains what a balance sheet audit is. It defines a balance sheet audit as the verification of all items in the balance sheet combined with an examination of related income and expense accounts. The purpose is to ensure assets and liabilities are correctly recorded and accounting principles are followed. Guidelines for auditors include examining organizational documents, verifying account ledgers, and ensuring cut-off procedures are followed to record transactions at the fiscal year end. Advantages of the balance sheet are that it provides important financial information, allows for ratio analysis, and is needed for obtaining credit. A disadvantage is long-term assets may be misstated if using historical costs rather than current values.

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    This document is an assignment that explains what a balance sheet audit is. It defines a balance sheet audit as the verification of all items in the balance sheet combined with an examination of related income and expense accounts. The purpose is to ensure assets and liabilities are correctly recorded and accounting principles are followed. Guidelines for auditors include examining organizational documents, verifying account ledgers, and ensuring cut-off procedures are followed to record transactions at the fiscal year end. Advantages of the balance sheet are that it provides important financial information, allows for ratio analysis, and is needed for obtaining credit. A disadvantage is long-term assets may be misstated if using historical costs rather than current values.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views6 pages

    What Is A Balance Sheet Audit

    Uploaded by

    SOMOSCO
    This document is an assignment that explains what a balance sheet audit is. It defines a balance sheet audit as the verification of all items in the balance sheet combined with an examination of related income and expense accounts. The purpose is to ensure assets and liabilities are correctly recorded and accounting principles are followed. Guidelines for auditors include examining organizational documents, verifying account ledgers, and ensuring cut-off procedures are followed to record transactions at the fiscal year end. Advantages of the balance sheet are that it provides important financial information, allows for ratio analysis, and is needed for obtaining credit. A disadvantage is long-term assets may be misstated if using historical costs rather than current values.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 6

    NAME: ELIZABETH AUDU YOHANNA

    REG NO: 2001031021


    COURSE: AUDITING
    DEPT: NDII ACCOUNTING
    TITLE: ASSIGNMENT
    QUESTION: Explain in details what is balance sheet audit?

    INTRODUCTION
    What is a Balance Sheet Audit?
    Verification of all items included in the balance sheet combined with the examination of
    related income and expenses accounts is known as balance sheet audit.

    PURPOSE OF CONDUCTING BALANCE SHEET AUDIT


    In large organizations, the trading transactions are numerous and mostly they are
    entirely computerized. In such cases, the routine checking may be completely
    dispensed with.
    If the computerized accounting system is coupled with effective internal control, detailed
    vouching can also be dispensed with. In such organizations, auditor conducts the
    balance sheet audit.
    The balance sheet audit includes the following:
    1. To ensure that all assets owned by the organization are included in the balance sheet
    at the correct value.
    2. To ensure that all liabilities are included at the appropriate values.
    3. To ensure that the assets shown in the balance sheet are in fact owned by the
    organization.
    4. To ensure that accepted accounting principles are followed to prepare the balance
    sheet.
    5. To verify that all items are appropriately identified into capital items/revenue items
    and treated accordingly.

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    6. To ensure that the requirements of applicable Statutes are duly complied with. For
    example, in the case of companies, the issue of share capital is correctly recorded in
    the books and all the requirements of law are duly complied with.

    BALANCE SHEET AUDIT – GUIDELINES FOR AUDITORS


    1. Balance sheet audit includes examination of Partnership deed, Memorandum and
    Articles of Association, Minutes of the Board and the system of accounting followed by
    the organization.
    2. Verification of debtors’ ledger: In the case of the debtors’ ledger, the auditor shall
    obtain a certificate from the management that all the debts that are considered bad and
    doubtful are provided for and the other book debts are good and recoverable.
    Further,
    a. the management should provide a list of balances of customers which are
    outstanding for more than six months.
    b. the management shall reconcile the trial balance of the debtors ledger with that
    of their control accounts, if any.
    c. the auditor should thoroughly verify the transactions pertaining towards the close
    of the year. The Goods Outward register and Sales register for that period are to
    be verified. He may also verify the implementation and effectiveness of the cut off
    arrangements.
    d. The auditor shall obtain confirmation of balances of accounts, earmarked by him.
    3. Verification of Creditors’ ledger: In the case of creditors’ ledger,
    a. The management has to certify that all liabilities accrued up to the date of
    balance sheet have been taken into account.
    b. The management shall reconcile the trial balance of the creditors’ ledger with that
    of their control A/c, if any.
    c. The Purchase transactions pertaining to the close of the year are to be
    thoroughly verified. The purchase journal and the Goods Outward Register for
    the corresponding period are to be verified thoroughly. The auditor shall also
    verify the cut off arrangements implemented to record the above transaction.

    2
    ADVANTAGES & DISADVANTAGES OF A BALANCE SHEET
    A balance sheet is a snapshot in time of what a company owns (assets), what it owes
    (liabilities) and the shareholders' interest in the company (stockholders' equity). The
    balance sheet is used internally to help manage the company and externally to report
    the company's financial condition. The advantages of the balance sheet involve the
    important information it conveys; however, the use of outdated values for certain assets
    is a major disadvantage.

    ADVANTAGE: KEEPING THINGS IN BALANCE


    The balance sheet equation shows that a company's assets equal its liabilities plus its
    stockholders' equity. Since this equation must always hold, any deviation from it
    indicates a failure of the company's accounting systems. The highly structured format of
    the balance sheet breaks the three major components into a series of accounts with
    dollar values as of a given date. As such, it is a compact, easily understood source of
    current information, and it shows trends when compared to previous balance sheets.
    Advantage: Calculating and Analyzing Ratios
    One of the benefits of a balance sheet is that managers, investors, lenders and
    regulators take the measure of a company by calculating financial ratios using
    information from the balance sheet, often in conjunction with other reports such as the
    income statement. For example, balance sheet data is used to examine liquidity, which
    is the ability of the company to pay its current bills, by dividing current assets by current
    liabilities (the current ratio). There are dozens of balance sheet ratios that help show
    how a company compares to its competitors and can help detect important financial
    trends.
    Advantage: Obtaining Credit and Capital
    The importance of a balance sheet is also evident should a business need to obtain
    lines of credit or loans. Before a lending institution will lend money or extend lines of
    credit to a new or established business, the lender will likely require a balance sheet to

    3
    help assess a business' creditworthiness and financial state. If your balance sheet is
    accurate and up-to-date, it will provide the lender with a picture of the business' ability to
    repay its debt. Without a balance sheet, the lender generally will require other records
    or deny the loan entirely.
    DISADVANTAGE: MISSTATED LONG-TERM ASSETS
    Long-term assets are expected to last more than one year and include items like
    property, plant and equipment. The balance sheet records the value of long-term assets
    at the price paid for them, known as the historical or book value. One of the limitations
    of a balance sheet is that it ignores the current value of these assets.
    Depreciation reduces the value of long-term assets according to an arbitrary schedule
    created for tax purposes but does not necessarily reflect real wear and tear.
    Furthermore, the balance sheet ignores any gain in value or the money it would take to
    replace an asset at current prices. Book value can substantially understate long-term
    assets, distorting the wealth of the company.
    Disadvantage: Missing Assets
    Only assets acquired by transactions are reported on the balance sheet. Therefore, it
    omits some very valuable assets that are not transaction-oriented and can't be
    expressed in monetary terms. For example, a company might have a highly valuable
    group of technical experts that would be hard to replace but are not reported on the
    balance sheet. In addition, assets developed internally, such as an online internet sales
    channel, can have tremendous value that the balance sheet ignores.

    CONCLUSION
    Within financial accounting, a balance sheet refers to a summary of the financial
    balances of a company. Using balance sheets can have both its advantages and
    disadvantages. The advantages include full disclosure and ratio analysis while the
    disadvantages can include value discrepancies and transparency. A standard balance
    sheet is made up of three parts: Assets, liabilities and ownership equity. These are all
    listed as of a specific date, such as at the end of the company’s financial year.

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    REFERENCE
    "Microsoft Corporation balance sheet, June 30, 2004". Microsoft.com. Retrieved 2012-
    10-04.
    "US Small Business Administration sample spreadsheet for a small business". Archived
    from the original on 2007-07-15. Retrieved 2003-08-10.
    Daniels, Mortimer (1980). Corporation Financial Statements. New York: New York :
    Arno Press. pp. 13–14. ISBN 0-405-13514-9.
    Williams, Jan R.; Susan F. Haka; Mark S. Bettner; Joseph V. Carcello (2008). Financial
    & Managerial Accounting. McGraw-Hill Irwin. p. 40. ISBN 978-0-07-299650-0.
    Williams, p.50

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