Ledger Scrutiny Process:
A Crucial Aspect of Financial Audits
Ledger scrutiny is an essential part of all audit procedures, including vouching and posting. Whether it’s an internal audit or statutory audit, all clients, including private and public companies, require ledger scrutiny. It’s essential to conduct a ledger scrutiny regardless of whether the accounts are maintained manually, using Tally, SAP, or customized accounting software. Whenever there’s a ledger, such as a stock ledger, accounts ledger, DRS, CRS, or expense ledger, scrutinizing the ledger is necessary. Although ledger scrutiny has been a part of the audit process for many years, it’s rarely been explained in simple terms. Usually, a senior assistant or a partner of the firm carries out the ledger scrutiny at the end of the audit.
The importance of ledger scrutiny in any audit is that it’s the foundation of the entire process. There are no standardized procedures for ledger scrutiny, but the following steps have been summarized based on over twenty-five years of experience:
1. Reconciliation of Opening and Closing Balance: To ensure that the balance includes only entries pertaining to the said account and that every amount in the balance is identifiable with the account, it’s necessary to reconcile the opening and closing balance in a particular ledger account.
2. Journal Entries in the Account: It’s essential to trace the journal entries in the account, including transfers to and fro, and to ascertain the reasons for passing a journal voucher. The transaction flow of the journal entries to the various accounts should be verified for a specific account. It’s also necessary to verify the necessity of passing the journal voucher for a particular transaction.
3. Characteristics of the Account: Before beginning the scrutiny of a particular account, it’s necessary to write down and understand all the specific characteristics of that account. For example, the ledger account of electricity expenses has monthly bills to be posted, and the payment if paid against the particular bill, including provision for the last month.
4. Transactions Nearest to the Head of the Account: For accounts such as repairs and maintenance, which have features of major and minor repairs, it’s necessary to understand which head the account should be nearest to.
5. Combo Ledger Accounts: For combo ledger accounts, such as repairs and maintenance, it’s essential to understand the specific characteristics of different types of transactions.
6. Type of Transactions: Transactions can be capital or revenue, recurring or non-recurring. Specific account heads are available for each transaction, and it’s necessary to look into the particular account with the nature of the transaction.
7. Period of Transactions: Transactions occur on the opening date of the books or ledger, the closing date of the financial year, and the rest of the transactions that are entered into and squared up in the same financial year. Understanding the peculiarity of the transaction with respect to its period will help in comprehending the transactions in a particular ledger account.
8. Arithmetic Calculations: For transactions in the ledger with arithmetic calculations, scrutinizing the calculation is fundamental.
In conclusion, ledger scrutiny is a crucial part of any audit process. The above steps can guide accountants and auditors to conduct a thorough and accurate ledger scrutiny.