Overview:

In accounting basic, most businesses normally use one of two accounting basic for their company to record accounting transaction in the system, cash basis or accrual basis.

It is depended on the nature of the company whether they use a cash basis or an accrual basis.

A cash basis is a method that the book is kept based on actual cash in and out of the Company. With accrual basis, income and expense are recorded when they have occurred whether on credit or by cash.

Understanding Control:

Anyway, accrual is referred to as the accounting concept or principle that is used to recognize expense and income of the Company that has been consumed or earned within the specified reporting period, and It is also to ensure that the Company’s expense and income are recorded and recognized based on actual.

Below are some examples of accrual that normally happened in respective companies;

  • Utility expense is subjected to be accrual in the month that invoice is not received from the supplier by recording as a debit to a utilities expense account for the month which presented in Income Statement and credit to accrual on utility expense account which presented in Balance Sheet.
  • Utility income is subjected to accrual. Normally, the Companies that provide electricity to their customers, bill invoice to them in the following month. Mean that electricity was used in the last month, but the invoice is billed in the current month.
  • Salary expenses normally need to accrual since they are not normally paid in the month that employees are providing their services to the company. However, the salary expenses do not need to be accrued when the payments are made at the end of the month, year, or accounting period.
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Assertions:

  • Completeness: To ensure the completeness of the accruals in the balance sheet, the auditor has to reconcile detailed listings of accruals to trial balance (TB). If there is variance, further reconciliation must be performed.
  • Existence: There are the risks that accruals that presented in the detailed listing of accruals might not exist.
  • Right and Obligations: Company liabilities are recognized in the financial statements represent the obligations of the Company. Auditor has to check and verify supporting documents of the accrual whether the accrual belongs to the Company’s obligations or not.
  • Presentation and disclosure: This assertion is concerning the disclosure of significant information that matters to other users of the financial statements. That information includes accounting manual, credit term for expense and revenue recognition for recording accrual.

Common Risks Related to Borrowings audit:

Audit risks related to accrual are varied based on the nature of the business and auditor’s understanding of the business’s control. The following are the risks that normally come up when performing an audit on the accruals;

  • Overstate and understate the accrual amount recorded in the system. Auditor has to assess the reasonableness of the accruals methods.
  • The discrepancy between balance per recording and its supporting documentation. Auditor has to perform testing on accrual transactions by selecting some transactions from GL or from the listing of the accruals. Adjustment should be made if any variance between the accounting records and per its supporting document.
  • Posting accruals in the system without proper supporting documents. Auditor has to perform an understanding of its control over the recording of accruals and walk-through its supporting document.
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Audit Procedures:

  • Obtain detailed listings of accruals to reconcile to GL or TB: Auditor should obtain detailed listings of accruals of the Company to reconcile with financial statements for the period of auditing.
  • Assess the reasonableness of management’s assumptions used in the assessment of accruals.
  • Compare estimates made in prior periods with actual results for those periods.
  • Determine whether accounting estimates made by the management of the Company in this area represent a risk of material misstatement (overstate or understate).

Written by Chancrersna