For vouching of which item the auditor is most likely to examine cost records?
|a) Commission earned|
b) Bad debts recorded
c) Credit sales
d) Sale of scrap
The Correct Answer Is:
- d) Sale of scrap
The correct answer is d) Sale of scrap.
Vouching is an essential auditing procedure that involves the examination of financial transactions and records to ensure their accuracy and reliability.
While all the options provided can be subject to vouching, the auditor is most likely to examine cost records when vouching for the “Sale of scrap.” Let’s delve into the reasons why and also discuss why the other options are not as likely to require examination of cost records.
d) Sale of scrap:
When examining the “Sale of scrap,” the auditor is likely to scrutinize cost records because scrap typically originates from the production process. Cost records are essential to determine the cost of producing the scrap, which, in turn, affects the calculation of the profit or loss on the sale of scrap.
The auditor needs to verify that the recorded revenue from scrap sales matches the actual income derived from selling the scrap materials. To achieve this, the auditor should compare the cost of the scrap, as recorded in the cost records, with the revenue generated from its sale, ensuring that the profit or loss is correctly accounted for in the financial statements.
The cost records will provide details on the cost of materials, labor, and overhead associated with the production process and, by extension, the cost of producing the scrap.
By examining these records, the auditor can assess whether the selling price of the scrap is reasonable, whether the cost allocation methods used are appropriate, and whether the financial statements accurately reflect the economic reality of the scrap sales.
In summary, vouching the “Sale of scrap” is likely to involve an examination of cost records because the cost of production directly impacts the profit or loss on scrap sales, and this information is critical for verifying the accuracy of financial statements.
Now, let’s address why the other options are not as likely to require examination of cost records:
a) Commission earned:
While commission earned is an important revenue item, it doesn’t typically involve an examination of cost records. The revenue from commissions is earned by performing certain services or facilitating transactions, and the associated costs are usually related to sales and marketing expenses, not production costs.
Therefore, cost records are less relevant when vouching for commission earned. Auditors would typically focus on verifying the agreements, contracts, and supporting documentation related to the commissions.
b) Bad debts recorded:
Bad debts represent accounts receivable that are unlikely to be collected. The examination of bad debts primarily involves assessing the accuracy of the allowance for doubtful accounts and determining whether the specific debts written off are valid. While bad debts can indirectly impact profitability, they are not tied to production costs or cost records.
Auditors would typically focus on assessing the creditworthiness of customers, the aging of accounts receivable, and the appropriateness of the bad debt expense based on the company’s historical experience.
c) Credit sales:
Credit sales refer to revenue generated from sales made on credit terms, and they are typically vouched by examining sales invoices, shipping documents, and related sales contracts. Auditors are concerned with ensuring that the revenue recognition criteria are met and that the recorded sales are legitimate.
While the cost of goods sold (COGS) is relevant to credit sales, the examination of cost records is not typically required for vouching credit sales unless there are specific concerns related to the cost of goods sold, such as inventory valuation issues.
In conclusion, the auditor is most likely to examine cost records when vouching for the “Sale of scrap” because the cost of production directly affects the profit or loss on scrap sales.
For the other options, while they are important aspects of financial auditing, cost records are not typically a primary focus when examining commission earned, bad debts recorded, or credit sales. Auditors approach each of these areas differently, emphasizing the relevant documentation and factors that impact the specific financial transactions.