AUDIT PROCEDURES

I.

Introduction

In accordance with the approved Internal Audit Plan of Veritas Maritime

Corporation, the students have completed their internal audit review on selected areas
to assess the effectiveness and efficiency of the companys internal manual.
II.

Background and Scope

The students had obtained an understanding of the companys internal manual by

assessing the accounting policies and related records based on the documents collected
from the management.
The scope of our audit review of this manual as per the Internal Audit Plan is only
limited to the following areas:
1.
2.
3.
4.
5.
III.

Cash Receipts
Petty Cash Fund
Billings and Statement of Accounts
Fixed Assets
Payroll

Analysis

Explanation of risk ratings used in Table 1:

WEAK A high risk weakness in controls within the audit area, capable of compromising
process integrity that requires senior management attention.
MODERATE A control weakness within the audit area, capable of compromising internal
controls that should be addressed by management in the short term.
STRONG A low risk weakness in the internal controls within the audit area which should
be addressed by management through routine procedures.

TABLE 1:

ACCOUNT
1. CASH RECEIPTS
2. PETTY CASH
3. BILLINGS AND
STATEMENT OF
ACCOUNTS
4. FIXED ASSETS
5. PAYROLL

IV.

WEAK

MODERATE

STRONG

Conclusion

1. Cash receipt

The companys cash receipt system is moderately effective and efficient for the
following observations:
Official Receipt
The detailed numerical system employed by the company in issuance of
its official receipts is notably systematic which makes cross-referring,
recording, and monitoring of transactions easier. As the official receipts
issued are also triplicated (original copy is for the payor, one is kept at in
the OR booklet as a control file, one is for the payee) and properly
distributed, the transactions can be verified independently by another
person by accounting for each sequentially numbered receipts. Their
procedure in cancelling ORs by writing the word CANCELLED is also a
big factor in maintenance and prevention of errors in recording. However,
the students observed that the person signing and issuing the official
receipts is the same who is the finance officer of the company.

Deposit of Collection
The policy on when the collections are going to be deposited at the end of
the working day or the next banking day can reduce the probability of
theft. Nevertheless, the company did not provide any specifications or
policies regarding the security of the collection and the person responsible
for it.
Recording Procedure
The segregation of duties between checking and recording of the
transactions by the bookkeeper and accountant minimizes the possibility
of fraud in the management and provides easier and efficient timemanagement.

2. Petty Cash Fund

The companys petty cash system is strongly effective and efficient for the
following observations:
Main Features
The maintenance of two petty cash fund critically monitors specific
disbursements between the companys administrative and operating
expenses. Moreover, it is also highly noted that the company has an
assigned custodian who is in charge and have principal access on all
matters affecting the petty cash fund. Security of the fund is also assured
because of its proper storage.
Petty Cash Voucher
Requiring petty cash vouchers approved by the department heads in every
disbursements in the petty cash fund helps ensure the accuracy and
reflection of actual amount of balances. The proper verification of all the
transactions, in return, makes it easier to check the receipts and compare
them against the record in the custodians log.

Restrictions of disbursements
Specification of amount allowed to be withdrawn from the petty cash fund
only up to five hundred pesos (P500) ensure that the petty cash fund will
not be depleted.

Fund Replenishment
The companys policies regarding the replenishment of the fund is also
found to be in compliance with the accounting procedures.
Surprise Count
The companys policy of having an occasional surprise count of the petty
cash fund is also commendable because through this procedure, the finance
manager can guarantee that the amount in the vault is complete and
accurate.
Detailed Procedures
The procedures of the company in recording the petty cash transactions are
also observed to be organized and controlled through its step by step
process of petty cash disbursements.

3. Billing and Statement of Accounts

The companys billing and statement of accounts is strongly effective and efficient
for the following observations:
Debit Notes
The policy of company of having debit notes numerically numbered and
prepared every month on a per vessel basis is very helpful in manning the
lumpsum cost agreed between the principal and the company which, in
return, provides reliable source of billing to the principal. Moreover, the
billing sent to the principal are also supported with invoices and documents
necessary for verification. It is also stated in the manual the specific
expenses incurred in relation with the invoices of the billings.
Detailed Billing Procedures
It is also observed that the billing procedures of the company on monthly
basis is commendable because the company monitors and properly manages
its remittances from its principals. It is provided in the manual that on or
before of 10th of the every month, debit notes are sent to the principal to
update them on their billing due. Also, the remittances must be received or
made on or before the 20th of every month.
4. Fixed Assets

The procedures adopted by the company regarding the fixed assets is strongly
effective and efficient for the following observations:
Capitalization
The classification of the company of fixed assets is found to be in compliance
with the Philippine Accounting Standards. Its manual is also specific on what
amount is allowed to be capitalized which should not be lower than three
thousand pesos (P3000) which lessen the possibility of having misrecorded
amount. Also, the account balance of fixed assets is verified by the auditor by
obtaining a detailed schedule on asset purchases and disposition that makes
accounting records congruent with the general ledger account balances.
Valuation
Proper asset valuation was ultimately shown by the company. Capital assets
were valued at their historical acquisition cost plus any additional money
spent on asset improvement. Companys auditor examines proper asset
valuation of the recorded fixed asset cost and other purchase supporting
documents. The auditor also considers the reasonableness of an assets
estimated economic life less depreciation cost.
Method of Depreciation
Company depreciate their assets using the straight-line method of
depreciation. Annual depreciation differs in rates, 20% for transportation
equipment and 10% for office equipment and furniture and fixtures which is
the simplest method that is available and would not complicate and cause
errors in getting the accurate value of the fixed asset.

5. Payroll

The payroll system of the company is strongly effective and efficient for the
following observations:

Office Payroll

The companys manual is very specific in its policies regarding the payroll
of its employees which is classified into confidential and regular payroll and
its detailed procedures from the preparation up until the encashment and
actual payment of the salary.

Allotment of Vessel Personnel

The policies of the company regarding the payroll system of vessel
personnel is also specific for instance, the period to be used as a
denominator on computing the salary is uniform as well as the cut-off dates,
the detailed procedures of recording, payment of taxes, reviewing and
investigating of errors, and the segregation of duties of the personnel
assigned in the payroll management.

V.
1.

Recommendation
Cash Receipts
Cash
To determine that cash balances represent cash on hand or held on deposit by third
parties, cash should be properly accumulated in the financial records.

Analytical Procedures:

Review listing of bank accounts authorized by the board of directors or other

authorized body or official and compare to those accounts included in the
general ledger.
Obtain and review period end bank reconciliation for bank accounts. Then
perform the following:
a. Test mathematical accuracy of the reconciliation
b. Agree balances on the reconciliation to the general ledger and bank
statements
c. Trace uncleared checks to the subsequent bank statements
d. Trace subsequent deposit of deposits in transit to subsequent bank
statements
e. Investigate long-outstanding, material and unusual reconciling items
Perform desk review of bank reconciliation for the months prior to the period
end cut-off date.

Conduct surprise cash count on cash on hand and other funds on hand under the
custody of the treasurer/cashier/fund custodian, which form part of the cash
items and obtain certification from the fund custodian.

2.

Petty Cash Fund

3.

Billings and Statement of Accounts

Receivables
To make sure that the trade accounts receivable represent enforceable claims for
the sale of goods and the performance of services; cash advances to officers and
employees exist and properly recorded in the books of the company; suitable allowances
are made for receivables which are unexpected to be collected in full; completely
recorded and properly accumulated in the underlying financial records.

Analytical Procedures:

Explain movements and study any sudden or unusual connection between current
period, prior period and budgeted amounts for
a. Loans receivable, trade accounts and regular and special advances to officers
and workers in as a whole.
b. Number of days sales in receivables
c. Aging of receivables
d. Write-offs
e. Allowance for bad debts as a part of receivables/actual past due or bad debt
expense as a percentage revenues.

Study list/schedule of cash advances granted to officers and employees

Verify and conduct a just follow-up for chosen receivable balances from the
receivables sub-ledger as the period end or a date close to the period end with
detailed roll forward testing through the period end.
Check backup documents of cash advance liquidation for validity of utilization as
authorized
Conclude on the results of the work done.

Revenues

To make sure that revenues stands for amounts derived from the sale of goods, the
performance of services and loaning operations; revenue transactions are correctly
calculated; completely recorded; properly accumulated and proper cut-off has been made in
the underlying financial records.

Analytical Procedures
Study and explain movements and review any sudden connection between
current period, prior period and budgeted amounts, by products or locations
where applicable for:
a. Total revenues for the entire period
b. Monthly revenues, including the months prior to and subsequent to the
prior end
c. Monthly returns, discounts and allowances, including months prior to and
subsequent to the period end
d. Deferred revenue

4.

Conduct a search for credit notes issued subsequent to the period end relating
to sales prior to period end.
Investigate analysis of deferred revenue and approve details to backup
documentation.
Conclude on the results of the work performed.
Fixed Assets
Property and Equipment
To ascertain that property and equipment physically exists and is owned by the client,
acquisitions and disposal must be duly authorized and completely recorded. Property and
equipment should be properly accumulated in the financial records.
Analytical Procedures:

Investigate any sudden or unusual connections between the current period, prior
period and budgeted amounts, by site or segment of business where applicable,
for:
a. Balances of accumulated depreciation and asset cost by asset category
b. Disposals and acquisitions by asset category
c. Maintenance and repair expenses

Study and analyze the status of projects in progress with minor or no activity.

Acquire equipment and property detailed records, agree opening balances to the
prior period and;

a. Reunite to the general ledger

b. Examine mathematical accuracy

For chosen acquisition from the entire period, including additions to project in
progress:
a. Approve details to backup documentation
b. Approve payment to cash records
c. Study mathematical accuracy of the calculation of the cost and the
depreciation charge for the period since the acquisition date.

Examine minutes of board of directors meetings, budgets or client business

plans and make sure that any noted asset acquisition or disposals have been
properly recorded.

Depreciation Charges
Audit Objective
To guarantee that depreciation relate to property and equipment which
exists; correctly computed using acceptable depreciation processes and useful lives.

Analytical Procedure

5.

For chosen assets from the depreciation transaction listings from the entire
period:
a. Approve depreciable cost to backup documentation
b. Investigate mathematical accuracy of the calculation of the
depreciation charges and assure compliance with authorized rules.
c. Study suitability of the account coding (e.g. expenses, production
costs)
d. Contemplate whether depreciation policies and estimated useful lives
are suitable and reliable with prior periods.

Payroll

Payroll interface process with the general ledger should be documented and automated or made
less complex so that it can be performed as a routine process within the Finance department.