Financial Audit Session 2 Synthesis PDF

Financial Audit Session 2 1. Importance of Cut-off in Accounting The cut-off ensures that transactions are recorded in the correct period, aligning with the principle of separation of periods. This allows for accurate financial statements reflecting the real performance and position of a business...

Financial Audit Session 2 1. Importance of Cut-off in Accounting The cut-off ensures that transactions are recorded in the correct period, aligning with the principle of separation of periods. This allows for accurate financial statements reflecting the real performance and position of a business. Types of Cut-off Adjustments: 1. Accrued Expenses: a. Expenses incurred during the current period but not yet paid or invoiced. b. Example: Unpaid utility bills for December recorded as expenses for that year. c. Journal Entry: i. Debit: Expense Account (e.g., Electricity) ii. Credit: Accrued Liabilities (e.g., 408 - Suppliers, invoices not yet received). 2. Accrued Income: a. Income earned during the current period but not yet invoiced or received. b. Example: Services performed in December but billed in January. c. Journal Entry: i. Debit: Accounts Receivable (4181 - Customers, invoices to be issued). ii. Credit: Revenue Account. 3. Prepaid Expenses: a. Payments made in advance for services or goods to be received in future periods. b. Example: Paying an annual insurance premium in December covering the next year. c. Journal Entry:  i. Debit: Prepaid Expenses (486 - Charges constatées d'avance). ii. Credit: Cash or Bank. 4. Prepaid Income: a. Income received in advance for goods or services to be delivered in future periods. b. Example: Receiving a customer deposit in December for a January service. c. Journal Entry: i. Debit: Cash or Bank. ii. Credit: Prepaid Income (487 - Produits constatés d'avance). 2. Core Accounting Principles 1. Continuity of Operations: a. Financial statements assume the company will continue operations in the foreseeable future. 2. Historical Cost: a. Assets and liabilities are recorded at their original purchase price. 3. Prudency: a. Anticipate potential losses but not unrealized gains. 4. Materiality: a. Focus on information that significantly impacts decision-making. 5. Period Independence: a. Transactions are recorded in the period they occur, regardless of cash movement. 3. Key Documents in Financial Auditing General Ledger: Records all journal entries in detail. Journals: o Sales Journal. o Purchase Journal. o Cash Journal. o Miscellaneous Journal. Balance Sheet: Snapshot of assets, liabilities, and equity. Income Statement: Summary of revenues, expenses, and profit/loss. 4. Organization of Financial Records Accounting Software: o Tracks journal entries and generates reports. Auxiliary Journals: o Detail accounts like accounts receivable or payable. Ledger and Balance: o Aggregated and classified accounts with running balances. 5. Common Adjustments for Next Period (N+1) At the start of the next fiscal year: Accrued Expenses: Reversed as liabilities are settled. Prepaid Expenses: Expensed as the period progresses. Accrued Income: Recorded as income when invoiced. Prepaid Income: Recognized as revenue when the service or product is delivered. Example Exercise: 1. Scenario: You receive a utility bill of €500 for December on January 5. a. Adjustment for December: i. Debit: Utilities Expense €500. ii. Credit: Accrued Liabilities €500. b. Reversal in January: i. Debit: Accrued Liabilities €500. ii. Credit: Cash/Bank €500.