IFRS List.com: Cash basis

Home » IFRS

Cash basis – accrual basis

15 December 2008 613 views No Comment

Dear all,
during an interview I was asked this question and I am still in doubt about the reply.
If you need to audit an entity which is going to change from a cash basis to an accrual basis accounting system, what would you audit first and why?
Thanks for your replies.

Fabiola

Dear Fabiola

First thing I would audit the statement for the period end under review containing the dues not receivable for the servcies or sales already done during the year and likewise, payment received from clients in advance for the sales or services not yet performed during the year.

Likewise for the creditor for goods and services.

Sujeet

Check the bank statements after what should be accrued for as of the date of change.

Truly yours,

Stéphane Bellanger – France

Income Statement, Groupings and P&L Analysis.

Regards

If you are changing to accrual on a particular accounting year then it means your debtors and creditors account need to be built up which is not there in cash bookings….sundry creditors and sundry debtors were either never builtup or there is a memorandum maintenance….Check and construct this item.

–
CMA.R.

When an organization is operating on cash basis, all its financial reports are on cash basis only. Because revenue and expenditure is maintained, identified and recorded on actual cash inflow or outflow basis.

But, such organizations maintain a MEMORANDUM for all their dealings and record there-in.

So, the first and foremost thing you have to audit is the MEMORANDUM, when an organization wants to transform from Cash Basis to Accrual Basis.

As said above, the first recording point of any transaction, while on cash basis, is in MEMORANDUM, so when you audit MEMORANDUM you can eliminate all those transactions which are completed by virtue of either receipt of cash or payment of cash and the balance are the items you have to classify for proper recording at respective statements for transformation into accrual basis.

Normally, when a transaction is recorded in a memorandum, it would not identify whether that is a capital item or revenue item. So, you have to classify all those pending items in the MEMORANDUM and account them accordingly.

Good Luck.

hi,

I think may be all prepaid and outstanding payments, revenue and expenses recognition.

Hi,

we should first see the constitution of entity. Because under Companies Act, all entities are required to maintain books on acrual basis. even income tax act requires this, except in case of certain professional like doctor, CA.

we should assess the income and expenditure on acrual basis, we should see for any outstanding liability and prepaid expenses

I will be happy also to be confortable if Fabiola’s question is answered.