Provision and Accruals
Previous to we consider the audit procedures along with regard to accruals and provisions, it is essential to clarify the meaning of two words in general use that tend to confuse students.
a) Provision: this is any amount retained like reasonably essential for the reason of giving for any liability or loss that is likely to be incurred or is certain to be incurred although uncertain as to amount or as to the date on that it will arise. Thus a provision is a debit such to the profit and loss accounts that decrease profit and hence future dividends. Therefore it is for a likely or certain further for future payment and the amount or else the date of payment is uncertain.
b) Reserve: this is such part of shareholders funds not accounted for through the nominal value of mattered share capital or through the share premium account.
The need to create provisions must receive serious consideration through the directors and also through the auditors. Review of post balance sheet events frequently casts lights on the amount of the provision needed. The auditor's duty is to confirm that any provisions set up are required for the main reason for which they were set up and such any provisions that are no longer required are transferred back to loss and profit account. Considerable attention requires to be paid to accruals as similar to prepayments they are not checked through the double entry system and hence open themselves to distortion of the accounts through the senior management.
The auditor must ensure about that last year's accruals are written back. Accruals do not change much from year to year and consequently comparison of last year's and this year's listing is an important audit procedure and any such are substantially greater or smaller would call for analysis.