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HMRC internal manual

Enquiry Manual

Examining Accounts: Record Examination - Tests to Apply: Work done by the Accountant

Various checks can be applied to test the accuracy of business records. Merely duplicating the work of accountants or auditors is unlikely to be a productive use of your time. In the run of the mill unaudited case, the agent’s work will have consisted of preparing accounts from whatever records have been kept. If there is a well kept proprietary book that will be relatively straightforward, but if it has been necessary to work up from bank statements and retained invoices it will have taken some time and the result will probably rest on a number of assumptions.

The agent is unlikely to have tested the veracity of the figures and will have been retained simply to prepare accounts. The fee charged represents the possibly conflicting demands of the work which needs to be done to have confidence in the result and what the market place will bear. The fee in the accounts, allied to your knowledge of local rates, will give some indication of the time spent in preparing the accounts but is not conclusive. When described, often in response to initial enquiries, the work may seem extensive. However, what time has there been to undertake any one task in depth, and to scrutinise the figures which have emerged?

Most accountants treat the records of small businesses as incomplete and make adjustments in the course of preparing accounts. These adjustments usually take the form of net additions to sales or drawings in order to balance the cash account, although adjustments to purchases or other allowable debits are sometimes made. Some estimates may also be brought in to cover minor unrecorded items (for example, postage, wrapping and cleaning materials).

Where there are incomplete records the accountant will have drawn up a cash account or a combined cash and bank account. Instead of trying to recreate this record yourself, ask for a sight of this, not only to see how the accountant has treated any difference (a shortage on the credits side of the cash account should be debited to drawings and a shortage on debit side credited to takings), but also to see how the accountant drew up the account.

If drawings were not recorded then we would expect the accountant to have questioned their client closely on the level of cash drawings and to have included in the cash account a reasoned estimate. Very often, however, cash drawings are merely taken as the balancing figure on the cash account. If a reasoned estimate has been used, you should be satisfied as to the adequacy of the estimate and if drawings is merely the balancing figure the taxpayer should usually be questioned closely on cash drawings.

Accountants who have made adjustments may claim that because the resultant accounts balanced they must be accurate. The flaw in this proposition is that the adjustment made is usually the minimum necessary to achieve a balance and it assumes that although one vital component in the account was not properly recorded everything else is complete and accurate. Where drawings are not recorded or there is a large deficiency on the cash account, it demonstrates that the basic records are incomplete and may be unreliable.

Where an accountant claims that the records contained only minor imperfections which necessitated a small adjustment to either recorded drawings or takings, you may want to consider preparing cash accounts for shorter periods than the accounting year EM2961+. On occasions, this will show the need for an adjustment greater than that for the whole year.