Page 79 - Accounting Information Systems

50 PART I Overview of Accounting Information Systems

FI G U RE
2-9 GENERAL LEDGER (continued)

Purchases ACCOUNT NO. 502

BALANCE
POST.
DATE ITEM DEBIT CREDIT
REF. DEBIT CREDIT
Sept. 1 P1 2 05 0 0 2 0500

SUBSIDIARY LEDGERS. Subsidiary ledgers are kept in various accounting departments of the firm,
including inventory, accounts payable, payroll, and accounts receivable. This separation provides better
control and support of operations. Figure 2-10 illustrates that the total of account balances in a subsidi-
ary ledger should equal the balance in the corresponding general ledger control account. Thus, in addi-
tion to providing financial statement information, the general ledger is a mechanism for verifying the
overall accuracy of accounting data that separate accounting departments have processed. Any event
incorrectly recorded in a journal or subsidiary ledger will cause an out-of-balance condition that should
be detected during the general ledger update. By periodically reconciling summary balances from sub-
sidiary accounts, journals, and control accounts, the completeness and accuracy of transaction process-
ing can be formally assessed.

THE AUDIT TRAIL
The accounting records described previously provide an audit trail for tracing transactions from source
documents to the financial statements. Of the many purposes of the audit trail, most important to accoun-
tants is the year-end audit. Although the study of financial auditing falls outside the scope of this text, the
following thumbnail sketch of the audit process will demonstrate the importance of the audit trail.
The external auditor periodically evaluates the financial statements of publicly held business organiza-
tions on behalf of its stockholders and other interested parties. The auditor’s responsibility involves, in
part, the review of selected accounts and transactions to determine their validity, accuracy, and complete-
ness. Let’s assume an auditor wishes to verify the accuracy of a client’s AR as published in its annual fi-
nancial statements. The auditor can trace the AR figure on the balance sheet to the general ledger AR
control account. This balance can then be reconciled with the total for the accounts receivable subsidiary
ledger. Rather than examining every transaction that affected the AR account, the auditor will use a sam-
pling technique to examine a representative subset of transactions. Following this approach, the auditor
can select a number of accounts from the AR subsidiary ledger and trace these back to the sales journal.
From the sales journal, the auditor can identify the specific source documents that initiated the transac-
tions and pull them from the files to verify their validity and accuracy.
The audit of AR often includes a procedure called confirmation. This involves contacting selected
customers to determine if the transactions recorded in the accounts actually took place and that cus-
tomers agree with the recorded balance. Information contained in source documents and subsidiary
accounts enables the auditor to identify and locate customers chosen for confirmation. The results from