SRA Handbook

Test procedures

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Rule 39: Test procedures

39.1

The accountant must examine your accounting records (including statements and passbooks), client and trust matter files selected by the accountant as and when appropriate, and other relevant documents, and make the following checks and tests:

(a)

confirm that the accounting system in every office complies with:

(i)

rule 29 - accounting records for client accounts, etc;

(ii)

rule 30 - accounting records for clients' own accounts;

and is so designed that:

(A)

an appropriate client ledger account is kept for each client (or other person for whom client money is received, held or paid) or trust;

(B)

the client ledger accounts show separately from other information details of all client money received, held or paid on account of each client (or other person for whom client money is received, held or paid) or trust; and

(C)

transactions relating to client money and any other money dealt with through a client account are recorded in the accounting records in a way which distinguishes them from transactions relating to any other money received, held or paid by you;

(b)

make test checks of postings to the client ledger accounts from records of receipts and payments of client money, and make test checks of the casts of these accounts and records;

(c)

compare a sample of payments into and from the client accounts as shown in bank and building society or other financial institutions' statements or passbooks with your records of receipts and payments of client money, including paid cheques;

(d)

test check the system of recording costs and of making transfers in respect of costs from the client accounts;

(e)

make a test examination of a selection of documents requested from you in order to confirm:

(i)

that the financial transactions (including those giving rise to transfers from one client ledger account to another) evidenced by such documents comply with Parts 1 and 2 of the rules, rule 27 (restrictions on transfers between clients) and rule 28 (executor, trustee or nominee companies); and

(ii)

that the entries in the accounting records reflect those transactions in a manner complying with rule 29;

(f)

subject to rule 39.2 below, extract (or check extractions of) balances on the client ledger accounts during the accounting period under review at not fewer than two dates selected by the accountant (one of which may be the last day of the accounting period), and at each date:

(i)

compare the total shown by the client ledger accounts of the liabilities to the clients (and other persons for whom client money is held) and trusts with the cash account balance; and

(ii)

reconcile that cash account balance with the balances held in the client accounts, and accounts which are not client accounts but in which client money is held, as confirmed direct to the accountant by the relevant banks, building societies and other financial institutions;

(g)

confirm that reconciliation statements have been made and kept in accordance with rule 29.12 and 29.17(a);

(h)

make a test examination of the client ledger accounts to see whether payments from the client account have been made on any individual account in excess of money held on behalf of that client (or other person for whom client money is held) or trust;

(i)

check the office ledgers, office cash accounts and the statements provided by the bank, building society or other financial institution for any office account maintained by you in connection with the practice, to see whether any client money has been improperly paid into an office account or, if properly paid into an office account under rule 17.1(b) or rule 19.1, has been kept there in breach of the rules;

(j)

check the accounting records kept under rule 29.17(d) and 29.19 for client money held outside a client account to ascertain what transactions have been effected in respect of this money and to confirm that the client has given appropriate instructions under rule 15.1(a);

(k)

make a test examination of the client ledger accounts to see whether rule 29.10 (accounting records when acting for both lender and borrower) has been complied with;

(l)

for liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes, check that records are being kept in accordance with rule 29.15, 29.17(c) and 29.20, and cross-check transactions with client or trust matter files when appropriate;

(m)

check that statements and passbooks and/or duplicate statements and copies of passbook entries are being kept in accordance with rule 29.17(b)(ii) and 29.21 (record-keeping requirements for joint accounts), and cross-check transactions with client matter files when appropriate;

(n)

check that statements and passbooks and/or duplicate statements, copies of passbook entries and cheque details are being kept in accordance with rule 30 (record-keeping requirements for clients' own accounts), and cross-check transactions with client matter files when appropriate;

(o)

for money withdrawn from client account under rule 20.1(j), check that records are being kept in accordance with rule 29.16, 29.17(a) and 29.22, and cross-check with client or trust matter files when appropriate;

(p)

in the case of private practice only, check that for the period which will be covered by the accountant's report the firm was covered for the purposes of the SRA's indemnity insurance rules in respect of its offices in England and Wales by:

(i)

certificates of qualifying insurance outside the assigned risks pool; or

(ii)

a policy issued by the assigned risks pool manager; or

(iii)

certificates of indemnity cover under the professional requirements of an REL's home jurisdiction in accordance with paragraph 1 of Appendix 3 to those rules, together with the SRA's written grant of full exemption; or

(iv)

certificates of indemnity cover under the professional requirements of an REL's home jurisdiction plus certificates of a difference in conditions policy with a qualifying insurer under paragraph 2 of Appendix 3 to those rules, together with the SRA's written grant of partial exemption; and

(q)

ask for any information and explanations required as a result of making the above checks and tests.

Extracting balances

39.2

For the purposes of rule 39.1(f) above, if you use a computerised or mechanised system of accounting which automatically produces an extraction of all client ledger balances, the accountant need not check all client ledger balances extracted on the list produced by the computer or machine against the individual records of client ledger accounts, provided the accountant:

(a)

confirms that a satisfactory system of control is in operation and the accounting records are in balance;

(b)

carries out a test check of the extraction against the individual records; and

(c)

states in the report that he or she has relied on this exception.

Guidance notes

(i)

The rules do not require a complete audit of your accounts nor do they require the preparation of a profit and loss account or balance sheet.

(ii)

In making the comparisons under rule 39.1(f), some accountants improperly use credits of one client against debits of another when checking total client liabilities, thus failing to disclose a shortage. A debit balance on a client account when no funds are held for that client results in a shortage which must be disclosed as a result of the comparison.

(iii)

The main purpose of confirming balances direct with banks, etc., under rule 39.1(f)(ii) is to ensure that your records accurately reflect the sums held at the bank. The accountant is not expected to conduct an active search for undisclosed accounts.

(iv)

In checking compliance with rule 20.1(j), the accountant should check on a sample basis that you have complied with rule 20.2 and are keeping appropriate records in accordance with rule 29.16, 29.17(a) and 29.22. The accountant is not expected to judge the adequacy of the steps taken to establish the identity of, and to trace, the rightful owner of the money.