audit programme (1)

7/27/2019 Audit Programme (1)

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AUDIT PROGRAMME

PREPARATION BEFORE THE COMMENCEMENT OF AUDITProper execution of any work requires appropriate planning and programme of action. Before

commencing a new audit an auditor should take following steps:

1. Ascertain the Scope of Duties2. Procure Engagement Letter

3. Knowledge about business

4. Knowledge of the Accounting System

5. List of Principal Officers6. Knowledge of Technical Details

7. Enquiry into Special Circumstances, if any

8. Instructions to the client

AUDIT PLANNING For effective and efficient conduct of audit; audit planning is necessary. In fact planning should becontinuous throughout the course of audit assignment. Statement of Standard Auditing Practices (SAP) 1renamed as Auditing and Assurance Standards (AAS-1) states that, the auditor should plan his work to enable

him to conduct an effective audit in an efficient and timely manner. The first steps in the audit planning has thegoals of:

(a) developing time budgets,

(b) assigning audit staff personnel,

(c) scheduling dates for interim and year end audit procedures.

Developing an Audit PlanIn the light of expected scope of the assignment, an auditor should prepare a plan after considering

the following points:

(a) The statutory responsibilities under the assignment.

(b) The term of engagement.(c) The applicable legal rules.

(d) The nature and timings of reports.

(e) The prevailing accounting policies in the organization and changes, if any.(f) The significant audit areas.

(g) The effect of any new accounting or audit pronouncements on the under consideration.

(h) Possible rotation of emphasis over a period on specific audit areas.

(i) Reliability of accounting and control systems.(j) The areas requiring special attention e.g. where chances of error and fraud are more, areas of personal

interest of directors and other important officials of the organization.

(k) The nature and extent of audit evidence to be obtained.(l) The work of internal auditors in the audit of branches or subsidiaries.

(m)The involvement of experts.

(n) The involvement of other auditors like branch auditors.(o) The allocation of work to be undertaken between joint auditors and the procedures for its control and

review.

(p) Establishing and coordinating staffing requirements.


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The auditor should put his plan in black and white. The extent of written plan can be decided by

him in the light of size and complexity of organization.

Advantages of Audit PlanAdequate audit planning helps to:

(a) ensure that appropriate attention is devoted to important areas of the audit ;(b) ensure that potential problems are promptly identified ;

(c) ensure that the work is completed expeditiously ;

(d) utilize the assistants properly ; and(e) coordinate the work done by other auditors and experts.

Short note on Procure Engagement Letter?

When an auditor decides to accept an audit engagement, he should procure an Engagement

Letter from the client. The letter is for all purposes an audit contract. It should lay down the terms of the audit

contract and the understanding reached between the auditor and the client. The letter may be standard letter

engaging an auditor for audit of the accounts prepared in accordance with established accounting practices. In

case the auditor is to perform special assignment or tasks, the same should be included in the engagement letteror audit contract. Such a letter or contract is highly desirable to avoid any misunderstanding with the client. The

letter will also prove to be handy, if he accused of not performing the work promised by him.

AUDIT PROGRAMME Proper implementation of any plan depends upon a good programme. Even a computer gives agood situation, if it is provided with correct and sound programme.

Statement on Standard Auditing Practices8 (SAP-8) issued by the Institute of Chartered

Accountant of India in April 1989, suggests that the auditor should prepare a written audit programme settingforth the procedures that are needed to implement the audit plan. The programme may also contain the audit

objectives for each area and should have sufficient details to serve as a set of instructions to the assistants

involved in the audit as a means to control the proper execution of work. It should act as a guide in arrangingand distributing the work and in checking against the possibility of omissions.

It may be worth while to prepare a preliminary audit programme to begin with. Preliminary

programmes prepared for both compliance testing of the internal accounting systems and substantive testing of

accounting balance.Compliance tests of the existing system of internal control on which auditor intends to rely are

required to determine the standard of work. A proper study and evaluation of internal control includes two types

of compliance tests. First is observations in which auditor observes control procedures that leave no trail ofdocumentation. Second is detailed tests of transactions. This involves examination of documents that indicate

performance of control procedures.

The evaluation of internal control can be done in four-step approach.

1. Consider the type of errors and irregularities that could occur.2. Determine the accounting control procedures that prevent or detect such errors and irregularities.

3. Determine whether:

(a) the necessary procedures are prescribed (review phase)(b) they are being followed satisfactorily (compliance testing phase.)

4. Evaluate weakness, if any : Decide what effect the absence or non-observance of control procedures

have on :(a) the nature, timing, or extent of other auditing procedures, and


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(b) suggestions to be made to the client.

SPECIMEN OF AUDIT PROGRAMMEAudit programme are generally prepared in columnar form providing information regarding the

name of the clerk doing the work, the type of work, its date of commencement and completion. Every audit

assistant signs the audit work performed by him so that he owns the responsibility of the same. A proforma ofthe audit programme is given.

Name of the client :.

Date of Commencement of Audit..Date of Completion of Audit

Any special information from previous audit

Name of Organisation

YEARMONTH

CashBankBalanced

Bankbookbalanced

Cashbookvouched

PettyCashVouched

Boughtledgervouchers

Boughtledgervouchers

Boughtledgercashpostings

SalesBooksAdditions&Posting

ReturnsbookPostings

JournalExamined

StockSheetChecked

BoughtledgerBalancedChecked

SalesledgerBalancedChecked

TrialBalancedChecked

GeneralledgerChecked

Profit&LossA/cChecked

BalanceSheetChecked

January

February

March

April

May

June

July

August

September

October

November

December

Advantages of Audit Programme


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Some of the important advantages of conducting an audit programme according to pre-determined audit programme are:

1. The auditor can be certain that the audit staff will cover the whole of the ground and if, in futureyears, different members of the staff are engaged upon the audit, they can see the reference to the

programme exactly what work they are required to perform.

2. Audit assistants know their clear cut duties.3. Efficiency of the audit assistants increases.

4. It enables the auditor to keep in touch with the work done and general progress of the work.

5. Fixing of the responsibility of audit assistants becomes easier.6. It serves as an evidence, if at any time an action is brought against the auditor alleging negligence in

the performance of his duties.

7. The routine gets systematic.

8. It provides a check against the possibility of certain important items requiring verification which arebeing omitted.

9. Continuity is not lost even if the person on duty is changed.

10. The chief auditor is saved from botheration of issuing instructions to the staff repeatedly.

Disadvantages of Audit ProgrammeAn audit programme tends to introduce monotony in the work, which may result into

mechanical performance by the staff without any sense of responsibility. The possible disadvantages of an

Audit Programme are listed below:

1. The task becomes mechanical, as a result initiative and efficiency are adversely effected.2. The may be finished hurriedly to complete it within the scheduled time.

3. It does not serve any purpose in the audit of a small organization.

4. Uniformity of the audit programmes can not be applied extensively, as the nature of work in the audit

of different organizations can not be exactly the same.5. It tends to introduce rigidity.

6. Inefficient audit assistants may also take shelter behind the programme.To overcome these disadvantages an auditor should impress upon his staff that the programme suggeststhe basis upon which the audit is to be conducted and they must keep in mind the objectives of an audit.

Execution of audit programme should not become an objective in itself, surprise checking outside the

predetermined audit programme will also help in minimizing the impact of disadvantages. The auditor shouldnot depend entirely on one standard audit programme, he should receive suggestions from the audit staff and

review the audit programme from time to time in the of variation of nature of business or management.

Types of Audit ProgrammesBroadly, there are two types of audit programmes, namely:

1. Fixed Audit Programme

2. Flexible Audit Programme1. Fixed Audit Programme: It is a set of standardized instructions,which are to be followed while

conducting the audit. A fixed audit programme includes all possible procedures, although all of them

may not be applicable in a situation. It attempts to take care of every possible audit situation; therefore,it prescribes procedure to be followed in each situation. The problem with this kind of programme is that

very rigid. Nothing is left to initiative of the audit team.

2. Flexible Audit Programme: A flexible audit programme does not prescribe the exact audit procedureto be followed. It prefers to give an outline of the scope, nature and limitations of the audit assignment.


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It does not predetermine the nature of work to be performed by each person of the audit staff. Most of

the things are decided as the work proceeds and the reliability of the procedures and internal control

system becomes known to the auditor.

Thus, a flexible audit programme allows the auditor to develop, adapt and modify the programme

according to the needs of the situation. It also leaves scope for some initiative by the audit staff.

Modification of Audit Programme

Modifications in a fixed audit programme are not easy. Usually, the senior audit clerk is

authorized to make minor changes will require the approval of the auditor himself. However, there is no suchdifficulty in the case of flexible audit programme. While modifying the audit programme, the following points

will need attention.

1. Any change in the ownership of the organization since previous audit.

2. Any change in the organizational structure resulting into changes to the authority or responsibilities ofthe employees.

3. Utility or otherwise of the working papers of previous year.

4. Any changes in the books or records being maintained and its implication for the audit programme.

5. Changes, if any, in the internal control system and its implication for the audit programme.6. Any notable change in the business due to introduction of new products, entry into new territories or

diversification etc.7. Need for changes in the reporting due to any reason.

Essentially, the modification of audit programmes will depend upon the evidence produced by

the earlier programme. This will also explain the relevance of the procedures followed. Nature, timing andextent of audit can also force a modification in the audit programme.

AUDIT- NOTE BOOKAudit Note Book is a diary or register maintained by audit staff to note errors, doubtful queries

and difficulties. The purpose is to note down various points which need to be either clarified with the client or

the chief auditor. The audit note book is also used for recording important points to be included in the AuditorsReport. It is a complete record of doubts and their clarification.

Contents of an Audit Note Book

An audit note-book usually contains the following information about the audit work performedby the audit staff:

1. A list of books of accounts maintained.

2. The names, duties and responsibilities of principal officers.3. The particulars of missing receipts and vouchers.

4. Mistakes and errors detected.

5. The points calling for clarifications and explanations.

6. The points deserving the attention of the auditor.7. Various totals and balances.

8. Extracts from the minutes and contracts.

9. The points to be the part of the Auditors Report.10. Date of commencement and completion of the audit.

Advantages of Audit Note-Book

Some of the advantages of an audit note-book are given below:


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1. It ensures uniformity and helps in knowing the amount of work performed.

2. Important matters relating to the audit work may be easily recalled.

3. Facilitates the preparation of the audit report.4. In case the assistant incharge is changed, no difficulty is faced in continuing the incomplete work.

5. The responsibility for errors undetected can be fixed on clerk concerned.

6. The audit note book shows the extent of interest and pains taken by the audit staff. It helps in theirappraisal.

7. It ensures that the audit programme has been sincerely followed. Deviations can be noticed.

8. It is reliable evidence in the court of law, if an auditor has to defend himself.

Limitations of the Audit Note-Book

In case the audit work is conducted negligently by the staff of an auditor, the audit note-book can

act as an evidence against the auditor himself. However, it is a document whose advantages out do itslimitation.

Audit working papers

Audit working papers are those papers which contain essential facts about accounts under audit. Henceit may not necessitate the auditor to refer back the accounts of the client at a later stage, as it is time consuming.Audit working papers comprise all documents obtained or prepared by the auditor and retained by him inconnection with the performance of his audit work.

Definition:Arnold W. Johnson defines that Audit working papers are the written private material, which an

auditor papers for each audit. They describe the accounting information which he receives from his client, the

methods of examination used, his conclusions and the financial statements.

Purpose of Working Papers

The purposes served by working papers are:(i) they show the extent to which accounting principles and auditing standards have been adhered to;(ii) they provide essential support for the auditors opinion including evidence that the examination was

conducted in accordance with the generally accepted auditing standard;

(iii) they also reveal how the work was performed by the audit staff and thus helps the auditor in formingan opinion about their efficiency;

(iv) they assist the auditor in justifying his position against criticism and can be used as an evidence if a

legal action is brought against the auditor, alleging negligence in the performance of his duties;(v) they help the auditor in finalizing his audit report without much delay;

(vi) If they enable the auditor to know the weakness of the internal check system in operation, and the

inefficiency of the accounting system, if any. He may advice his client about ways and means to

improve these inefficiencies; and(vii) These working papers serve as a guide to the auditor for audits of the same client in the succeeding

years.

Working papers are of confidential nature, therefore, the information collected by the auditor or his staffshould not be divulged. According to Part 1 of the Second Schedule of the Chartered Accountants Act, 1949, a

chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses, any

information acquired in the course of his professional engagement any person other than his client, without the


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consent of his client or otherwise than as required by any law for the time being in force. Thus, the auditor

should always impress upon his staff to maintain complete secrecy with regard to the working papers.

Working paper standards Since working papers serve many useful purpose, they should be prepared in such manner that the

summaries and analyses of data as well as the verification and investigation procedures described there in maybe profitably used not only in the current audit, but also in the subsequent audits following are the essentials for

good working papers:-

1) The working papers should record the audit plan, nature, timing and extent of audit proceduresperformed and the conclusions drawn the evidence obtained.

2) Working papers should be prepared in a standardized form. The subject matter should be clearly marked

on the top indicating the name of the department to which the data belong and the date on which theaudit examination was carried out.

3) Working papers should be complete, consistent and accurate as to the information contained therein.

Completeness means that they should incorporate all significant and relevant data, making a clear

distinction between factual and opinion based information.

4) Each complete working paper should be signed and dated by the persons performing the work andsufficient space should be left after each note so that any decision taken by the auditor may be taken

down.5) They should properly organize and arranged, so that one may not find difficulty in pinpointing a

particular fact.

6) Presentation of the factual and other information in working papers should be in a clear andunderstandable manner.

7) The writing in the working papers should be legible and neat. They should be arranged in logical orders,

depending upon its importance and relevance.

8) The working papers should be of convenient and uniform size.9) Working papers should be of good quality, so that by frequent handling they are not damaged.

Audit Markings As the auditor performs his audit procedures, he uses a variety of distinctive, special ticks or symbols

to indicate that a particular has been done. Those are called tick marks, check marks and audit markings. They

may be in the form of alphabetic letters, numbers, geometric designs, etc.; He may adopt different types of tickmarks for different type of work such as postings, additions, carry forwards, contra entries, vouching and so on.

Following are the important points to be noted with regard to the use of audit markings.

(1) These tick marks should be small and distinctive.(2) Different colors or inks should be used for different periods.

(3) There should be different types of markings for different types of work.

(4) Audit staff should be clearly instructed not to disclose the meaning of different ticks to the staff of the

client.(5) The staff of the client should be asked not to make use of the tick marks which are used by the audit

staff.


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Illustrative Audit Marking:

Dr. Cash Book ABC Ltd Cr.Date Particulars Amount

(Rs.)

Date Particulars Amount

(Rs.)

30.3.07

30.3.07

31.3.07

31.3.07

To balance b/d

To Sales(Cash Rec. No. 223)To Sale

(Cash Rec. No. 224)

To Interest

14500

30,000

34,000

1,40079,900\

30.3.07

30.3.07

31.3.07

31.3.07

By Wages

By PurchasesBy RentBy Stationery

By balance c/d

17,500

26,80015,2002,100

17,900

79,900\

Illustrative Markings:

\ = Totals Checked= Carry Forward of Balance checked

= Posting of the entries checked

Audit marking help the auditor in the following ways:

(1) Audit markings help the auditor in establishing the extent of work performed by the audit staff.(2) These markings help him in distinguishing entries in the books of account which are already examined

from those which have no been examined.

(3) Audit markings provide evidence of the work performed by him. He can defend himself in case anycharges of negligence are leveled against him.

(4) A transaction or a document which has already been examined by the auditor cannot be produced beforehim in support of any other transaction.

Routine Checking: Routine checking involves checking of such common records and books which is carried

on by the auditor as a matter of routine. The functions included in routine checking are:-

(a) Checking of casts, sub casts, carry forwards and other calculations in the book of original entry.(b) Checking of postings in the ledgers.

(c) Checking of balances in the ledgers and

(d) Checking of transfer of balances from ledger to the trial balance.Routine checking helps the auditor in finding out certain errors and frauds. However, it can disclose only

clerical errors and some simple frauds. Only occasionally it may help in detecting the errors of principle. For

detecting clever frauds and errors of principles an auditor has to go beyond routine checking.

Advantages of Routine Checking

(i) Usual errors are revealed quickly.(ii) Arithmetical accuracy of most of the entries is verified.

(iii) A thorough checking of books of original entry takes place, which minimizes the carry forward of

many mistakes.

(iv) Checking of postings and castings is helpful in preparation of trial balance.


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(v) It is easy and simple job which can be done even by untrained audit clerks.

Disadvantages

It suffers from following disadvantages:

(i) It can reveal only arithmetical and clerical mistakes or simple frauds.

(ii) Errors of principle are hardly detected in routine checking.(iii) Compensating errors are also unlikely to be detected.

(iv) It is too mechanical and monotonous.

(v) In self-balancing system of account its utility is further reduced.However, these disadvantages can not minimize the importance of routine checking in the work of an

auditor.

Test Checking: The main objective of audit is to formulate an overall opinion on the accounts and financialstatements so as to enable an auditor to give a report that books of accounts give a true and fair view regarding

the profit, assets and liabilities of the business. In large organizations the numbers of transactions which are the

subject matter of an audit are too many to handle. It is virtually impossible for an auditor to physically verify all

these entries. The usual practice is that a representative number of entries of each class is selected and checkedand, if they are found correct, the remaining entries are also taken to be correct. Test checking is an accepted

substitute of detailed checking, which in most of the cases from the economic point of view is unwarranted. Thejustification for accepting test results in lieu of complete verification of each item lies in the theory of

probability. If the sample is truly representative of the population the test checking will give reliable results

The reliability of test checking will greatly depend upon the efficiency and reliability of internal controlsystem. In test checking the detection of error demands further investigations only if the auditor is satisfied that

the mistake was unintentional and chance of repetition is nil, he can proceed with the test audit. If further

investigation indicates fraud, matter must be taken up with requisite seriousness. In addition to the above

following points need special attention of the auditor-----1. Test checking should be used in such a fashion that the staff of the client can not understand it. Frequent

changes in the pattern of test checking can ensure this.

2. The test checking applied during one year should be kept in mind while preparing the audit programmeof the next year. The effort should be to cover the different block of period over a period of 3 to 4 years.

3. Over the years each section and period must be covered under this kind of scrutiny.

4. There cannot be a pre-decided sample in forms of size. It should be decided after taking intoconsideration of requirement of the assignment and reliability of internal control system in operation.

5. The materiality concept may be applied in deciding the sample i.e., larger number or items of higher

account, smaller number of transactions from transactions involving smaller amounts.

6. The relative risk of error of fraud is another consideration. The areas where the risk of fraud is higherdefinitely deserve greater attention.

7. In case of lower reliability of the evidence produced for the decided sample, the sample size for test

check should be increased.

Methods of Deciding the SampleBlock method: This is favorite with auditors because of its simplicity under this method the sample is selected

as a block. The entries will be covered fro a block of period i.e., week or month or on the basis

of index of ledger, for example the ledger heads with B to F alphabet may be covered. The

main disadvantage of the method is that every item does not get equal opportunity of beingincluded. It is not a true representative of the population in statistical sense.


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Random Selection method: In this method each item should be numbered and then a table of random numbers

is used to select the items to be included in the test. The method is surely more representative.

However, a truly random selection is likely to be cumbersome and difficult. To simplify theprocess, items may be selected by the use of systematic or interval selection of items i.e.,

without numbering the item, an item appearing at a given interval may be included in the

sample.Stratified Sampling method may be used. A breaking point, say Rs. 5,000 may be decided and all items of an

amount equal to or larger than Rs. 5,000 may be examined.

With effect from April 1, 1998, the statement of Standard Auditing Practices (SAP) 15 of the Instituteof Chartered Accounts of India has become operative. The SAP-15 applies to both statistical and non-statistical

sampling methods.

Some important notable points of SAP-15 are:

1. When using either statistical or non-statistical sampling methods, the auditor should design andselect an audit sample, perform audit procedures thereon, and evaluate sample results so as to provide

sufficient appropriate audit evidence.

2. When designing an audit sample, the auditor should consider the specific audit objectives, the

population from which the auditor wishes to sample and the sample size.3. When determining the sample size, the auditor should consider sampling risk, the tolerable error,

and the expected error.4. The auditor should select sample items inn such a way that the sample can be expected to be

representative of the population. This requires that all items in the population have an opportunity of being

selected.5. Having carried out, on each sample item, those audit procedures that are appropriate to the

particular audit objective, the auditor should:

(a) Analyze any errors detected in the sample; (b) project the errors found in the sample of the population;

and (c) reassess the sampling risk.

Organization of Auditors StaffFor efficiency and economy in conduct of audit, the auditors staff shall be properly organized.The work shall be carried on by two or more audit clerks. The auditor needs experienced and efficient staff

which shall consist of supervisors and senior junior assistants. However, the number of persons required

depends upon the volume and character of work. The auditor shall ensure that neither there is understaffing noroverstaffing. The juniors shall be trained so that they may occupy the next position later on.

Usually the following categories of audit staff bare used in India:

1. Supervisors. They perform the following duties:a. To remain in touch with the audit staff on work.

b. To assess the progress in work.

c. To discuss the work completed with the auditor.

d. To take advise from the auditor on important points and queries.e. To rotate the audit staff from one job to another.

2. Senior Audit Assistants. They perform the following duties:

a. To keep contact between principal and the client.b. To prepare and review the audit programme.

c. To check the work done by the juniors and clerks.

d. To ensure that the work moves smoothly.e. To give instructions and guidance to juniors.


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f. To verify the basis of valuation of assets and contingent liabilities.

g. To assess the capital structure assets and liabilities.

h. To review whether legal provisions affecting accounts are met.

3. Junior Audit Assistants. They perform the following duties:

a. To carry out the instructions given by the seniors.

b. To carry out checking of schedules and reconcile the statements.c. To examine the supporting data, documents and papers.

4. Audit Clerks. They perform the following duties:

a. Routine checking and comparison work.b. Checking of posting, casting and carry forward.

Internal Control:

Definition: Internal Control comprises the whole system of controls, financial andotherwise, establish by the management in the conduct of the business. It includesinternal check, internal audit and various other forms of control. The fundamental

objective of internal control is to safeguards the assets of the company against lossesavoid frauds, errors, wastes and eliminate inefficiency. It helps the management inmeasuring the implementation of business policies as well as ensuring maximumaccuracy of all data and statements.

Internal control system is the whole management control system meant tosafeguard the assets of the organization and to ensure efficient and effective routingoperations of the ---------- price. The term internal control has been defined as the wholesystem of controls financial or otherwise, establish by the management in order to carryon the business of the company in an orderly manner, safeguards its assets and secureas per as the accuracy and reliability of its records internal control means accountingand operational controls. Operational control means quality control, budgetary control,

internal checks, internal audit etc. It means a number of controls and checks on variousactivities of business. There are 2 types of internal controls:

a) Accounting Control: - The plan of organization and the procedure and the recordsthat is concerned with and directly related to the safeguarding of assets andreliability of financial records. Accounting and financial controls includes standardcosting, control accounts, bank reconciliation, self balancing ledgers and internalauditing. Such control ensures accuracy reliability of financial records, prescribedmanagerial policies and safe custody over assets.

b) Administrative Control: - This control is concerned with operational efficiency. Theymay include time and motion studies, quality control through inspection,performance reports and statistical analysis. An auditor has to make a careful

review of accounting controls in order to ensure accuracy, adequacy andauthenticity of financial statement. He may not be expected sometimes to reviewthe administrative control because they only have a remote relationship withfinancial records. Thus in audit an auditor is more concerned with financial controlthan administration control.

Objectives


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The objectives of internal control are determined by the managementkeeping in view the specific requirements of an enterprise such as nature and size of theorganization, scale of its operations and degree of ------- of management etc. The SAP[Standard Auditing Practices (6)] states the following objectives of internal controlsrelating to accounting system:

1) The transactions are executed in accordance with the management authorization.2) All transactions are promptly recorded in an appropriate manner to permit thepreparation of financial information and to maintained accountability for assets.

3) Assets are safeguarded from unauthorized use or-------4) Assets are verified as reasonable intervals and appropriate action is taken with

regard to the differences in amounts.

Importance of Internal Control:The importance of internal control can be study into two phases but the

businessman must know the objectives are the purposes1) From client points of view: Cost benefit analysis is applied by the management to

assess and select a particular method of control and its applicability to the businessconditions. The benefits which the internal control system offered are:a) Providing reliable data: Business decision required accurate information to run thebusiness activities efficiently. Ex: - fixation of selling price, production directives,depending on the requirements etc.b) Safeguarding assets and records: The physical assets of a company can be stolen,misused or accidentally destroyed, if they are not properly protected by adequatecontrols. Ex: - accounts receivable, important documents [confidential governmentcontract] and records [ledger and journal]. These are non physical assets. Thesafeguarding of certain assets and records has become increasingly important becauseof computer system. Large amount of information stored on computer can be destroyed

permanently if care is not taken to protect them.c) To promote operational efficiency: The controls with in an organization are meant toprevent unnecessary duplication of efforts, protect against waste in all aspects of thebusiness and discourage other types of inefficient use of resources.d) To encourage adherence to prescribed policies: The system of internal control ismeant to provide reasonable assures that procedures and rules are followed by thecompany personnel.

2) From the auditor points of view: The study and evaluation of the client system ofinternal control is important to auditors. The auditor must have a thoroughunderstanding of the system. There is a difference between the systems that issupposed to be in operation and the one actually being used. Simply by asking certainquestions reviewing the organization chart and studying few procedure manuals toobtain an understanding of the system is not sufficient. To obtain the adequateunderstanding the system must also be tested. There are two ways to study the system.a) To determine whether an audit is possible; if possible, thenb) To determine the scope of audit.


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Principles of internal controla) Competent and trustworthy personnel: Personnel are the most important element ofany system of internal control. If employees are competent and trustworthy then reliablefinancial statements can still result.b) Records, financial and other organization plans: Documents perform the function of

transmitting information throughout the client organization and between differentorganizations. The document must be adequate to provide reasonable assurance that allassets are properly controlled and all transactions are correctly recorded.c) Segregation of duties: For the prevention of both intentional and unintentional errorsfollowing types of segregation of duties should be taken care of.(i) Separation of operational responsibility from record-keeping responsibility: If eachdepartment or division in an organization is responsible for preparing its own records andreports, there would be a tendency to change the results to improve its reportedperformance. So in order to ensure unbiased information, record keeping is sometimesincludes in a separate department under the controllership function.(ii) Separation of custody of assets from accounting: To protect the firm against frauds, it

is required that the custody of assets and their accounting should be done by separatepersons. When one person performs both functions, there is a risk of his disposing of theasset for personal gain and adjusting the records to relieve him of responsibility for theasset.d) Supervision: Directors should review the companys financial operations and positionsat regular and frequent intervals. Comparison with result for previous periods indicatesdifferences that calls for further examinations where budgetary controls is used attentionwill be drawn to material variances and explanation require for time to time specialreviews are particular items such as stock, wages department, etc., should beundertaken.e) Authorization- written: If the control is to be satisfactory, every transaction must be

properly authorized. Authorization can be of two types. 1. General 2. Specific. Example ofthe General authorization is the issue of fixed price list for the sale of product. Exampleof the Specific Authorization is sale transaction by the sales manager for the car of acompany.f) Sound practices: Sound practices of administration require establish procedures,policies and delegations of responsibility that helps in avoiding questions, unsatisfiedperformance etc.g) Internal audit: Internal audit is a part of the whole system of internal control. It is theexamination of accounts of a business concern by its employees specially appointed forthe purpose. It is an independent appraisal of activity within an organization for thereview of accounting, financial and other business practices.

h) Arithmetic and accounting controls: Charts of accounts that is balance sheet andincome statement is an important control because it provides the frame work fordetermining the information presented to management and other financial statementusers. Charts of accounts and financial statements should be prepared in accordancewith the generally accepted accounting principle.

Limitations:


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Standard Auditing Practices 6 issued by the Institute of CharteredAccounting of India highlights certain limitations of internal control these include thefollowing:

1) Operation of internal control system involves expenditure of time and money.Management consideration that a control should be cost effective weakens the

effectiveness of the internal control system.2) Internal controls are concerned more with the transactions of a routine nature,unusually and irregular transactions may be over look by the internal controlsystem.

3) The possibility for human error may weaken the internal control system.4) Persons operating the internal control and the employees of the client enterprises

or outside parties may render the control ineffective.5) The possibility that a person responsible for exercising control could abuse

(misuse) his authority.6) The possibility that changes in conditions may render the procedures ineffective

and inadequate compliance with the procedure may bring down the system.

7) Manipulation by the management may defeat the objectives of internal control.

Area/Scope of Internal Control:The term internal control is a broad term with a wide coverage. The main

divisions which are covered by a well developed system of internal control may besummarized as below:

1) General financial control: It is concerned with an efficient system of accounting,adequate supervision, recording and duplicating systems etc.

2) Cash control: It includes proper control from receipts, payment and balance held.Due safeguards must be exercised to avoid misappropriation of cash.

3) Control over trading transaction: This area deals with an efficient system of control

over both purchases and sales transaction. Proper procedures should be laid downfor acquisition handling and accounting of goods purchased vis-a-vis for recordingand handling of goods sold.

4) Control over employees remuneration: This area concerns itself with thepreparation and maintenance of records for remuneration to employees; methodsof payments etc. proper control must be exercised over this aspect so as to avoidmisappropriation of cash payment to be made to the employees.

5) Capital expenditure control: The expenditure on capital assets must be kept underproper control. It should properly sanctioned and used for the purposes intendedfor feed back reports must be prepared and submitted to the management in thisregard.

6) Others: These include a) Maintenance of staff relationshipb) Stock maintenances andc) Control over investments.

Types of Internal Control(i) Physical Controls,(ii) Administrative Controls,


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(iii) Accounting Controls.

(i) Physical Control: It is concerned with protective equipments, forsafeguarding the business assets, like use of security arrangements forcash and It is concerned with protective equipments, for safeguarding the

business assets, like use of security arrangements for cash and It isconcerned with protective equipments, for safeguarding the businessassets, like use of security arrangements for cash and valuable assets,iron safe for cashier, etc., Such type of controls ensures that onlyauthorized officers are permitted to access cash, assets and otherrecords.

(ii) Administrative Control: It is concerned with assigning of powers andjob descriptions of key personnels, establishment of standards foroperating procedures, development of organizational charts etc. Theprocedures are to be established for managements approval andauthorization of transactions.

(iii) Accounting Controls:These controls are related to accounting systemused in the organization. The main objectives are all transactions areexecuted as per managements authorization, recorded promptly duringthe period to which these are related, assets are safeguarded from theunauthorized use. Various policies and procedures determine accountingcontrols in an organization:

1. Various parts of recording a transaction is allocated in such a way that accuracy orcorrectness of work of one person is independently checked by another person, itis known as internal check. It minimizes occurrence of frauds or errors and theseare detected in the earliest whenever these take place.

2. The duties of various personnel should be rotated periodically; it ensures if fraud or

error is committed, it will not remain undetected over a long period of time.3. To execute various types of transaction, authority is delegated at various levels

and to specified persons as per the conditions prevailing in an organization. Thepower of authorization is general or specific to a single transaction.

4. The transactions are to be recorded with correct amounts and in the period inwhich these are executed ad then classified in the proper account.

5. It is to be ensured that accountability for all the assets is maintained and sufficientcontrol measures are provided for safeguarding of assets from unauthorizedaccess, disposal are use. Accountability is a continuous process which starts fromthe purchase of assets and ends with their disposal.

6. Independent persons should be involved of the accounting systems. Internal audits

are used to examine accounting controls, its design as well as operations.

Internal Control and Auditor:Basically the management is responsible for introduction sound

system of internal control. But it is the matter of concern for the auditor that certainrules and procedures should be adopted by the business in spite of the fact that he hasno authority to recommend or prescribe such rules. The whole purpose of the study ofinternal control is to decide upon the degree of reliance on the system to unable auditor


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to assess extent to which he should applied various test to determine the adequacy ofinternal control system. The ICAI as recommended that the auditor should criticallyreview and revaluate the existing internal control system prepared his audit programme.There cannot be two opinions that there is a good system of internal control the work ofan auditor automatically becomes quite easy. The entire responsibility lies on him and no

one can protect him if he does work carelessly and negligently.

Internal Control Questionnaires [ICQ]: The internal control questionnaires is aserious of questions which are prepared by the auditor to test the adequacy or otherwiseof the system of internal control. ICQ contains questions which are consider important fordetermining the adequacy of the system such questionnaires may be used of all theclient, big or small are may be change according to the requirement of each client.Generally the questionnaire is so worded that a no answer suggest undesirablepractices and a yes would indicate satisfactory internal control. The out come depictedby the ICQ will definitely help the auditor to evaluate the adequacy of the internalcontrol.

An Illustrative questionnaire for Petty Cash Funds

AnswerYesNo

VerificationName & Date

TestsObservations

1. Is concerned system in use?2. Is the responsibility of eachfund vested in one person only?3. Is the amount of the fundrestricted so as to requirereimbursement at relativelyshort intervals?4. (a) Has a maximum figure forindividual payments from thefund have been established? (b)If so, state maximum figure- Rs.5. Are payees required to signvouchers for all disbursements?6. (a) Is the cashing of personalcheques prohibited? (b) If not,

are such cheques re-cashed atbank or included as voucherssupporting request forreimbursement? Stateprocedure.7. (a) Are vouchers andsupporting documents checkedat the time of reimbursement by

Particulars Auditors


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a responsible employee? (b)Does that employee verify theunexpended balance of fund?8. Are the amounts of thevouchers spelled out in words as

well as written in numerals?9. Are vouchers marked so as topreclude their reuse?10. Describe the operation of thefund if the same is partrepresented by bank account?

Name Date CommentOriginally prepared by: ..Reviewed by subsequentExamination by: . ..

The person in charge of each section will sign for the respective section.The overall questionnaire will then be signed by the partner in charge of the audit.

And finally it should be filed in the permanent file along with other important workingpapers.

The following are the points must be kept in mind while preparing I.C.Q.(i) The I.C.Q should always be revised from time to time in order to keep

questionnaires up-to-date.(ii) The I.C.Q should be completed in all respects. Any changes should be made

regularly.(iii) The questions should be designed with care and in a manner that they replies

may fulfill the desired objective.

(iv) The replies to ICQ should be obtained properly and these should be test checked.(v) Appropriate suggestions should be made to the client on the weakness brought

out by the I.C.Q.

Internal Check:Internal check is a valuable part of internal control. The entire system of

accounting needs to be organized in such a manner that it may ensure some sort ofcheck without incurring additional financial burden. Method of internal check has beendevised to meet this requirement. It is an arrangement of the duties of members of staffin such a manner that the work performed by one person is automatically andindependently checked by the other. Each employee operates independently but it doesnot involve duplicating the work of other. Frauds, errors or irregularities are preventedthere is a collusion among them.

Internal check means the check imposed on day-to-day transactions. It ensuresaccuracy. Internal check includes matters such as allocation of authorities, division ofwork and proper methods of recording transactions etc. It is a part of overall internalcontrol system and operates as a built in device so far as staff organization and joballocation aspects of control system are concerned.


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Definition: Internal check means practically a continuous internal audit carried on by thestaff itself, by means of which the work of each individual is independently checked byother members of the staff.

Features of Internal Check:1) The work is divided in such a way that all the duties are assigned to differentclerks.

2) The clerks get the work-load according to their capabilities and qualifications.3) Only one clerk does not perform any single task from the beginning to the end.4) The work done by one clerk is independently and automatically checked by

another. For example, in case of cash sales, the salesman should not be allowedeither to deliver the goods to the customer or receive money from him. The cashierwill receive the cash, the gatekeeper i.e., good clerk will deliver the goods and theaccountant will make entry in the cash book.

Objectives of Internal Check1. To exercise moral pressure over staff.2. To ensure that the accounting systems produces reliable and adequate

information.3. To provide protection to the resources of the business against fraud, carelessness

and inefficiency.4. To distribute the work in such a manner that no business transactions left

unrecorded.5. To allocate duties and responsibilities of each clerk in such a way that he may be

held responsible for particular fraud or error.6. To minimize the chances of errors, frauds or irregularities in the business.

7. To increase the efficiency of clerks because the allocation of duties based on theprinciple of division of labour.

8. To detects errors and frauds easily if it is committed, because in an efficientinternal check system, there is a provision for independent checking.

Principles of Internal Check1. Responsibility: Responsibility of each individual must be properly defined and

fixed. The work of the business should be allocated amongst various clerks in sucha manner that their duties and responsibilities are clearly divided.

2. Completion:The work should be divided in such a way that no single person isallowed to complete the work solely by himself from the beginning to the end.However, there should be no duplication of work.

3. Rotation of employees: A good system of internal check should not allow personhaving custody of assets to have access to the books of account. A system oftransfer or rotation of employees from one seat of work to another must befollowed by the business.

4. Automatic check: A good system of internal check must provide for an automaticchecking of the work of one clerk by the other.


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5. Safeguards: Safeguards should be prescribed to keep un-used cheque books,files and securities etc.

6. Supervision: A strict supervision should be exercised to ensure that theprescribed internal checks and procedures are fully operative.

7. Formal sanction: No deviation should be allowed from the established

procedures till it is formally sanctioned by the top official.8. Periodical review:The system of internal check should be reviewed from time totime to introduce improvements.

Advantages of Internal Check1. For the Business(a) Proper division of work: Internal check entails a proper and rational distribution ofwork among the members of staff of the enterprise keeping in view their individualqualifications, experience and area of specialization.(b) Detection of errors and frauds: Since no individual worker is allowed to handle ajob completely from the beginning to the end, and the work of each clerk is

automatically checked by the other, this helps in the early detection and discovery oferrors and frauds and the possibilities of the commission of errors and frauds can beminimized.(c) Increased efficiency coupled with economy: A good system of internal checkincreases the efficiency of work among the staff and leads to overall economy.(d) Moral check: Knowledge of subsequent checking of each employees work byothers, acts as a great check to commission of errors and frauds.2. For the Auditor(a) Quick preparation of final accounts:The Profit & loss account and the BalanceSheet are prepared without any loss of time.(b) Convenience to auditor: Where an organization is operating system of internal

check, the statutory auditor may conveniently avoid detailed checking of thetransactions. He may apply a few tests here and there and can relieve himself fromdetailed checking.3. For the Owner(a) Accuracy of the accounts can be relied upon: If there is a good system ofinternal check the owner of the concern may rely upon the genuineness and accuracy ofthe accounts.(b) Increase in profits: Overall efficiency and economy in operations result in moreprofits thus ensuring larger dividends for the owners or shareholders.Disadvantage of internal check Dependence on each other delays in the quick completion of the work. If one person

is absent, the day-to-day work will be seriously disrupted. Following are some of thedisadvantages of a system of internal check.1. Costly for small business. A system of internal check is quite expensive especially

for small business houses.2. Quality is sacrificed for promptness: In an internal check system quality of work

declines because the clerks of the business give more importance of the speed ofwork and do not care about quality.


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3. Carelessness among high officials: Carelessness among the officials increases asthey think under a sound system of internal check nothing can go wrong.

4. Disorder in the working of the business: In the absence of properly organizedsystem of internal check there will be confusion and disorder in the working of thebusiness.

5. Risky for an auditor: If the auditor does not apply tests and procedures of his ownand if he relies on the output of the system his work cannot be free from irregularitiesif the system itself proves to be defective.

Internal Check and AuditorSystem of internal check in a business concern largely determines the nature

and extent of the scope of an auditors work. It determines the reliability where anauditor can place a test checking. A good system of internal check may relieve anauditor of a large part of detailed checking and the time saved can be used for otherimportant matters. But, wherever the system is found defective, it is the duty of theauditor to check the whole transaction in detail because ultimate responsibility in case

anything goes wrong in the financial accounts lies on the external auditor. In case of agood system of internal check, his work, but not the responsibility, is reduced. Statutoryauditor cannot be relieved of his liability. No doubt a good and efficient system ofinternal check is very helpful to the auditor but it does not relieve him office contractualresponsibilities. So, the extent to which he should rely upon the system of internal checkwill depend upon his skill, experience and training.

Internal Check With Regard To Purchases1. Requisition:The procedure for issuing purchase requisitions should be specified. Thedepartment requiring supplies must send a requisition to the purchase department. Thehead of the department, who is in need of goods, should fill in a requisition slip details

about the quantity, quality and the time by which the goods must be supplied be clearlymentioned and signed by the concerned person. Requisition books must be kept by eachsection of the organization. Requisition duplicate must also be prepared by the head ofthe department.

2. Enquiry: Purchases department makes an enquiry about the terms and conditions ofpurchases from suppliers. For this purpose tenders are generally invited from differentsuppliers. These tenders must be opened and approved by senior officer.

3. Purchase Order: After deciding the approved supplier, the purchase department willprepare four copies of purchase orders. One copy will send to the vendor, second to thestores, third to the accounting department and fourth will be with the purchasedepartment itself. The purchase order should be carefully written, must be approved andauthorized by the head of the purchase department or any officer authorized to do theconcerned work.

4. Receipt of Goods: On receipt of the goods, the purchase department shouldproperly inspect them on the basis of quantity, quality and condition and must compare


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with the purchase order. Goods received should also be entered in the goods inward(Receipt) book. The purchase department then sends the goods to the stores and willalso inform the concerned department about the receipt of goods.

5. Making the Payments:The purchase department should thoroughly check the

suppliers invoice and then they should send to the accounting department for payment.The accounting department should compare the invoice with the authorized purchaseorder and should also verify the calculations. The accounting department shouldcompare the invoice with the incoming inspection report and it should enter the invoicein the purchase book. Only responsible officer should draw a cheque for the payment ofinvoice. At the time of signing a signing authority must verify the correct payment ismade.

If some portion of the goods is returned to the suppliers, a proper entry mustbe made in the purchase return book. A credit note to that effect must be obtained fromthe supplier and the accounts section must adjust the payments accordingly.

A good system of internal check with regard to purchases will prevent certain

types of irregularities, errors and frauds such as fictitious payment, double payment,artificial increase and decrease in profits.

Internal Check With Regard To SalesSales are the most important source of revenue in a business. Therefore the

system of internal check regarding sales should be extremely efficient otherwise thefollowing types of frauds may be committed.

1. Sales may be omitted from recording in the Sales Book.2. Fictitious sales may be recorded in the Sales Book.3. Goods actually sold may be treated as sent on approval basis.4. Sales of the next year may be recorded as sales of the current year.

Thus to avoid such types of frauds the whole system of credit sales should bekept under the proper control and supervision.

The system of internal check regarding sales should take care of thefollowing:

1. On receipt of the order, it should be numbered and preserved in Orders ReceivedBook with full particulars. A confirmatory written order must be obtained for verbalorders.

2. The Dispatch Department should be given a copy of the order with necessaryparticulars.

3. Authority to examine and record the dispatch of goods should rest in persons otherthan that in-charge of stock maintenance or invoicing duties.

4. The Dispatch Department should take steps to pack the goods as per order.5. The statement of goods as prepared by the Dispatch Department should be

checked with customers order and then the invoice will be prepared in triplicate bymeans of carbon papers.

6. A responsible official should check the invoice, particularly the rates charged andcalculations made. He should see that the terms and conditions in the order havebeen duly followed and there is no room for complaint by the buyer. He shouldthen put his initials on the invoice.


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7. With the help of the copy of invoices, entries should be made in the Sales DayBook.

8. On dispatch of the goods records should be made in the Goods Outward Book.9. Two copies of the invoice may be sent to customer who will return one of them

after signing it. It will serve the purpose of delivery note. Third copy will be

retained for further reference.10. Entries should be made in Goods Inward (Receipt) Book for all the goodsreturned by the customers. Credit notes should be prepared and should be dulychecked and initialed by the responsible official.

11. With the help of credit notes, records should be made in the Sales ReturnBook.

Internal Check with regard to Stores (stock)The Stores Department has the charge of preserving and issuing stock

to different departments. Proper control of stores is very much essential to prevent

pilferage, theft and misuse. Therefore, the internal check system in relation to storesmust be given careful attention.

The following general rules may be followed to ensure effective check overstores.

1) Location of the store: Stock should be located at a convenient place. It shouldhave proper storage facilities so that goods may not be misplaced, misused orwasted.

2) Receipt of Stock: On receiving stores, the Stores Department will prepare aGoods Received Note in triplicate.

One copy will be sent to the Purchases Department.

Second copy will send to Accounts Department.

The third will be retained by the Stores Department itself.

The stores should be properly checked after their receipt.3) Preservation of Stock:

a) Goods received should be stored at their allotted racks.b) The system of bin cards should be used to show the receipts, issues and

balance of stores. Such bin cards may be kept hanging on the places wherestores are preserved. Stores inventory software may be used on computerfor items stored.

c) Stock-taking should be carried out at regular intervals. It should be done byan independent person who is not involved in any way with purchase, issue

or maintenance of stores.4) Issue of Stores: No item from the stores should be issued to any person withoutformal requisition or demand note from some authority. Only authorized personshould be allowed to remove articles from the stock according to the requisition.The Stores Officer should be seated near the gate so that all issues may be madeunder his supervision. For the materials or stores returned from the concerneddepartment material return note should be prepared. In the same way materialtransfer from one department or job to another. The gate keeper should instruct


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not to allow any material out of the factory without necessary permit from thestore keeper or Invoice of the Sales Department.

5) Recording: After the issue of materials from the stores, the Store IssueRequisition should be sent to the Stores Accounts Section for proper records there.The bin cards should check and compared from time to time with stores records.

Internal Check with regard to Fixed AssetsFixed assets are of the permanent nature by means of which the business is

carried on. They are held for the purpose of earning income and not for the purpose ofsale e.g. Land, buildings, furniture and fixtures, plant & machinery etc. the expenditureon fixed assets is term of capital expenditure. The purchase of fixed assets may be forthe expansion of the project or for a new project or it may be normal addition to thefixed assets.

The internal checks in related to fixed assets are1. A proper authority should be designated for the sanction of capital expenditure..

The authority may give to Managing Director, a director a factory manager or a

committee may be set up for this purpose.2. A proper authority may be designated even for sales of fixed assets, transfer or

even for discarding of any asset.3. Proper accounting records in respect of fixed assets should be maintained and it

should be ensured that the proper accounting distinction is observed betweencapital and revenue expenditure.

4. There should be a periodic inspection of assets.5. A fixed assets register must be maintained giving details of all the fixed assets. In

this register description of the assets, their cost and location should also bementioned. Management should also ensure that all the fixed assets are verifiedphysically from time to time.

6. Perfect arrangement should be made to ensure that fixed assets are properlymaintained and applied in the service of the company.

7. Where fixed assets are transferred between branches or members of the samegroup, proper arrangements in respect of their pricing, depreciation andaccounting should be made.

8. Depreciation rates are to be authorized to some responsible person for checkingthe necessary calculations.

9. It should be seen that these fixed assets are adequately insured.

Internal Check with regard to Investments1) Who is to be responsible for authorizing purchase and sales at investments and

how such authorization is to be evidenced? Those responsible person have noconcern with cash are the custody of documents of title.

2) Next question arises what arrangements should be made for maintaining adetailed investment register and how should be responsible for verifying itperiodically.

3) The documents of title should be kept in safe custody, preferably under the jointcontrol of two persons.


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4) Arrangements should exist for checking brokers notes against purchases or salesauthorization and it should be ensure the charges are correctly calculated.

5) It should be ensured that bonus, capital repayments and dividends or interest arereceived and properly accounted for.

6) An independent person should check the investment register with the actual

investments physically.7) Finally, the person checking the register should also verify that the investment arein the name of the company.

Internal Check regard to WagesThe system of internal check for wages should be devised in a careful and

planned way, especially in manufacturing concerns. This is because particularly in largemanufacturing concerns, employing large number of workers, possibility of frauds alsothere. Thus efforts should be made to prevent such frauds with the help of some suitable

arrangement of internal check which should be revised from time to time and it shouldbe supervised by some responsible officer.

Objectives1. To avoid inclusions of dummy workers in the list.2. To avoid incorrect time or piece work records.3. To avoid fraudulent manipulation of wage-sheets and misappropriation of money

etc.

Maintenance of Wage Records1. Time records: Workers are paid their wages normally on the basis of time. Thus

the time spent by each worker should be correctly recorded in the time recordbook. Ex: time recording clock, attendance cards.

2. Piece work Records: Where the workers are paid on the basis of piece wagesystem, proper books for actual work done by worker should be recorded on thiscard which should be sign by the head of the department. Store keeper to whomthe goods manufactures are hand over should also signed this card.

3. Overtime Records: Ordinarily overtime work should not be encouraged. Noworker should be allowed to work overtime unless he is authorized to do so by theauthorized officer. Overtime slips should be sanctioned in advances. Such slipsshould bear the name and number of workers, overtime put in and the job or thedepartment in which he is engaged. At the weekend such slip should send to thetime keeper who will forward them to wage officer.

4. Pass-out Records:The worker should not be allowed to live before the scheduletime. But if sometimes, a worker wants to go out of the factory on his personalwork during working hours he should not be obtained permission for authorizedofficer who should issued pass-out slips. Such slips are handed over to gatekeeper.The wage office should also be given copy of such slips.


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5. Preparation of Wage Sheets: It should be done by a separate department. Thiswork should be done by different clerks to minimize the irregularities. Informationregarding attendance can be obtained from attendance register, job cards, piecework register, overtime slips, pass out slips, etc.

The essential particulars should be enter in wage slips

a. Nameb. Number allotted to him and his addressc. Total time workedd. Details of worke. Ratef. Total amount of wagesg. Bonush. Overtimei. Deductionsj. Net amount payable

Internal Check with regard to Payments1. The clerk associated with the preparation of wage sheets must not be associated

in the payment of wages to avoid collusion between two or more persons.2. The cashier should be given the job t make payment as he is not associated with

the preparation of wage sheet.3. Each worker, who is to receive the wages, should be present.4. The concerned officer of each department should be present at the time of

payment to identify the worker.5. The signature of the worker should be obtained when they receive the amount of

wages and the whole payment should be attested by cashier or work manager.6. If casual workers also employed in the organization a separate list of such workers

should be prepared and the payment should be made to them in the present ofresponsible officer. The names of dummy workers can be figure in the wage list ifnecessary precautions are not taken by the works manager.

7. Proper arrangement should be made with regard to unclaimed wages.8. Advances to the workmen should be discouraged but if it becomes unavoidable

then it should be detected later during the payment of wages.

Internal Check with regard to Cash TransactionsThe risks of misappropriation of cash or chances of frauds are more in cash

transactions. Ex: receipts may not be entered in the cash book; records of cash may beunderstood by preparing duplicate receipts for amount less than original. Cash sales may

be treated as credit sakes charging the amount to fictitious debtors etc.The following points should be taken into consideration to have a good

system of internal check for cash transactions.Cash Receipts

1. Correspondence, specially inward mail must be handled by some responsibleperson.

2. All cheques received should be marked not negotiable or account payee only.


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3. All the receipts in cash or cheque must be banked daily. This job should be done bythe person who is not responsible for preparing pay-in-slips.

4. From time to time bank reconciliation statement should be prepared to reconcilethe bank and cash balance.

5. All receipts should be acknowledged by means of printed receipts. Counter foils of

all receipts issued should be properly maintained. Unused receipt book must bekept under lock and key with some responsible officer.6. Spoiled receipts should be cancelled. If some alterations made in the receipts

already written, it should be properly signed.7. Copies of receipts previously issued must be marked duplicate.8. Some responsible persons of the firm should verify the balance of cash by carrying

out a surprise check from time to time.Cash Payments

1. All payments should be made by cheques (payable to order or crossed).2. Petty cash payment should be handled by the petty cashier.3. Records of petty cash payment should be made in the petty cash book.

4. For all the payment made, vouchers and other relevant correspondence should bechecked.

5. The names, numbers and status of the person authorized to signed cheques andlimitations as to there authority must be decided.

6. All cheques and bills should be thoroughly scrutinized and signed by the properauthority, safeguard have to be adopted if cheques are signed mechanically orcarry printed signatures.

7. Confirmation of accounts with creditors should be made to maintained up to daterecords.

8. All vouchers should be serially filed.9. Bank reconciliation should be frequently prepared.

10. A proper system must be adopted for controlling the supply and issue ofcheques for use and their safe keeping.

Cash SalesIn a big trading house the transaction of cash sales enlarged in number. They

may consist of sales over the counter, postal sales and sales by traveling agents.1. Sales over the Counter:

a. For cash counter the separate salesman should be appointed to look after hiscounter.

b. Each salesman is given a separate sales memo book, such books are ofdifferent color for different counters.

c. The salesman should prepared four copies of the cash memo.d. These copies of cash memo should be checked by another officer before

they are handed over to the customers. One copy should be returned forpreparing sales summary at the end of the day.

e. Payment should be made at the cash counter. The cashier after receiving theprice of goods from the customers should have one copy stamped as cashpaid to the customer, two copies must be retained by the cashier.


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f. The cashier should record the days total sales in cash sales register to knowthe total cash received at the end of the day.

g. Every salesman should also prepare a summary sheet to know the total salesof the counter.

h. Copies of the sales summary sheet of different counters and the total cash

received should be sent to the officers in-charge of the trading house.

2. Postal Sales:a. A separate register should be maintained in which all details for sales made

must be recorded.b. The goods returned should be recorded in a separate register.c. The total receipts on these accounts should be entered in the register.d. Any advance receipt by the customer should also be entered in this register.e. The register should be thoroughly checked by some senior officer and the

goods return and the goods for which paid has not been received should becarefully examined.

3. Sales by Traveling agents:a. Traveling agents should be allowed to issue rough receipt books to the

customers for cash received and final receipt to the customer should beissued by the Head Office.

b. Agents should not be allowed to deduct their commission or to meet out anyexpenditure incurred in commission with the sales out of the sales proceedscollected by them.

c. The Head Office should be maintained a list of debtors and other customers.Reminders should be sent to those customers who have not cleared theirdebts.

d. The agent should be asked to submit a periodical statement of sales and thisshould be thoroughly examined by responsible officers.

e. The agent should not be allowed to work on a long term basis in one area butshould be transferred to other areas. It will increase his efficiency andminimized the possibility of frauds.