UNIT I
Introduction
The term Audit is derived from the Latin word’ audire’ which means to hear. In traditional times, auditors used to ‘hear’ accounts read out by the book keeper. The final accounts of a business concern are used by various persons such as the owners, shareholders, investors, creditors, lenders, Government etc for different purpose. All these users need to be sure that the final accounts prepared by the management are reliable. An auditor is an independent expert who examines the account of a business concern and report whether the final account are reliable or not.
Definition:-
ICAI “Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon’’.
‘’Auditing is a systematic and independent examination of data, statements, records, operations and performances ( financial or otherwise ) of an enterprise for a stated purpose.’’ [General Guidelines on Internal Auditing]
Features of Auditing:
e. Audit is done with the help of vouchers, document, information and explanations received from the authorities.
f. The auditor has to satisfy himself with the authenticity of the financial statement and report that they exhibit a true and fair view of the state of affairs of the concern.
g. The auditor has to inspect, compare, check, review, scrutinize the voucher supporting the transactions and examine correspondence, minute books of shareholder, directors, Memorandum of Association and Articles of association etc in order to establish correctness of the books of accounts.
Objectives of Auditing
SA200 issued by ICAI states that the objective of audit of financial statement is to enable an auditor to express an opinion on such financial statement. A financial Audit has the basic object of examining whether the account are true and fair. It has an incidental object of detecting errors and fraud.
1. Basic Object - True and Fair View:- SA 200 states that the auditor’s opinion helps in determination of true and fair view of the financial position and operating results of an enterprise. The auditor gives an opinion on whether the final accounts give a true and fair view if the affairs of the concern i.e. whether the balance sheet gives a true and fair view if the financial position of the concern as at end of the year and the profit and loss account gives a true and fair view it the profit and loss for the year.
2. Incidental Object - Detection Of Errors And Frauds :- The main objective of a financial audit is to report on the truth and fairness of the final account. Since the final account are based on the books of accounts, the incidental objective of audit is to ensure that the final account tally with the books of account. While conducting the audit, the auditor has to vouch the transactions, verify the assets and liabilities and study the internal control. During such vouching, verification etc an auditor may come across errors or fraud. He then takes proper action. He should ensure that the accounts are free errors and frauds so as to give a true and fair picture of the affairs of the concern.
3. Not Object - However, it is not the object of audit to give a guarantee that all is well with the concern. A clean audit reaper does not imply the management has been efficient or that the business will continue to be profitable in future and so on. Thus it not the objective of the audit to give an opinion on the future prospects of business or on the efficient or effectiveness of the management.
Key Takeaways:
Auditing refers to examination of accounting and financial records to ascertain and give opinion whether such records show true and fair view or not.
The following are the types of audit:-
Sr. No. | Form of Organization | Act |
Company | Companies Act, 2013 | |
2. | Banks | Banking companies Regulation Act,1949 |
3. | Insurance Companies | Insurance Act,19358 |
4. | Co- operative Societies | Co-operative Societies Act relevant to the particular state . E.G. Maharashtra co-operative societies Act,1960 |
5. | Public Charitable Trusts | Act under which the trust is registered |
6. | Statutory corporations e.g. LIC,ICAI, RBI etc | Special Act of Parliament |
7. | Electricity Companies | Electricity supply Act, 1948 |
8. | Persons liable to pay tax | Tax Audit under income Tax Act,1961 |
2. NON- STATUTORY AUDIT:- Non statutory Audits are audits that are not compulsory i.e. organization may get such audits conducted voluntarily .
The following are example of certain non- statutory audits
TYPES OF AUDIT
Sr. no |
| CONTINUOUS AUDIT | INTERIM AUDIT | FINAL OR ANNUAL AUDIT | BALANCE SHEET AUDIT |
01 | Meaning | Continuous audit is defined by R.C. Williams is one whether is continuous or at regular intervals engaged in checking the accounts during the period. Continuous Audit means an audit at regular intervals throughout the accounting year. Generally, the audit work begin after the accounting year is over . But in case of Continuous Audit, the work begins in the accounting year itself. | Interim Audit is an audit conducted in between the annual audits. For example, an audit of account prepared for the period of six-month form 1st April to 30th September, Would be interim Audit. | Spicer and Pegler define it as “ an audit which is not commenced until after the end of the financial year and then carried on until completed. Final or Periodic Audit means an audit taken up after the end of the accounting year. The audit work begins only after the accounting year is over. Generally majority of audit are in the nature of Final, Periodical or Annual Audit. | Balance sheet audit involves an in- depth examination of the various item in the balance sheet and the profit and loss Account. The original entries and vouchers are examined only to the extent necessary. |
2. | Necessity | 1.Where the volume of transaction is very large. 2.Where it is desired having the audited account ready immediately after the end of the accounting year. 3. Where the system oh internal control of internal check is weak. 4. Where the management requires reliable and authentic final account every quarter or so, e.g., for submitting to stock exchange; to foreign collaborators etc. | 1.Quarterly Results 2.Interim Dividends 3. Sale of Business 4. Changes in Firm |
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| 1.The internal control system is very strong. 2. The volume of transaction is so large 3. the concern has its own internal audit department. |
3. | Advantages | 1.Quick preparation of final account. 2. Early dividends to shareholder 3. Up-to-date account for bank / investors 5. Check of employees 5. Prevent Errors and frauds 6.Thorough audit 7.Utilisation of audit staff. | 1.Quick preparation of final account. 2. Early dividends to shareholder 3. Up-to-date account for bank / investors 5. Check of employees 5. Prevent Errors and frauds 6.Thorough audit 7.Utilisation of audit staff. | 1.inexpensive 2. audit at stretch 3. less errors and frauds 4. does not disrupt account work | 1.inexpensive 2. audit at stretch 3. less errors and frauds 4. does not disrupt account work |
4. | Disadvantages |
| 1 Expensive 2 Audit in instalments 3 Errors and fraud in books already checked 4 Disrupts Accounts work 5 Undue Reliance of auditors | 1.Delay in final account 2. late dividends to shareholder 3. state accounts for banks and investor 4. No moral check on employees 5. sample checks | 1.Delay in final account 2. late dividends to shareholder 3. state accounts for banks and investor 4. No moral check on employees 5. sample checks |
It is desirable that in respect of each audit and more particularly for bigger audits an audit programme should be drawn up. Audit programme is nothing but a list of examination and verification steps to be applied and set out in such a way that the inter-relationship of one step to another is clearly shown and designed. In other words, an audit programme is a detailed plan of applying the audit procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the audit objectives.
For the purpose of programme construction, the following points should be kept in view:
Advantages of an Audit Programme
Disadvantages of Audit Programme
The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme.
All these disadvantages may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal.
Key Takeaways:
An audit note book is usually a bound book in which a large variety of matters observed during the course of audit are recorded. It is thus a part of the permanent record of the auditor available for reference later on, if required. The audit note book also provides a valuable help to the auditor in picking up the links of work when the concerned assistant is away or the work is stopped temporarily because in it are recorded along with observations, the various queries, explanations obtained and evidence seen, while queries remaining undisputed of would be noted for follow up. It is more satisfactory in some ways, however, to use loose sheets for entering queries and notes which, subsequently, on being punched, may be filed in a special query file maintained for each client or along with the clients’ accounts and papers, separately for each year.
Significant matters observed during the course of audit, a record of which should be kept in the Audit Note Book:
Specimen of entries in an Audit Note Book to indicate the manner in which entries in those books ought to be made:
Queries-Vouchers-Cash Book Payment
Voucher | Account Debited | Query | How disposed of | |
38 | Advertisement | 2,01,600 | Managing Director’s sanction required | Sanction obtained |
107 | Rent | 81,500 | Rent bill & receipt required | Receipt & bill obtained |
306 | Das & Co. | 5,23,474 | Receipt required | Party reminded |
42 | Machinery | 15,49,160 | Board’s sanction required | Sanction obtained minute dated 10-1-15 |
89 | Stores | 37,403 | Invoice required | Party reminded |
128 | Raw material | 83,457 | Rates for items (I) & (ii) are different from those on the purchase order | Items of the quality ordered not being available, a better quality was accepted under purchase officer’s approval. |
The making of intelligent enquiries on the accounts under audit is an important part of the work of an auditor. However, to guard against the client’s staff being required to provide explanation and information which are unnecessary or which could be ascertained otherwise junior members of the audit staff should be allowed to raise audit queries only after obtaining the prior approval of the senior in charge.
The audit notes constitute important evidence of matters considered by the auditor during the course of the audit, some of which may not find a place in his report submitted to the shareholders or directors, for the reason that on the basis of an explanation given to him by the management, he, on being satisfied, decided to drop them. As such, audit notes can be an important defense for the auditor in the event of an action for negligence in the discharge of his duties being subsequently brought against him.
Audit notes can also serve as a guide in framing audit programmed in the future as they indicate the weaknesses in the system of the client which specially need to be watched.
Also, it is desirable that the audit notes, whether they are kept in a book or in loose sheets, should bear a reference to the particular item of work in the audit programmed, and as far as practicable, all notes relating to the particular work in the programmed should be kept together in the systematic order.
The audit working papers constitute the link between the auditor’s report and the client’s records. According to SA-230 , Audit Documentation refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are also sometimes used). The objects of an auditor’s working papers are to record and demonstrate the audit work from one year to another.
Audit documentation serves a number of purposes:
Working papers are varied in nature. They may be recorded on paper or on electronic or other media. Examples include:
The auditor may include abstracts or copies of the entity’s records (for example, significant and specific contracts and agreements) as part of working papers. Working papers, however, is not a substitute for the entity’s accounting records.
The auditor need not include in audit documentation superseded drafts of working papers and financial statements, notes that reflect incomplete or preliminary thinking, previous copies of documents corrected for typographical or other errors, and duplicates of documents.
Oral explanations by the auditor, on their own, do not represent adequate support for the work auditor performed or conclusions the auditor reached, but may be used to explain or clarify information contained in the working papers.
The foundation of all working paper can be traced to:
Form and Content of Working Papers: Working papers should record the audit plan, nature, timing and extent of auditing procedures performed, and the conclusions drawn from the evidence obtained.
The form, content and extent of working papers depend on factors such as:
A permanent audit file normally includes:
B. CURRENT FILE
The current file normally includes:
Key Takeaways:
The following points are considered before commencing an audit:
1. In the case of a company, see that the appointment of the auditor is legally valid according to provisions of the Companies Act, verify records of the company and obtain certified true copies of resolution of the Board or of shareholders, as the case may be, convey acceptance of appointment to the Registrar of Companies and notify the previous auditor, if any, about the appointment.
If the new auditor is appointed due to – (i) Resignation of or unwillingness of the previous auditor to be reappointed, the latter may send a communication to the board of director or (ii) Non-appointment of the outgoing auditor though willing, he may send a representation to the management of the company for circulation to the shareholders.
In both cases, the new auditor must obtain copy of the said communication or representation and consider the same before accepting the appointment. In other cases, make sure of formal appointment clearly setting out the scope and nature of work.
2. Ascertain from relevant statutes or from instructions received the scope of work and nature of duties.
3. Inspect the various legal documents relating to the business as may be applicable, e.g., memorandum and articles of association, special Acts of Parliament, deed of partnership, will, trust deeds, letters of administration, contracts and agreements etc., and make notes of important provisions that may have some bearing upon the audit.
4. Ascertain the general nature of the business and also its technicalities and peculiarities so as to be able to appreciate the nature of transactions that may take place in that business.
5. Obtain a list of all books and of persons in charge of them and also a list of superior officials together with their specimen signatures or initials.
6. Thoroughly examine the system of accounting as well as the nature and extent of internal control and internal check on which will depend the scope of the audit work.
7. In the case of an established business examine final accounts and auditor’s report relating to the previous year.
8. Refer to the previous year’s working papers, if any, and prepare a suitable audit programme.
9. Send advance information to the clients’ office to prepare for the audit, in particular to ensure that postings, castings and balancing of books are completed and they are inked-up, vouchers are serially arranged and filed, lists of balances and draft final accounts with annexure and schedules are made available and suitable working space is arranged. Also ask the clients to provide suitable physical facilities including space, furniture etc. for the audit work.
ROUTINE CHECKING
MEANING
Routine Checking means checking of arithmetical accuracy of books of original entry and ledgers with a view to detecting clerical errors and simple frauds. It involves the
- Checking of casting, sub casting (total, sub-totals), carry-forward, extension and calculation etc. in subsidiary books,
- Checking of postings into the ledgers, casting of ledger account and
- Extraction of their balance into the trial balance.
FEATURES
1. Detailed Checking
Routine chewing involves detailed checking of each and every accounting step-entry in the original books, postings into the ledger and preparation of the trial balance.
2. Traditional system
It is the traditional system of audit also known as ‘vouch and post’ audit.
3. Juniors
The work is usually done by junior members of the auditor’s staff.
4. Ticks
Distinctive ‘ticks’ are used in routine checking for different purposes e.g. for totals, for posting etc. hence ‘routine checking’ is also called ‘tick-work’.
5. Routine Errors / Frauds
Routine Checking can reveal routine clerical errors / frauds.
OBJECTIVES
The main objects of routine checking are:
1. Verification of the arithmetical accuracy of the entries,
2. Verification of the accuracy of posting of ledgers.
3. Verification of the balancing of the ledger accounts, and
4. Ensuring that no figures have been altered after checking.
ADVANTAGES
1. It is the simplest form of audit work.
2. Errors and frauds of simple nature can be very easily detected.
3. The books of accounts can be thoroughly checked.
4. It helps in checking castings and postings.
5. Arithmetical accuracy of all the transactions can be confirmed by this method.
6. It offers an opportunity to train the junior auditors.
DISADVANTAGES
Routine Checking has the following disadvantages:
1. It is a mechanical and boring work
2. It can detect only simple arithmetical errors and small frauds.
3. It is time consuming and expensive.
4. It is unnecessary in case of a large business using information technology.
TEST CHECKING
INTRODUCTION
SA 700 (Audit Report) mentions that an audit includes examination, on a test basis, of evidence supporting the amounts and disclosures in financial statements.
MEANING
SA 500 issued by the institute of Chartered Accounts of India (ICAI) states that in forming an opinion an auditor may obtain audit evidence on selective basis. The selection may be based on auditor’s personal judgment or statistical sampling technique.
TEST CHECKING VS. STATISTICAL SAMPLING
When items are selected and checked on the basis of the personal judgment of auditor, it is called Test Checking. When items are selected by applying statistical techniques of sampling, random selection etc., it is called Statistical Sampling.
UNSUITABLE
The following transaction/balances are not suitable for test checking.
IMPORTANCE
When the number of transactions is large auditor cannot check all the transactions 100%. In such cases auditor has to resort to test checks.
2. Full Checking Unnecessary
In most cases, 100% checking is unnecessary. Statements on Auditing Practices issued by the ICAI states that where an adequate system of internal control is in force, the auditor is entitled to apply test checks.
3. Extent of Checking
The extent of checking should be based on the following factors:
(a) Possibility of errors and frauds.
(b) Nature and materiality of item being checked.
(c) Nature of the business and size of the company.
(d) The system of accounting.
(e) Internal controls.
(f) Internal audit.
ADVANTAGES
DRAWBACKS
The selection depends upon the personal judgment of the auditor.
2. Ignores Statistical Techniques
Test checking ignores statistical techniques of sampling, random selection, risk assessment etc. Thus, auditor cannot be confident that he has selected the right sample.
3. Ignores Quality
An audit instruction regarding, say 25% checking of purchase entries, does not indicate how those 25% entries are to be selected.
4. Risks
Risk means the possibility that conclusions from test checks may be different from those based on 100% checking. Risks are of the following types –
(a) Reliance on Internal Controls
(b) Wrong Conclusions
PRECAUTIONS-
AUDITOR’S LIABILITY
The test checking does not reduce auditor’s liability. If an auditor is accused of negligence, he cannot say that the items for test checking were free of errors. It is the duty of the auditor to take reasonable care and exercise his skill during an audit. Auditors must keep proper record of the test checks carried out, to help him defend his conclusions later on.
Key Takeaways:
MEANING
Guidance Note of ICAI: internal checking is the system of allocation of responsibility, division of work, and methods of recording transactions, whereby the work of an employee is checked continually by correlating it with the work of others. An essential feature is that no one employee has exclusive control over any transaction(s).
FEATURES
Internal Check aims to detect and prevents errors and frauds.
Key Takeaways:
MEANING
SA 610 issued by the Institute of Chartered Accountants of India (ICAI) defines Internal Audit as follows: Internal audit is a separate component of internal Control established to determine whether other Internal controls are well designed and properly operated.
OBJECTIVES
3.SCOPE / FUNCTIONS OF INTERNAL AUDIT
BASIC PRINCIPLES GOVERNING INTERNAL AUDIT
Standard on Internal Audit (SIA) 2, Basic principles Governing Internal audit, issued by the Council of the Institute of Chartered Accounts of India lays down the following:
**(SAME AS THE PRINCIPLES OF AUDIT)
INTERNAL AUDIT VS. STATUTORY AUDIT
TOPIC | INTERNAL AUDIT (IA) | STATUTORY AUDIT (SA) |
Voluntary / Compulsory | IA is Voluntary | SA is compulsory under law e.g. under Companies Act. |
Appointment | Internal Auditor is appointed by the management itself. | Statutory Auditor is appointed by the shareholders of a Company. |
Status | Internal Auditor is an employee of the concern. | Statutory Auditor is an independent outside expert. |
Responsible & reports to | Internal Auditor is responsible and reports to management. | Statutory Auditor is responsible and reports to shareholders. |
Scope of duties | Management decides the scope of duties of internal Auditor. It includes non-accounting matters. | Duties of statutory auditor are laid down by law (e.g. Companies Act) its scope limited to accounting matters. |
Removal | Internal auditor can be removed by the management on its own. | Statutory Auditor can be removed by shareholders only if approved by central Government. |
Objectives | IA aims to review the internal control system of concern. | SA aims to report to shareholders whether the accounts are true and fair. |
Period | IA is continuous. | SA is normally periodical or annual. |
Qualifications | No qualifications are prescribed by law for an Internal Auditor. | Qualifications are prescribed by law for Statutory Auditor. |
Liability for Negligence | Internal Auditor is liable only to management and not to shareholders or third parties. | Statutory Auditor is liable to shareholders and in some cases to third parties also. |
MEANING
SA 400 issued by the Institute of Chartered Accountants of India (ICAI) deals with the study and evaluation of Internal Control in connection with an audit. It defines internal Control as “all the policies and procedures adopted by the management of a concern to ensure the orderly and efficient conduct of its business.”
PURPOSE, ADVANTAGES AND OBJECTIVES
The objective of internal control i.e. accounting Controls and Operational Controls are as follows.
a. All transactions are duly authorized, properly recorded and recorded promptly.
b. The accounting policies adopted by the management in respect of stock valuation, depreciation etc. are implemented.
c. The assets of the concern are safeguarded; the assets are not used or sold without proper authorization and are verified regularly.
d. Errors and frauds are prevented and detected.
e. The books of accounts are complete and accurate.
f. The final accounts are reliable and ready in time.
2. Operational or Administrative Controls
Operational Controls aim to ensure that the management policies in respect of the operations and administration of the concern are implemented. This in turn ensures that the business is conducted in an orderly and efficient manner. Examples of operational controls are Quality Control, Budgetary Control, Internal Check, Internal Audit, Quantitative Controls etc.
AUDITORS DUTIES
SA 400 makes the following recommendations in this regard:
Basically, the management is responsible for establishing and operating the Internal Control system.
2. Auditor’s Duty
The auditor’s duty is to study system, check whether the system was actually in operation during the year and evaluate the system to ascertain how much he can rely upon it.
3. Need for Evaluation
An auditor needs to evaluate internal control system to achieve the objectives.
4. Steps in evaluation
a) Understand the System: In the first stage, the auditor should understand the system of Internal Control. He can understand the system with the help of manuals, discussions with managers or the technique of Flow Charts.
b) Test Application: He should check whether the controls were actually applied in practice. He can check some transactions in depth. Thus he can take up some sales transactions and check all the documents right from the sales order to the receipt from debtors.
c) Evaluate the system: He should judge, on the basis of above tests, whether he can rely on the system and if so to what extent.
5. Communicate Weakness to Management
a) The material weakness in internal controls should be communicated to the management by the auditor. Material weakness means the absence of adequate controls that increase the possibility of errors and frauds in the financial statements.
b) Such communication should be in writing.
INHERENT LIMITATIONS OF INTERNAL CONTROL
All the objectives of internal control, listed above, may not be actually achieved, because of its following limitations.
Cost of implementing control procedure may be much more than its benefits.
2. Human Error
A control procedure may not prove effective due to human errors e.g. carelessness of employees, mis-understanding of instructions, wrong judgments etc.
3. Collusion
Even if duties are divided among different employees, they may collude (work together fraudulently).
4. Misuse
An employee responsible for a particular function may misuse his authority.
5. Manipulation by Management
Manipulation and misappropriation by top management will defeat the very purpose of internal control.
INTERNAL CONTROL FOR SALARIES AND WAGES | INTERNAL CONTROL FOR PURCHASE | INTERNAL CONTROL FOR SALES | |
Division of Work | Work relating to payment of salaries and wages should be divided among different employees. Different person should employ the staff and workers, record the attendance, prepare the pay Sheet, check the Pay Sheet, make the payment and record the entries. | Work relating to purchase should be divided among different departments and employees. Thus sales and Debtors would involve the Sales Department, the stores and the account department. | Work relating to sales and debtors should be divided among different departments and employees. Thus sales and Debtors would involve the Sales Department, the stores and the account department. |
Procedures | The employees should sign in the Pay sheet or Vouchers in acknowledgment of payment received. Payment to representatives of absent employees should be made only after verifying their authorization. If salaries are paid by cheques, they should be crossed “A/C payee” to prevent misuse. | Purchase department should invite tenders on the basis of purchase requisitions received from the factory or stores. Material should be received in the godown and property inspected before acceptance. Payments should be made by the Account department only after verifying the Goods Received Note and the Inspection report. | Sales department should obtain sales Orders and issue Dispatch Orders to the stores. Material should be dispatched from the godown only on the basis of such dispatch orders and after preparing delivery challans. The Sales Bills should be raised and the cash or cheques from debtors should be received by the Accounts department. |
Cross-Check | The work should be divided in such a way that the related documents are prepared by different persons and automatically checked by another employee. | The work should be divided in such a way that the related documents are prepared by different persons and automatically checked by another employee. | The work should be divided in such a way that the related documents are prepared by different persons and automatically checked by another employee. |
Change in Duties | The security Staff, the Personnel Staff and the Cashier should be changed from time to time. | The duties of the concerned employees (purchase officer, storekeeper) should be rotated from time to time. They may be transferred to a different location. | The duties of the concerned employees (salesman, storekeeper) should be rotated from time to time. They may be transferred to a different location. One employee should not do same work for a long time. |
Annual Leave | The security staff and the cashier should be asked to go on leave at least once every year, to enable detection of errors or frauds. | The concerned employees (especially the storekeeper) should be asked to go on leave at least once every year, to enable detection of errors or frauds. | The concerned employees (especially the storekeeper) should be asked to go on leave at least once every year, to enable detection of errors or frauds. |
Access to Books | The security staff should not have access to the pay sheets. The personnel Staff or Cashier should not have access to the books of accounts. | The purchase officer or Storekeeper should not have access to the books of account, such as sales Journal or ledgers. | The sales staff should not have access to the books of account, such as sales Journal or ledgers. |
Proper Recording | The attendance should be recorded in the Attendance Records properly. Mechanical Time Clocks should be used to prevent errors and frauds. All payments should be properly recorded. | All goods should be properly recorded i.e. the right quantity should be entered, against the right party and on the right date. | All goods should be properly recorded i.e. the right quantity should be entered, against the right party and on the right date. |
Prompt Recording | The attendance and payments should be recorded promptly in the relevant books. | The transaction should be recorded promptly in the relevant books of accounts. | The transaction should be recorded promptly in the relevant books of accounts. |
Accounting policies | The payments should be recorded on the basis of the accounting policies adopted by the management. | The purchase should be recorded on the basis of the accounting policies adopted by the management. | The sales should be recorded on the basis of the accounting policies adopted by the management. |
Safeguarding | The cheques signed but not handed over to the employees who may be absent should be kept in safe custody. Such as cheques or cash vouchers for unpaid salaries should be verified immediately after the ‘pay-day’ | The stock in hand should be safeguarded i.e. stored safely and properly. Stock in hand should be verified regularly. | The stock in hand should be safeguarded i.e. stored safely and properly. Stock in hand should be verified regularly. |
Errors and Frauds | Pay sheets, cash Book and bank book should be checked to detect errors in recording payments of salaries and wages e.g. errors of commission, errors of omission or errors of principle etc. these books should be checked to detect frauds by inflating payments, by showing payments to dummy workers etc. Payments to dummy persons may be detected by checking the attendance record, making surprise check on attendance. | Stock books should be checked to detect errors in recording purchase. e.g. errors of commission, errors of omission or errors of principle etc. stock books should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of goods by inflating dispatches. | Stock books should be checked to detect errors in recording sales. E.g. errors of commission, errors of omission or errors of principle etc. stock books should be frequently reconciled with the physical stocks to detect frauds e.g. misappropriation of goods by inflating dispatches. |
Reconciliation and confirmations | --- | The Creditors accounts should be reconciled regularly. Confirmation of balances should be obtained from them at least once during year. | The Debtors accounts should be reconciled regularly. Confirmation of balances should be obtained from them at least once during year. |
| Internal Control for Creditors | Internal Control for Debtors |
Credit Limits | a) Fixed on a basis which is clearly laid down b) Approved by an officer independent of the sales department c) Checked before accepting orders from customer, and d) Reviewed from time to time. | |
Prompt Recording | The procedures should ensure prompt recording of the amounts due to creditors and the amounts paid to creditors. | The procedures should ensure prompt recording of the amounts due from debtors and the amounts received from debtors. |
Prompt Adjustment | The amount paid to a creditor should be promptly adjusted against the relevant bill. Unadjusted amounts should be reconciled regularly. | The amount received from a debtor should be promptly adjusted against the relevant bill. Unadjusted amounts should be reconciled regularly. |
Age-wise Schedule | There should be a procedure for preparing age wise schedule of creditors. The schedules should be reviewed by a senior officer. | There should be a procedure for preparing age wise schedule of debtors. The schedules should be reviewed by a senior officer. |
Statements of Accounts | Statements of accounts should be prepared and periodically to all creditors. They should be prepared by a person other than the ledger-keeper and sent by yet another person. | Statements of accounts should be prepared and periodically to all debtors. They should be prepared by a person other than the ledger-keeper and sent by yet another person. |
Discounts & write-offs | All materials adjustments such as discounts, allowances and rebates received, amount not payable written back etc. should be approved by a senior manager. | All materials adjustments such as discounts, allowances, rebates, and debts written off etc. should be approved by a senior manager. |
Reconcile Control Accounts | There should be a system of periodic reconciliation of creditors’ balances with related control accounts. | There should be a system of periodic reconciliation of debtors’ balances with related control accounts. |
References:
