BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material

Internal Check as regards Cash

(a) Receipts

(1) There should be a separate clerk known as cashier to deal with the receipts of cash. As soon as cash is received, it should be entered in a rough cash book or diary. He should not be authorized to keep cash with him, to make expenditure out of it and to make entries in the ledger and other books of prime entry. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(2) All remittances should be opened by the cashier in the presence of a responsible officer who is not connected with the office of the cashier, and should be crossed immediately by means of a rubber stamp as ‘Not negotiable-A/c Payee only’.

(3) All receipts should be banked daily. It is also necessary that from time to time. bank reconciliation statements should be prepared to reconcile bank and cash balances. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(4) The counterfoil portion of the paying-in-slip should be filled up by the clerk who marks out the counterfoil receipts and the portion which is to be retained by the bank should be filled in by the cashier.

(5) There should be a separate person to take money to the bank and he should not be connected with the cash transactions.

(6) The receipts which are issued for remittances received should be a numbered serially. They should not be prepared by someone who is connects entering remittances in the rough cash book or diary.

(7) The debtors or institutions from whom cash is received should be adviser proper receipts from the head office. They should also be directed to send pa through crossed cheques.

(8) Spoiled receipts should be cancelled and must not be detached from counterfoils or totally removed from the receipt book. If some alteration is made in receipt already written, it should be properly initialled.

(9) While entering receipts in the cash book, it is a good practice to enter in it the relevant receipt numbers. This makes checking in future quite convenient.

(10) The unused receipt books should be kept in safe custody under lock and key.

(11) A proper system of affecting and recording cash sales should be in operation under proper control and supervision.

(b) Cash Sales

In big business-houses where daily transactions of cash sales are larger in number there are many chances of fraud and irregularities. Unless there is a good system internal check, the auditor finds a great difficulty in detecting errors and fraud. There mai be three types of sales:

1. Sales at Counter,
2. Sales by Travelling Agents, and
3. Postal Sales.
4. Sales at Counter

Generally, big businesses employ a set of assistants to deal with daily cash sales, and tools like cash register, etc., are also usefully employed. The following procedure may be of great use in regard to cash sales:

(i) The salesman is in charge of making sales. A specific number or word may be allotted to every salesman.

(ii) Every salesman is given a separate book containing blank copies of cash memo. Such books are of different colours for different departments.

(iii) The salesman sells goods to a customer and prepares three copies of the cash memo.

(iv) These copies are checked by another official sitting nearby, and are, then, signed by the salesman.

(v) Two copies of the cash memo are handed over to the customer to whom the goods have been sold. He is instructed to pay cash to the cashier.

(vi) The customer goes to the cashier and hands over the two copies of the cash memo. The cashier after having received the price of goods, hands over the goods and copy of the cash memo duly stamped as ‘cash paid’.

(vii) Sometimes, goods are handed over to the customer by the gate-keeper after showing his copy of the cash memo. But in such a case, four copies of the cash memo are prepared and the fourth copy is retained by the gate-keeper.

This is the daily routine. At the end of the day, the salesman, the cashier and the gate-keeper (if four copies of the cash memo are prepared) prepare summaries and send them to General Manager of the officer-in-charge. The salesman’s summary reveals the quantity and value of the goods sold and that of the cashier shows the cash collections and the gate-keeper’s summary reveals the goods delivered during the day.

If these summaries tally, the accounts are certified as correct. The cash received is sent to the bank, and the statements to the Accounts Department. In case of any discrepancy, it shows some fraud being committed by someone of those responsible for making cash sales.

Such a system of internal check can reduce the chances of errors and fraud in regard to cash sales.

2. Sales by Travelling Agents

There is practice in big business-houses to engage travelling agents to push sales and collect debts. These travellers collect debts from old customers and accept advances from the new ones. A good system of control over these agents may be like this:

(i) The agents should be authorized to issue rough receipts to the customers for cash received and they should be instructed to acquire receipts from the head office. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(ii)The customers should also be told that if they do not get properly authorized receipts from the head office, they should make correspondence to the head office direct.

(iii) These agents should be instructed to remit the entire cash to the head office. They should not be allowed to deduct their commission or any other expenditure out of it. They should charge for these expenses directly from the head office.

(iv) The head office should send, as a matter of routine, statements to old debtors and customers so as to appraise them of their debts and balances.

(v) The agents or salesman should invariably send statements showing the names of defaulters and make correspondence with the head office in this regard.

(vi) These agents should also be transferred to other places or areas. This is necessary for increasing their efficiency and avoiding fraud.

3. Postal Sales and Sales through Internet i.e. On-line Sales

(i) A separate register should be maintained for recording sales made by post, V.P.P. or through internet.

(ii) The goods returned by customers should also be entered in proper registers.

(iii) Receipts of cash or through debit and credit cards on this account should be entered in proper registers.

(iv) A responsible officer should be deputed to check carefully the receipts through cash or debit or credit cards. The goods for which cash has not been received should be especially audited.

(v) In this connection, Cash Book and orders received through post or the internet should also be checked. Orders received should be properly filed.

(c) Payments

(1) A good system of internal check is one in which a separate person has charge of making payments. He should have no connection with the receipt of cash.

(2) Petty cash payments should be made by the petty cashier.

(3) All payments should be made by cheque, with the exception of those dealt with through petty cash. As far as possible, cheques should be made payable to order and crossed before they are sent out.

(4) Proper regulations should be in force for checking invoices and other relevant correspondence before cheques are prepared. Such vouchers should be stamped paid’ before the cheques are signed.

(5) The bill for which payment is to be made should not be used for sanction but a separate paper, sanction should be attached to the bill and on this paper, sanction should be taken from the proper authority.

(6) All cheques and bills should be scrutinized and signed by the proper authority.

(7) Strict regulations should be in force to sanction payments of a special nature. Such a work should be entrusted to directors or high officers. It is also a good practice if cheques involving heavy amounts are signed by more than one responsible person.

(8) Confirmation of accounts with the creditors should be made through direct correspondence.

(9) Bank Reconciliation Statement should be prepared to reconcile bank and cash balances from time to time.

(10) Petty cash payment should be kept under proper control.

(11) A proper system should be in operation for the payment of wages.

(d) Petty Expenses

(1) The petty cash book should be kept on the imprest system. The necessary amount, which could be as low as possible, should be handed over to the petty cashier every month.

(2) Petty cash expenses should be entered on the basis of proper vouchers. The item for which vouchers cannot be had should be supported by statements signed by some responsible officer.

(3) All vouchers should be serially filed.

(4) The cashier should check the petty cash at frequent intervals.

(5) The petty cashier is charged with making petty cash payments and maintaining records thereof. Hence, he should not be allowed to lend money or incur any other type of expenditure. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Internal Check as regards Wages

In businesses where the number of workers is large, the work connected with the maintenance of wage records and payment of wages is of much importance. There are many possibilities of misappropriation of cash under this item. Unless there is an efficient system of internal check in operation as regards wages, the auditor cannot satisfactorily check entries connected with wages.

The auditor should at the first instance satisfy himself with the arrangement for the preparation of Wage Sheets. If there are some shortcomings, he must disown his liability. The following may be the chances of errors or fraud:

(1) The time records may be incorrect and incomplete and as a result, workers get wages for the period for which they have not worked.

(2) Similarly, the piece-wage records may be incomplete and incorrect and workers may get wages for the work which they have not done.

(3) Chances of clerical errors in the preparation of Wage Sheets.

(4) Inclusion of fictitious names of ‘dummy’ or ‘ghost’ workers in the Wage Sheets.

The whole system of internal check may be kept as given:

1. Maintenance of Wage Records

(a) Time Records. Wages may be paid to the workers according to the time spent by them. It is necessary that correct records should be maintained with regard to the time devoted by them in the factory.

Some general rules may be as follows:

(i) A separate wage department should be set-up under a responsible officer.

(ii) For each worker, a Record Card should be used and on this card. details about him should be shown.

(iii) Rates of wages and alterations, if any, should all be in writing and duly authorized.

(iv) For recording time, different devices may be used.

Time Recording Clock. When a worker enters the gate of a factory, he puts his card in the slot of the clock. The date and time of his entry are recorded on this card. Similarly, he gets the time and date recorded on the card when he leaves the factory. Thus, the card provides a correct and clear record of the time spent by a worker in the factory.

Use of Tokens. This is not a much popular device for maintaining time records. Under this system, a token, duly numbered is issued to each worker who keeps it hanging on the board meant for the purpose when he enters the factory and the time-keeper records his attendance in the attendance register. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Attendance Cards. In some business houses, attendance cards are used. When a worker enters the works, he drops his card in the box meant for the purpose and the gate-keeper records his attendance in the Attendance Register. This can also be done without using Attendance Cards. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Similarly, the time of entering or leaving the works is also recorded usually by the foreman of the department in which a worker works. These two records, i.e., the one maintained by the gate-keeper and the other kept by the foreman, are then compared. Thus, errors and fraud can be avoided but all this should be done under proper supervision and control.

Biometric device of recording attendance is the latest device for recording time of arrival and departure of employees. In this system the employee has only to place his finger on a glass screen and his time of arrival and departure gets recorded in the computer.

(b) Piece-work Records. When wages are paid according to the actual work performed by a worker, there should be a good system to maintain records. A card known as Job Card or piece-worker’s card is given to each such worker. The amount of work done by a worker is recorded on these cards which is signed by the worker, foreman of the department and, where possible, by the stock-keeper to whom the goods produced are to be delivered. Sometimes, in place of the foreman, the viewer has to sign the card.

In certain organizations a separate register is kept to maintain the records along with the use of Job Cards.

(c) Overtime Records. No worker should be allowed to work overtime unless he is properly authorized to do so by some responsible officer. An overtime slip is issued to each worker on which details about his name, address, duty, etc. are given. When he works overtime, it should be recorded on the overtime slip. It should be noted that overtime records should be separately maintained and passed by the foreman and also by the works manager. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(d) Pass-out Records. Sometimes, a worker goes out of the factory on his personal work during working hours. He should not be allowed to go out without the permission of the foreman or of the works manager. Two copies of pass-out slips may be prepared-one for the gate-keeper and the other for the foreman and the second one should be sent to the wages department for record. The nature of work should clearly be mentioned in the slip. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

2. Preparation of Wage Sheets

How to prepare Wage Sheets is another important work connected with wages. As quoted already, information regarding attendance, etc., can be had from the Attendance Register, Job Cards or Piece-worker’s Cards, Piece-work Register, Overtime Slip, pass-out slips, etc., and on their basis, Wage Sheets can be prepared. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

The work entailed in the preparation of Wage Sheets should normally be divided four portions to be done by clerks in the wage office or department, e.g,

(1) Two Clerks to examine the time and piece-wage records, overtime records, statements received from the foreman, etc., so that irregularities if any, may be removed. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(2) Third Clerk to fill in the names and addresses of workers, rates of wages, attendance, gross amount of wages, etc.

(3) Fourth Clerk to check the work done already and to calculate the net amount of wages after making the deductions pertaining to rent, tax, insurance, etc.

(4) Fifth Clerk to check the whole work thoroughly.

(5) All these clerks should perform their jobs and sign the sheets which should be certified as correct and signed by some responsible officer, such as Director, Manager, etc.

(6) Such Wage Sheets can be prepared for both types of wages, time as well a piece-wages.

The gross wage consists of the basic pay, piece-work or other bonus and overtime. It is to be noted in particular:

(1) The basic wage should be checked for a number of employees several times each year by verifying the number of hours actually worked and calculating them on the basic rate.

(2) Overtime payments should be carefully attended to. Such payments should be authorized by the head of the department and be duly supported by relevant overtime slips. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(3) The wage sheets are generally prepared as individual pay rolls but if there are group pay rolls in which earnings depend on the group productive performance, such sheets should be signed by the foremen or the charge head of the department.

3. Payment of Wages

The Wage Sheets should then be passed over to the Cashier who has not been associated with their preparation. The Cashier should withdraw the necessary sum as shown by the Wage Sheets under the column ‘Net Wages’. After the amount has been withdrawn, the following procedure may be adopted to avoid a fraud or irregularity in payment:

(1) The clerks who were associated with the preparation of Wage Sheets should not take part in the payment of wages to avoid collusion between two or more persons. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(2) The use of envelopes (i.e., pay packets) indicating the names of workers and amounts contained therein can be a suitable device for making payments.

(3) All workers who are to receive wages should be present at the time of payment.

(4) The foreman of each department should be present at the time of payment to prevent any sort of impersonation for workers who are absent.

(5) Proper precaution should be taken to make payments to workers who become absent at this time. In such cases, payment may be made on the basis of a letter of authority brought by a worker who is present.

(6) Generally, it is not possible to obtain the signature of each worker on the Wage Sheets. Hence, the payment should be attested by those present, e.g., the foreman, the works manager and the cashier.

(7) The payment of wages to casual labour present problems. A separate list of such workers should be prepared and the payment should be made in the presence of a responsible officer. To avoid fraud, the officer employing casual labour should not be connected with the payment of wages. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Internal Check as regards Purchases

A separate department for credit purchases is usually maintained in business houses. This efficiency of such a department depends upon its policy of purchasing best goods at the cheapest price. The Purchases Department should function separately and its work should be sub-divided between small departments, each of which should be headed by a responsible officer. To facilitate its operation, the whole work connected with purchases may be divided into five heads:

1. Assessment of Requirements,
2. Enquiry
3. Placing Orders,
4. Receipt of Goods, and
5. Recording and Making Payments.

1. Assessment of Requirements. This is the first important job to assess requirements of goods. Requisition Books should be issued to the various departments of a concern. The head of the department which is in need of goods should fill in a requisition slip duly signed and then send it to the Purchase Department. The details about the quantity, quality, the price (if it can be quoted) and the time by which goods must be supplied, should be entered in the requisition slip.

On receipt of similar requisition slips from the various departments, the Purchase Department can know exactly the volume of requirements of different goods to be purchased. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

2. Enquiry. Then, the Purchase Department makes an enquiry about the terms and conditions of purchases from different suppliers. For this, tenders or quotations are invited from them. The lowest tender should be accepted, and accordingly, a decision be taken by an officer or by a sub-committee of the Purchase Department if the amount of purchase is heavy and involves a huge expenditure.

3. Placing Orders. The Purchase Department places orders which should be recorded in the Purchases Order Book. Three copies of such orders should be prepared-one each for the supplier, the Store and the Purchase Department itself. A responsible officer should sign the order. After putting the number of the order on the requisition slip concerned and vice-versa, such requisition slip should then be filed in the Purchase Department. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

4. Receipt of Goods. On receipt of goods, the gate-keeper should enter the particulars of all goods received in the Goods Inward Book after having checked them properly. The goods then should be sent to the Store where they should be carefully preserved. The Stores Department should prepare a ‘Goods Received Note’ and send a copy thereof to the Purchase Department, the Accounts Department and the Production Control Department. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

The goods received note should be prepared with the following details:

1. The date when the goods were received.
2. The name of the supplier.
3. The advice note number.
4. The description and code number of goods.
5. The quantity advised.
6. The quantity received.

Besides, if a part of the goods has been rejected, the goods received note should contain the following additional information :

7. The quantity rejected.
8. The rejection note number.
9. The quantity accepted into store.
10. Signatures of employees concerned with having entered items on it.

5. Recording and Making Payments. Lastly, the Purchase Department should scrutinize the requisition slip, the order, the goods received note and the invoice. Invoices are usually checked by a separate person known as the Invoice Clerk. The number of order should be entered on the invoice and so an. All these documents should be marked as checked and signed, if necessary.

The invoice should then be handed over to the Accounts Department where steps will be taken to make payments. It is to be seen that the invoices when checked have been properly stamped. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

The Accounts Department should enter the invoice in the Purchases Book. If the goods are defective partially or wholly, the invoice should not be passed in such cases. It is, however, for the Purchase Department to make correspondence with the suppliers about the return of such goods which are defective. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

The aim of an efficient system of internal check is to prevent the following errors and fraud in connection with purchases:

(1) Fictitious purchases may be recorded in Purchases Book so that payments withdrawn from the business may be misappropriated.

(2) The same invoice may be recorded twice so that double payment made may be misappropriated.

(3) Goods purchased may not be entered in that period so as to inflate profits.

(4) Goods not received in one period may be entered as purchases so as to show profits less than the actual.

Internal Check as regards Purchases Returns

(1) There should be a proper system of control in regard to purchases returns so that full credit may be ensured for all goods returned.

(2) A statement should be prepared by the Stores Department for all goods returned.

(3) The Purchase Department should check such goods and prepare an advice note which should be sent to the Accounts Department.

(4) The Accounts Department should further examine the advice note with original invoice and enter it in the Purchases Returns Book.

(5) All goods returned should be entered in the Goods Outward Book.

(6) A credit note should be obtained from the supplier, i.e., the creditor for each return of goods which should then be attached to the invoice if it is not yet paid.

It should be remembered that, if the system of internal check is not good, a credit note so received may be suppressed and the corresponding cash payment misappropriated. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Internal Check as regards Sales

The whole system of credit sales should be kept under proper control and supervision There should be a separate Sales Department for the purpose. The Sales Department should have charge of receiving orders, supplying goods to customers, preparing invoices and maintaining accounts of goods supplied. The Sales Department should function as a composite of some sub-departments. The procedure of its working may be like this:

(1) All orders received should be entered in the Orders Received Book and properly numbered. The original order or its copy should then be sent to the Despatch Department. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(2) The Despatch Department should take steps to pack the goods as per the order It should prepare a statement showing the goods packed.

(3) The statement so prepared by the Despatch Department should be sent to the Counting House where the list of goods should be checked and rates, etc. entered in The invoice will then be prepared in triplicate by means of carbon papers.

(4) Two copies may be sent to the customers who will then return one of them after signing it in token of having received the goods. Thus, it will serve the purpose of delivery note. The third copy will be retained for further reference.

(5) The Accounts Department should prepare documents like Railway Receipt, Bill of Lading, etc.

(6) All goods supplied on order should be entered in the Goods Outward Book which should be checked at frequent intervals with the Orders Received Book. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(7) The Invoice Book should also be compared with the Goods Outward Book and the Orders Received Book.

(8) The Sales Book should be written up with the help of the copies of invoices.

The following types of fraud may be committed in connection with sales:

(1) Sales may be omitted from recording in the Sales Book.

(2) Inflation of sales in the Sales Book in any of the following ways:

(a) Recording fictitious sales;

(b) Treating goods as sales sent on approval or by V.P.P., but not yet accepted or sent on consignment but not yet sold by the consignee;

(c) Treating sales of fixed assets as sales of goods:

(d) Entering sales of the next year as sales of the current year; and

(e) Treating sales of consignment inward as own sales.

Internal Check as regards Sales Returns

(1) All goods returned by customers should be recorded in the Goods Inward Book.

(2) The statement of goods so returned when received should be sent to the Despatch Department which should check it and, then send it to the Accounts Department. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(3) A credit note should then be prepared and signed by a responsible official before it is sent to the customer.

(4) The Sales Returns Book should be written up with the help of the copies of credit notes issued. The number and date of credit notes should also be entered in this book. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

The aim of such a system is to prevent an improper credit being passed in the books for fictitious returns and to avoid fraud involved in misappropriating equivalent cash. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

Internal Check as regards Stores

The Stores Department has charge of preserving and issuing stores to the different departments. If the stores are not kept under proper control and a proper system of internal check is not adopted, chances of fraud arise. Besides this, the maintenance of stores and purchasing functions should be separated. The chances of fraud and misappropriation would be more if both these functions are performed by the same person. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

1. Receipt of Stores. On receiving stores, the Stores Department will prepare a ‘Goods Received Note’ in triplicate-one for the Purchases Department, second for the Accountant and third for the Stores Department itself. All details about stores should be noted on the note. The stores should be properly checked after their receipt.
2. Preservation of Stores. The stores should be properly preserved before they are issued. The following points may be noted:

(i) A separate place should be earmarked for each type of stores.

(ii) A system of proper numbering should be adopted for all stores and places where they are to be kept.

(iii) The use of bin cards should be made for preserving stores. Such bin cards should contain details about stores and have three columns for receipt, issue and balance of stores. Such bin cards may be kept hanging on the places where stores are preserved.

(iv) The stores should frequently be counted and checked by a responsible official who should also compare the bin cards with the stores ledger. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(v) Stock-taking should be conducted at the end of a year or at regular or irregular intervals during the year, if necessary.

(vi) Difference, if any, between the actual stock and the balance of stock as shown by the books should be adjusted or written-off after getting the sanction of the appropriate authority. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

3. Issue of Stores.

For issue of stores, an organized procedure may be like this:

(i) The issue of stores should be made only against the requisition slip received from a department whose head should sign it.

(ii) After issue, the requisition slip should be sent to the accountant who will make entries for the issue.

(iii) The requisition slips used by the departments should be of different colours.

(iv) Only a responsible clerk should have charge of issue of stores so that in case of fraud, he may be held liable.

(v) The Stores Officer should be seated near the gate so that all issues can be made under his supervision and control.

(vi) A system of permits should be in operation for those who go out of the Stores Department. The permits should be entered in the Gate Book. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(vii) Whenever stores are returned by some department, a Stores Returned Note should be prepared and the return should be recorded in the Gate Book. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(viii) Stores returned should be entered in the bin cards.

4. Recording

(i) A separate accountant should maintain records of stores.

(ii) If the stores are of a small variety, ledgers may be maintained. But if there is a large variety of stores used in the business, stores record cards may be used. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(iii) The stores record cards may be of different size and colour.

(iv) The details in the stores record cards may be written-up with the help of goods received notes, requisition slips, goods returned notes, etc. (BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material)

(v) The bin cards should be checked and compared from time to time with stores record cards.

BCom 3rd Year Internal Control and Internal Check in Auditing Notes Study Material

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