AUDIT PROGRAMME

PREPARATION BEFORE THE COMMENCEMENT OF AUDIT

Proper 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 Duties 2. Procure Engagement Letter 3. Knowledge about business 4. Knowledge of the Accounting System 5. List of Principal Officers 6. 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 be continuous throughout the course of audit assignment. Statement of Standard Auditing Practices (SAP) 1 renamed 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 the goals of: (a) developing time budgets, (b) assigning audit staff personnel, (c) scheduling dates for interim and year end audit procedures.

Developing an Audit Plan

In 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.

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 Plan

(a) (b) (c) (d) (e) Adequate audit planning helps to: ensure that appropriate attention is devoted to important areas of the audit ; ensure that potential problems are promptly identified ; ensure that the work is completed expeditiously ; utilize the assistants properly ; and 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 letter or 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 a good 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 setting forth 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 arranging and 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 of documentation. 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

(b) suggestions to be made to the client.

SPECIMEN OF AUDIT PROGRAMME

Audit 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 of the 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
Boug ht ledg er vouc hers Boug ht ledg er vouc hers Bou ght ledg er cash posti ngs Sale s Book s Addit ions & Posti ng Stoc k Shee t Chec ked Boug ht ledge r Bala nced Chec ked Sale s ledge r Bala nced Chec ked Gen eral ledg er Chec ked Profit & Loss A/c Chec ked Bala nce Shee t Chec ked

YEAR MON TH Janua ry

Cash Bank Bala nced

Bank book bala nced

Cas h book vouc hed

Petty Cash Vouc hed

Retu rns book Posti ngs

Journ al Exam ined

Trial Bala nced Chec ked

Febru ary March April May June July

Augus t Septe mber Octob er

Nove mber

Dece mber

Advantages of Audit Programme

Some of the important advantages of conducting an audit programme according to predetermined audit programme are: 1. The auditor can be certain that the audit staff will cover the whole of the ground and if, in future years, 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 are being 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 Programme

An 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 suggests the 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 should not 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 Programmes

Broadly, there are two types of audit programmes, namely: 1. Fixed Audit Programme 2. Flexible Audit Programme 1. 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 procedure to be followed. It prefers to give an outline of the scope, nature and limitations of the audit assignment.

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 such difficulty 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 of the 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 and extent of audit can also force a modification in the audit programme.

AUDIT- NOTE BOOK

Audit 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 Auditors Report. 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 performed by 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:

1. 2. 3. 4. 5. 6.

It ensures uniformity and helps in knowing the amount of work performed. Important matters relating to the audit work may be easily recalled. Facilitates the preparation of the audit report. In case the assistant incharge is changed, no difficulty is faced in continuing the incomplete work. The responsibility for errors undetected can be fixed on clerk concerned. The audit note book shows the extent of interest and pains taken by the audit staff. It helps in their appraisal. 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 its limitation.

Audit working papers

Audit working papers are those papers which contain essential facts about accounts under audit. Hence it 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 in connection 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 forming an 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 staff should 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

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 may be 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 procedures performed 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 the audit 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 and sufficient 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 and understandable 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 tick marks 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.

Illustrative Audit Marking: Dr.

Date 30.3.07 30.3.07 31.3.07 31.3.07 Particulars To balance b/d To Sales (Cash Rec. No. 223) To Sale (Cash Rec. No. 224) To Interest

Cash Book ABC Ltd

Amount Date (Rs.) 14500 30.3.07 30.3.07 30,000 31.3.07 34,000 1,400 31.3.07 79,900\ Particulars By Wages By Purchases By Rent By Stationery By balance c/d Amount (Rs.) 17,500 26,800 15,200 2,100 17,900 79,900\

Cr.

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 any charges of negligence are leveled against him. (4) A transaction or a document which has already been examined by the auditor cannot be produced before him 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.

(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 financial statements 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 checked and, 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. The justification 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 control system. 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 programme of 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 into consideration 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 higher definitely 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 Sample

Block 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 being included. It is not a true representative of the population in statistical sense.

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 the process, 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 Institute of 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 and select 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 Staff

For 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 nor overstaffing. 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.

f. g. h. 3. a. b. c. 4. a. b.

To verify the basis of valuation of assets and contingent liabilities. To assess the capital structure assets and liabilities. To review whether legal provisions affecting accounts are met. Junior Audit Assistants. They perform the following duties: To carry out the instructions given by the seniors. To carry out checking of schedules and reconcile the statements. To examine the supporting data, documents and papers. Audit Clerks. They perform the following duties: Routine checking and comparison work. Checking of posting, casting and carry forward.

Internal Control:
Definition: Internal Control comprises the whole system of controls, financial and otherwise, establish by the management in the conduct of the business. It includes internal check, internal audit and various other forms of control. The fundamental objective of internal control is to safeguards the assets of the company against losses avoid frauds, errors, wastes and eliminate inefficiency. It helps the management in measuring the implementation of business policies as well as ensuring maximum accuracy of all data and statements. Internal control system is the whole management control system meant to safeguard the assets of the organization and to ensure efficient and effective routing operations of the ---------- price. The term internal control has been defined as the whole system of controls financial or otherwise, establish by the management in order to carry on the business of the company in an orderly manner, safeguards its assets and secure as per as the accuracy and reliability of its records internal control means accounting and operational controls. Operational control means quality control, budgetary control, internal checks, internal audit etc. It means a number of controls and checks on various activities of business. There are 2 types of internal controls: a) Accounting Control: - The plan of organization and the procedure and the records that is concerned with and directly related to the safeguarding of assets and reliability of financial records. Accounting and financial controls includes standard costing, control accounts, bank reconciliation, self balancing ledgers and internal auditing. Such control ensures accuracy reliability of financial records, prescribed managerial policies and safe custody over assets. b) Administrative Control: - This control is concerned with operational efficiency. They may 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 and authenticity of financial statement. He may not be expected sometimes to review the administrative control because they only have a remote relationship with financial records. Thus in audit an auditor is more concerned with financial control than administration control.

Objectives

The objectives of internal control are determined by the management keeping in view the specific requirements of an enterprise such as nature and size of the organization, scale of its operations and degree of ------- of management etc. The SAP [Standard Auditing Practices (6)] states the following objectives of internal controls relating 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 the preparation 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 purposes 1) 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 business conditions. The benefits which the internal control system offered are: a) Providing reliable data: Business decision required accurate information to run the business 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 adequate controls. Ex: - accounts receivable, important documents [confidential government contract] and records [ledger and journal]. These are non physical assets. The safeguarding of certain assets and records has become increasingly important because of 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 to prevent unnecessary duplication of efforts, protect against waste in all aspects of the business and discourage other types of inefficient use of resources. d) To encourage adherence to prescribed policies: The system of internal control is meant to provide reasonable assures that procedures and rules are followed by the company personnel. 2) From the auditor points of view: The study and evaluation of the client system of internal control is important to auditors. The auditor must have a thorough understanding of the system. There is a difference between the systems that is supposed to be in operation and the one actually being used. Simply by asking certain questions reviewing the organization chart and studying few procedure manuals to obtain an understanding of the system is not sufficient. To obtain the adequate understanding the system must also be tested. There are two ways to study the system. a) To determine whether an audit is possible; if possible, then b) To determine the scope of audit.

Principles of internal control

a) Competent and trustworthy personnel: Personnel are the most important element of any system of internal control. If employees are competent and trustworthy then reliable financial statements can still result. b) Records, financial and other organization plans: Documents perform the function of transmitting information throughout the client organization and between different organizations. The document must be adequate to provide reasonable assurance that all assets are properly controlled and all transactions are correctly recorded. c) Segregation of duties: For the prevention of both intentional and unintentional errors following types of segregation of duties should be taken care of. (i) Separation of operational responsibility from record-keeping responsibility: If each department or division in an organization is responsible for preparing its own records and reports, there would be a tendency to change the results to improve its reported performance. So in order to ensure unbiased information, record keeping is sometimes includes 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 separate persons. When one person performs both functions, there is a risk of his disposing of the asset for personal gain and adjusting the records to relieve him of responsibility for the asset. d) Supervision: Directors should review the companys financial operations and positions at regular and frequent intervals. Comparison with result for previous periods indicates differences that calls for further examinations where budgetary controls is used attention will be drawn to material variances and explanation require for time to time special reviews are particular items such as stock, wages department, etc., should be undertaken. 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 of the General authorization is the issue of fixed price list for the sale of product. Example of the Specific Authorization is sale transaction by the sales manager for the car of a company. f) Sound practices: Sound practices of administration require establish procedures, policies and delegations of responsibility that helps in avoiding questions, unsatisfied performance etc. g) Internal audit: Internal audit is a part of the whole system of internal control. It is the examination of accounts of a business concern by its employees specially appointed for the purpose. It is an independent appraisal of activity within an organization for the review of accounting, financial and other business practices. h) Arithmetic and accounting controls: Charts of accounts that is balance sheet and income statement is an important control because it provides the frame work for determining the information presented to management and other financial statement users. Charts of accounts and financial statements should be prepared in accordance with the generally accepted accounting principle.

Limitations:

Standard Auditing Practices 6 issued by the Institute of Chartered Accounting of India highlights certain limitations of internal control these include the following: 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 control system. 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 be summarized 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 down for acquisition handling and accounting of goods purchased vis-a-vis for recording and handling of goods sold. 4) Control over employees remuneration: This area concerns itself with the preparation and maintenance of records for remuneration to employees; methods of payments etc. proper control must be exercised over this aspect so as to avoid misappropriation of cash payment to be made to the employees. 5) Capital expenditure control: The expenditure on capital assets must be kept under proper control. It should properly sanctioned and used for the purposes intended for feed back reports must be prepared and submitted to the management in this regard. 6) Others: These include a) Maintenance of staff relationship b) Stock maintenances and c) Control over investments.

Types of Internal Control

(i) (ii) Physical Controls, Administrative Controls,

(iii)

Accounting Controls. (i)

1.

2. 3. 4. 5.

6.

Physical Control: It is concerned with protective equipments, for safeguarding the business assets, like use of security arrangements for cash and It is concerned with protective equipments, for safeguarding the business assets, like use of security arrangements for cash and It is concerned with protective equipments, for safeguarding the business assets, like use of security arrangements for cash and valuable assets, iron safe for cashier, etc., Such type of controls ensures that only authorized officers are permitted to access cash, assets and other records. (ii) Administrative Control: It is concerned with assigning of powers and job descriptions of key personnels, establishment of standards for operating procedures, development of organizational charts etc. The procedures are to be established for managements approval and authorization of transactions. (iii) Accounting Controls: These controls are related to accounting system used in the organization. The main objectives are all transactions are executed as per managements authorization, recorded promptly during the period to which these are related, assets are safeguarded from the unauthorized use. Various policies and procedures determine accounting controls in an organization: Various parts of recording a transaction is allocated in such a way that accuracy or correctness of work of one person is independently checked by another person, it is known as internal check. It minimizes occurrence of frauds or errors and these are detected in the earliest whenever these take place. 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. To execute various types of transaction, authority is delegated at various levels and to specified persons as per the conditions prevailing in an organization. The power of authorization is general or specific to a single transaction. The transactions are to be recorded with correct amounts and in the period in which these are executed ad then classified in the proper account. It is to be ensured that accountability for all the assets is maintained and sufficient control measures are provided for safeguarding of assets from unauthorized access, disposal are use. Accountability is a continuous process which starts from the purchase of assets and ends with their disposal. 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 certain rules and procedures should be adopted by the business in spite of the fact that he has no authority to recommend or prescribe such rules. The whole purpose of the study of internal control is to decide upon the degree of reliance on the system to unable auditor

to assess extent to which he should applied various test to determine the adequacy of internal control system. The ICAI as recommended that the auditor should critically review 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 of an 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 a

serious of questions which are prepared by the auditor to test the adequacy or otherwise of the system of internal control. ICQ contains questions which are consider important for determining the adequacy of the system such questionnaires may be used of all the client, 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 undesirable practices and a yes would indicate satisfactory internal control. The out come depicted by the ICQ will definitely help the auditor to evaluate the adequacy of the internal control. An Illustrative questionnaire for Petty Cash Funds Particulars Auditors Answer Verification Tests Yes Name & Date Observations No 1. Is concerned system in use? 2. Is the responsibility of each fund vested in one person only? 3. Is the amount of the fund restricted so as to require reimbursement at relatively short intervals? 4. (a) Has a maximum figure for individual payments from the fund have been established? (b) If so, state maximum figure- Rs. 5. Are payees required to sign vouchers for all disbursements? 6. (a) Is the cashing of personal cheques prohibited? (b) If not, are such cheques re-cashed at bank or included as vouchers supporting request for reimbursement? State procedure. 7. (a) Are vouchers and supporting documents checked at the time of reimbursement by

a responsible employee? (b) Does that employee verify the unexpended balance of fund? 8. Are the amounts of the vouchers spelled out in words as well as written in numerals? 9. Are vouchers marked so as to preclude their reuse? 10. Describe the operation of the fund if the same is part represented by bank account? Originally prepared by: Reviewed by subsequent Examination by: Name . Date Comment .. ..

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 working papers. 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 of check without incurring additional financial burden. Method of internal check has been devised to meet this requirement. It is an arrangement of the duties of members of staff in such a manner that the work performed by one person is automatically and independently checked by the other. Each employee operates independently but it does not involve duplicating the work of other. Frauds, errors or irregularities are prevented there is a collusion among them. Internal check means the check imposed on day-to-day transactions. It ensures accuracy. Internal check includes matters such as allocation of authorities, division of work and proper methods of recording transactions etc. It is a part of overall internal control system and operates as a built in device so far as staff organization and job allocation aspects of control system are concerned.

Definition: Internal check means practically a continuous internal audit carried on by the staff itself, by means of which the work of each individual is independently checked by other members of the staff. Features of Internal Check: 1) The work is divided in such a way that all the duties are assigned to different clerks. 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 allowed either to deliver the goods to the customer or receive money from him. The cashier will receive the cash, the gatekeeper i.e., good clerk will deliver the goods and the accountant will make entry in the cash book.

Objectives of Internal Check

1. 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 the principle of division of labour. 8. To detects errors and frauds easily if it is committed, because in an efficient internal check system, there is a provision for independent checking.

Principles of Internal Check

1. Responsibility: Responsibility of each individual must be properly defined and fixed. The work of the business should be allocated amongst various clerks in such a manner that their duties and responsibilities are clearly divided. 2. Completion: The work should be divided in such a way that no single person is allowed 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 person having custody of assets to have access to the books of account. A system of transfer or rotation of employees from one seat of work to another must be followed by the business. 4. Automatic check: A good system of internal check must provide for an automatic checking of the work of one clerk by the other.

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 the prescribed 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 to time to introduce improvements.

Advantages of Internal Check

1. For the Business (a) Proper division of work: Internal check entails a proper and rational distribution of work among the members of staff of the enterprise keeping in view their individual qualifications, experience and area of specialization. (b) Detection of errors and frauds: Since no individual worker is allowed to handle a job 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 of errors and frauds and the possibilities of the commission of errors and frauds can be minimized. (c) Increased efficiency coupled with economy: A good system of internal check increases the efficiency of work among the staff and leads to overall economy. (d) Moral check: Knowledge of subsequent checking of each employees work by others, 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 Balance Sheet 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 the transactions. He may apply a few tests here and there and can relieve himself from detailed checking. 3. For the Owner (a) Accuracy of the accounts can be relied upon: If there is a good system of internal check the owner of the concern may rely upon the genuineness and accuracy of the accounts. (b) Increase in profits: Overall efficiency and economy in operations result in more profits 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 the disadvantages 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 of work and do not care about quality.

3. Carelessness among high officials: Carelessness among the officials increases as they 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 organized system of internal check there will be confusion and disorder in the working of the business. 5. Risky for an auditor: If the auditor does not apply tests and procedures of his own and if he relies on the output of the system his work cannot be free from irregularities if the system itself proves to be defective.

Internal Check and Auditor

System 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 an auditor can place a test checking. A good system of internal check may relieve an auditor of a large part of detailed checking and the time saved can be used for other important matters. But, wherever the system is found defective, it is the duty of the auditor 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 a good system of internal check, his work, but not the responsibility, is reduced. Statutory auditor cannot be relieved of his liability. No doubt a good and efficient system of internal check is very helpful to the auditor but it does not relieve him office contractual responsibilities. So, the extent to which he should rely upon the system of internal check will depend upon his skill, experience and training.

Internal Check With Regard To Purchases

1. Requisition: The procedure for issuing purchase requisitions should be specified. The department requiring supplies must send a requisition to the purchase department. The head 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 clearly mentioned and signed by the concerned person. Requisition books must be kept by each section of the organization. Requisition duplicate must also be prepared by the head of the department. 2. Enquiry: Purchases department makes an enquiry about the terms and conditions of purchases from suppliers. For this purpose tenders are generally invited from different suppliers. These tenders must be opened and approved by senior officer. 3. Purchase Order: After deciding the approved supplier, the purchase department will prepare four copies of purchase orders. One copy will send to the vendor, second to the stores, third to the accounting department and fourth will be with the purchase department itself. The purchase order should be carefully written, must be approved and authorized by the head of the purchase department or any officer authorized to do the concerned work. 4. Receipt of Goods: On receipt of the goods, the purchase department should properly inspect them on the basis of quantity, quality and condition and must compare

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 will also 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 purchase order and should also verify the calculations. The accounting department should compare the invoice with the incoming inspection report and it should enter the invoice in the purchase book. Only responsible officer should draw a cheque for the payment of invoice. At the time of signing a signing authority must verify the correct payment is made. If some portion of the goods is returned to the suppliers, a proper entry must be made in the purchase return book. A credit note to that effect must be obtained from the 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 Sales

Sales are the most important source of revenue in a business. Therefore the system of internal check regarding sales should be extremely efficient otherwise the following 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 be kept under the proper control and supervision. The system of internal check regarding sales should take care of the following: 1. On receipt of the order, it should be numbered and preserved in Orders Received Book with full particulars. A confirmatory written order must be obtained for verbal orders. 2. The Dispatch Department should be given a copy of the order with necessary particulars. 3. Authority to examine and record the dispatch of goods should rest in persons other than 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 by means of carbon papers. 6. A responsible official should check the invoice, particularly the rates charged and calculations made. He should see that the terms and conditions in the order have been duly followed and there is no room for complaint by the buyer. He should then put his initials on the invoice.

7. With the help of the copy of invoices, entries should be made in the Sales Day Book. 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 goods returned by the customers. Credit notes should be prepared and should be duly checked and initialed by the responsible official. 11. With the help of credit notes, records should be made in the Sales Return Book.

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 stores must be given careful attention. The following general rules may be followed to ensure effective check over stores. 1) Location of the store: Stock should be located at a convenient place. It should have proper storage facilities so that goods may not be misplaced, misused or wasted. 2) Receipt of Stock: On receiving stores, the Stores Department will prepare a Goods 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 where stores are preserved. Stores inventory software may be used on computer for items stored. c) Stock-taking should be carried out at regular intervals. It should be done by an 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 without formal requisition or demand note from some authority. Only authorized person should 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 made under his supervision. For the materials or stores returned from the concerned department material return note should be prepared. In the same way material transfer from one department or job to another. The gate keeper should instruct

not to allow any material out of the factory without necessary permit from the store keeper or Invoice of the Sales Department. 5) Recording: After the issue of materials from the stores, the Store Issue Requisition 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 Assets

Fixed 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 of sale e.g. Land, buildings, furniture and fixtures, plant & machinery etc. the expenditure on fixed assets is term of capital expenditure. The purchase of fixed assets may be for the expansion of the project or for a new project or it may be normal addition to the fixed assets. The internal checks in related to fixed assets are 1. 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 between capital 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 be mentioned. Management should also ensure that all the fixed assets are verified physically from time to time. 6. Perfect arrangement should be made to ensure that fixed assets are properly maintained and applied in the service of the company. 7. Where fixed assets are transferred between branches or members of the same group, proper arrangements in respect of their pricing, depreciation and accounting should be made. 8. Depreciation rates are to be authorized to some responsible person for checking the necessary calculations. 9. It should be seen that these fixed assets are adequately insured.

Internal Check with regard to Investments

1) Who is to be responsible for authorizing purchase and sales at investments and how such authorization is to be evidenced? Those responsible person have no concern with cash are the custody of documents of title. 2) Next question arises what arrangements should be made for maintaining a detailed investment register and how should be responsible for verifying it periodically. 3) The documents of title should be kept in safe custody, preferably under the joint control of two persons.

4) Arrangements should exist for checking brokers notes against purchases or sales authorization and it should be ensure the charges are correctly calculated. 5) It should be ensured that bonus, capital repayments and dividends or interest are received 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 are in the name of the company.

Internal Check regard to Wages

The system of internal check for wages should be devised in a careful and planned way, especially in manufacturing concerns. This is because particularly in large manufacturing concerns, employing large number of workers, possibility of frauds also there. 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 should be supervised by some responsible officer. Objectives 1. 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 Records 1. 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 record book. Ex: time recording clock, attendance cards. 2. Piece work Records: Where the workers are paid on the basis of piece wage system, proper books for actual work done by worker should be recorded on this card which should be sign by the head of the department. Store keeper to whom the goods manufactures are hand over should also signed this card. 3. Overtime Records: Ordinarily overtime work should not be encouraged. No worker should be allowed to work overtime unless he is authorized to do so by the authorized officer. Overtime slips should be sanctioned in advances. Such slips should bear the name and number of workers, overtime put in and the job or the department in which he is engaged. At the weekend such slip should send to the time keeper who will forward them to wage officer. 4. Pass-out Records: The worker should not be allowed to live before the schedule time. But if sometimes, a worker wants to go out of the factory on his personal work during working hours he should not be obtained permission for authorized officer who should issued pass-out slips. Such slips are handed over to gatekeeper. The wage office should also be given copy of such slips.

5. Preparation of Wage Sheets: It should be done by a separate department. This work should be done by different clerks to minimize the irregularities. Information regarding attendance can be obtained from attendance register, job cards, piece work register, overtime slips, pass out slips, etc. The essential particulars should be enter in wage slips a. Name b. Number allotted to him and his address c. Total time worked d. Details of work e. Rate f. Total amount of wages g. Bonus h. Overtime i. Deductions j. Net amount payable Internal Check with regard to Payments 1. 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 of responsible officer. The names of dummy workers can be figure in the wage list if necessary 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 Transactions

The 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 be understood 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 responsible person. 2. All cheques received should be marked not negotiable or account payee only.

3. All the receipts in cash or cheque must be banked daily. This job should be done by the person who is not responsible for preparing pay-in-slips. 4. From time to time bank reconciliation statement should be prepared to reconcile the 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 be kept 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 be checked. 5. The names, numbers and status of the person authorized to signed cheques and limitations as to there authority must be decided. 6. All cheques and bills should be thoroughly scrutinized and signed by the proper authority, safeguard have to be adopted if cheques are signed mechanically or carry printed signatures. 7. Confirmation of accounts with creditors should be made to maintained up to date records. 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 of cheques for use and their safe keeping. Cash Sales In 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 his counter. b. Each salesman is given a separate sales memo book, such books are of different 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 for preparing sales summary at the end of the day. e. Payment should be made at the cash counter. The cashier after receiving the price of goods from the customers should have one copy stamped as cash paid to the customer, two copies must be retained by the cashier.

f. The cashier should record the days total sales in cash sales register to know the total cash received at the end of the day. g. Every salesman should also prepare a summary sheet to know the total sales of 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 be carefully 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 be issued by the Head Office. b. Agents should not be allowed to deduct their commission or to meet out any expenditure incurred in commission with the sales out of the sales proceeds collected 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 their debts. d. The agent should be asked to submit a periodical statement of sales and this should be thoroughly examined by responsible officers. e. The agent should not be allowed to work on a long term basis in one area but should be transferred to other areas. It will increase his efficiency and minimized the possibility of frauds.