Explain the term internal check and state its objects and auditors duty in regard there of? | ADNAN

Internal check:

Internal check means that checks imposed on such a way on day to day transactions that work of one person is checked by other person automatically. In this way the chances of fraud and errors minimizes. Because the mistake made by one person is checked by the other.

Matters relating to allocation of powers, division of work and methods of recording transactions are included in the internal check.

Objectives:

      ·        The frauds and mistakes of clerk may be prevented.

     ·    To prevent the goods and cash peculation by keeping check on the receipts and             delivery.

      ·     To keep the record of all the business transactions.

Auditory’ duty:

Auditor’s position with regard to internal check is as under.

                 Expansion:

First of all an auditor should satisfy himself about the working of proper internal check/control system. He should examine carefully the system of internal check before deciding the scope of work he would do.

                 In case of satisfactory system:

If the auditor is satisfied about the effectiveness of internal control them he should check hire efficiency and its existence by checking various items from different places. After it he may pay more attention or care to other important parts of this work.

               Unsatisfactory case:

If the auditor feels that internal control system is not satisfactory then he should check those accounts where errors are likely to exist. If the internal control system cannot conform or satisfy to the auditor the he should report the client in writing.

                Some sections are inadequate:

If auditor feels that overall system is satisfactory but certain sections of the system appear to be inadequate then he should inform the client about the dangers. The auditors should also give suggestions that how weaknesses can be removed if he is asked by the client.

Internal check over store

Following steps are considered the most important in case of internal control over store.

1.      Maintenance of record:

For the strong control over stores it is necessary that record of the goods in the store should be maintained properly. Quantity and quantity of the goods should be recorded in detail.

2.      Checking of record:

There should be proper checking of such record. This record should be kept in those hands who do not handle the store record.

3.      Continuous stock taking:

Continuous independent stock taking by actual must be carried out. It should be proper checking of such record. This record should be kept in those hands who do not handle the store record.

4.      Use of separate bin:

Store room should be arranged systematically and each item should be kept in separate bin/rack. It will become very easy for the store keeper to find the particular item.

5.      Quantity fixation limit:

Each item of the store minimum and maximum quantity limit should be fixed by the management. This limit should be interred in bin cards, if the quantity of any item reduces than the fixed limit, to the purchase department store keeper should report.

6.      Entrance not allowed:

Except the store keeper and his assistance no one should be allowed to enter in the store room.

7.      Use of bin cards:

Bin card should be attached with each bin. Store keeper should write issuance or receipt of item to the bin card. The record of store room should consist of only a bin cards.

8.      Issuance without requisition not allowed:

Any item may not be issued by the store keeper upon verbal request. Without showing the requisition duly signed by the in charge of the needed department no any material should be issued by the store keeper.

9.      Return of any item:

Sometime any item is not used and returned to store. It should be accompanied or associated by “store returned notes” in duplicates its entry in the bin card and stores record cards will be just like the requisition entry.

10. Placing of order:

Official order forms (after proper sanction) should be sent to suppliers in respect of the materials required. To store keeper a copy of this should also be sent to store keeper.

11. Receipt of materials:

The materials received should be assure by the store keeper with copies of purchase orders and a report as a quantity etc should also be sent to the buying department.

12. Verification of items:

Inspection department should make a surprise checking of the store time to time. Some items of the stores should be proving by actual count and these should be applied on the whole data.

Internal Check over wages

There are following steps should be taken to prevent error and frauds in case of works wages.

1.      Recording of work:

In some factories wages are d according the amount of work done by the worker. In this case card should be granted to the labour and the amount of work should be recorded on the card daily. This card should be signed by the labour and by his in charge of the department. If goods are acquired by the labour then those should be delivered to the storekeeper. He should also sign on the card.

2.      Recording of time:

In some factories wages are paid according the working hours. In this case also each labour is given a card. When he enters in the factory, time keeper enters the date and time of entry in the factory on card. When worker leaves the factory the time is again recorded on it. So maintenance in view the total working hours he will be paid. There will be on chance of error.

3.      Allocation of duties:

The internal check system should be operative at all stages in employee’s remuneration. The duties of the labours should be clearly defined so that each labour may be held responsible for his job.

4.      Wages sheet preparation:

While preparing the wages sheet it should be subdivided to ensure that work is checked properly. Wages sheet should be prepared is such a way that it should provide various information like name, trade, rate of wages, gross wages and net wages etc of the labour. All the officials who render the information should also sign on the wages sheet. It will make the internal control very good or effective.

5.      Separate staff for sheet preparation:

Cashier should not prepare the wages sheet. Differentiate staff should prepare the wages sheet and handed over it to the cashier.

6.      Exact amount:

According to the wages sheet exact amount of wages sheet should be drawn by the cashier.

7.      Payment under proper supervision:

The payment of wages to the worker should be made under the proper supervision of responsible official. So that the chance of misapplication may be reduced.

8.      Case of absent workers wages:

Special arrangements should be made for the payment of absent workers. The wages of absent workers in their behalf.

9.      Temporary workers payment:

Casual workers payment may not be made until and unless an official certifies that the worker temporarily employed is known to me. It will remove the chance of fictitious payments.

10. Sign on wages sheet:

All the officers should sign and verify the wages sheet that payments are made correct.

11. Record of unpaid wages:

Casher should prepare the list of unpaid remuneration all the concerned officers like foreman and work managers should sign the list.

Internal control over petty cash transaction:

There are Following system of internal is very useful for petty cash transaction.

1.      Immediate recording of entries:

Entries from the voucher should be immediately recorded in the cash book. The petty cashier must be a person different from the cashier.

2.      Use for small expenses:

Petty cash must be used for the small expenses and not for bigger payments. It may not be used for payments of wages or to the supplier.

3.      Support of voucher:

Voucher must be supported by external documentary evidence while obtaining payments from the petty cash.

4.      Checking of initial of cashier:

Every month the cashier should verify and initials the petty cash book when the petty cash is reimbursed or cash book postage is examined.

5.      System of vouchers:

All the system of petty cash book should be up to date. The entire voucher should be numbered consecutively. The entire voucher should be properly filed.

6.      Use of imp rest system:

Petty cash system should be used the imp rest system. Column petty cash book is very useful and it should be maintained by the petty cashier.

7.      Surprise checking:

Trustworthy officer should do the surprise checking of the petty cash in hand.

            8.      Payment by authorized person:

A liable person who is authorized to make the payments should allow the payment on voucher.

9.      Use of slip or docket:

If voucher system is not possible in some cases the slip system can be introduced. Slip of particular amount should be issued by the officer who has spent the money. In this way maintain proper record will be available for checking.

10. Employees not allowed:

The internal workers should not be allowed to borrow the money from the petty cash.

Internal check for sales over the counter:

There are following system can be recommended for the sales over the counter.

1.      Duties of sales man:

·        Only the sales man should make the sale.

·        Sales man should not receive the cash from the customer.

·        Sales man should prepare the duplicate copy of cash memo. He should give both the copies to customer  for payment to the cashier.

 2.     Duties of cashier:

·        Cashier wills only received the payments and sign on both the copies of the memo.

·        He will return the original copy to the customer and retain the carbon copy.

·        He will not make the sale.

3.      Checking of cash:

A responsible official will daily check the amount of cash sales over counter. He will also compare it with the summaries of sale prepared by the sales man and cashier.

4.      Cash deposit:

All the received daily must be deposited in the bank on the same day or next morning.

5.      Entry in cash book:

When the cash received over the sales counter must be entered in the cash book.

6.      Use of cash register:

To record the daily cash sales over the counter cash register can also be maintained. It will be helpful for effective internal control.

Discuss various kinds of frauds.and how these are detected by the auditor?

 

Frauds:

It means false representation making wrong entry internally believing to be wrong. Following are the important kinds of frauds which are connected with the accounts.

1.      Misappropriation of cash.

2.      Misappropriation of goods.

3.      Manipulation of accounts.

1.      Miss appropriation of cash:

It means to take money dishonestly for one self. There are two methods by which misappropriation of money may be connected by the dishonest employee.

·        Omitting to enter the receipt or under casting the receipt sides of the cash books.

·        Entering the fictitious or excess payments.

·         

Principle ways of misappropriation of cash:

1.     Factitious purchase are recorded for the purpose of misappropriation the corresponding cash payments.

2.     Factitious expenses are recorded for the purpose of misappropriation.

3.     By putting the dummy names on the payment side of the cash book.

4.     Theft of unusual receipt of cash like the sales of waste.

5.     Sales cash may not be entered in the books and the cash is misappropriated.

6.     By over casting the wages sheet, wages cash way is misappropriated.

7.     Misappropriation of the proceeds of bills discounted the bills being showed as being in hand.

8.     Cash received on account of goods sent for sale is misappropriated by showing that goods are returned back and not sold.

9.     By tempering in the cash receipt and disbursement records cash is misappropriated.

10.                        Cash received from the customer is misappropriated by omitting the sale.

11.                        Approved and paid vouchers may also used for further payments.

Detection of misappropriation of cash:

Detection of fraud is the main responsibility of the auditor. He can detect this fraud if he conducts the complete vouching of the cash. Second helpful thing in detecting this fraud is the effective internal control system. If this system is effective it will be very easy for him to locate this fraud.

2.      Misappropriation of goods:

It means to take the goods dishonestly. Theft of goods is very common among the employees, where the internal control system over the stock is very poor.

Detection of misappropriation of goods:

If the stock register is properly maintained. Purchase sales, consumption and stock taking record is available physically, stock can be checked and it can be compared with the record and misappropriation may be detected.

3.      Manipulation of accounts:

False representation of accounts is another kind fraud. This is usually commited by the directors and management of the business with the object of either showing more profit or less profit than they actually are sometimes to maintain the confidence of the shareholders they show more profit than the real. Sometimes they show less profit in order to purchase the share at fewer rates this fraud may take place in the following way.

1.     Over valuation or under valuation of expenses.

2.     Over valuation or under valuation assets and liabilities.

3.     Recording of fictitious purchases.

4.     Recording of less purchase than the original.

5.     Use of secret reserves without disclosing the shareholders during the period.

6.     Depreciation not provided.

7.     Deprivation provided but more or less than the real.

8.     Recording fictitious expenses or omission of expenses.

9.     Revenue expenditure charged to capital and vice verse.

10.                        Credit taking to accrued income not like to be received or commission of income.

Detection of manipulation of accounts:

Routine checking, verification, vouching and intelligent enquiries of an auditor may detect such kind of fraud.

What is audit program ? its advantages and disadvantages ?

Audit program:

It is written scheme of the exact details of the work done by the audit and his staff in connection with the particular work. All the work which is specify to each member of the audit is written in the audit program. Audit programs guides the audit personnel in the work of audit to be done. Following are the methods by which the program is carried out.

1.      Complete program:

Complete programe is on the file. Complete items are ticked off by the particular assistant. Assistant knows how to do and what he has to do. Assistant also knows that by which date each item is to be completed.

2.      Individual program:

According to the business nature the auditor prepares the programe for each assistant is such cases.

3.      No any advance program:

In this case auditor never prepares the programe in advance but according to progress of the work he allows to go.

Advantages of audit program:

Supervision of work:

The auditor can judge the efficiency of his audit team, by having a well develop audit program. He is in the position to know the progress of work. He can see at any time that what part of the work has been completed and what remains to be done.

Distribution of work:

Audit program is very useful in distributing the audit work properly among the member of the audit team according to their talent.

Uniformity of work:

Audit program help is setting all the things in advance, so the provides training and guidance to them.

Basic instrument for training:

Audit program is very useful for the new auditor. It provides training and guidance to them.

Legal evidence:

Audit program is legal evidence for work done by every assistant of the audit team. Audit program can be presented in the court of law if any action is taken against the auditor of negligence.

Fixation of responsibility:

If any error of fraud remains undetected the responsibility of negligence will fall on that particular assistant who has performed that job.

Several audits may be controlled:

The auditor controls the audit of various companies at the same time. In the absence of audit program, one cannot supervise them effectively.

Easy transfer:

If one assistant is unable to continue the work given to him it can be given to another person. Audit program the way for him that what is done and what is remaining.

Final review:

Review is made before signing the report final and for this purpose also audit program is very useful.

Useful for future:

On completion an audit it serves the purpose of audit record which may be useful for future reference.

Disadvantages of audit program:

Ø Not comprehensive:

Auditors may have covered the whole field but it cannot said with certainty that all the necessary word have been done.

Ø Rigidness:

Audit programe loses its flexibility while each business has separate problems so audit programe cannot be laid down for each type of business.

Ø Not initiative:

It kills the opening of capable persons the assistant cannot suggest improvement in the plan.

Ø Not suitable for small audit:

It has been testify that audit programe is not suitable for small audits.

Ø New problems overlooked:

Time to time new problems arise which may be over looked.

Ø Fraud:

If work is carried out according to pre determined plan fraud may be facilitated.

Ø Omission of work:

Work may be hurried in order to complete a required schedule involving omission of one aspect or other.

Define the vouching and principles of vouching?

A careful examination of every business transaction with its supporting documentary evidence is called voucher. It is a documentary evidence which proves the accuracy or otherwise of a transaction appearing in the books of account. Different types vouchers relevant to the business transactions should be carefully field and preserved to enable the auditor to carry out vouching. The various types of vouchers to be presented / produced to the auditor for checking are cash receipt, cash paid, purchases, sales, purchases return, and sales return and journal entries. Two persons do the job of vouching. A junior member of the audit staff calls the particulars in respect of each of the entry appearing in the books and the senior member compares the details called out with the documentary evidence produced to him to satisfy himself as to the genuines of the transaction. In this connection either of the following procedure is followed by identifying the act of vouching on the voucher.

The higher rank puts his initials on the voucher.A rubber stamp is put upon its supporting documents and upon the voucher.

If a transaction is satisfactory considered to have been vouched, distinctive tick is placed on the amount appearing in the book of the original entry. If an item is considered to be in sufficiently vouched for certain reasons, a symbol “Q” is put on the amount appearing in the book of original entry and the relevant particulars of the vouchers which are insufficiently vouched are noted on the query list. A copy of the queries should be handed over to the management to give them opportunity and time to get them cleared on the production of required documentary evidence, the queries would be cleared and consequently objections raised against them would be dropped. At the conclusion of the audit, a list of unclear queries will be prepared and reported to the management or to the shareholders.

Principles of vouching:

At the time if vouching auditor should keep in view the following important principles in his mind.

1.      Arrange vouchers:

First of all auditor should check all the vouchers provided by the client are properly arranged. These are in same orders as the entries are made in the books.

2.      Checking of date:

Compare the date of the voucher with the date recorded in the same book. It is the responsibility of auditor.

3.      Compare the words and figures:

The auditor should fully confidence about the amount written on the vouchers, its figures and words are same or not.

4.      Checking of authority:

The auditor should examine that all the vouchers are passed by the authorized officers. If the voucher is passed by unauthorized person it will not be correct.

5.      Cutting or change:

If there is any cutting or change on the receipts and vouchers figures it should be signed by the authorized officer. The auditor should fully confidence by inquiring about it.

6.      Transaction must relate to business:

The auditor should carefully analyze that the entries must pertain to the business.

7.      Case of personal vouchers:

The auditor should not accept the voucher in personal name. There may be a chance that an officer of the company has bought any item in his personal capacity.

8.      Checking of account head:

Auditor must be satisfied about the head of account in which cash is deposited and drawn. He should analyze the documentary evidence in this regard.

9.      Case of account head:

The auditor should not accept the cancelled voucher. Because it has already did the purpose of payment. There will be a risk of double payment if it is accepted.

10. Complete/important note:

The auditor should take some notes about those items which need further evidence or explanation e.g. partnership deed, leases, articles of association, minute, books contracts etc.

What are the objectives of vouching the cashbook?

Objectives of the Cash Books Vouching:

1)    To verify that all the receipts and payments have been properly recorded.

2)    To verify about the cash at the bank and in hand.

3)    To know or understand that all receipts are accounted for.

4)    To prove that no fraudulent have been made.

Vouching the receipts side:

     1.       Examination of internal system:

In case of receipts side the auditors has to depend upon the internal checks and external documentary evidence. He should examine the weak points of the internal check system and pay the special attention on the weak point.

2.      Compare counterfoil with cashbook:

The auditor should checks the received cash with the counterfoil. He should also verify that unused receipt books are kept under lock and key or not.

3.      Sale of assets:

The auditor should check the money received from the sale of assets and vouch it with reference to the correspondent of contract and other available evidence.

4.      Terms of discount:

Auditor should verify that the terms and conditions on which discounts are given to the debtors. He should also examine a few items, on their base.

5.      Receipts of rent:

When the Rent received it should be vouched with the rent agreement and counterfoil receipts.

6.      Cash sale:

In this regard or consider auditor should compare the daily sale, statement of cashier and salesman with the bank statement.

7.      Verify commission:

Auditor should check the account of commission with the accounts of the parties from whom commission has been received. The rate of agreement and commission must be checked verified.

8.      Profit from investment:

Auditor should touch the profit from the investment with the counterfoil of dividend warrants and financial journals.

9.      Bills receivable:

The amount received against the bill receivable should be vouched with reference to the bills receivable books. Inquires must be made against those bills, which are for the receipts of money, but against which the amount has not been received.

10. Bad debits dividend:

Receipts from debtors who become bank rupt should be vouched with the dividend warrants received from the official receiver, total debt, rate per rupee payable as dividend and correspondence exchanged between the debtor or the official receiver and the client should be examined.

11. Insurance claim money received:

Amount received in represent of a claim from an insurance company should be vouched with correspondence exchange with the insurance company, the amount rendered by the company, the original claim actually lodged.

12. Sale of securities:

Broker sold note should be vouched. The fact that sale is “ex-dividend” or “cum-dividend should carefully be examined. Minutes of the boards of directors if any should also be examined.

13. Miscellaneous receipt:

For vouching miscellaneous receipt resort be made to correspondence, contracts, or any other document which will be produced for proving the support of transaction involved in respect of the miscellaneous receipts.

14. Opening balance:

It should be verified with the balance shown in the auditor’s balance sheet of the previous years.

Payment side:

1.      Checking of internal system:

With reference to cash payments, auditor should analyze the internal check system and keep in view the weak points while auditing.

2.      Inspection of wages and salaries:

The auditor should inspect the certified wages sheet and also test a few items for his satisfaction. He should also compare the contract and the appointment orders with the salaries.

3.      Petty cash checking:

Auditor should examine the petty cash in hand and verify the balance of petty cash with cashbook.

4.      Checking of payable bills:

The auditor should examine these bills with the returned bill. If these are paid through bank then passbook should be checked.

5.      Checking of revenue and expenditure:

The auditor should prove that proper allocation has been made between capital, revenue and expenditure.

6.      Creditors payments:

Auditor should also verify or examine the record and documentary evidence about the payments made to the creditors.

7.      Detection of any missing entry:

Auditor should be very careful is examining the various payments. He should find out the missing or irregular entry by proper checking of vouchers.

8.      Checking of cash purchase:

Auditors should check the name of the payees in the cash book against their entries. He should also note the dates on vouchers.

9.      Checking of cash purchase:

These should be vouched with cash memos of the suppliers. For acquiring satisfaction that good have actually been received. The good received notes (GRN) good inward book etc should be examined. Allocation to the head of account debited should be verified.

How sales book is vouched ?

Vouching of sales book:

Auditor should analyze or examine the following points while vouching the sales books.

1.      Internal check system:

Auditor should verify or check the working of internal control and test the few entries.

2.      Execution of sales order:

He should examine the system of execution of sales order and be fully satisfied that the record of all the sales orders received is available for checking with the sales invoices.

           3.     Sales book:

It should be checked with carbon copy of the invoices, which should be canceled by a rubber stamp or initials by the auditor so that it may not be produced again in support of another entry.

4.      Invoices:

                                            i.                        Debtors name.

                                           ii.                        Date & amount.

                                          iii.                        Authority.

                                          iv.                        Trade discount.

                                           v.                        Authority for granting discount.

5.      Duplicate invoices:

The responsibility of Auditor checks the entries in the sales book with the duplicate invoices.

6.      Authority checking:

It should also be verified by the auditor that the invoices should be authorized by the responsible officer.

7.      Comparison with order book:

Auditor should compare the sales book with the order received book and goods outward book. It will show that no fictitious sale of made.

8.      Verification of year:

It should also be verified or checked by the auditor that all the entries made in the sales book belongs to the year under audit.

9.      Forwarding contracts:

The forward contracts for the sale of goods must be inspected and their settlement should be verified.

10. Provisional sales invoices:

If any invoice is market provisional, the auditor should see that the relevant adjustments are made through the final sale invoices and incorporated in the book.

11. Insufficiently vouched sale invoice:

A list of all missing sale invoices should be made and handed over to the management for clearing the quires. Then the unclear queries should be reported to the management.

12. Casts postings:

The casts cross casts and the carry forwards of the sales book should be checked, Posting to general ledger.