AUDITING COMMERCE ACADEMY. AUDITING

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1 1. What is an audit? What are the objectives of an audit? Ans. The word audit is derived from the Latin word audire which means to hear. Thus the old concept of the audit which is the auditor calls the accounting parks and their account. Auditing means an examination of the account books and the relative document by the auditor ascertain the accuracy of the figures appearing. There is some of the definitions given by different writers are as follows:- i) According to Montgomery : Auditing is a systematic examination of the books and records of a business on other organization in order to ascertain on verify and to report upon the facts regarding its financial operation and the results there of. ii) According to R.K.Mourtz : Auditing is concerned with the verification of accounting data with determining the accuracy and reliability of accounting statement and reports. Hence from these above definitions now it s clear that auditing is the verification of entries in the books of account relevant voucher and document with a view to determine the accuracy and reliability of the financial statement and reports. OBJECTIVES OF : The objective of auditing is to report on the reliability and accuracy of financial statements. The auditor is to see whether the accounts give a true and fairs view in the case of the statement of affairs and in the case of profit and loss account., the profit and loss for the financial period. The primary objective of an auditing is to establish by an examination of books of accounts, vouchers and other records to see the authenticity of these records. Hence the main objective is to form a independent judgments and opinion about the regularity and reliability of accounting records and truth and fairness of financial state of affairs and working result. The subsidiary object of auditor is as follows : a. Detection of Error b. Detection of fraud c. Detection of Error and Fraud A) DETECTION OF ERROR : Error may arise at various stage in bookkeeping innocently But sometimes they are also knowingly omitted to cover some dishonest transaction. They may occur at the time of account i.) Clerical error, ii.) Error of principle. ii. Clerical Error : A clerical error arises on account of wrong posting. In other wards posting of an item of wrong account causes. Clerical Errors are again divided into following four types. 1

2 a. Error of Omission : Errors which arises on account transaction not being recorded in the books of account the omission may be fully or partially. In case where a transaction has been totally omitted. It will not affect the trial balance. Example : Omissions to enter purchase in purchase book on the other hand partial omission can be easily discover from the trial balance. In case it entry fro purchase in made in purchase book but it is omitted on customer accounts. b. Errors of Commission : The errors of commission occur because of in correct records made in the books of accounts. They may involve wrong entries, posting, costing, calculating and carry forward. Example: The purchase worth may be entered in the books for Rs it wrongly entered c. Compensating Errors : A compensating may arise when errors counter acts each other. They are also known as offsetting errors because the effect is off set. Example: If an error is committed amounting to Rs 500 on the debit side and another error of the same amount is committed in the credit side. They would compare each other. They would not affect the trial balance. d. Error of duplication : It is also clerical errors and occurs if the same transaction has been recorded twice in the books of original entry and also posted twice in the ledger for instance, purchase worth Rs 2000 may be recorded twice in the accounts. As these errors would not affect the agreement of the trial balance. ii. Errors of Principle : This type of errors occurs when the transactions are not recorded in the books of accounts according to the fundamental law of accountancy. Example: Purchase a building for Rs which was entered in the purchase book. Here capital expenditure is shown as revenue expenditure which against the principle of accountancy. B. DETECTION OF FRAUD : The detection of fraud by the auditors is more difficult then the detection of errors. The fraud may be divided in two classes. i) Misappropriation of cash on goods ii) Falsification on Manipulation of accounts. I) Misappropriation or defalcation of cash or goods : Misappropriation of cash on goods is more in a big business than the small business. Cash can be more easily appropriated than goods; some of the examples of misappropriation of cash are as follows : Ø Ø Ø Cash sales may not be recorded at all Record of credit sales may be omitted and money received from customer latter may be pocketed. Cash received from sales by V.P.P. or sales on returning may be pocketed. Cash may be misappropriated by maintaining fictitious payments. Misappropriation of goods is very difficult to detect for this proper stock records should be maintain sharing receipts issues from time to time ii) Manipulation of accounts : Accounts may be manipulated to show more on less profit than what is actually earned. Profits may be inflated to attract share holder on to get more commission similarly profit may be defeated to buy share at a lower price on to reduce an avoid the payment of income tax. Some of the methods of manipulating the accounts are as follows: Ø Recording fictitious sales or purchase. 2

3 Ø Ø Ø Ø Recording on omitting to record various exp Charging revenue expenses as capital exp Creative or utilization of secret revenues Window dressing ii) Prevention of errors and fraud : Prevention of error and fraud is another duty of auditor this is possible only by application of sound system of internal check and efficient management of the concern. The auditor should make a detailed study, analysis and evaluation of internal control system of enterprise and find out its weakness. He should accordingly suggest for improvement of the system. An auditor should be very careful about the prevention of error and frauds.he should make a detailed checking of the system. Q.2. What are the advantages of audit? Ans. It is only auditing which discloses the truth and fairness of financial statement of a concern. Nowadays the significance of auditing is highly essential to a concern. The organization of the business has become so complex that a individual on group of individuals can t check into every aspect of the concern. It is therefore necessary to introduce audit which is an integral part of business activities. The following are the advantages of audit. 1) Detecting and preventions of errors and fraud : Auditing helps in the detection of errors and fraud. It exercises a great moral influence on the whole staff putting check on the dishonest of an employee. It suggests steps for improving the system of internal control. 2) Moral influence of staff : A regular audit exercises a great moral influence on the accounting staff, these prevent frauds and error. They will be very careful and vigilant not come it errors fraud. They will keep the book account up to date. 3) Comparative study of financial statement : Audit facilitates comparative study of financial statement. The audited account and the comparisons of accounts from year to year and thus the fluctuation may be accounted for. 4) Borrowing from financial institutions : Bank and other financial institution really on audited accounts. While granting loan and advances to business concern.unaudited accounts may not be at least the bankers for the purpose of charity and valuation of financial position of the borrowing concern. 5) Income Tax and Sale tax assessment : Income tax and sale tax authorities usually accept audited accounts for the assessment of tax. Because audit accounts are consider reliable for taxation. These facilitated classification of information and filing of returns. 6) Insurance Claims : Audited accounts are helpful in claiming reasonable compensation from the insurance company respect loss by fire on burglary etc. 7) Sale of Business : In case sale of business audited accounts help in the calculation of purchase consideration. Assets and liabilities can be valued properly and the values of goodwill can be determined without difficulty. 8) Partnership Firms : Audited accounts of partnership firm minimize the chances of disputes among partners audits accounts facilitates the statement of the claim at the time of retirement on death of a partner. 9) Interest of shareholders : An auditor acts as a trustee of the shareholders who safeguard their firms financial interest. The statutory audit of the companies in intended to protect the 3

4 interest of the share holders to know the true state of affairs and working results of the company. 10) Interests of workers creditors and Govt. : Audit safeguard the interest of the concerns creditors investors, workers and also govt. for example, workers claim for bonus and other allowances on the basis of audited account audited account also help the creditors to know the credit worthiness. They also facilitated the assessment of taxes payable to the govt. 11) Audit of manufacturing concern : Audit of manufacturing concern facilitates the containment of cost of production and also states t he various sources of waste. 12) Audited account is more reliable as evidence in the court of law. 13) It create confidence in the mind of large number of investors in a joint stock company by ensuring whether capital invested is safe or not. 14) An auditor may be consulted by the management at the time of need he may offer expect advice to improving accounting work. Q.3 Give a brief classification of audit. Ans. Audit can be a classified from many points of views. For example:- on the basis of average it may be classified as complete or particular audit, from the point of legality it can be classified as voluntary and compulsory audit. Similarly, from the point of nature of organization audit may be private and govt. from particular point of view it may broadly classified as final, continuous and interim audit. From the point of specific objectives, the audit may be cash audit, special audit, cost audit, joint audit, system audit or proprietary audit. Similarly from the point of degree of independence we may easily audit into class such as independent or statutory audit and internal audit. The following are the brief discussion of some important classes of audit i) Final Audit : A final audit is one which begins after the class of the period of accounts and its continues till it is completed. The audit is also called completed audit on periodical audit on balance sheet audit. This system of audit is used in most of the concern and organization. When it can be suitable applied it is more suitable to a smaller concern then a great concern where transactions are numerous. Because it takes more time to complete the audit of such huge organization. Advantages of final audit : The Following are the main advantages of final audit. i) Audit works can be completed easily at a stretch the auditor maintains continuity in his work. ii) It does not cause any dislocation of work of the concern because the audit work is done at the end of accounting year. iii) Audit work can be undertaken thoroughly iv) The audit work become simple the auditor can easily allocate his audit work among his staff. v) It is less expensive as compared to the continuous audit vi) The audit can be completed easily and within a reasonable time. vii) It helps in minimizing the collusion among the employees of the client and there is no question of alternation of figures. DISADVANTAGES OF FINAL AUDIT : i) Under this system of audit thorough and complex checking of all the accounting records is not possible. ii) This type of audit is not suitable for a big organization when the transaction are numerous. 4

5 iii) As auditor depends much upon test checking, error and frauds can exist every after accounts have been accounts iv) It takes time to finalize the report so it is not suitable for this organization which requires quick over the client s staff. ii) Continues Audit : A continues audit is one where a detailed examination of all the transaction are carried on by the auditor continuously throughout the year. The auditor and his staff are engaged at regular intervals such as weekly monthly and quarterly in other words the auditor staff as continuously occupied on the accounts throughout the year. A continues audit is usually applicable in the following cases:- I) Where it is necessary to present final account soon after the close of the financial year. That is book. (ii) When a suitable system of internal check has not been applied and there is chance for errors or fraud. (iii) Where the volume of transaction is very large as in the cause of insurance companies railways etc (iv) where monthly or quarterly statement of accounts have to be presented to the management. Advantages of Continues audit : i) Under continues audit a detailed and through checking of accounts is possible because the auditor and his staff gets one complete financial year for their work. ii) Errors and frauds are discovered quickly because the auditors staff attained the work at a regular interval iii) The auditor visit throughout the year imposes a moral change over the members of staff. Thus also encourage honestly efficiency and alertness iv) The continuous audit motivates the accounting staff of the concern to keep the book of account up to date. v) It can be completed more quickly and final account cab be presented sooner. vi) The auditor is able to acquaint himself with day to day activities of the concern. He remains constantly touch with the technical details of the firm which helps informing his duties efficiently. vii) The auditor can arrange his work easily because he can spread his work over the whole financial period and may get cooperative from his staff. viii) The proprietor may get any desired information on duly verified at any time without difficulty. Disadvantages of continuous Audit : i) The greatest disadvantage is that the items on figures may be altered by the client s staff after the auditor has checked them. ii) The auditor may loss the thread of his work as audit is not carried on to a finish at a stretch and it may result in the omission of completing the work. iii) The audit work may become too mechanical since it continuous throughout the year. iv) The audit work is expensive so a smaller concern may not be able to adopt such method. v) The frequent visit of auditor and his staff may cause inconvenience to the staff of the client. iii) Interim Audit : An audit which is conducted in between two annual audits for same interim purpose is called interim audit. For example : To enable a company to declare an interim divided on to get periodical data of the sales on gross profit. This audit may be under taken at any time during the year this auditor a 5

6 complete checking of the accounts prepared by a concern for a part of the accounting year. Such audit saves time in the final audit it may also help the auditor to collect some important information about the concern which may be of help to him later while conducting the final audit. iv) Cash Audit : The cash audit is undertakes with a limited purpose it is usually done to examine the cash receipts and payments. It does not involve through checking of all the records. In other word here the auditor is engaged only in cash book. Here the auditor has to be very careful in auditing cash book. Because there is manipulation of cash in most of concerns. He must refer to all the reveled vouchers and documents so that he may satisfy that all the cash receipts and payments have been tardily recorded. v) Special Audit : The companies (Amendment) Act 1960 empowered the control Govt. to under special audit of company in certain cases. In following cash central Govt.can direct special audit of the company. (i) When the Govt. is of the opinion that the affairs companies are not being managed with sound business principle. (ii) If the management of company causes serious injection on damage of the interest of the trade industry business. (iii) The financial position of a company is not sound Hence now it is clear that a audit is undertaken due to inefficient management may pass an order for conducting special audit accounts of any company in any period. vi) Cost Audit : The cost audit means an audit cost records It implies a though examination cost accounting records of a company. Here the accountant is appointed to check the cost account records. In order to know their accountancy and also ensure that cost accounting plan is well carried. It is an audit of actual performance. It acts as a effective management tool for the detection of fraud errors. Inconsistencies and irregularities in cost accounting records. The companies act Empowered the central Govt. to order an audit of cost accounting in the case of specified companies. vii) Partial Audit : When an auditor is asked to carry out the audit of the records and books of particular work only, it is called partial audit. For Ex:- The auditor may be asked to audit only the payment side of cash book, because the proprietor himself receives cash or cheque on behalf of his business and there are no chance of any appropriation of cash. In this case the auditor should get inspection in writing because they may arise dispute later on. This kind of audit is not permited.in case of a private or public limited company. viii) Balance Sheet audit : It is an audit which verifies the items operating in the balance sheet it commence with details examination of the balance Sheet and work s book to the book s of original entry. This is a type of partial audit because it verifies the items appearing in the balance Sheet only. He will also check those items of assets. This type of audit can be successful. In these concern where an efficient system of internal control exists. ix) Management audit : Management audit means the audit of management process and functions. It is the examination of an organization structure of a concern and its plan and objects. Thus the auditor examines the policies and action of the management to ensure that there prepare and maximum utilization of the resources. x) Propriety audit : 6

7 The concept of propriety audit is of recent origin. This audit implies racifactory accounting records. In such a way so as to find out when the action and decision in a concern have been taken in the public interest and as per company accepted customer and standard conduct. Thus this audit is conducted is find out any leakages of revenue, misappropriation of assets or wastage of fund. This type of audit is specifically used in Govt.organization. Its main purpose is being to the notice of the administration in the rules regulation and to suggested way and means for the execution of plan and project with grater expedition, efficiency and economy. xi) Internal audit : Internal audit is a continuous and systematic process of examining and reporting the operation and records of accompany. This is a auditing which is intended for management. The audit depends upon the nature and size of organization. In this case some employees are appointed to this audit work. This audit is suitable to those transaction are back complex because due to large size of concern it is not possible to carry out audit work with the help of insider. It is one of the measure functions of the management. 4. Difference between the following? (a) Final audit and continuous audit. (b) Continuous audit and internal audit. FINAL AUDIT In a final audit the audition and visits the client for the checking accounts only at the end of the final year. In final audit, accounts are audited much after their recording in the books. Final audit undertaken where all the transactions related to the financial year have been recorded balanced and Final account have been prepared. Final audit is very suitable for small organization. CONTINUOUS AUDIT In case of continuous audit the auditor the client for the checking accounts only at the end of the final year. In final audit, accounts are audited much after their recording in the books. Final audit undertaken where all the transactions related to the financial year have been recorded balanced and Final account have been prepared. Final audit is very suitable for small organization. CONTINUOUS AUDIT The scope of continuous is not extensive. It is confined to accounting mater only. In case of continuous audit the auditor belongs to outsiders. INTERNAL AUDIT i) The scope of continuous is not extensive. It is confined to accounting mater only. ii) In case of continuous audit the auditor belongs to outsiders. 5. Explain the difference between : Book-Keeping, accounting & Auditing. Ans. BOOK-KEEPING : Book-keeping may defined as an a recording business transaction includes the recording of business transactions book of original entry and posting their from in ledger accounts. ACCOUNTANCY : Accountancy refers to the checking arithmetical accuracy of transactions as entered book the agreement of their balance and the performance of final accounts. 7

8 : Auditing is the verification of the tranctions with relevant documents and vouchers etc to that the final accounts represent the true and a working result and financial position of the concern. The difference between accountancy and auditing is very clear. It is said that the work of auditor begins where the work of an accountant of the account does not check the books and he cannot certify that the balance sheet is true and fair but he can say that the balance sheet is accordance with the book. Audit is quite district from accountancy. It does not prepare final a/c s. It involves the exam to ascertains that they are properly drown up to represent the connect financial... The followings are the difference between accountancy and auditing. Ans. I) Purpose : Accountancy refers to preparation of final accounts and its preparations which may be helpful to the management on the proprietor on the other hand auditing refers to examination and checking of the accounting records. ii) Objectives : The object of accounting is to find out the profit on loss of a given period and show the financial position of the concern as on a particular period. Whereas the object of auditing is to find out the truth and fairness of the learning and position of ositionofthe concern. iii) Qualification : An accountant may not be a chartered accountant where as an auditor must be a chartered accountant. iv) Term of Service An accountant is an employee of the concern where as an auditor is not an employee but an independent person appointed with specific purpose. v) An accountant is an permanent employee of concern where as an auditor is not a permanent staff and he be changed from year to year. vi) Knowledge about matter : An accountant need not have through knowledge of auditing where as an auditor must have through knowledge of accountancy. vii) Turn period of the work : Auditing is governed by the code of conduct and standard laid down by the institute of chartered accountant of India. Whereas the accountancy is not governed by such professional regulations. viii) Period : Auditing begins where the accountancy ends. ix) Regulation and rules : The work of accounting is undertaken throughout the year. Where as the work of auditing is generally carried on at the end of the financial year or periodically. x) Approach turn : The accountant is basically a construction a list of an approach where as an auditor is analyst an approach. xi) Personal skill : An accountant is an architect (who builds) who purposes final a/c from the books of account. Where as an auditor is a critic who verifies the books of accounts and final skills. 8

9 xii) Final report : An account is not required to submit a report to the proprietor where as an auditor must submit the report to the proprietor after the completion of his audit work. xiii) Statutory qualification : An accountant need not posses any statutory qualification, where as an auditor of a joint stock company should possess the qualifications prescribed by the companies act. 6. What are the considerations you will have in mind on the commencement of a new Audit? Ans. The audit must have the have the following consideration in his mind at the commencement of a new audit. 1) The first step for the commencement of a new audit is that the audition should get clear instructions in writing from his client regarding his scope and nature of his duties. 2) The auditor should know the nature of the business carried on so that he can know the requirement of books. 3) He should make a care full examination of the system of accountings employed. 4) He should obtain a complete list of the books maintained in the office. 5) If there is any system of internal check, he should require about the adequacy and reliability of the system. 6) He should know the technical detail of the business by visiting the work and by putting intelligent question to his client. 7) He should get a list of the officer of the company along with their duties and power. 8) In case of manufacturing concern he should pay special attention to the following points. a) In cashiers duties and internal check regarding receipt and payment of cash. b) He should see whether the cashier writes up other books of original entries. c) He should mark the method employed in the preparation of wages sheet and manner of payment of wages. d) The method of checking and passing of invoice. e) The method of maintaining petty cash. 9) He should examine the opening balance sheet to ensure that the period commenced with the balance as shown there in. 10) If appointed in the place of retired audition, he should enquire about the for the change. He should communicate with the audition to find out whether there is any reason why audit should not be accepted. 11) He should go through the audit report of the previous year for information regarding the state of affairs of the company during that year. 12) He must study all document which have a bearing an account such memorandum and articles in the case of joint stock companies and partnership deed in case of firms. 7. What is an audit program? What are its advantages and disadvantages? Ans. Audit program is a plane on scheme of work to be done by the audition and his staff, during the course of audit. It is define as "as detailed plan of the auditing work to be performed, specifying the procedures to be followed in the verification of each item in the financial statement and giving an estimated time required." 9

10 Audit program is usually prepared by the senior clerk in consultation with the audition. It contains the detailed of work to be done by each of member of staff and time by which the work is to be completed. Advantages of audit program : 1) It enables the audition to exercise effective control over his staff. 2) It facilitates distribution of work among the staff according to their qualification and experience. 3) (It reveals the quantity of work to be done so that they can plan required it up to completes the work.) 4) It ensures that is part of checking is completed and nothing has been omitted. 5) The audition can easily know how the work is going on. He can find from the audit programs, the extent of work done, the remaining work to be done and time to taken to complete the audit. 6) It ensures uniformity of work. 7) It services guidance to the audit clerks. 8) Audit programme serves as a record of this work done by the auditor and staff. It can be produced as evidence in future course of action. 9) It ensures proper audit routines and applies the principle of audition and accounting. 10) It facilitates the continuity in the work because in the absence of a clerk, his work may be performed by another clerk. 11) It enables the audition to keep constantly in touch with the work done. 12) It likes responsibility for the work done. 13) The audition is saved time through audit program. 14) It serves as guide for audit to be carried out by the auditor in the succeeding years. Disadvantages of audit program: 1) The audit staffs case their initiative and sense of responsibility which make the work mechanical. 2) The audit staff is bound to follow the program they cannot make any suggestion. 3) Certain parts of the work may be left on checked the audit program may not cover of everything. 4) The same audit program may be followed from year to year without alternations. 5) As per the audit program the work has to be completed within a time period. This makes the audit staff hurries in the work. So the efficiency of the audit may suffer, 6) The program is fixed. It is very difficult to new items. 7) Audit staff can't be held liable for failure to be a work is not included in the audit program. 8) What are the audit working papers? Explain its advantages and discuss as to who has lion on such papers. Ans. Audit working papers are those paper which records certain essential facts about accounts which are under audit. During the course of audit, the audit staff notes down the details of evidence collected on papers which are known as working papers. This working paper constitutes an important tool of the audit profession. They help the auditor informing an opinion on the accuracy and reliability of the financial statements. These papers are required to the audition for the preparation of the report. 10

11 The working paper contains the follow items. a) Audit program delay completed, showing the nature of work, the extent of checking and the initial of the persons who have done work. b) Trial balance. c) Schedules of debtors, creditors, investors, inventories, depreciation etc. d) A certificate from management regarding stock in trade, outstanding assets and 4b's is accounts. e) Adjusting entries. f) Important information received from 3rd parties. g) Important abstraction from minute book. Advantages of working paper: i) The working paper shows the extent to which accounting principle and auditing standard have been used. ii) It provides essential support for the auditor's opinion that examination was conducted per generally accepted auditing standard. iii) It also received how the work was performed and opinion about their efficiency. iv) These people can be used as evidence in factuations. v) This helps the auditor in finalizing his audit report. vi) This enables the audition informing an opinion about the accuracy and liability of the financial statement. vii) These working papers serve as a guide to the auditor for audit of the same client in the succeeding year. An auditor should try to keep control over these working papers. These should not be left on attended in the client's office. These should be kept looked, because these are confidential nature and such they should not be handed over to a third person. Working paper is the proper by of the auditor. He can't be completed to hand them over to the client on others. In other words the auditors are the owner of such paper and they need not hand them over to others. If those are over to the client the auditor can produce in account of law. In case he is charged with negligence of duty. UNIT-2 9) What is internal check, what is its objective? Describe the essential features of a good internal check system. Ans. Internal check is system of account of an office or a factory an arrangement by which the duties of various numbers of various members of the staff are allocated in such a way that the work done by one person automatically checked by another. Hence fraud and errors committed by the employees can be quickly discover for example clerk in change of the ledger should not keep on be allowed to make entries in the book's of 1st entry journal. Similarly the cashier should not be allowed to have any control over the users. In other words internal click refers to an agreement of the duties of members of staff in such a manner that the work performed by one person is automatically and independently checked by another. According to L.R.Dicksee", Internal check in an arrangement of book keeping routine that errors and frauds are likely to be prevented on discover by the very operation of the book keeping itself. 11

12 According to spieen and pegler ", A system of internal check in an arrangement of staff duties whereby no one person is allowed to carry through and to record every aspect of a transaction. So that without solution between two or more persons, fraud is prevented and at the same time the possibilities of the errors are reduced to a minimum. Objectives of internal check : Following are the objectives of an internal check system : 1. To elimination of the acts of fraud and error. 2. To prevent the misappropriation of cash on goods. 3. To detect an fraud or an error quickly. 4. To expensive moral pressure over the staff member. 5. To ensure that the accounting system produces reliable information. 6. To provide protection to the resources of the business against fraud, carelessness and inefficiency. 7. To facilitate control of the business. Features elements of good internal check system. 1. There should be proper division of responsibilities of members of staff that means every body should be given separate responsibilities for carrying on transaction and recording the same. 2. The duties instruction and produces of each job should stated in a written form. 3. If a large number of person is employed in the concern the must be kept in charge of some responsible officials. 4. The duties of the members of the staff should changed from time to time. Without given prior notice that means one person should not be allowed to continue with the same work for a long period. 5. For audit purpose proper system should be followed for placing orders and receiving goods. Proper record should be maintained at the gate by gate keeper in this store by the store keeper and by the accountant in the purchase book. 6. Receipts and payments of cash should be controlled carefully. The cashier must be under proper control. 7. The self balancing ledgers should be used the concern and the total amount should be under control of a responsible official. 8. There should be a proper reporting to the movement. 9. No single person should be allowed to control over any aspect of business. 10. Every member of the staff should be encouraged go as leave at least once a year. This will help in detecting concealed fraud. 11. Persons having physical custody of assets must be permitted to have access to books of a/c. 12. Procedure should be laid down for the verification testing of different sections of accounting records periodically. 13. For stock taking at the close of the year the trading activities should be stopped for some time. 14. To member if the staff should be allowed to the away goods without prior permission of some responsible officer. 15. There should be efficient accounting control respect of each important class of assets. 12

13 16. A detailed record should be maintained for good record. and issued out of the business premises. 17. The whole system of internal check should be economical for the concern and at same time it may ensure greater efficiency. Conducted to assure management that the system of internal check is effective is design and operating. Internal auditor acts as an adviser also. He gives advice to the management for the operation and implementation of different plans and policies of the concern. His duty is to promotes the efficiency against the sheet-coming of the accountant. Internal auditor is an integral part of internal control. 10. Describe internal check system for (a) Cash receive, (b) Cash payment (c) Cash sales. (OR) Describe internal system for cash transaction of a concern. Ans. The chance of fraud numerous in cash transaction. The following are the system of internal check for cash transactions. CASH RECEIPTS: 1. Receipt of cash must be handled by a separate clerk known as cashier. As soon as cash is received it should be entered in to a rough cash book on doing. 2. All main remittance should be opened by the cashier in the presence of responsible official. 3. All cheques received should be marked not negotiable account payee only. 4. All the receives in cash on cheque must be banked daily. 5. Bank reconciliation statement should be prepare by the cashier to reconcile bank and cash balance. 6. Cash clerk should not have any control for the ledger, other fund securities, negotiable instrument etc. 7. All receipts should be acknowledged by a receipts having counter foils. The counter foils should be properly maintained, spoiled on cancelled receipts should not be destroyed but mostly kept under lock and key. 8. All debtors and customers should be requested to make payment by crossed cheques. 9. A proper system of recording of cash sales should be in operation under proper control. 10. Proper arrangements are to be made for dealing with recording and investigating any cash shortage on surpluses. 11. Posting of cash book should be independently checked. Cash sales: The following internal check system is suggested for cash sales in a big trading concern. 1. Each salesman should be identified with a number on letter and supplied with a sales memo book. 2. The salesman should not be allowed to collect cash. 3. When sales take place, the sales man should prepare sales memo in triple case. 4. The salesman should show the memo book to some responsible person who examines and verifies the details and the amount charged. 5. Two copies of memo should be given to the customer who should handover them to the cashier. 13

14 6. The customer should present the copy at the delivery counter to receive the goods. 7. The salesman should prepare a summary of sales made by him at the end of everyday from the copies of sales memo retained in the book. 8. Similarly at the end of each day, the cashier made by each salesman. 9. The cash sales summary prepared by the cashier should be verified with the cash sales summary of each salesman. 10. Copies of the sales summary sheet of different counter and total cash received should be sent to the officer in charge of the concern. Cash Payments: The following systems are suggested for cash payment of a concern. 1. All payments should be made by cheques. 2. Petty cash payment should be made handled by the petty cashier. 3. The records of petty cash payment should be maintained on the imprest system. 4. A voucher should be obtained for cash payment. 5. All the voucher should be consecutively numbered and properly filled. 6. The number of relevant voucher should be maintained against each entry on the payment side of the cash book. 7. The voucher and other paper should be checked properly. It must be noted that the voucher is not presented for payment twice. 8. The names, numbers status of persons authorized sign in cheques etc. must be decided. 9. All cheques and bills should be thoroughly scrutinized signed by the proper authority. 10. Bank reconciliation, statement should be prepared frequently. 11. The actual cash balance should be counted and verified with the cash book. 12. Cheque book must be kept under lock and key. 13. A proper system must be adopted for controlling supply and issue of cheques. 11. Describe a system of internal check suitable for the wage payment in a long manufacturing concern. Ans. In big manufacturing concern, the work connected with the maintenance of various types of wage record. Computing the amount of wages and payment of wages is of paramount importance. There are greater possibilities of irregularities and fraud is a big organisation having a large number of workers. Therefore the internal check system should be designed properly. The following are the internal check system relating to wages: I) Maintenance of wage records Workers are paid their wages normally on the basis of the time spent by them. Hence the time spent each worker should be recorded in the time record books. There are many method which are used to record the time of workers. The following are the method of recording. 1. The time recording clock is placed at the gate under the change of a time keeper. Such works as provided with time card. He should sent his record at the time of arrival and departure from the place of his work. This clock records the total time spent by the worker on the job. 2. The worker are given a brass token bearing their numbers. At the gate a time board is maintained on which worker bangs is taken as he entry the factory. The time keeper is now able to record the time of workers entering the factory. 14

15 3. Every worker is issued an attendance card containing information like name, number, department, rate of wages etc. The workers put the cards into a provided at the gate as he enters. The time keeper maintains the records in the attendance register from such card. 4. A time card is also given to the worker which contains his name and number. He should units the time of his arrival and departure from the factory. The jobs for which he is engaged and the department in which is works. At the week end the card should collected from the workers and sent to the wage office. If the workers are paid on the basis of piece wage system, proper books for recording the actual work done by workers should be maintained. A job card should be given to each such worker. The actual work done by a worker should be recorded on this card which should be counter signed by the foreman of the department. Some times, workers allowed to work overtime. In such cases overtime slip must be issued to the worker by the proper authorized official. At the same time strict check must be kept on these workers who goes out of the premises on leaves the place of work without permission. For this a pass out slip may be prepared by the authorized officials. He clearly mentions for the purpose of going out. A copy of the pass out slip must be forwarded to the wage department for records and necessary actions. II) Preparation of wage sheet: The wage sheet is prepared to minimize the chances of wrong payment to the workers. The preparation of wage sheet should be done by a separate department four clerk should be engaged for the work. for time workers and pieceworkers separate wage sheet must be used. Two clerks should examine the time and piece wage records, over time records received from the foreman. The clerk will prepare individual employee statements that the address of the workers time spent on work done and rate of wages, the fourth clerk will check the calculation and deduct the permissible amount such as rent provided fund. Income tax and installment of loans etc. from the gross wages to arrive at the net amount to be paid to the workers. All these clerk should initials the wage sheet before they are signed by the work manager. III) Payment of wages: The payment of wages must be paid by a person who is in no way concerned with the preparation of wage sheet. Generally the cashier makes payment of wages. He should withdraw the net amount as shown by the wage sheets. Each worker should be present at the time of disbursement. The foremen of each department should be present at the time of payment to indentifying the workers. Special arrangement should be made to pay to the absenteeism workers. A list of unpaid workers should be prepared by the cashier and the foreman of each department. Similarly a list of casual workers should be prepared by the foremen in each department. Daily records with the name of casual workers, rate of wages, work done and the total wages payable to such workers must be checked by a senior officer of the organization. he should be paid on a different date from the payment day of the regular workers. 12. Describe a suitable internal check system for purchase. Ans. In a big concern there should be separate departments known as purchase department which check in the affairs of the purchase. The aim of this department should buy the best product at the most competitive price. The following procedures of internal check are suggested for purchase of materials. i) Requisition : The department which requires supplies materials must send requisition to the purchase department. The requisition books must be kept by each department, section on branch of the 15

16 concern. The requisition contains details about the quantity, quality and the time by which the materials must be supplied requisition must be prepared in duplicate b the lead of the department. ii) Purchase order: The purchase department should invite tender to the suppliers. These tenders must be opened and approved by a senior official. They quotations are received from the various suppliers by the purchase department. A comparative statement is prepared from the quotation to select the suppliers. After deciding the suppliers the purchase department will prepare four copies, of the purchase order. One copy will be sent to the supplies, second to the store and third will be forwarded to the accounting department. The purchase order should be carefully written and must be approved and authorized by the purchase department. iii) Receipt of goods : All the time of receiving goods the purchase department should properly inspect the gives as to the quality, quantity the condition. The goods must be compared with the purchase order. Goods receipts should also entered in goods inwards books. Then purchase department sent the goods to the stores. iv) Invoice: The purchase department should thoroughly check the suppliers invoice the when they should be sent to the accounting department for payment. The accounting department should be compared the invoices with the purchase order, examine the inspection report of the purchase department and also verify the calculations are found correct, record must be made in the purchase book. Payment of the verified invoices should be authorized by a senior offices. If some portion of good are returned to the supplier proper entry must be made in the purchase return book. A credit note must be obtained from the supplier and the accounts section must be informed accordingly. 13. What do you understand by the term vouching? What are the object of vouching? Ans. A voucher is a documentary evidence in support of an entry in the books of accounts. It includes receipts, counter foils agreement, invoices resolution passed at a meeting of directors of shareholders etc. Vouching is the examination of the evidence in support of the entry in the book of account. It is an important tool various transactions entered in the books of accounts. It is the essence of auditing. According to Taylon and parry vouching may be defined as the examination of the evidence offered in substantion of the entries in the books including such examination of proof, so for as possible that no entries have been omitted from the books. From the definition it is clear that vouching means testing the truth of entries appearing in the books of accounts. Objects on Importance of Vouching : It is rightly said that vouching is the essence of audit. It is fundamental to all audit procedures and success of an audit will depend upon the thoroughness with which vouching is completed. The following are the objectives of vouching : i. The objective of vouching is to see that transactions are entered in the prepare books of accounts or not. ii. To see that the amount are correctly recorded. iii. To see that transactions are properly classified. iv. To see that no transaction, not relating to the business is recorded in the books. v. To see that no fraudulent transactions entered in the books. 16

17 vi. vii. viii. To see that no transactions omitted to be recorded in the books. To see that transactions are properly authorized by responsible persons. To see that all entries are supported by necessary evidence. 14. What is vouching? What are the factors to be kept in mind, while examining vouchers? Ans. For meaning of this question refers the Q.No. 15. Factors to be noted in vouchers : The auditor should examine the vouchers presented to him carefully with special reference to the following points. i. The name of the panty to whom the voucher is addressed. ii. The date and year of the receipt on the voucher. The date of the receipt on voucher should correspond with the actual date of entry in the cash. iii. All vouchers should be consecutively numbered and filled and arranged in order. iv. The voucher should properly stamped. v. The auditor should see that every voucher is passed as in order by an authorized officer. vi. He should also note the proper signature of the payer. vii. Special attention should be paid to those voucher are not in the name of clients business. In such original invoice inward book and order book etc. should examined to mark sure that the goods were purchase the business only. viii. Amounts paid should appear both in wards and figure. ix. The auditor should be careful about the period for what the payment has been made to find out whether the payment relates to the subsequent period. x. He should see about which account the item is posted distinction must be observed between capital and revenue expenditure. xi. Voucher inspected should be cancelled by means of rubber stamp on by other means so that they are produced again. xii. The nature of the payment must be in conforming with the nature of the clients business that means unusual transactions should be carefully noted in the audit book must be avoided. xiii. Various items requiring further information explanation should be carefully noted in the audit note book. xiv. Receipted invoice should not be accepted as a voucher because there is a danger of payment being made twice. xv. The auditor should not take the help of any member the clients while vouching receipts. xvi. Receipt should be as the authorized form of the payment where such forms are generally used. xvii. Auditor should see that any alternation is the voucher has duly signed and approved by the authorized officer of the organization. 15. Describe the system of vouching of cash transactions. Ans. Vouching cash transaction is the most important job of every enterprise. Before setting the program of vouching the cash book. An auditor should enquire carefully into the system of internal control in operation the auditor should vouching the cash book intelligently and carefully because there are greater chance of fraudulent manipulation in the cash book. 17