The nature and extent of the scope of the Auditor’s work depends upon the system of Internal Check in an organization. The system of Internal Check will determine the reliability on work which an Auditor can place. The External Auditor is ultimately responsible for the final accounts.
The Internal Check system cannot relieve the Auditor of his contractual responsibilities in case anything goes wrong in the final accounts, therefore it is the duty of the Auditor to check the whole transaction in detail. A good Internal Check system may relieve the Auditor of detailed checking and he can utilize the saved time to any other work of more importance.
We will further discuss Internal Check related to different aspects −
- Cash Payments
- Cash Sales at Counter
- Cash Sales by Salesmen
- Postal Sales
- Cash Receipts
- Fixed Assets
Consider the following points while doing Internal Check for cash payments −
- Excluding petty cash payments, all payments should be made through cheques, Demand Drafts, RTGS (Real Time Gross Settlement), NEFT (National Electronic Fund Transfer) or any other banking mode as available time to time.
- Person making payments should have no connection with the receipt of cash.
- Every paid bill or voucher should be stamped as “Paid” to avoid double payments for same bill or voucher.
- Confirmation of balances from creditors should be made directly.
- Cash receipt should be obtained for each payment.
- For petty cash payments petty cashier will be responsible instead of main cashier.
- Petty Cash should be maintained on Imprest system.
- In absence of cash receipt, proper bill or voucher should be obtained from the petty cashier.
- Petty cash book should be checked by the Cashier frequently.
- Bank reconciliation should be done on a regular interval.
- Pay-in slip to deposit cash in bank should be filled by the Cashier not by the person who is going to deposit the cash.
As per the provision given under section 40A(3) of the Income Tax Act, 1961 for payment exceeding Rs. 20,000/- it is stated that “Where the assessee incurs any expenditure and it is paid in a sum exceeding Rs. 20,000/- otherwise than by crossed cheque or crossed bank draft, whole of such expenditure is disallowed”
Cash Sales at Counter
- Every Salesman who is authorized to do cash sales should be specifically demarcated.
- Four copies of cash receipt should be generated out of which three will be handed over to the customer out of which customer will give one copy to cashier at the time of payment and one copy to gatekeeper at the time of delivery of goods and exit from gate and one copy will be retained by the customer.
- Three sales summaries will be prepared, one by the Salesman, second by the Cashier and the third by the Gatekeeper to tally the cash sales on daily basis.
- All Cash Sales should be deposited into bank on daily basis without any failure without deducting any expenditure or commission out of it.
- Cash received (as per cash recording machine), cash sales and amount deposited into bank should be same.
Sales by Travelling Salesmen
- Pre-numbered rough cash receipt book should be issued to every salesman for the collection of debt or advance from customers.
- Final receipt should be sent to customers directly.
- Without making any deduction, salesmen should deposit all the cash at the head office on daily basis without any fail.
- Regular reconciliation of account should be made with customer.
- To avoid any fraud every salesman should be replaced and transferred regularly to other areas.
- Postal sales should be recorded in separate register.
- A separate register should be maintained to record the cash received against postal sale.
- Cash received through postal sale should be deposited into bank separately.
- Regular and careful checking of the sale and payment register should be done by an officer of the company.
A Cashier deals with the following tasks concerning cash receipts −
- Record cash receipts immediately upon the receipt of cash.
- He is not authorized to keep cash with him.
- He is not allowed to make any expenditure out of it.
- Cash receipt should be deposited in to bank on daily basis.
- Cashier should not be allowed to do primary entry in the books.
- Requisition slips duly signed by the head of the department should be issued and sent to the purchase department, clearly mentioning the quantity, quality and the delivery date on the requisition slip
- Enquiry about the required material should be done by the purchase department from different suppliers of the material
- Purchase order should be issued on the basis of the lowest quotation received from the suppliers. There may be four copies of the purchase order, one for the supplier, second for the stores department, third for the accounts department and the fourth copy should be retained by the purchase department
- Goods should be sent to store after proper examination at the time of receipt of goods. Store department will inform concerned department for the same.
- After proper verification of purchase invoice same should be sent to accounts department for their accounting and payment purpose
- On the basis of the purchase order, the accounts department will book that invoice in our books of accounts and if there is any discrepancy, debit note should be issued to the supplier under intimation to the purchase department.
- Payment is made to the supplier according to the due date.
- After receipt of the sales order, one copy of it should be sent to the dispatch department for further process.
- The dispatch department after receipt of the sales order packs the material according to the order.
- Preparation & verification of Invoice is done based on the sales order.
- Entry is done in goods outward register before sending it to customers.
- Sales return is entered in goods inward register and a credit note for the same is issued to customers accordingly.
A Store is a very important and crucial department of any industry and proper control over store is very much essential to prevent theft, pilferage and misuse of inventory. Following points need to be considered for Internal Check on Stores −
- Every store must be equipped with all the facilities as require keeping inventory in order and convenient location of store is also important for any industry.
- Triplicate copy of G.R.N. (Goods Receipt Note) should be issued on receipt of material, one to be sent to purchase department along with invoices, second for accounts department and third will be retained by store department.
- Receipt goods should be stored at proper place. Proper stock accounting should be there for receipt of goods and on issue of goods.
- Physical stock taking at regular interval should be carried out and reconciliation of stock with books should be done without any fail. There should be a proper and quick action in case of any discrepancy.
- If material is issued to any other department, it needs to be specified on “Material Transfer Note”, the return of Material should be on the MRN (Material Return Note) and the material being issued to the customer should be on the basis of Sales Invoice only.
Purchase of Fixed Assets may be for normal addition to Fixed Assets, for new project or for expansion of business. Fixed assets are of permanent nature to earn income, i.e., Land, Building, Plant & Machinery, Furniture & Fixtures, computer and vehicles, etc.
Following are the important checks related to fixed assets −
- Sanction of capital expenditure should be done by a committee may be set up for this purpose or by the proper authority. Same procedure should be followed in case of transfer or discarding of any assets.
- Distinction between Capital and Revenue expenditure is must for proper accounting records.
- Fixed Assets register should be maintained giving all the description about qty, cost and location etc of fixed assets.
- Physical verification of fixed assets should be there from time to time.
- Accounting and depreciation of fixed assets should be done according to Accounting Standard-10 issued by the Institute of Chartered Accountants of India.
Following points need to be considered while dealing with investments −
- Sale and purchase of investment should be done by an authorized person only.
- Detailed investment register should be prepared and physical verification of the document of title on periodically basis to be done. These documents of title should be kept in safe custody of company.
- Correctness of charges of brokers should be checked.
- Checking of accounting entries on account of dividends interest, bonus and capital repayment should be done.
- Physical verification of investment should be done.