Question

Explain tbe auditors duty as regards internal check on sales and purchases

Answer 1

Internal Check

Internal check is a method of organising the accounts system of a business concern or a factory where the duties of different clerks are arranged in such a way that the work of one person is automatically checked by another and thus the possibility of fraud, or error or irregularity is minimised unless there is collusion between the clerks. For example, the receipt of cash is entered by the cashier on the debit side of the cash book; this entry is carried to the ledger by another clerk; the statement of account relating to this transaction is sent to the customer by a third clerk and so on. Thus the same transaction has passed through three different hands and the work of one is checked automatically by the other. It is a kind of division of labour. This minimises the possibilities of frauds and errors unless all the three join hands in defrauding their employer.

According to the special committee on Terminology, American Institute of Accountants, 1949 "Internal check-a system under which the accounting methods and details of an establishment are so laid out that the accounts procedures are not under the absolute and independent control of any person - that, on the contrary, the work of one employee is complementary of that of another, and that a continuous audit of the business is made by the employees."

The essential elements of an internal check are :

(a) Instituting of checks on day-to-day transactions.

(b) These checks operate continuously as a part of routine system.

(c) Work of each person is made complementary to the work of another.

The objective of such allocation of the duties is that no one has an exclusive control over any transaction.

Internal check system in the various aspects of the accounting is given below :

Internal check as regards cash

There should be a proper system of internal ^heck in respect of all transactions because majority of the frauds arise in connection with cash. The auditor must familiarise himself with the system of internal check in operation. Duties in respect of cash should be divided in such a manner that there is automatic check on the various functionaries connected with cash section. It is necessary that employees of the cash are encouraged to go on vacation. Rotation of duties relating to cash section should also be enforced.

Internal check as regards Cash Receipts

1. The cashier should not have access to the incoming mail books (which do not concern him), petty cash funds and the ledgers.

2. Remittances should be opened by the cashier in the presence of a responsible person. All cheques and bank drafts received should be marked - `Not negotiable A/c Payee only.'

3. All the receipts of the day should be deposited in the bank at the end of the day or the next morning.

4. On receiving cash, it should be acknowledged by issuing a printed receipt. This receipt should have a counterfoil. These receipts should be consecutively numbered. The receipt should be kept under lock and key.

5. Cash registers should be used.

6. The cashier should prepare the paying-in-slips to be retained by the bank. However, the counter-foils of the paying-in-slips should be entered by some other clerk and not by the Cashier.

7. Cash sales should be so organised as to reduce the chances of misappropriation to the minimum.

8. As far as possible the system of collection by travellers should be discouraged. However, if they are authorised to collect debts on behalf of the business, there should be proper rules and regulations.

9. Bank reconciliation statement should be made by cashier and someone else frequently.

Internal check as regards cash payments

1. As far as possible, all payments should be made by cheques authorised by a responsible person and signed by responsible persons. Cheques should be marked' A/c Payee only' :
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Answer 2

Answer:

To check all sales have been recorded the auditor should check