Internal Check System for Various Transactions | Auditing

In this article we will discuss about the internal check system of auditing for various transactions:- 1. Cash Sales 2. Credit Sales 3. Cash Purchases 4. Credit Purchases 5. Wages Sheet Preparation 6. Payment of Wages 7. Discounts and Rebates to Customers 8. Sales Returns 9. Settlement of Claims against Suppliers 10. Cash Receipts 11. Cash Payments 12. Petty Cash Payments 13. Stores and Materials Issues.

1. Cash Sales:

(a) Sales at the counter:

(i) Preparation of cash memo in triplicate by Salesmen, the original and duplicate copies being handed over to the cus­tomer and the triplicate retained in the book;

(ii) Payment of cash by the customer along with cash memo (2 copies) to the cashier;

(iii) Marking cash memos as ‘Paid’ by rubber stamp by the cashier who should hand over them to the customer and record the amount as a receipt in Cash Register Machine;

(iv) Verifying the total cash sales for the day as per cash register statement with the cash memos retained by the salesmen and the gatekeeper.

This system is followed in a big departmental retail stores:

(b) Sales by travelling Salesmen/Agents:

For ‘direct sales’ promotion and collection by them, the-system should be:

(i) Authorising them to issue money receipt;

(ii) Specifically instructing them to deposit the entire cash collection daily to the cashier or to company’s bank account;

(iii) Asking them to submit daily report of sales and collection for bank deposits;

(iv) Strictly ad­vising them neither to keep any collection with them nor to allow any collection to remain outstanding.

(c) Sales through post:

For this, the system should be:

(i) Maintenance of separate registers for VPP sales, postal sales, and sales returns for non-acceptance by customers;

(ii) Recording in respect of goods dispatched/received from stores/ returned to stores, cash received against sales, ex­penses on postage for dispatches, etc.;

(iii) The person dispatching goods should not receive cash;

(iv) Accounting of cash in the Cash Book and de­posit thereof in the bank;

(v) Accounting and ad­justment of advances to avoid double dispatches.

(d) General Checks:

(i) Verification and ac­counting of outstation cheques by reference to the sales bills;

(ii) Verification of cash or cheque re­ceipts with the Order Receipt Book to find out un-realised amounts, if any; and

(iii) Preparation of Bank Reconciliation Statement by the cashier to confirm bank balance.

2. Credit Sales:

(i) Separation of sales department from the des­patch department;

(ii) Functional sub-divisions, e.g., receiving orders, accounting of goods supplied, invoice preparation, etc. within the dept.;

(iii) Re­cording of all customers’ orders serially in the book;

(iv) Endorsement of customers’ orders to the des­patch dept.;

(v) Authorisation by a competent offi­cial as regards terms of sale, discount allowed, bad debts write-offs;

(vi) Verification of invoices against orders executed with the orders received prior to despatch;

(vii) Preparation of invoices in triplicate and matching the third copy with the duplicate re­ceived from the customer duly signed for the goods received;

(viii) Daily verification of the Goods Out­ward Book (containing entries for goods supplied to customers) with the Order Book and the Invoice Book;

(ix) Maintenance and checking of the Sales register written up from invoice copies; and

(x) Periodical follow-up measures on the collection of customers’ accounts.

3. Cash Purchases:

(i) Preparation of purchase orders based on the purchase requisitions duly authorised by a compe­tent official;

(ii) Deciding the terms of purchase based on the comparative tenders and quotations;

(iii) Verification of purchased materials as to quan­tity and quality by a dept.. Independent of purchase and stores dept.;

(iv) Verification and accounting of purchase invoices with the purchase order, goods receipts and the prevailing market prices to pre­vent/detect manipulation or fraud;

(v) Authorisa­tion of payment against invoices by a responsible official; and

(vi) Recording of all details in the purchases register.

4. Credit Purchases:

In addition to the internal checks outlined at:

(3) Above, the system should include

(i) Separa­tion of records between cash purchases and credit purchases;

(ii) Functional separation of the main items of work, e.g., purchase ordering, tender com­mittee, tenders and quotations, contracts, accept­ance of purchases, etc.;

(iii) Record of approved suppliers;

(iv) Pre-numbered purchase orders and their distribution to the concerned depts..;

(v) Pre- numbered goods receipt notes and their distribu­tion;

(vi) Recording of advances paid and adjust­ments before final payment; and

(vii) Checking of credit terms and discount receivable.

As regards Purchases Returns (Returns Out­ward), the system should be:

(i) Maintenance of Purchase Returns Book for goods returned to sup­pliers on account of rejections;

(ii) Preparation of Goods Returned Notes and their distribution to Stores and Accounts dept.. and to Suppliers;

(iii) Obtaining Suppliers’ credit notes for account­ing adjustments and entries in purchase returns book;

(iv) Matching Invoices (not paid-off) and the credit notes, or filing credit notes with the current invoices awaiting payment.

5. Wages Sheets Preparation:

(i) Separation of the main functions, like attend­ance, preparation of wages sheets, and payment of wages, etc.;

(ii) Use of Separate Wages Sheets/ books for time-workers and piece-workers;

(iii) Preparation of wages sheets (i.e., checking the time records, piece-work records, overtime records, and computation of wages payable and deductions) by one set of staff;

(iv) Checking the wages sheets by another set of staff;

(v) Recording,, computation, and checking of each element of wages should be by different clerks independent of each other;

(vi) Initialling by each clerk of the work done by him, and countersignature of the wages sheets by the in-charge before these are finally approved and au­thorised by the departmental chief or the employer.

6. Payment of Wages:

(i) Entrusting the disbursement function to those staff who has not taken part in the wages sheets preparation;

(ii) Withdrawal of the exact amount of the wages bill from the bank;

(iii) Dis­tribution of identity slips to the workers;-

(iv) Dis­bursement of wages to workers, in presence of the departmental foremen concerned, after obtaining signature and thumb impressions on the sheets;

(v) Making special arrangements for payment of wages to night-shift workers with an authority del­egated to the foreman;

(vi) Regulating the payment of wages to absentee workers on their behalf to others against appropriate letters of authority only;

(vii) Attestation of payments by the persons who made disbursements, the foremen, and the manager;

(viii) Preparation and authentication of unpaid wages list for necessary adjustments;

(ix) Hand­ing over the unpaid wages list and the amounts to the cashier;

(x) Preparation and authentication of cash vouchers for payment out of unpaid wages account of workers by the cashier, foreman and the manager; and

(xi) Selecting different day for wages payment to casual workers.

7. Discounts and Rebates to Customers:

(i) Separation of the Customers’ accounts into two groups: Customers to whom discounts and rebates are applicable and those not applicable;

(ii) Written approval and authorisation as regards the rates of discounts and rebates and changes thereto;

(iii) Verification of the amounts incorpo­rated in the invoices by the staff independent of the staff who computed these amounts while prepar­ing the invoices;

(iv) Separate accounting of dis­counts and rebates allowable and allowed;

(v) Is­suing credit notes to or obtaining debit notes from the customers in case of variations in amounts com­pared to predetermined allowances; and

(vi) Veri­fication of credit or debit notes by the accounts department for necessary adjustments in current invoices.

8. Sales Returns:

(i) Recording of returns inwards from the cus­tomers in the Returns Inward Book;

(ii) Issue of credit notes, duly signed by an authorised sales of­ficial, to the customers for each return;

(iii) Prepa­ration of a statement of goods returned by the sales departments;

(iv) Verification of the goods as per the statement so received by the despatch dept..;

(v) Making adjustment entries in the accounts dept..; and

(vi) Comparison between the Returns Inwards Book and the Warehouse’s record of re­turns.

9. Settlement of Claims against Suppliers:

Although the system of internal checks with re­spect to this would depend on the exact nature and type of claims, the general procedure should be:

(i) Review and check of the credit terms, the rates of discounts and rebates receivable, etc.

(ii) Review and check of the excess quantities supplied by the suppliers with reference to purchase orders, Goods Receipt notes, etc.

(iii) Rechecking of the bill amounts by reference to price and tax charges consequent on the revision of these items by any legislation.

(iv) Review and check of the advances and ad­justments.

In all these internal checks to be exercised for processing such claims, a responsible official should be entrusted with the task. The final settlement must, however, rest with the top official who would de­cide on the merits of each case.

10. Cash Receipts:

(i) Use of pre-numbered and pre-printed receipt book for all cash collections;

(ii) Adopting the same practice even for cash collection by travelling sales­man;

(iii) Making entries of all cash receipts in the Cash Book;

(iv) Depositing daily all cash receipts in the bank;

(v) Verification of such deposits daily by another person;

(vi) Acceptance of cash only by one person i.e., cashiers;

(vii) Opening of incoming letters and remittances by the cashier in presence of a responsible official;

(viii) Making entries thereof in the register;

(ix) Marking them with the words ‘Not Negotiable’ or ‘A/c. Payee only’;

(x) Safe custody of unused receipts;

(xi) Cancellation of spoiled receipts;

(xii) Preservation of receipted counterfoils for accounting and verification;

(xiii) Non-accessibility of the cashier to books of ac­counts other than the cash book; and

(xiv) Prepara­tion of a bank reconciliation statement by the cash­ier for bank balances ascertainment.

11. Cash Payments:

(i) Payments by A/c Payee cheques as far as practicable;

(ii) Safe custody of unused cheques;

(iii) ‘Pay Order’ authorisation;

(iv) Payment always by reference to appropriate documentary evidence;

(v) Signing of cheques by the authorised official only;

(vi) Payment for Rs. 2,500/- or more always by ‘A/c Payee’ cheques;

(vii) Use of revenue stamps for cash payments exceeding Rs. 500/-;

(viii) Cash payment of Salaries and wages in presence of a re­sponsible official;

(ix) Preparation of vouchers for all payments;

(x) Continuous serial numbering of all cheque/cash vouchers;

(xi) Obtaining receipts for all payments;

(xii) No payments against I.O.U. and ‘on account’ without the sanction of an appro­priate authority;

(xiii) Recording all payments in the cash book; and

(xiv) Preparation of bank recon­ciliation statement by a person who is not in-charge of writing the cash book.

12. Petty Cash Payments:

(i) Maintaining an imprest system of cash and a petty cash book;

(ii) Separate serial numbering of petty cash vouchers;

(iii) Preparation of vouchers by persons other than petty cashier;

(iv) Non-payment of any loans from the petty cash;

(v) Signing the statement of expenses and the petty cash book by a responsible officer.

13. Stores and Materials Issues:

(i) Preparation and authentication of ‘Stores/Materials Requisition’ by a department in-charge;

(ii) Actual issues to be made by weight or meas­urement;

(iii) Recording the same in the Requisi­tion and the Bin Card or Kardex;

(iv) Endorsement of requisition slips (duly receipted by indenting dept..) to Stores Accounts;

(v) Entries in the Stores Ledger at works accounts office;

(vi) Stores debit/credit/transfer notes preparation and checking etc.