Auditing is a multi-dimensional and multi-functional concept in the overall auditing and accounting perspective. There are mainly two types of auditing, internal audit and statutory audit. Internal audit encompasses a detailed study of the accounting and internal control system of the auditee entity and corresponding evaluation of the internal check system in operation and whether it is in continued existence for the period under review. Statutory Audit, on the other hand, is to check whether the auditee entity has complied with various rules and regulations under the relevant statute and it has not defaulted on statutory compliance and reporting formalities under corresponding laws in force for the period under review. Another sub-group under internal audit can be divided into tax audit and systems audit.
Generally, an internal audit programme is designed by the chief auditor-in-charge and the audit schedule can run from a week to around 30-60 days depending on the auditee entity, it’s transactions and the nature of the industry. A programme of internal audit is set to include the test check concept detailing the nature of transactions to be checked and the time-limit for completing the audit under review and the tasks assigned to each of the audit assistants employed for the specific purpose. Mainly, the areas of audit in a programme of internal audit are Cash, Bank, Purchases, Sales, Journal and General Ledger.
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In an audit of the cash book, physical cash verification has to be conducted as close to the Balance Sheet Date. But, an element of surprise has to be there to ensure that there is no wrong-doing on the part of the main cashier. It also has to be ensured that the person who approves the cash payment should not be the same person who disburses the cash. This is to ensure the existence of a proper system of internal control. It is to be ensured that there are no cash payments exceeding Rs 20,000 on any given transaction. It also has to be ensured that a system of internal Check is in operation whereby work of one person is automatically and Independently checked by another. This will be in conformity with the overall System of internal control. It is to be ensured that the main cashier talies the cash Balance daily as per the cash book with the actual cash-in-hand.
In case of bank book, it is to be ensured that the proper authority has approved all bank payments. In case of statutory payments, it has to be ensured that the payments are made well before the statutory due date to avoid penalties and statutory defaults. It also has to be seen that securities like company seals, cheque books, deposit receipts are kept in the safe custody of an independent person other than the person handling the important functions of accounting cash and bank. It is to be ensured that cash is banked daily to avoid fraud and misfeasance. The Bank Reconciliation Statement is to be prepared, preferably, every 15 days to ensure that Unresolved entries are accounted properly.
The purchases book is to be handled by a person other than the purchases officer. Purchases have to be backed by a purchase order depending on the inventory level in the stores department. There should be different layers of authority approvals depending on the quantum and amount of purchases made , say, preferably, for a month.
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It is to be ensured that there are no old outstanding purchase orders for more than 3 Months. It is to be seen that every purchase is backed up by a Goods-receipt-cum- Inspection report from the concerned department, thereby ensuring that the quantity Mentioned in the purchase invoice tallies with the quantity in the GRIN. In case of Purchase returns, it is to be seen that the amount is properly debited to the party Concerned and the amount collected back from him for the goods returned. In case of sales, it is to be ensured that the sales invoice is backed up by an internal Work order or the party’s purchase order, as applicable in the circumstances. Every sale should be delivered to the party within the due delivery date, as applicable, to avoid the penalty of liquidated damages. In case of export sales, it is to be seen that the sale proceeds are received within the statutory limit of 6 months from the date of sale.
In case of inventory, it is to be seen that the balance as per stock register tallies with the quantity as per the purchase register. It also has to be ensured that slow and non-moving items in stock should be segregated from the regular items in stock. The auditee entity should have a consistent policy on the time-horizon in case of slow and non-moving items(normally 3-6 months). It also has to be ensured that is perpetual inventory count and physical verification to avoid fraud and misfeasance.
In case of general ledger review, it is to be ensured that exceptional and non- recurring items are adequately monitored to prevent error and fraud. Statutory defaults and non-compliance with attendant regulatory mechanisms warrants the auditor’s immediate attention and reporting it to the highest possible authority with adequate power in the entity concerned.
In the case of Debtor’s ledger, it is to be ensured that the sales made should be Recovered within the shortest possible time-frame, so that money is not locked in Working-capital. It is to be ensured that the credit limits are carefully set, keeping in view the financial condition of the customer concerned.
It also has to be seen that in the case of creditor’s ledger, payments have to be made in time , so that too many creditors are not made to wait at the office-door demanding their dues , which would put unnecessary strain on the company’s finances.
The views expressed here are of the author, The Feelancer may not necessarily subscribe to them.
The writer is Pritvi Kanchi.
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