CHAPTER WI
INTERNAL CHECK OR CONTROL
Meaning of Internal Check.
Internal Cheek is a method of organising the accounts system
ofan office or factory and the duties of the different clerks in such
a way that the work of one person is automatically checked by an-
other and thus the possibility of fraud, or error or irregularity is
minimised unless there is a collusion between the clerks; e.g. the
receipt of cash is entered by the cashier on the debit side of the cash
book ; this entry is carricd to the leilger by another clerk ; the
statement of account relating t> th!s transictioa is sent to the cus-
tomer by a third clerk and so on. Thus we sec that the same
transaction has passed through three different hands, and the work
ofone is checked automatically by the other. This minimises the
possibilities of fraud and errors unless all the three join hands in
defrauding their employer. Again, the clerk in charge of a book of
prime entry should not have access to the ledger and vice versa. Self
balancing ledger system, time recording clocks or autonntic tills for
recording cash receipts, are some ofthe devices by which the com-
mission of fraud may be prevented. No one is allowed to deal with
one book throughout. Under this system, wages sheets are pre-
pared and checked from different records by different clerks. In
case of cash sales, the salesman does not reccive the money from the
customer, nor does he deliver the goods tohim. Cash is received by.
the cashier ; the goods are delivered by the gate-keeperand all the
three, viz. the salesman, the cashier and the gate kecper send their
own statement regarding the sales, receipt of cash and the delivery
of goods in the evening to the General Manager who compares
these statements and if he finds any discrepancy, he makes an in-
vestigation. Under such a system, unless all the three join hands,
there is no possibility of fraud.
Similarly when the goods are purchased on credit, entries are
made regarding the purchase by the gate-keeper, who records
the
name of the supplier, the quantity and the date; another entry
is
made by the keeper of the purchases book, the godown
keeper etc.
Thus the same entry is recorded by different clerks and
the possibi-
lity of fraud or mistake is reduced to the minimum,
It must be
, te clear here that the students should not
confuse between the
i
INTERNAL CHECK OR CONTROL ’ 2}
Internal Check and Internal Audit. The internal audit implies an
audit of the accounts by the employees of the business. The clerks
go on auditing the accounts throughout the year. Itisa kind of a
continuous audit, but conducted by the clerks of the concern.
In the case of large concerns like banking companies or local bodies,
they have a separate Internal Audit Department.
The Objects of the Internal Check
The internal check system is organised to achieve the follow-
ing objects :—
1. To prevent the commission of any fraud by a clerk,
2. To prevent the misappropriation of cash or goods by any
clerk by kecping a check on the reccipts and payments of
cash and reccipts and delivery of the goods.
3. To throw responsibility on a particular clerk when the
fraud or mistake is detected,
4, To detect a fraud or an error quickly and easily.
5. To have an accurate record of all business transactions,
Axditor’s duty in regard to Internal Check System.
To what extent should an auditor depend upon the Internat
Check system will depend upon the magnitude of the business
whose accounts he is auditing,
In case ofa concern where there is no internal check system
and the clerk has full control over all the books of accounts, it would
be better if the auditor checks all the transactions from the begin-
ning to the end, irrespective of the fact whether the concern is
small or big. Of course, it would entail more time but it is worth 4
while to do so. He must not assume that there is no error. Ifheaaq
docs so, he would be running a great risk. noe
In the case ofa big concern where there is a good internal
check system, the auditor may rely upon it and may, to a great
extent, presume the accuracy of the accounts. But he must not be
negligent. He should apply a few test checks, i.e., he should check a
few transactions here and there at random or check fully the
accounts for a few months, say for January, April, July etc, and
carry out a thorough check of the whole of certain classes of trans-
actions taking place during that particular period, e.g., cash sales, or
cash received or credit purchases during that period. In selecting
certain transactions for ‘test checks’ the auditor should see that
such sample transactions are representatives and true specimens of
such entries throughout the year.
INTERNAL CHECK OR CONTROL 23
books and their specimen signatures. Such a list should
be duly signed by a responsible official of the company.
If internal check system is followed, he should get a written
ul
statement to that effect.
‘6. He should get a list of the officers of the company together
with their duties and powers.
7. Ifthe business is of a technical nature, he would do well to
visit the works, acquire technical knowledge to some
extent, before he actually commences the business so that
he may put intelligent questions to his clients and may not
appear to be ludicrous by putting absurd questions and mete
may also not bedeccived by the clerks who may take
undue advantage of his lack of technical knowledge.
8. He should ask his clients to balance the books, prepare the
final accounts and the balance sheet, file the vouchers in,
ry order of the occurrence of the transactions, prepare the
os schedules of the debtors, good, doubtful and bad debts,
creditors, important legal papers, contracts, list of securities
etc. if this has not been done so far. He should never
begin his work until the books have been balanced.
9. We should get the previous year’s balance sheet and see
that the accounts during the current year have been
opened with those balances with appeared in the previous
balance sheet.
10. He should get the report of the auditor, ifany, relating to
the accounts of the previous year for information regarding
the state of affairs of the company during that year.
11. He must read those clauses of Memorandum of Association
and Articles of Association of the company which have a
bearing on the accounts or the Articles of Partnership of
the firm whose accounts he is auditing or Will or Trust
Deed in case of an audit of a Trust.
12. Ifit is the first audit of a company, he must go through
the prospectus.
Division of work, between Senior and Junior Audit Clerks.
Having considered the above points, the auditor has now to
chalk out a programme and divide the work amongst his assistants as
the chief auditor has simply to supervise and give a finishing touch
to the work already done by his assistants. Of course, it should be
borne in mind that the ultimate responsibility is his.
24 A HANDBOOK OF PRACTICAL AUDITING
The auditor will do well if he allots the audit work ofa concern
toone of his senior audit clerks who in his turn will be assisted
by a few junior clerks sclected by him. Sometimes the
senior clerk himself selects the juniors to help him. Both the
methods have advantages. These junior clerks will get instructions
from their senior audit clerk regarding the work and will be responsi-
ble directly to him under whom they are working. The work
assigned to the juniors will be of routine nature which requires less
skill and technical knowledge, such as checking of original records
with documentary evidence such as vouchers, casting of subsidiary
books, posting of such books into the ledger, checking of stock and
wages sheets etc. Incase of doubt or difficulty, they should refer
the matter to their senior audit clerk who will get a clarification
from the client.
In selecting the senior and junior audit clerks for the work factors
like expericnce, tact, skill etc., must be borne in mind and one
should not be led by the age of the clerk or the length of his
service. It is possible that a clerk with many years of service,
may not be tactful or may not be skilful. The juniors should not
do the work mechanically. They should try to understand the
transactions, They should take lively interest in their work and
suggest ways of improvement to the senior audit clerk under whom
they are working. They should workin full co-operation with the
senior, This is the ground work where they get their initial
training. ‘They should pass no entry which they do not understand
Notes should be made for such entries to enable the senior to get
further explanation about such entries.
The senior audit clerk will supervise the juniors working under
him. He will come in contact with the client or with the manage-
ment. At the outset, the senior in consultation with the auditor,
will chalk out the programme, assign duties to different juniors and
decide as to what work is to be done by himself. Usually the vouch-
ing of the receipts and payments, verification of the cash balance,
verification of the journal entries, adjustments, apportionment of the
capital and revenue items etc., are done by the senior audit clerk.
Having done so, he submits the final accounts together with his notes
to the auditor who in his turn certifies the balance sheet, and prepares
he report to be submitted to the sharcholders of the company. As
tioned above, it is he who is responsible for the whole work and
ss he who signs the balance sheet.
INTERNAL CHECK OR CONTROL 25°
Audit Programme or Audit Note Book
The auditor having selected a senior and the juniors to do a
particular assignment, the senior wil! chalk out the programme as to
what work is to be done by each junior and by himself and with the
time by which the work is to be finished and this is laid down in
the Audit Note Book. There are three metheds by which the
programme is carried out, viz.~—
l. Thee isa complete programme on the file from which
the items to be completed by a particular junior are ticked
off and thus the junior hnows what he has to do and by
what date each item is to be completed.
2. In other cases the senior chalks out a programme for each
cle.k according to the nature of the business of the client.
In this case there is no previous chalked-out programme.
3. In the third case, the senior never prepares a programme
in advance but may allow it to grow as the work pro-
sresses,
Each worker signs for the work he has performed so that the
responsibility may rest upon him for the work he has dene. This
is very important.
Advantages of Audit Programme.
The advantages of such audit programme or Audit Note Becks.
may be outlined as below >—
1. The auditor is in a position to know about the progress of
the work done by his assistants.
2. Auniformity of the work can be attained as the same
programme will be followed at subsequent audits.
3. Work of the audit can be divided amongst the different
juniors who will be responsible for their work. In case
a clak goes on Jeave, his work can be resumed by another
clerk who is in a position to hnow what work has already
been done.
4, Incase of a charge of negligence for not having done
some work against the auditor, the auditor can defend
himself that the work had been done by him or his assistant
who had duly signed the Note Book.
§. Ttisa kind of guidance to the audit clerk for the work
he has to perform.
26 A HANDBOOK OF PRACTICAL AUDITING
After the above preliminaries are settled, the senior clerk must
‘inform the clients beforchand that they would begin the work on
‘such and such date. Though giving of this information may not be ne-
-cessary, it is but in the interest of both the parties. In case he does not
give the information regarding his visit, he may find that the books
are not ready for checking, schedules of debtors and creditors may
‘not have been prepared, vouchers might not have been arranged
-properly, no satisfactory and comfortable room for the audit work
may be available and above all he may find himself unwelcome.
"Loss of time and disappointment may result. To avoid all this, a
previous intimation to the client will result in cordial relations,
mutual co-operation and smooth working.
Tf the work is to be finished by a particular time, the senior
“must see that itis done so. Ifnecessary, juniors may be asked to
-do overtime work, 4 Sse ol
The senior audit assistant equipped with a letter of introduc-
‘tion from the principal auditor, should reach the office of the client
-with his assistants on the day previously intimated after having
‘gone through the whole of the correspondence which had passed
‘between the auditor and the client and previous year’s balance shect
.and the auditor’s report.
QUESTIONS
1, What do you understand by the term “Internal Check” ?
‘Has the auditor any responsibility in regard thereto? Show by
illustrations under what circumstances and to what extent, if any,
he is justified in relying upon it in the course of an audit.
(Agra B. Com. 1944)
2. What are the general principles which should influence
an auditor in deciding whether or not a system of internal check is
-adequate ? (Agra B. Com. 1936)
. 3 - You are appointed auditor to a private firm, the partners
in which devote no time whatever to the books.
You find that the office work is apportioned as follows amongst
the three clerks :—
; A keeps the Cash Book, pays the wages, fills in the calcula-
tions and makes the additions of the wages sheets, and posts the
‘Cash Book and sometimes posts the Sales Book to the Sales
Ledger.
B keeps the Sales Book and posts part of it to the Sales
- He also does some correspondence.
INTERNAL CHECK OR CONTROL 27
C keeps the Purchases Book and posts it to the Bought Ledger.
He also keeps the Private Ledger (which contains the nominal
accounts) and does some of the correspondence.
All these clerks make entries in the Returns (in and out)
‘Book.
Do you approve of this arrangement? Ifnot, submit a report
embodying any suggestions yoa have to make for the protection of
your clients,
4, What is meant by “Internal Check”? What are the
principles upon which you would found a system of “Internal
Check”, and what is the position of an auditor in relation to such
-a system ? (Rajputana M. Com. 1950)
5. It is said that an auditor is entitled to rely on the system
-of interna) check in force. Is thisa correct statement or does it require
any modification ? ,
6, Prescribe a system of internal check to your clients, who
sare the proprietors of a big departmental stores, for control of cash
sales.
7. Your client, who conducts an extensive Ready Money
Business (not Mail Order) requests you to advise him how to protect
‘himself against losses of cash sales. Outline your recommendations.
8. You have been appointed as an auditor to (a) a firm,
consisting of three persons, and (b) a joint-stock company, both of
which were newly formed. Describe briefly what steps you would
‘take before commencing the detailed work of audit.
9. For the guidance of junior clerks who have been
placed under your control, draft a set of instructions suitable to the
ordinary commercial practice. Mention any matters of importance
upon which you would question them when inspecting their work. ~
10. Outline a system of internal check calculated to prevent
the following types of frauds: (a) a bank manager allows loans
‘to his friends and shares the proceeds; (b) stock is written up to
augment profits; and (c) dummy vouchers are printed and
cheques drawn against them. (Bombay B. Conn 1939)
li. What is the object of keeping an audit programme and
‘maintaining notes during audit ?
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