CO-OPERATIVE AUDIT

Definition of Co-operative Audit

(i) Section 2(ab) of the Kerala Co-operative Societies Act define cooperative audit as ―Auditing of accounts of
Co-operative Societies means a close examination of financial transactions, overdue debts, if any
maintenance of books of Accounts, documents and other records of a business, preparation of audit report
and includes an inquiry into the affairs of the society and subsidiary institutions in order to ascertain
the correctness of accounts and the extent to which its activities were useful in promoting the economic
welfare of the members in accordance with the cooperative principles.
(ii) Co-operative audit is a more comprehensive enquiry than a mere financial audit. It is an administrative
audit too
OBJECTIVE
Section 64(1) of the Kerala Co-operative Societies Act 21 of 1969, lays down that ―audit shall include an
examination of overdue debts, if any, the verification of the cash balance and securities, and a valuation of the
assets and liabilities of the Society concerned and such other audit matters, as may be prescribed.
Main objects of audit- The main objects of audit are:
(i) To detect clerical errors and errors of principle.
(ii) To detect fraud, if any exists and
(iii) To prevent fraud and errors.
(iv) To ascertain a true and correct state of affairs of the institution/ organization.

ADVANTAGES
Apart from the detection of errors and fraud, a regular audit would help to keep the books of
accounts of a business concern up-to-date. The fact that audit is being done at regular intervals
will act as a moral check and prevent fraud and errors to a certain extent. It also helps to
provide an independent opinion to the members‘ general body about the management
of their committee and the institution. Audited accounts are usually relied upon for the
purpose of assessing the income tax and GST and also for disbursement of Government
assistance. An efficient audit is a safeguard to the creditors whose investments enable the
institutions to conduct its business. The audit helps to ascertain the correct and true state of
affairs of the business, which consequently enables the institution to secure necessary
finance on the certificate of the audited balance sheet. The financial ratio analysis by
the Auditor will enable the cooperative to have realistic assessment on the financial Strength
and weakness of the institution which will help them to take future course of action.
Difference between the audit of Cooperative Societies and of Joint Stock
Companies.-
1.Section 63 of the Kerala Co-operative Societies Act, 1969 lays down that the
managing committee shall cause to audit the accounts of every society at least once in every
year by a person authorised by the director of co-operative audit by general or special order
in writing in this behalf. The audit of a joint stock company is conducted as per sections 224
to 234 of the Indian Companies Act, 1956. Thus the Co-operative audit is state controlled, while
audit of a joint stock company is an annual obligation left to the company itself.

(ii) The appointment of auditor of a Cooperative Society is made by the managing

committee from the panel approved by the Director of Cooperative Audit while in a joint
stock company it is made by its shareholders.

(iii) A joint stock company being an association of capitalists is mainly a profit seeking concern.
The important result of audit they normally expect is the disclosure of the net profit
available for distribution as dividend, But in a Co-operative Society, the primary objective is
to find out how far the society has been carrying on its business on sound co-operative
lines and principles and aiming at the material and moral improvement of its members.

iv) Usually in a joint stock company the statement of accounts are prepared by the
Company themselves, whereas in a Cooperative Society chief executive is liable to
prepare all the statements of accounts, which will be certified by the Auditor. Even though
the societies are bound to file the annual accounts in such form as may be specified by
the Director, such statements are made use of for compiling the state statistics. Such
statements are subjected to scrutiny by the Auditor, during audit of accounts of the society.

(v) In a Co-operative Society, interest accrued and fallen overdue and interest accrued after
an item of interest has fallen overdue is excluded for arriving at the net profits whereas
in a joint stock company, both these items are included in calculating the net profits.
(vi) As per section 64 of the Kerala Co-operativeSocieties Act, the Cooperative Auditor is
expected to examine the overdue debts, if any, and also to value the assets and liabilities. But
in a joint stock company, the auditors simply check the valuation made by the management.
Thus Co-operative Audit entails a more comprehensive enquiry than is usually made in
the case of Joint stock companies.

FEATURES
Scope and special features of Co-operative Audit.
1.Examination of overdue debts- Examination of overdue debts involves a careful assessment
of chances of their recovery and their classification into good bad and doubtful. The
auditor has also to examine in detail whether the society has taken effective and prompt
action for recovering the overdues.

(ii) Valuation of assets and liabilities.-One of the important duties of the auditor is to verify the
assets and liabilities appearing in the balance sheet.
(iii) Adherence to Cooperative Principles- In conducting business operations the Cooperatives are expected to
observe certain well defined principles

(iv) Personal verification of members’ accountsand Examination of their pass book - Personal
verification of members‘ accounts is a safeguard to prevent manipulation of accounts
by dishonest employees and office bearers of societies.

(v) Assessment of damages due to negligence.If any deficiency or loss has occurred to the
society due to negligence, want of proper care, misfeasance or misconduct on the part of the
employees or members of the committee, or of the society, the auditor, after careful
examination of the relevant records, has to assess such deficiency or loss.

(vi) Certification of bad debts.-Rule 62 of the Kerala Co-operative Societies Rules, lays down
that such of the dues to the society including loans and advances and interest thereon which
are found irrecoverable can be written off only after they are certified as such by the auditor
appointed under Section 63 of the Kerala Cooperative Societies Act 1969.
(vii) Awarding of audit classification to the society- On completion of the statutory audit,
the authority competent under the Rule has to award an audit classification to the society, in
accordance with the instructions issued by the Registrar from time to time. An elaborate
procedure has been laid down in the method of classifying primary credit societies and
non-credit societies. The societies are classified under A, B, C and D classes. Classification is
made depending upon their general performance for which marks are awarded in
each item.

ADMINISTRATIVE SET UP OF CO-OPERATIVE SOCIETIES IN KERALA

The Director of Co-operative Audit shall be an officer on deputation from the Indian Audit and
Accounts service not below the rank of Deputy Accountant General or an officer from the
Indian Administrative Service. Additional Director at the Head Office is in overall control
of the audit staff of the state and exercises all powers of the Director. Apart from Additional
Director, the head office consist of one Joint Director, One Deputy Director, One Assistant
Director and Eight senior auditors and concurrent auditors for apex societies having
state wide jurisdiction. At District Level , there are Joint Director of Co-operative Audit one for
each district and his office have one Assistant Director and two senior auditors and
concurrent auditors – Deputy Director and Assistant Director for major societies. At taluk
level there are Assistant Directors of Cooperative Audit one for each taluk. One
Senior/Junior Auditor assist the Assistant Director in his office. These Assistant Directors
closely supervise and guide the work of the unit/concurrent auditors working in the
respective taluks. In major Cooperative Institutions, Deputy Director/Assistant Director
are working as concurrent Auditors, where as special grade /Senior/Junior Auditors are
working as concurrent auditors in other cooperatives .

Different kinds of Audit

i) Interim audit: Interim audit is one performed before the final audit. It helps the auditor to get
the final audit done easier and quicker. Interim audit report has to be submitted with copy of
receipts and disbursement statements for the period with the summary of defects if any.
ii) Test Audit: Test audit is one special to the Co-operative department. The Director/ Joint
Director/ Assistant director are expected to test audit a few Societies to ascertain whether the
auditor has done the audit correctly or not, which is termed as ―Test Audi. This involves a
re-audit of the accounts of the Society, the audit of which is tested.
iii) Internal Audit:- Internal audit means audit of accounts of the institution by the employees
of the very same institution (audit wing of the institution deputed for the work). The work is
done by a separate section of the staff, to detect weakness in system, procedure and for
improvement. This is a type of continuous audit by the staff. In institutions where internal audit
wing is functioning efficiently and independently, the auditor can depend on their
checking to a certain extent. The existence of internal audit wing will minimize chances for
committing frauds, errors and omissions. In apex and federal/ Regional level institutions the
internal audit wing should be constituted and their work should be reviewed and monitored
by the management/ Audit Committee periodically.

(iv) Final Audit/Statutory Audit

Final audit is the statutory annual audit. It is the obligation imposed on the institution by the
statute. It is legally required to review the accuracy of the financial statements. It is taken
up at the close of the financial or trading period when all the accounts are balanced and a
trading and profit and loss account and Balance Sheet prepared. The valuation and verification
of assets are also done by the Auditor.

Reconciliation of Bank accounts.-

Bank reconciliation statements have to be prepared at regular intervals by the Cashier or
the officer concerned. During the course of audit, the auditors should compare the debits
and credits shown in the Bank statements/pass books with the entries in the book and
counterfoils of the pay-in-slips/cheques issued. Contra items either in the cash book or in the
pass book should also be enquired into in detail. Items pending reconciliation at the end
of each period should be traced out and reconciled in the following period. Any
abnormal variation in the dates should also be specially taken note of. If for any collection of
Cheque/DD a longer period is noticed written explanation of the CEO/Manager should be
obtained and reserve should be created for such amount.

Auditor‘s duties and responsibilities.-

Section 64(1) of the K. C. S. . Act 1969, lays down that the audit shall include an
examination of overdue debts, if any, the verification of cash balance and securities, and
a valuation, of the assets and liabilities of the society.

Therefore the auditor should:

(i) Verify the cash balance on the date of his visit and record the result of verification with
his signature, date and designation.

ii) Verify whether all the books and registers prescribed in the Kerala Cooperative Societies
Rules made under the Act and as prescribed by the Registrar from time to time are maintained
properly and kept up-to-date;

(iii) Verify the genuineness and adequacy of all personal security, mortgage and other bonds
and ascertain as to whether any of them is time barred

Preparation for audit

1.Initially theauditor conducts meetings with management and the personnel to discuss the
overall scope of the audit.
2.The auditor should conduct the review of all important documents about the organisation.
3.Management policies and guidelines should be reviewed carefully.
4 Procedures and the detailed information about the processes which should also be
reviewed.
5. Flowcharts help in understanding the processes and how the transaction flow has
dependencies and branches to various directions.
6.Organisations should have control over processes and have to preserve the evidence of
the same in the form of system screen shots and system logs which can be accepted as
evidence.

Preparation of audit programme

Audit, to be methodical and efficient, it is necessary that it should be carried on regularly
according to a definite programme. Audit programme is a scheme setting out in detail the
different phases of work to be done in the course of audit within a fixed time. The
programme to be effective, has to be based on a standard model, which would contain all the
necessary items. It will not only record the exact nature of work to be performed by the
auditor and his staff, but will also have columns for the initials of the persons performing each
part as and when they complete it. Audit programme will give the auditor a clear idea as to what has been
done and how he has carried out his work and how he has to finish the remaining work logically and efficiently.
It will
also guard against any possible omission and ensure thorough and systematic checking

Audit Reports
Audit reports are prepared after the completion of the audit. It should be the sum
total of the observations and findings. It includes:
1. Scope
2. Audit methodology
3. Conclusion and road map
4. Detailed findings
5. Observations
6. Policies and procedures to be reviewed
7. Risk areas
8. Recommendations
9. Annexures supporting the observations
10. Personnel interviewed
11. Evidences obtained
12. Disclaimer

AUDIT FEES OF CO-OPERATIVES

The sub section (6), (7) and (8) of Section 64 of KCS Act empowers the Director of Co-operative
audit charge the audit fees or audit cost for the audit of accounts of cooperative societies. Rule
65 of KCS Rules stipulates the procedures charging audit fees. Every cooperative society,
whose accounts are audited by the cooperative department auditors, is required to remit the
audit fee in the government treasury accordingto the scale fixed under the provisions of Kerala
Co-operative Societies Rules. Audit fees is calculated and shown in the Audit Certificate as
payable.
The criteria of levying of audit fees for different type of societies according to Rule 65 of KCS
Rules: “Every cooperative society shall pay to government within one month of receipt of the
annual audit certificate an audit fee calculated on the working capital as on the last day of the
year to which the audit relates or on the total sales during the year or on the gross income
during the year as the case may be as shown below.”

(i)Credit Societies: (Excluding PCARDBS, Housing Societies and House Mortgage Banks )-On
Working Capital
(ii)PCARDBS: Housing Societies and House Mortgage Banks- On the aggregate of loans
issued and that recovered during the year under audit
(iii)Societies having Credit and Non Credit activities -On working capital or sale proceeds,
whichever is higher
(iv)Societies dealing in goods except coir and consumer societies -On sale proceeds of goods
(v)Coir Cooperatives societies - On proceeds of coir sold as owner as well as on the commission
realised on goods sold as agents
v(a)
i. Primary consumer Co-operative societies - On sale proceeds of goods
ii. District whole sale Co-operative consumer stores and Apex consumer Cooperative societies -On working
capital or sales proceeds of goods, whichever, is higher
(vi)Transport Societies- On hire charges collected and sale proceeds of articles
(A) Farming Societies which accept deposits and Grant loans advances- - On working capital
(B)Social welfare societies which accept deposits and grant loans - On working capital
(vii).Other Societies On Gross income

The audit fees shall be calculated at the rate of 50 paise for every 100 rupees or part thereof on
the working capital, the value of sales or the gross income, as the case may be. The maximum
audit fee payable by the society shall not exceed one lakh rupees. Sub rule A of Rule 65 of KCS
Rules provides for the upper limit of audit fees for different type of cooperative societies as
shown below.
(i) Credit Societies having working capital up to ten crore rupees (Except PCARDB, Housing
Society and House mortgage banks)- Fifty thousand
(ii) Credit societies having working capital above ten crore rupees (Except PCARDB, Housing
Society and House mortgage banks) - One lakh 188
(iii) PCARDBS, Housing societies and House Mortgage Banks – where aggregate of loans
issued and that recovered during the year under audit is up to Ten crore rupees -Fifty thousand
(iv) PCARDBS, Housing Societies, House Mortgage Banks where aggregate of loans
issued and the recovered during the year under audit exceeds Ten crore rupees- One lakh
(v) Societies having credit and non credit activities, where the working capital or sales
proceeds of goods whichever is higher is up to ten crore rupees. - Fifty thousand
(vi) Societies having credit and Non credit activities , where the working capital or sales
proceeds of goods, whichever is higher exceeds ten crore rupees -One lakh
(vii) Societies dealing in goods (except coir and consumer societies) where the sale proceeds is
up to ten crore rupees -Fifty thousand
(viii) Societies dealing in goods (except coir and consumer societies) where the sale proceeds
exceeds ten crore rupees -One lakh
(ix) Primary Consumer Societies -Ten thousand
(x) District wholesale stores and Apex Consumer society -One lakh
(xi) Transport Societies -Twenty Five thousand
(xii) Farming societies which accept deposits only from members and grant loans and
advances- Fifty thousand
(xiii) Social Welfare societies which accept deposits only from members and grant loans Fifty thousand.
(xiv) Weaver’s Cooperative societies -Twenty Five thousand
(xv) Hospital Cooperative societies -Twenty Five thousand
(xvi) Dairy Cooperatives -Twenty Five thousand
(xvii) Vanitha Cooperatives which do not accept deposits and do not grant loans -Ten thousand
(xviii) Vanitha Cooperatives which accepts deposit, only from members and grant loans - Fifty thousand
(xix) Other societies -Fifty thousand

AUDIT CLASSIFICATION
The classification of a society on completion of audit is the final stage of audit which should be
carried out strictly based on the guidelines issued by the Registrar of Co-operatives and or
Reserve Bank of India from time to time. The audit classification norms for Urban Cooperative Banks and
District/Central Cooperative Banks are being issued by the Reserve Bank of India. The Registrar of Co-operative
Societies had issued guidelines for the audit classification of Primary agricultural cooperative
societies for primary cooperative societies Central cooperative Banks Urban cooperative
Banks Classification is a duty vested on the auditor and therefore, it should be performed
with care and diligence. The auditor should bear in mind that wrong classification into lower
classes may lead to weaken the enthusiasm of the office bearers of the society. At the same
time, there should be maximum care not to give any higher classification than it is actually
eligible or deserved. The classification is based on the following distinct facts:
1.The financial stability, economic viability soundness etc.
2.The administrative efficiency, general performance etc of the society.
Based on the marks obtained the societies may be classified as A, B, C or D.
Marks between 60 and above – A class
Marks between 50 and 60 -B class
Marks Between 40 and 50 - C class
And below 40 - D class
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AUDITING
MEANING AND DEFINITION OF AUDITING

 The word audit is derived from Latin word audire which means ‘to hear’. Auditing is a critical
examination of the records and books of account of a business by an independent qualified person for
ascertaining the authenticity and the accuracy of entries appearing in the books of account and
financial.

 Montgomery defined auditing as examination of the books and records of a business in order to
ascertain or verify and report up on the facts regarding the financial operations and the results
thereof.”

OBJECTIVES OF AUDITING

 Primary Objective or Main Objective:

The main objective of auditing is to verify the accounts and records and to report to the owners of the
business whether the profit and loss account and the Balance sheet have been properly drawn up according to
the requirements of law, and whether they exhibit a true and fair view of the profit and the financial position
of the business

 Subsidiary or Ancillary objectives: - Subsidiary objectives of auditing are

(1) Detection and prevention of errors.
(2) Detection and prevention of frauds.

 Detection and prevention of Errors: - Errors refer to unintentional misstatements in the records or
books. Errors are two types namely
(1) Clerical or technical errors and
(2) Errors of principle.

 Clerical Errors: - Clerical errors refer to all types of errors committed on account of clerical
mistakes. They are
(1) Errors of omission
(2) Errors of Commission
(3) Compensating errors and
(4) Errors of duplication.

 Errors of Principle: - An error of principle arises when the generally accepted principles of
accountancy are not observed, while recording a transaction in the books of account. In other
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words, if a transaction is recorded in the books of account against the generally accepted principles
of accountancy, the error is known as an error of principle.

 Detection and prevention of frauds: - It is intentional or wilful representation or deliberate

concealment of material fact with a view to deceive, cheat or mislead somebody. Fraud may be
broadly classified into three types. They are

(1) Misappropriation of cash

(2) Misappropriation of goods
(3) Manipulation of accounts

1. Misappropriation, Defalcation or Embezzlement of Cash: - Misappropriation of cash means the

fraudulent appropriation of cash belonging to another person by whom it has been entrusted.

"Teeming and lading" or "lapping process".

This is one of the methods of misappropriation of cash. Under this method cash received from the
first customer is misappropriated by the cashier. The money received from the second customer is
credited to the account of the first customer, the money received from the third customer is credited
to the account of second customer, and the money received from thefourth customer is credited to
the account of third customer and so on. This process is carried out throughout the year.

2. Manipulation of accounts: Manipulation of accounts means falsification of accounts without any

misappropriation of cash or goods. It implies presentation of accounts more favourably than what
they actually are. Manipulation of accounts may be done in any of the following ways:

(1) Non provision of depreciation on fixed assets.

(2) Provision of less depreciation on fixed assets
(3) Provision of more depreciation on fixed assets
(4) Over valuation of assets
(5)Window dressing: - It is the practice by which the balance sheet is made to show a state of affairs
that is different from the actual state of affairs. Generally, the practice of window dressing is
adopted to make the balance sheet show a state of affairs far better than the actual state of affairs
 Specific objectives: There will be specific objective in respect of each type of specific audits. For
example, in operational audit, the aim of audit is to evaluate the existing operations of the entity in
order to give expert advice to improve their efficiency. The cost audit is to check the cost records of the
entity in order to make a report on the proper ascertainment of cost of production of goods or
services. Depending upon the nature of specific audit, there may be different objective in respect of
each specific audit.
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Classification of Audit

1. Statutory Audit: Statutory audit refers to the audit of accounts of a business enterprises carried out
compulsorily under the provisions of a statute or law. It is the audit carried out compulsorily under any
statute any law

2. Government audit: Government audit refers to the audit of accounts of Government departments
and offices, Government companies and statutory or public corporations .

3. Private audit or Voluntary audit: In other words, private audit refers to the audit of accounts of
private enterprises such as a sole trading concerns, partnership firms and other individuals and
institutions.

4. Internal audit: -Internal audit is a continuous and systematic review of the accounting, financial and
other operations of a concern by the staff specially appointed for the purpose. In other words, it is the
audit of accounts by the staff specially appointed for the purpose.

Objectives of Internal audit

 To ascertain whether internal check and accounting systems are adequate and effective.
 To ascertain whether predetermined policies, plans and procedures have been complied
with.
 To ascertain the reliability of the accounting and other data.
 To evaluate the performance of the personnel.
 To ascertain whether the properties of the concern are safeguarded.
 To suggest to the management the improvements desired in the internal check systems,
accounting system etc.

5. External Audit :Audit conducted by independent qualified person and examines the books of
accounts and report to the management.

6. Continuous Audit. Continuous audit is one where the auditor’s staff is occupied continuously on the
accounts whole the year round and performs interim audit. It is an audit under which detailed
examination of the books of accounts is conducted continuously throughout the year. It is continuous
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review of the accounts of the organization. It is generally applicable to banking company and insurance
company.

7. Final Audit or Annual or periodical audit: It is an audit carried out after the preparation of
financial statement. It is an audit where the auditor takes up his work of checking the books of
accounts only at the end of the accounting year

8. Interim Audit: It is an audit conducted between two annual audits. In other words, it is the audit
conducted in the middle of the financial year.

9. Cost Audit :It is a thorough examination of the cost accounting records of a company by a cost
auditor to ensure that they are accurate and they also follow to the cost accounting principles,
procedures and plans
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Duties of auditors related to detecting Errors and Frauds

 Examine all aspects of the finance.

 Vouch all the receipts from the counterfoils or carbon copies or cash Memos, sales mart reports etc.
 Check thoroughly the salary and wages register.
 Verify the methods of valuation of stocks.
 Check-up stock register, goods inwards notes, goods out wards books and delivery challans etc.
 Calculate various ratios in order to detect fraudulent manipulation of accounts
 Go through the details of unusual items.
 Exercise reasonable skill and care while performing the duty.
 Make surprise visit to check the accounts.

Investigation
Investigation is an enquiry into the accounts and records of a business concern for a special purpose, say, to
know the actual financial position of the concern or to know the real earning capacity of the business or to
know the extent of fraud.

Qualification and Qualities of an Auditor

1. Professional Qualities: -

• Knowledge of principles and practice of general accounting.

• Knowledge of Cost accounting

• Knowledge of Management accounting

• Thorough knowledge of techniques of auditing

• Knowledge of provisions relating to income tax , GST etc.

• Knowledge of business laws.

• Knowledge of economics.

• Knowledge of Mathematics and Statistics

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• Knowledge of Business Management and Organization and financial administration

• Knowledge of report writing.

• Knowledge of technical details of the business under audit.

• Knowledge of the accounts of the business under audit

2. Personal Qualities or General Qualities,

• Honesty and Integrity.

• Tactfulness

• Vigilance

• An enquiry mind

• Methodical

• Care and Skill

• Diligence

• Judgement.

• Responsibility

• Impartiality and independence.

• Common sense

• Ability to communicate

• Ability to work hard

• Patience

• Courtesy

• Ability to maintain secrets.

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1. Audit Programme
 It is a written plan regard to the conduct of a particular audit
 It is a set of procedures specially designed for each audit
 It should prepare before the commencement of the audit
 It helps to distribute audit work among the staff
 It help to fix responsibilities of staff
 It indicate the duration of time within which audit work should be completed

2. Audit Note Book

 Audit Note Book is a register maintained by the audit staff to record important points observed,
errors, doubtful queries, explanations and clarifications to be received from the clients.
 It also contains definite information regarding the day-to-day work performed by the audit
clerks.
 The note book should be maintained clearly, completely and systematically.
 It serves as authentic evidence in support of work done to protect the auditor against any legal
charge initiated against him for negligence.
 It is of immense help to the auditor in preparing audit report.
 It also acts as a valuable guide for conducting audit for future years.

3. Audit Working Papers

 Audit working papers are the papers and documents which consists of details about accounts
which are under audit
 Important facts and details about the accounts are recorded in the working papers
 Current year working papers are used as base in the next year of audit
 Ownership of audit papers belong to the auditor not to the client

4. Procedure of Audit
I. Routine checking
It is the checking and casting common books of accounts by the auditor. It involves following activities.

a) Checking, casting and sub casting of such books.

b) Checking of posting into ledger book.

c) Checking the balances transferred from one book to another

II. Test Checking.

 Testing of test checking means to select and examine a representative sample from large number of
similar items.
 The main objective of test checking is to select representative item and examining it and conclusion is
drawn from all of the items.
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 The success of test checking depends upon the system of internal check in operation.

III. Surprise checking

 A system under which the auditor make surprise visit to the organization and check the important items
i.e. the verification of the cash book, investment, examination of entries related to stock and stock items
and examine the book of original entry.

IV. Auditing in depth: - Examination of selected item in depth or to the origin to conclusion

V. Adoption of distinctive tick mark, check mark etc..

The auditor can use the ticks, tick marks, check marks etc to indicate the work done by the auditor
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INTERNAL CONTROL AND CHECK

INTERNAL CONTROL
Internal control is the whole system of control established by the management for the proper conduct of
various activities of the organization. It is not only internal check and internal audit but also the whole system
of control financially and otherwise established by the organization in order to carry out the business in
orderly and efficient manner

Objectives of Internal Control

1) To ensure that transactions are recorded proper books of account.

2) See that all transactions are carried out only on account of a sanction of authority.

3) See that management policies and decisions are properly implemented.

4) To ensure efficient conduct of business.

5) To evaluate the efficiency of performance of the various personnel.

6) To safeguard the assets of the organization.

7) To safeguard the interest of the organization.

8) To ensure reliability of accounting records.

9) To ensure the periodical verification of assets

INTERNAL CHECK

 It is an arrangement of accounting work under which the work of one person comes under the security
of another person.
 It is an arrangement of accounting system under which no one person is allowed to carry out one work
completely
 The work of one staff is automatically checked by another person in order to locate errors and frauds

Objectives
 Proper division of work.
 Minimization of errors and frauds.
 Easily detection of errors and frauds.
 Ensures the reliability of accounts.
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 Easily preparation of final accounts.
 Simplification of the external auditors work

Advantages of Internal check

 Advantages to business
1. Proper division of work
2. Fixation of responsibility
3. Greater efficiency of the staff.
4. Increased carrying capacity.
5. Early detection of errors and frauds.
6. Easy preparation of final account.
7. Truth and accuracy of accounting can be available

 Advantages to Owners.
Genuineness and accuracy of the account.
2. Overall efficiency, economy in operations, increased profit etc..

 Advantages to Auditor
1. There is no need for detailed examination of book of accounts.
2. It reduces burden
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1. Voucher (Source Document)

 Business transactions are usually evidenced by an appropriate documents such as Cash memo, Invoice,
Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the transactions
is called the Source Document or a Voucher
 All documents (vouchers) are arranged in chronological order and are serially numbered and kept in a
separate file.
 All recording in books of account is done on the basis of vouchers.

2. Books of Original Entry (Journal)

 The book in which the transaction is recorded for the first time is called journal or book of original
entry.
 The process of recording transactions in journal is called journalising.
 Once the journalising process is completed, the journal entry provides a complete and useful
description of the event’s effect on the organisation

3. Narration :A brief description of the transaction given in journal

4. Ledger
 The process of transferring journal entry to individual accounts is called posting.
 It contains a summarised record of all the transactions of the period
 Also known as Principal Book of entry.
 Ledger is the book for analytical record.

5. Trial Balance :A statement prepared with the balances of ledger accounts to test the arithmetical
accuracy

6. Sub-division of journal
 The journal in which transactions of similar nature only are recorded may be termed as special
journal or day book
 The division of original entry in to different Day book is called sub-division of journal

Special journals
 Cash book : Cash book is a book in which all transactions relating to cash receipts and cash
payments are recorded. It serves the purpose of both journal as well as the ledger (cash)
account. It is also called the book of original entry.
 Purchases (Journal) Book : All credit purchases of goods are recorded in the purchases
journal whereas cash purchases are recorded in the cash book.
 Purchases Return (Journal) Book : In this book, purchases return of goods are recorded.
Sometimes goods purchased are returned to the supplier for various reasons such as the
goods are not of the required quality, or are defective, etc.
 Sales (Journal) Book: All credit sales of merchandise are recorded in the sales journal. Cash
sales are recorded in the cash book.
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 Sales Return (Journal) Book :This journal is used to record return of goods by customers
 Journal Proper :A book maintained to record transactions, which do not find place in special
journals, is known as Journal Proper or Journal Residual.

Following are the items recorded in this journal proper

1. Opening Entry: In order to open new set of books in the beginning of new accounting year
2. Adjustment Entries: In order to update ledger account on accrual basis
3. Rectification entries: To rectify errors in recording transactions in the books of original entry and
their posting to ledger accounts
4. Closing entries
5.Other entries :
(i) At the time of a dishonour of a cheque the entry for cancellation for discount received or discount
allowed earlier.
(ii) Purchase/sale of items on credit other than goods.
(iii) Goods withdrawn by the owner for personal use.
(iv) Goods distributed as samples for sales promotion.
(v) Endorsement and dishonour of bills of exchange.
(vi) Transaction in respect of consignment and joint venture, etc.
(vii) Loss of goods by fire/theft/spoilage

 Petty Cash Book

 Petty cash book maintained by the petty casher to record petty payments(Small amount
payments)made by him during an accounting period
 It is usually maintained under “Imprest System”
 It is usually prepared for a week, fortnight or month
 The fixed sum with which the petty casher has to begin is called the “Imprest” or “Cash float”.

 Debit Note & Credit Note

Debit note:

 It is a document similar to an invoice

 It is a document prepared by the purchaser of goods to seller of goods to inform about he returns
some of the goods bought.

Credit note:

 It is a source document to record sales return, allowances granted etc..

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 it is a document prepared and sent by the seller to purchaser to inform about his account is
credited with the amount mentioned in it.
9. Discount
Trade discount:
 Discount usually allowed by the wholesalers to retailors on bulk purchase
 It is deducted in the invoice from the list price and net amount only is recorded in the books of
accounts
Cash discount:
 It is the reduction allowed by the creditor to debtor usually on making prompt payment.
 Discount is loss to creditor and gain to debtor

10. Contra Entries

 Entries which affects both cash and bank

 Contra entries are marked with letter “C” in the ledger Folio column

Ex: Money deposited in to bank

Withdrawn cash from bank