Lesson 26




Credit Note 


Ledger control 
Test for: 
Test for:
(i) Evidence of a sequence check.
(ii) Evidence of approval. 
(iii) Adherence to authority limits 
Test f or evidence of a sequence check
Test for evidence of a sequence check.
1. Serial numbering 
2. Evidence of sequence check 
3. Evidence of matching purchase invoices with goods received notes and purchase
4. Evidence of checking casts, extensions and tax treatment 
5. Evidence of account coding. 
6. Initialing of invoice grid for work done. 
7. Approval of purchase invoice for further processing. 
Test for evidence of matching credit notes to goods returned notes 
Test for evidence of authorization of adjustments to payables ledge
Text for:

(i) Evidence of review of reconciliation of purchase ledger listing.
(ii) Evidence of authorization of adjustments to purchase ledger control account. 

The control objectives in respect of a wages and salaries system are as follows: 
(a) Payment of wages and salaries should be made only in respect of the client's authorized employees.
(b) Payment should be made at authorized rates of pay.
(c) Wages and salaries payments should be in accordance with records of work performed, e.g. time, output, 
commissions on sales.
(d) Payroll and payroll deductions (tax and social security) should be calculated accurately.
(e) Payment should be made to the correct employees.
(f) Liabilities to the tax authorities for tax and social security should be properly recorded. 

Lesson 27

Control Objectives  
The control objectives in respect of a wages and salaries system are as follows:
(a) Payment of wages and salaries should be made only in respect of the client's authorized employees.
(b) Payment should be made at authorized rates of pay.
(c) Wages and salaries payments should be in accordance with records of work performed, e.g. time, 
output, commissions on sales.
(d) Payroll and payroll deductions (tax and social security) should be calculated accurately.
(e) Payment should be made to the correct employees.
(f) Liabilities to the tax authorities for tax and social security should be properly recorded. 

(a)  Approval and control of documents 
i) There should be written authorization to employ or dismiss any employee.
ii) Changes in rates of pay should be authorized in writing by an official outside the wages 
iii) Overtime worked should be authorized in advance by a manager/supervisor,  
iv) An independent official should review the payroll and sign it.
v) The wages cheque should be signed by two signatories and agreed with the signed payroll.
vi) Where weekly pay relates to hours at work, clock cards should be used. There should be 
supervision of the cards and the timing devices, particularly when employees are clocking-on or
vii) Where a piece work system operates, payment should only be made for work of an appropriate
quality which has been inspected and approved. 
viii) Personnel records should be kept independently of the payroll department for each employee
giving details of engagement, retirement, dismissal or resignation, rates of pay, holidays etc, with
a specimen signature of the employee. 
ix) A wages supervisor should be appointed who could perform some of the authorization duties
listed above. 
(b) Arithmetical accuracy
(i) Where appropriate, payroll should be prepared from clock cards, job cards etc, and a sample 
checked for accuracy against current 'rates of pay.
(ii) Payroll details should be checked for '.he accurate calculation of deductions e.g. tax, social 
security, pensions, trade union subscriptions etc
(c) Control accounts 
(i) Control accounts should be maintained in respect of each of the deductions showing amounts
paid periodically to the inland Revenue, trade unions etc. 
(ii) Overall analytical checks should be carried out to highlight major discrepancies e.g. check
against budgets, changes in amounts paid over a period of time, check against personnel
(iii) Management should exercise overall review and control.
(d) Access to assets and records
Ideally, payment should be made by cheque or by direct transfer into the employees’ bank account. If payment
is made in cash, the following procedures should be in place: 
(i) Employees should sign for their wages.
(ii) No employee should be allowed to take the wages of another employee.
(iii) When wages are claimed late, the employee should sign for the wage packet and the release of 
the packet should be authorized. 
(iv) The system should preferably allow the wages to be checked by the employee before the
packet is opened, by using specially designed wage packets. 
(v) The wages department should preferably be a separate department with their       personnel not
involved with receipts or payments functions. 
(vi) The duties of the wages staff should preferably be rotated during the year, and ensure that no 

employee is responsible for all the functions in respect of any particular department.
(vii) The employee making up the pay packets should not be the employee who prepares the 
(viii) A surprise attendance at the pay-out should be made periodically by an independent official.
(ix) Unclaimed wages should be recorded in a register and held by someone outside the wages 
department until claimed or until a predefined period after which the money should be rebanked.

Tests of Controls - Wages and Salaries
A suggested program of tests of control is set out below. This can, of course, be modified to suit the particular
circumstances of the client. 
(a) Test sample of time sheets, clock cards or other records, for approval by responsible
official. Pay particular attention to the approval of overtime where relevant. 
(b) Test authority for payment of casual labor, particularly if in cash.
(c) Observe wages distribution for adherence to procedures ensuring employees sign for 
wages, that unclaimed wages are re-banked etc.
(d) Test authorization for payroll amendments by reference to personnel records.
(e) Test control over payroll amendments.
(f) Examine evidence of checking of payroll calculations (e.g. a signature of the financial 
(g) Examine evidence of approval of payrolls by a responsible official.
(h) Examine evidence of independent checks of payrolls (e.g. by internal audit).
(i) Inspect payroll reconciliations.
(j) Examine explanations for payroll expense variances.
(k) Test authorities for payroll deductions.
(l) Test controls over unclaimed wages. 

Lesson 28

Control Objectives 
The control of cash is clearly of prime importance in any business. Cash is the asset which is most likely to
The central objectives are that: 
a) all sums due to the company are received and subsequently accounted for
b) no payments are made which should not be made
c) all receipts and payments are promptly and accurately recorded. 
Beyond this, it is better to consider detailed controls for each area of the business dealing with cash. In reality
there is not one 'cash system' in the same way as there is a sales cycle for example; there are a number of
systems which have their own considerations as to control due to the specific circumstances of that part of the
You should appreciate that the cash system also refers to cheque receipts and payments. Businesses should try
as much as possible to conduct all their cash transactions by means of cheques or other forms of bank
transfers as controls over cheque transactions are easier to establish and maintain than controls over cash, in
the form of notes and coins.
Controls are set out below for various aspects of the cash receipts and payments system.
(a) Controls over cash receipts by post
(b) Controls over cash collected by salesmen and representatives
(c) Controls over cash sales
(d) Controls over banking of receipts
(e) Controls   over cheque payments
(f) Bank reconciliations
(g) Controls over petty cash 

Controls over Cash Receipts by post:
a) The company should safeguard against possible interceptions between the receipt and opening of the post 
e.g. by using a locked mail box and restricting access to the keys.
b) The opening of the post should be supervised by a responsible official and where the volume of mail is 
significant; at least two persons should be present when the mail is opened.
c) All cheques and postal orders should be restrictively crossed 'Account payee only, not negotiable' as soon 
as the mail is opened. This may already appear on the documents when they are received; if not, it should
be added. 
d) A record should be made immediately of: 
i) Cheques and postal orders received 
ii) Cash received.
This record may be in the form of a rough cash book, adding machine list or copies of remittance advices. It
provides control over the eventual sums banked and entered into the cash book.
e) The cashier and sales ledger personnel should not have access to the receipts before this record is made.
f) Receipts should be kept in a locked safe or other security area and banked immediately.
g) Post should be date stamped. It provides evidence of when remittances are received and can periodically 
be checked against the date of banking. This helps to prevent cash received one day being banked as
representing different receipts on a later day (a process known as 'teeming and lading'). 
Controls over cash collected by salesmen and representatives:
a) Authority to collect cash should be clearly defined. 
b) Salesmen and others should be required to remit cash and report sales at regular intervals.
c) A responsible official should quickly follow up salesmen who do not submit returns as required.
d) Collections should be recorded when received e.g. in a rough cash book or copies of receipts which 
should be given to the salesmen or travelers.
e) The collector's cash receipts should be reconciled to the eventual banking which should be made as 
promptly as possible. 

f) Periodically a responsible official should check the salesmen's own receipt books with cash book entries.
g) If salesmen hold inventories of goods, an independent reconciliation of inventory with sales and cash 
received should be made.
Controls over Cash Sales:
a) Cash sales should be recorded at the point the sale is made. Usually this is by means of a Cash Till or the 
use of cash sale invoices or receipts.
b) If cash sale invoices or receipts are used they should be pre-numbered, a register should be maintained of 
cash sale books and copies should be retained.
c) Cash received should be reconciled daily with either the till roll or the invoice totals. Cash should be 
banked promptly
d) This reconciliation should be carried out by someone independent of those receiving the cash and 
recording the sale.
e) Daily banking should be checked against the till roll or invoice total and differences investigated.
f) A responsible official should sign cancelled cash sale invoices at the time of cancellation. All such invoices 
should be checked periodically for sequential numbering. 

Lesson 29


Controls over Banking of Receipts:
a) Receipts should be banked daily. The receipts should be banked intact - for example no cash payments 
should be made out of cash receipts. Banking intact allows control (d) below to operate.
b) Each day's receipts should be recorded promptly in the cash book.
c) Sales ledger personnel should have no access to the cash or the preparation of the paying-in slip.
d) Periodically a comparison should be made between the split of cash and cheques: 
i) Received (and recorded in rough cash book)
ii) Banked (and recorded on paying-in slip).  

Controls over Cheque Payments:
a) Unused cheques should be held in a secure place.
b) The person who prepares cheques should have no responsibility over purchase ledger or sales ledger.
c) Cheques should be signed only when evidence of a properly approved transaction is available. Such 
evidence may take the form of invoices, payroll, petty cash book etc.
d) This control should be evidenced by signing the supporting documentation.
e) In a large concern those approving the original document should be independent of those signing 
f) Cheque signatories should be restricted to the minimum practical number in order to make the operation 
of controls as practical as possible.
g) Two signatories at least should be required except perhaps for cheques of small amounts.

h) The signing of blank cheques and cheques in favour of the signatory should be prohibited.
i) Cheques should be crossed 'A/c Payee only', if this is not pre-printed on the cheque before being signed.
j) Supporting documents should be cancelled as paid to prevent their use to support further cheque 
payments. This cancellation could be done by the cashier before the cheque is signed (provided the
cancellation identifies the cheque number) or by the cheque signatory at the time of signing the cheque. 
k) Cheques should preferably be dispatched immediately. If not, they should be held in a safe place.
l) Returned cheques may be obtained from the bank and a sample checked against cash book entries and 
supporting documentation.

Bank reconciliations
a) Bank reconciliations should be prepared on a regular basis, at least monthly.
b) The person responsible for preparation should be independent of the receipts and payments function or, 
alternatively, an independent person should check the reconciliation. 
c) If the reconciliation is prepared by an independent person he/she should obtain bank statements directly
from the bank and hold them until the reconciliation is completed. 
d) The preparation should preferably include a check of at least a sample of receipts and payments against
items on the bank statement. 

Controls over Petty Cash
a) The level of and location of cash floats should be laid down formally.
b) There should be restricted access to the floats.
c) Cash should be securely held e.g. in a locked drawer or a safe, with restricted access to keys.
d) All expenditure should require a voucher signed by a responsible official, not the petty cashier. 
e) The imprest system should be used to reimburse the float i.e. at any time the total cash and value of
authorized vouchers not reimbursed equals a set amount, for example Rs.1,000. 
f) Vouchers should be produced before the cheque to top up the cash float is signed.
g) Vouchers should be cancelled once reimbursement has taken place.
h) A minimum amount should be placed on a petty cash payment to discourage normal purchase procedures 
being by-passed. 

i) A petty cash book should be maintained by the petty cashier. Entries should be made promptly.
j) Periodically the petty cash float should be reconciled to the balance in the petty cash book by an 
independent person.
k) Rules should exist preferably preventing the issue of IOU
s or the cashing of cheques for employees

Cash Receipts
(i) Attend mail opening and ensure procedures are adhered to.
(ii) Test independent check of cash receipts to bank lodgments.
(iii) Test for evidence of a sequence check on any pre-numbered receipts for cash.
(iv) Test authorization of cash receipts.
(v) Test for evidence of arithmetical check on cash received records.
Cash Payments
(i) Inspect current cheque books for: 
 Sequential use of cheques  
 Controlled custody of unused cheques 
 Any signatures or blank cheques.
(ii) Test (to avoid double payment) to ensure that paid invoices are marked 'paid'. 
(iii) Test for evidence of arithmetical check on cash payments records, including cashbook. 
(iv) Examine evidence of authority for current standing orders and direct debits. 
Bank Reconciliations
(i) Examine evidence of regular bank reconciliations (usually one per month).
(ii) Examine evidence of independent check of bank reconciliations (e.g. a signature).
(iii) Examine evidence of follow-up of outstanding items on bank reconciliations. Pay particular attention to 
old outstanding reconciling items that should be written back such as old, un-presented cheques.
Petty Cash
(i) Test petty cash vouchers for approval.
(ii) Test cancellation of paid petty cash vouchers.
(iii) Test for evidence of arithmetical check on petty cash records.
(iv) Examine evidence of independent check of petty cash balance. 

Lesson 30


The type and range of other systems that the auditor may encounter will depend upon the nature of the
business but, as a general rule, most other systems you may encounter will be concerned with the safe custody
of an asset of the business. 
Thus there will be a system for inventory in a manufacturing company and a system for non current assets in
many businesses. Some businesses may have significant investments and thus will have a system to maintain
control of this type of asset.
In this section, we will consider control systems: for inventory and non current assets.

You will be aware that there is a close link between inventory on the one hand and sales and purchases on the
other hand. In the light of this, you will not be surprised that many of the points in this section have already
been dealt with in covering sales and purchases above - they are repeated here briefly to give you the overall

Although inventory records may vary considerably from client to client, the controls are the same in all cases,
(i) Authorization and purchase procedures
(ii) Control over goods inwards
(iii) inventory records supported by physical inventory counts
(iv) Cont
ol over dispatches and goods outwards
(v) Adequate steps should be taken to identify all inventory for which provisions may be 
required on the grounds that their net realizable value is below cost
(vi) Inventory levels should be controlled so that materials are available when required but 
that inventory is not unnecessarily large

Control Procedures over Inventory
(i) Approval and Control of Documents 
a) Issues from inventories should be made only on properly authorized requisitions.
b) Reviews of damaged, obsolete and slow moving inventor/ should be carried out. Any write-offs 
should be authorized.
(ii) Arithmetical Accuracy 
a) All receipts and issues should be recorded on inventory cards, cross-referenced to the appropriate
GRN or requisition document. 
b) The costing department should allocate direct and overhead costs to the value of work-inprogress
c) To do this standard costs are normally used. Such standards must be regularly reviewed to ensure
that they relate to actual costs being incurred. 
d) If the value of work-in-progress is directly comparable with the number of units produced,
checks should periodically be made of actual units against work-in-progress records. 
(iii) Control Accounts
a) Total inventory records may be maintained and integrated with the main accounting system; if so 
they should be reconciled to detailed inventory records and discrepancies investigated.
(iv) Comparison of Assets to Records 
a) Inventory levels should be periodically checked against the records by a person independent of 
the stores personnel, and material differences investigated.
b) Where perpetual inventory records are not kept adequately a full inventory count should be held 
at least once a year.
c) Maximum and minimum inventory levels should be pre-determined and regularly reviewed for 
d) Re-order quantities should be pre-determined and regularly reviewed for adequacy. 

(v) Access to Assets and Records
a) Separate centers should be identified at which goods are held.
b) Deliveries of goods from suppliers should pass through a goods inwards section to the stores. All 
goods should pass through stores and hence be recorded and checked as received.
c) Inventories should be held in their locations so that they are safe from damage or theft.
d) All inventory lines should be identified and held together e.g. in bins which are marked with all 
relevant information as to size, grade, origin, title for identification.
e) Access to the stores should be restricted.  
Tests of Controls
a) Observe physical security of inventories and environment in which they are held.
b) Test procedures for recording of inventory movements in and out of inventory.
c) Test authorization for adjustments to inventory records.
d) Test authorization for write-off or scrapping of inventories.
e) Test controls over recording of inventory movements belonging to third parties.
f) Test procedures for authorization for inventory movements i.e. the use made of authorized goods 
received and dispatch notes.
g) Inspect reconciliations of inventory counts to inventory records (this gives overall comfort on the 
adequacy of controls over the recording of inventory).
h) Check sequences of dispatch and goods received notes for completeness.
i) Assess adequacy of inventory counting procedures and attend count to ensure they are carried out. 

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