Lesson 26
Purchase
Order
Goods
Received
Note
Goods
Returned
Note
Purchase
Invoice
Credit Note
Payables
ledger
Payables
Ledger control
Test for:
TESTING THE PURCHASES
SYSTEM
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
orders.
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.
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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.
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Lesson 27
TESTING THE PAYROLL
SYSTEM
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.
CONTROL PROCEDURES -
WAGES AND SALARIES
(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
department.
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
off.
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
records.
(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
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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
payroll.
(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.
An
official
should
investigate
the
reason
for
unclaimed
wages
as
soon
as
possible.
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
controller).
(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.
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Lesson 28
TESTING THE CASH SYSTEM
Control Objectives
The control of cash is
clearly of prime importance in any business. Cash is the asset which is most
likely to
disappear.
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
business.
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.
CONTROL PROCEDURES
(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.
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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.
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Lesson 29
TESTING THE CASH SYSTEM
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
cheques.
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.
99
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
TESTS OF CONTROL
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
TESTING OTHER SYSTEMS
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.
Inventory
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
picture.
CONTROL OBJECTIVES
Although inventory
records may vary considerably from client to client, the controls are the same
in all cases,
namely:
(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
r
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
according
to
the
stage
of
completion
reached.
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
adequacy.
d) Re-order quantities
should be pre-determined and regularly reviewed for adequacy.
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(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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