Year: 2020

Vouching of Receipts from Debtors

There should be an effective system of Internal Check. Important parts of such systems should be (a)Persons maintaining the debtor’s ledger should not be allowed to collect the money from the customers, and (b) The customers should be asked to remit cash/cheques through the post.

The auditor should ensure that the unused receipt books are kept in the custody and control of some responsible officer. The original copies of all the spoilt receipt forms are attached with the duplicate copies in the receipt book. Proper scrutiny should be made about the discounts allowed to the customers. Special attention should be paid to amounts written off as bad debts. Tally the dates and amounts on the counterfoils with those in the cash book. Teeming and Lading should be avoided.

Vouching of Sale of Investment

Sale of Investment should give rise to capital receipts, except in the case of sale by brokers or investment firms for whom the proceeds will constitute revenue receipts. Vouching of sale of investment should be done with the broker’s advice and comparison with the stock market quotations in the fin racial journal. It should also be checked with related to investments accounts. The securities on hand and the payments received thereon from time-to-tithe should be checked.

Routine Checking

The term ‘routine checking’ means

(a) The checking of casts, sub-casts, carry forwards, extensions and other calculations in the books of original entry;

(b) The checking of postings into ledgers, and

(c) The checking of ledger accounts, as regards their casts, balancing the carrying forward of balances and the transfer of balances and the transfer of balances to the Trial Balance.

For this purpose, Auditors usually employ ticks of different kinds. Very often coloured pencils are used to distinguish one type of ticks from other.

Objectives of Routine Checking

1. Verification of the arithmetical accuracy of the original books;
2. Ascertainment of postings from books of original entry to the correct accounts in the ledgers;
3. Ensuring, by special ticks, that no figures are altered after they have been checked.

Contrary to this the objects of vouching are much wider in their scope. In addition to the objects of routine checking discussed above, auditor undertakes the work of vouching with the object of going behind the books and to completely satisfy himself that the transactions recorded in the books are (i) properly authorised and (ii) correctly entered into. His attempt would be in the direction of finding out facts behind the figures. Careful and intelligent vouching would help an auditor to a very great extent in detecting frauds. The extent of vouching to be performed by an auditor would depend upon the systems of book-keeping and internal check in operation in the business.

Advantages of Routine Checking

Following benefits can be obtained from the routine checking:

1. All the original entries will be checked; so all the errors and frauds can be detected easily.
2. All the entries and posting will be tested.
3. Routine checking helps to conduct final audit because all the balancing and totals have already been checked.
4. Separate and specific staffs are not needed because it is a regular process.

Disadvantages of Routine Checking

Followings are the limitations of routine checking:

1. Routine checking is a mechanical test, so the staff who performs this work does not have inspiration. So, there are chances of leaving errors and frauds.
2. Routine checking can only detect small errors and frauds but not the planned frauds.
3. Routine checking is not needed where self balancing system is applied.
4. Routine checking cannot detect principle and compensating errors.

The following points, show the relationship/difference between routine checking and vouching:

1. The auditor verifies the arithmetical accuracy of the entries through routine checking. In vouching entries are checked with the help of related documentary evidence.
2. Vouching also includes examination of documentary evidence in support of recorded transactions besides routine checking. Thus, routine checking is a part of vouching.
3. The work of routine checking is generally done by junior audit clerks, whereas vouching is done by senior audit clerks.
4. Vouching traces the sources of information beyond the books of accounts whereas routine checking is limited to recorded entries.

The auditor verifies the arithmetical accuracy of the entries through routine checking. In vouching entries are checked with the help of related documentary evidence.

Vouching also includes examination of documentary evidence in support of recorded transactions besides routine checking. Thus, routine checking is a part of vouching.

The work of routine checking is generally done by junior audit clerks, whereas vouching is done by senior audit clerks.

Vouching traces the sources of information beyond the books of accounts whereas routine checking is limited to recorded entries.

Vouching, widely recognized as “the backbone of auditing,” is a component of an audit seeking to authenticate the transactions recorded in a firm’s book of accounts. When an accounting transaction is vouched, it is tested and verified by presenting relevant documentary evidence.

Vouching is a Technical term, which refers to the inspection of documentary evidence supporting and substantiating a transaction, by an auditor. It is the essence of Auditing.

It is the practice followed in an audit, with the objective of establishing the authenticity of the transactions recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the final statements of account. Vouching does not include valuation.

Vouching can be described as the essence or backbone of auditing. The success of an audit depends on the thoroughness with which vouching is done. After entering in all vouchers, only then can auditing start. Vouching is defined as the “verification of entries in the books of account by examination of documentary evidence or vouchers, such as invoices, debit and credit notes, statements, receipts, etc. The object of vouching is to establish that the transactions recorded in the books of accounts are:

(1) in order and have been properly authorized.

(2) are correctly recorded.

“Simple routine checking cannot establish the same accuracy that vouching can. In routine checking, entries recorded in the books only show what information the bookkeeper chooses to disclose; however, these entries can be fictitious without any vouching or vouchers. By using a vouching or a voucher system a company will have concrete and solid documentation and evidence of expenses, capital, and written proof in audits.

Vouching is the essence or backbone of auditing because when performing an audit, an auditor must have proof of all transactions. Without the proof provided by vouching, the claims provided by the auditor are just that, only claims. In most cases, hard to detect frauds can only be discovered through the use of vouching. This means that the auditor must conduct vouching with great importance, if not, he can be charged with negligence. The importance of vouching was realized. In this case, the auditors were found to be guilty on negligence, because the auditors did not display enough reasonable care and skill in vouching the wage sheets and ended up failing to detect fraud in manipulation of these wage records and cash vouchers. When delivering the decision, the Judge stated that “It was clear that a good many documents were suspicious on either face and called for Inquiry”. It was declared that it was essential that due care and attention are to be given to vouching in auditing.

Importance

Essence of Auditing:

Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.

Verification:

Once vouching of the transactions recorded is over, verification of assets and liabilities is done. Therefore, vouching acts as a basis for verifying the assets and liabilities.

Backbone of Auditing:

Main aim of auditing is to detect errors and frauds for proving the true and fairness of results presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the backbone of auditing.

Objectives

• To check whether proper documentary evidence is there in support of the entries made in the books of accounts.
• All transactions are to be supported by evidence. Each document should be proved by authorized authority. With the help of vouching we can detect errors and frauds by verifying each transaction. Planned fraud can be detected through vouching.
• To make sure that all the transactions that have been occurred, are entered in the books of accounts.
• To Find the Unrecorded Transactions: Each and every transaction is checked and ratified on the basis of document. Vouching helps to find out the unrecorded or missing transactions. If any voucher is found unrecorded, auditor can suggest to record such transactions.
• To examine the transaction for which money paid or received relates to the business.
• To check whether the transaction belongs to the entity.
• To Know That Only the Business Transactions Are Recorded: Sometimes, transactions are performed for individual purpose but payment is made out of business. Such transactions should not be recorded in account of business. If such transactions are recorded, we can find it with the help of vouching. To know the real profit or loss of business, such transactions are to be separated.

Characteristics

• Imperative Aspect of Auditing
• Basis of Auditing
• Drafted Evidence
• Disclosure of Extortion
• Report on Business Activities Only
• No Secret Transactions
• Course of Voucher

Source

Internal Voucher: The Voucher prepared by company and its entities (Different Branches), also called micro environment of Business use for own purpose. Eg. Sale Invoice, Transfer of goods invoice etc..

External Voucher: The Voucher prepared by macro environment of the Business Organization (Outsider) of the Business, received from outside Party. Eg. Electricity Bill, Rent Paid, Bank Statement etc..

1. Meaning

• Internal Check is an arrangement of duties allocated in such a way that the work of one person is automatically checked by another.
• Internal Audit is an independent appraisal of the operations and records of the company.

2. Object

• The purpose of Internal Audit is to detect the errors and frauds which have already been committed.
• The purpose of Internal Check is to prevent or minimize he possibilities of errors, frauds or irregularities.

3. Need for separate staff

• For carrying out Internal Audit, a separate staff of employees is engaged for the purpose.
• For internal check, no new appointment is made. It, in fact represents only the arrangement of duties of the staff in a particular way.

4. Nature of work

• The work involved in the Internal Audit is just like that of a watch man. Internal auditor has to report, from time to time, to the management about the various in efficiencies and suggest improvements. It is also his duty to see that the internal check system does not become static.
• Internal Check, on the other hand, represents a process under which the work goes on uninterruptedly and the checking too is more or less automatic.

5. Timing of work

• Internal Audit starts when the accounting process of different transactions is finished.
• Internal Check is an operation during the course of transaction.

6. Internal audit

• It is a device for checking the work, whereas
• Internal check is a device for doing the work.

7. In Internal Audit Errors and Frauds are detected after the completion of work, whereas in Internal Check the Errors and Frauds are discovered during the course of work.

8. Scope of work

• The scope of Internal Check is very limited.
• The scope of Internal Audit is comparatively board.

9. Involvement

• A large number of employees are needed for the implementation of Internal Check System.
• Whereas, a much smaller number of persons are needed for implementing Internal Audit implementation.

Differences between Internal Check and Internal Audit

If you want to successfully manage risk, it helps to use the correct risk terms and expressions. Many people use risk terms without realizing that they may not be using the right terminology. It’s easy to become confused because sometimes the field of risk management uses similar terms for different purposes. For example, “Operational Risk Management” has a different meaning in the banking and insurance industry, compared to other industries (oil & gas, mining, manufacturing, chemicals, etc.).

Similarly, the term “audit” can refer either to an internal audit conducted by an organization itself, or an external audit performed by an auditing firm hired by the organization. Some people confuse the two when using the term “audit”. This is important because an internal audit and external audit may assess different things, and have different frameworks and workflows.

Internal Audit is a Function Performed at Specific Times

Many people in risk management use this simple formula to explain the difference between Internal Audit and Internal Control: Internal Audit is a function, while Internal Control is a system. Internal audits are performed at specific times to assess:

• If the company has a good understanding of the risks that it faces
• If the controls put in place to mitigate risks are effective.

There is one very important distinction to be made: it is not the job of internal auditors to identify risks, nor to specify the controls that are needed. Internal Audit evaluates whether the process leading to the identification of risks is working well, checks whether controls already in place are working according to the way they are intended to, and evaluates an organization’s governance system and process.

Internal Control is an Ongoing System

Internal Control is made up of procedures, policies and measures designed to make sure that an organization meets its objectives, and that risks that can prevent an organization from meeting its objectives are mitigated. While the Internal Audit function is performed by internal auditors, Internal Control is the responsibility of operational management functions. Another point of contrast is frequency. An internal audit is a check that is conducted at specific times, whereas Internal Control is responsible for checks that are on-going to make sure operational efficiency and effectiveness are achieved through the control of risks. Some risk experts even say that Internal Control is a part of a company’s day-to-day management and administration.

The words “internal audit” often conjure a sense of fear, frustration, and time consumption. Even in the best circumstances, most would find having someone review their activities unsettling or intimidating. Having an understanding of the role of an internal audit, knowing what to expect during an internal audit, and knowing potential pitfalls to avoid will help put you at ease and make a much more pleasant and valuable experience.

Meaning

Internal Audit is a department or an organization of people within a company that is tasked with providing unbiased, independent reviews of systems, business organizations, and processes. The role of Internal Audit is to provide senior leaders and governing bodies of an organization an objective source of information regarding the organization’s risks, control environment, operational effectiveness, and compliance with applicable laws and regulations.

As Internal Audit reports to senior leadership, it is only appropriate that its activities are directed by CEO or Board of Directors through its Audit Committee. Members of Internal Audit must be independent of internal politics and unbiased to provide leadership with objective source of information. Under the direction of Audit Committee, Internal Audit works with management to systematically review control activities over critical systems and processes.

The reviews performed by Internal Audit are often called internal audits. An internal audit may be used to assess an organization’s performance or the execution of a process against a number of standards, policies, metrics, or regulations. These audits may include examining a business’s internal controls around corporate governance, accounting, financial reporting, and IT general controls. Internal audits may also entail evaluating the effectiveness/efficiency of critical business operations such as supply chain management. Those individuals working in Internal Audit are called internal auditors. Internal auditors may cover all areas of an organization or specialize based on their skill-sets.

The aim of internal audits is to identify weaknesses within the organization’s processes and control environment internally so that they can be fixed as quickly as possible to prevent harm to the organization or its stakeholders. Accordingly, the internal audit plan for an organization should be driven by risk basis or, in other words, be designed to examine those areas that present the greatest risk to the company. The internal audit plan should also include a component of the strategic needs of an organization.

Advantages of Internal Audit

1. To Discover Errors and Frauds

Internal audit helps to discover accounting errors and frauds so that they can be rectified before the final audit.

2. To Maintain Proper Accounting

It helps to maintain proper accounting system in the organization. It ensures accuracy and authenticity of accounting records.

3. Provides Base for Final Audit

Internal audit examines and verifies entire books of accounts and locate mistakes and frauds. So, conduction of final audit becomes easier.

4. Increase Employees Efficiency

Internal audit alerts the staffs by checking their performance regularly. It helps to increase their efficiency and also helps to minimize errors.

5. Proper Utilization of Resources

Internal audit ensures proper utilization of resources by detecting their misuse. It helps to increase operational efficiency and productivity.

6. Valuable Suggestions

It gives suggestions and instructions regarding the financial and operational activities of the organization. So it helps to maintain better management, proper supervision and effective control.

Disadvantages/Demerits of Internal Audit

1. Not Suitable for Small Firms

Internal audit is not suitable for small business organizations with less financial and operational activities.

2. Not Acceptable

It is conducted for internal purpose only. It is not accepted by shareholders and other external users.

3. Chance of Errors

There may be a chance of errors because of the poor knowledge of the audit staff.

4. Time Consuming

It takes a long time to perform internal auditing. It may disturb regular office work.

Types of Internal Audits

While a significant portion of internal audit covers internal controls over financial reporting within the organization as they pertain to generally accepted accounting procedures (GAAP) impacting their financial statements. Many organizations also recognize the need for other types of assessments or audits outside of accounting or finance. Some of these key areas include compliance (i.e., regulatory), environmental, information technology, operational and performance audits.

1. Compliance Audits

Compliance Audits evaluate compliance with applicable laws, regulations, policies and procedures. Some of these regulations may have a significant impact on the company’s financial well-being. Failure to comply with some laws, such as the Foreign Corrupt Practices Act (FCPA) or General Data Protection Regulation (GDPR), may result in millions of dollars in fines or preclude a company from doing business in certain jurisdictions.  Here is a link to a beginners guide to GDPR.

2. Environmental Audits

Environmental Audits assess the impact of a company’s operations on the environment. They may also assess the company’s compliance with environmental laws and regulations.

3. Information Technology

Audits may evaluate information systems and the underlying infrastructure to ensure the accuracy of their processing, the security and confidential customer information or intellectual property. They will typically include the assessment of general IT controls related logical access, change management, system operations, and backup and recovery.

4. Audits assess

Audits assess the organization’s control mechanisms for their overall efficiency and reliability.

5. Performance Audits

Performance Audits evaluate whether the organization is meeting the metrics set by management in order to achieve the goals and objectives set forth by the Board of Directors.

Internal Audit Procedure / Process

An internal audit should have four general phases of activities—Planning, Fieldwork, Reporting, and Follow-up. The following provides a brief synopsis of each phase.

1. Planning

During the planning process, the internal audit team will define the scope and objectives, review guidance relevant to audit (e.g., laws, regulations, industry standards, company policies and procedures, etc.), review the results from previous audits, set a timeline and budget for the audit, create an audit plan to be executed, identify the process owners to involve, and schedule a kick-off meeting to commence the audit.

2. Fieldwork

Fieldwork is the actual act of auditing. Throughout this phase, the audit team will execute the audit plan. This usually includes interviewing key personnel to confirm an understanding of the process and controls, reviewing relevant documents and artifacts for an example execution of the controls, testing the controls for a sample over a period of time, documenting the work performed, and identifying exceptions and recommendations.

3. Reporting

As you might guess, internal audit will draft the audit report during the reporting phase. The report should be written clearly and succinctly to avoid misinterpretation and to encourage the intended audience to actually read and understand the report. Findings should be accompanied by recommendations that are actionable and lead directly to process improvements. The process of issuing an internal audit report should include drafting the report, review the draft with management to ensure the accuracy of findings, and issuance and distribution of the final report.

4. Follow-up

The final stage is an important one that is often overlooked and neglected. Following up is critical to ensure that the recommendations have been implemented to address the findings identified. This process should include appropriate follow-up with process owners needing to implement the recommendations as well as Board oversight of the company’s overall status in addressing findings identified by internal audit. If an organization fails to follow-up on the implementation of recommendations, it is unlikely that the changes will be made.

Cash purchases are happened when entity make a purchase of goods or renders the services and then make the payments by cash immediately.

Most of the business prefer to make the payments by banks transactions so that the fraud case might be minimize. And sometime, entity’s management want to manage its cash flow by keeping delay to pay later or obtain long credit term.

For cash purchase, entity mostly use petty cash to make payments and for small items only. For larges purchase, they normally purchase on credit and make payments by banks transactions.

If the purchase are paid by cash, accounting transactions will be like this:

Debit Expenses or Assets based on products/material purchased ($ XXXX)

Credit Cash ($XXXX)

For cash taken from a customer, you can create an invoice in Wave and mark it as paid in cash by going into that invoice and selecting “Record A Payment”, and selecting cash as the payment method.

For cash spent you can upload a receipt for an expense, either in Wave ( look under Sales in the left navigation bar), or through our Receipts by Wave mobile application.

Both of these options will automatically create a log of that transaction for you.

If neither of these fit with what you’re looking for, you also always have the option of clicking Add Income or Add Expense in your Transactions page, and creating a log of those transactions manually in there.

How are cash purchases recorded on a company’s income statement?

Cash purchases are recorded more directly in the cash flow statement than in the income statement. In fact, specific cash outflow events do not appear on the income statement at all. Rather, different items on the operating section of a company’s income statement are affected by the balance of cash purchases, credit purchases and other previously recorded transactions. One of the limiting features of the income statement is it does not show when revenue is collected or when expenses are paid.

Any investor who wants to look at cash purchases should instead look at the cash flow statement. The cash flow statement further differentiates between cash purchases for financing activities, investing activities and operating activities. For really detailed entries, cash payments are listed in the general ledger by crediting the cash account and debiting the corresponding payable.

Role of the Income Statement

In financial accounting, the income statement is designed to show summaries of financial activity on a quarterly or annual basis. These summaries are drawn from the general ledger. There may be footnotes in an income statement that describe specific cash purchases, but this is not a reliable source for specific line item details.

Operating Section of the Income Statement

With larger, exchange-listed companies, cash flows are most likely built into the revenue and expenses portion of the operating section. Any cash purchases made in the course of normal operations increases the recorded expenses of the company.

Depending on the company in question, the expenses portion may be broken down into more specific sub-categories. Even in these cases, specific cash purchases are not recorded. The aggregate of all cash purchases and other cash outflows is instead built into the figures listed in the expenses portion.

Cash sales refer to sales that incur payment on the spot. A customer can use cash, credit card or cheque to settle their account. Sales that aren’t cash sales are made with the assumption that the client will pay later, either when their goods arrive or in installments over time.

For example

Keeping the cash sales turning over means you are not waiting for payments. It doesn’t have to include only the folding stuff, but can include direct bank to bank transfers.

Cash sales information can be found in the “accounts receivable” column of some financial statements. However, some accounts receivable don’t represent cash sales, but rather cash owed by customers. Most American financial statements track receivables on an accrual basis, meaning that transactions are recorded when the sale is made, not when cash is received. The accrual basis of the statements means credit and not-yet-received accounts receivable must be removed from the accounts receivable column to extract cash sales from the statement. Cash sales may be calculated from balance sheets, income statements and retained earnings statements. For statements of cash flows, cash sales must be figured out to create the statement.

Figuring Out Cash Sales from Balance Sheets, Income Statements or Retained Earnings Statements

Recognize and list payments. The payments may be listed as cash, with the amount received credited on the right side of the appropriate column. Be sure to note any deductions in the payments from coupons or other discounts.

Estimate uncollected accounts by comparing payments received to total revenue for the accounting period. Subtracting payments received from total revenue should give you uncollected payments.

Subtract uncollected payments from your earlier list of payments. The resulting number is an estimate of your cash sales.

Figuring Out Cash Sales for Statements of Cash Flows

List cash inflows from operating activities listed on an income statement. These items include the sales of goods and services, interest received and dividends received.

List cash inflows from investments and long-term assets listed on the balance sheet. These items include sales of equipment or property, sale of investments, sale of debts, sale of equity and collection on loans or other long-term debt.

List cash inflows from changes in long-term liabilities and stockholder equity listed on stockholder equity and other statements. These items include sale of common stock and the issuance of long-term debt such as notes or bonds.

Double check your list, and remove non-cash sale activities, such as directly issued common stock, bonds converted to common stock, debt from purchasing assets and non-cash exchange of assets.

Total the contents of your list, and subtract non-cash sale activities. The result is your total cash sales.

Wage Payment Systems are the different methods adopted by organizations by which they remunerate labour. There exist several systems of employee wage payment and incentives, which can be classified under the following names.

Methods of Wage Payments

There are different methods of wage payments. Wages are paid for work done and this is sometimes measured by the time worked i.e. according to the period of time the worker is employed, and sometimes by output. The former is called “piece wages” and the latter “time wages”.

Under “time wages” or time rates a definite sum is paid for a fixed period of time, that is, wages are paid at a fixed rate per hour, day, week; or other period, and each worker in a given category receives the same payment irrespective of differences in individual output.

Under Piece Wages or Piece Rates, payments depend upon output, each worker is paid according to the quantity of work done by him, and irrespective of the time he takes.

There are also various bonus systems to stimulate production. Piece rates, by which the pay of each worker is proportionate to his output, might be thought more satisfactory than time rates, especially from the point of view of the employer and the national economy and they also seem fair to the workers.

However, they are not suitable for all kinds of work, and also the system is liable to abuse if applied unscrupulously. Earnings are usually higher for workers on piece rates than for those on similar work paid on a time basis, and the danger of excessive speed is not great as the workers are not penalised if they fail to reach a given standard or “target”.

This danger is, however, serious if, as under some bonus system, attractive monetary rewards are paid for attaining high standards of production, and efforts to reach these standards may involve strain resulting in injury to health, increase in accidents, and damage to materials and machines.

Trade unions tend to prefer time rates, though they are parties to many collective agreements which include piece rates where these are suitable for the kind of work done. In addition the risk of speeding and the greater difficulty of regulating piece rates by collective agreements there may be tendency of piece rates to weaken the solidarity of the workers because of considerable differences in earnings.

Many individual workers, especially those who can achieve high output, favor piece rates or bonus payments which, if reasonable fixed, enable them to earn more. Where conditions are suitable employers also prefer piece rates because of their inducement work people to concentrate and to do more work.

There are two principal systems of wage payments:

1. Time wage system, and
2. Piece rate system

Other systems called premium plans or profit sharing schemes are used with either of these two systems to remunerate the employees and to provide them incentive wages for increased productivity.

Method 1. Time Wage System

Under this system, the worker is paid for the amount of time spent on the job. This is the oldest and most common system and the wages are based on a certain period of time during the course of work. The period of time may be an hour, a day, a week, a fortnight or a month and the wage rate will depend upon the period of time. It must be remembered here that wages are paid after the time fixed for work is completed irrespective of output or completion of the work.

Wages can be determined by the following formula:

Wages = Number of Hours worked × Rate per hour

Suppose that a worker is paid at the rate of Rs.8.00 per hour and he has spent 200 hours at work during a particular month. His wages for the month will be Rs. 1.600/.

Under this system, wages are paid on the basis of time spent on the job irrespective of the amount of work done. The unit of time may be a day, a week a fortnight or a month.

In the past, daily wages have been the most common basis and, therefore, it came to be known as the ‘Day Wage System’.

Advantages

(i) This method also avoids wasteful handling of materials and tools. In the absence of rough handling of machinery, repairs and maintenance expenditure is low. Workers can adjust the pace of work so that there is no injury to the health.

(ii) Learners can concentrate on learning the best methods of work and their earnings are not dependent on the amount of work.

(iii) It is the simplest and the oldest method. It is easy to understand and workers can easily compute their own remuneration.

(iv) Unions prefer time wage as it does not differentiate between efficient and inefficient workers. A sense of equality and solidarity is created among them.

(v) Where work done is of an intangible nature, e.g. mechanics, designer engineers, service, etc. it is difficult to measure output accurately and standards of output cannot be laid down.

(vi) The plan is economical as no detailed records of output are required. Clerical work in the computation of wages is minimum. The employer knows the cost of labour.

(vii) As there is no pressure to speed up production, the quality of work can be kept high. A worker can show his skill.

(viii) Earnings of workers are regular and fixed and they do not suffer from temporary loss of efficiency. This gives them a sense of economic security and self-confidence. The worker is assured of a fixed income and can, therefore, plan his expenses accordingly.

(ix) In continuous or assembly line production, the pace of work is beyond the control of an individual worker. Time wage is, therefore, a better method.

(x) It is an objective method and the employer can calculate the wage bill in advance.

Disadvantages of Time System

(i) This system increases the cost per unit of production. Under this system, the cost per unit of production is uncertain because the quantity differs from time to time.

(ii) Under this system of wage payment, it is very difficult to measure the efficiency of workers because all the workers of equal status are paid the wages at equal rate.

(iii) As this system does not make any difference between efficient and inefficient workers, it kills the efficiency of efficient workers.

(iv) Under this system of wage payment, the workers do not make proper utilisation by their time.

(v) As the production is low and the payment to the workers is more, this system increases the cost of production.

(vi) Under this system of wage payment, the quantity of production decreases because the workers do not get any incentive for increasing the production.

(vii) This system requires intensive supervision over workers. It increases the cost of supervision.

(viii) This system of wage payment makes equal payment to both the efficient and inefficient workers. Therefore, efficient workers do not get any incentive for more production and this system encourages labour unions. Sometimes, these labour unions misuse their powers.

We draw the conclusion that although time workers in the same grade receive the same wages for the day or week for different amounts of work and although the work of each is not measured exactly, they and their foremen have a reasonably clear idea of the amount of work to be done.

In other words, they must approximate to understand standards of output or of steady application to their work, and supervision ensures that this standard is maintained. Those who fail to do so are liable to lose their jobs or be put on to a job with a lower time rate, on the other hand good work can be rewarded by promotion to a higher grade with a better rate of pay.

Thus, although time rates are properly distinguished from incentive system, they have associated with the positive incentives of promotion and the negative of demotion and dismissal. Working at excessive speed is usually more associated with incentives methods than with time rates.

But Richardson also found that during a period of severe unemployment where, because of fear of unemployment, the workers on low time rates and long hours worked at almost intolerable speed and strain imposed by the management, each man knowing that if he failed to keep the pace, there were dozens of men available to take his place.

A foreman or manager who is always forcing the pace and finding fault is responsible for such tension and discontent. Hence, only under exceptional cases time worker is associated with speed.

Method 2. Piece Rates or Piece Wages

Piece rates and bonus systems provide a stimulus to output by varying the payments according to the quantity of work done by each worker or by a team of workers. Thus, workers who produce more receive more. These incentive methods are, therefore, applied when high output is desired, when quality of work is largely controlled by the machines and not by men, or where quality is of secondary importance or can easily be tested by inspection.

As their wages depend upon output the workers in trying to increase production are liable to be careless of quality, and, therefore, somewhat closer inspection of the product for quality is necessary than with time workers, but less supervision of the men to keep them at work is needed.

Incentive methods are suitable where easily defined standardized units are produced in large quantities by repetition work and the output of each worker can easily be counted.

They are effective under these conditions if the quantity produced depends considerably upon the workers efficiency, speed, and concentration on the job.

If overhead costs are high the use of incentives which result in increased output enables such costs to be spread over a larger production and the unit costs are, therefore, reduced.

The work should be regular and continuous so that the worker is not hampered in his efforts to attain a high standard of labour by having to wait for material or because his machine has broken down. Workers on piece rates are likely to protest if their work is interrupted through no fault of their own, and their grievance is legitimate as their power is reduced.

In fairness to the workers, therefore, the management must either organise the work so that interruptions are rare, or where this is not practicable they are agree to reasonable guarantee minimum time payment to cover losses caused by periods of interruption or abandon the piece work system altogether as being unsuitable for such work.

The textile industries provide illustrations of work suitable for piece rates. Thus, in cloth weaving the work is of defined standard and the output is easily measured by a meter on the loom.

The worker can influence the amount produced by quickly repairing breakages in the yarn and by otherwise keeping the looms running well. Quality of work can be controlled by inspection, and where the worker is responsible for defects he can be penalised by a deduction from his earnings, though this should be rarely done, being reserved for repeated carelessness.

Advantages of Piece Rate Wages

(i) This system of wage payment is very easy to understand and very simple to calculate.

(ii) Workers get more wages because they produce more. It increases their efficiency and productivity. It increases their remuneration also which improves their standard of living.

(iii) This system of wage payment increases the mobility of workers because they can change their enterprise easily.

(iv) Under this system, the workers use their machines and equipment with proper care because they feel that if their machine is out of order, their work will be held up and their wages will be low.

(v) This system decreases the cost of production because the maximum production is done by the workers in the minimum time. It decreases the cost per unit of production also.

(vi) The system of wage payment gets more production because all the workers make their best efforts to increase the production.

(vii) As the workers are paid according to their work, they make the best possible utilisation of their time. They do not want to waste their time.

(viii) This system of wage payment minimises the needs of supervision. It reduces the cost of supervision.

(ix) This system provides an opportunity to measure the efficiency of the workers. It makes proper distinction between efficient and inefficient working staff of the enterprise.

(x) This system encourages the workers to do more and more work because they get their wages according to their work.

(xi) This system of wage payment justified also because the workers are paid the wages according to the work performed by them.

(xii) This system brings industrial peace also because it satisfies both the workers and the employer.

Limitations of Piece Rate Wage

Piece wage system is, however, subject to the following drawbacks:

(i) The earnings of workers are not stable and they may suffer due to temporary delays or difficulties. They feel insecure and dissatisfied.

(ii) In order to maximise their earnings, workers work with excessive speed. This may affect their health. It also increases the wastage of materials and wear and tear of machinery. The method is not suitable for work of artistic and delicate nature.

(iii) It is very difficult to fix piece wage rates. Employers often cut the piece rate when they find workers are producing large quantities.

(iv) Employees may not stress quality so that rigid quality control becomes necessary.

(v) This system may create jealousy between efficient and inefficient workers. Trade unions do not like it as it affects their solidarity.

(vi) Detailed records of production have to be kept so that the clerical work is increased. The method is not practicable when contribution of individual workers cannot be calculated i.e. construction work.

(vii) The method may lead to industrial disputes. Fixation of piece rates may create controversy. Workers resent loss of output and earnings due to breakdown of machinery or power, non-availability of materials and such other factors beyond their control. Trade unions dislike piece wage system.

It can be concluded that piece rates and other incentive system are satisfactory if applied to suitable kinds of work on the basis of fair time studies, but they are liable to misuse. They have been abused by fixing rates in such a way, that workers could only attain a reasonable level of earning by working at excessive speeds.

Also much discontent has been caused by the practice of fixing a rate on the basis of a time study, and later cutting the rate, which has the effect of lowering earnings or of makings the workers speed up in order to secure a level of earnings equal to that before the rate was cut.

If this is done the system seems to the workers merely a device for speeding, and they may come to the conclusion that however hard they work their earnings will not be allowed to increase much.

Therefore, a fair relationship must be maintained between the earning of the workers different occupations in an undertaking and those in one occupation must not be able, except by working harder, to earn much more than workers in another occupation of similar difficulty, but this should be avoided, not by cutting rates, but by fixing proper rates at the outset on the basis of reliable time studies.

It should, however, be noted that piece rates should generally remain unchanged, except:

1. Where a mistake has been made in setting the rate.
2. When the price level and as a result of which purchasing power of money has changed.
3. Where the conditions of the work have changed making it easier or more difficult.
4. Where the basic rate of pay is increased or decreased, whether by collective or individual agreement.

Thus, if an employer buys new costly machines which enable the workers to double their output with no greater effort than before, it would be unfair that the piece rates should remain unchanged and workers gain double earnings.

These high earnings would be badly out of line with those of other work people in the undertaking for whom no improved equipment was available; also if almost the whole benefit from improved methods went to the workers, there would be no increase for the employer to spend money on better machinery and organisation.

If other things being the same, general price level have increased, the purchasing power of the workers would be reduced and, therefore, the workers real earning would be reduced in the same proportion. Hence, the piece rates should change in favour of workers.

Suitability of Piece Rate System:

Piece rate system is suitable in the following situations:

(i) When productivity of the workers is to be increased.

(ii) Where the degree of physical worn is more than the mental work.

(iii) Where output can be measured and quality control system exists to discourage low quality production.

(iv) When methods of production are standardised and the job is of repetitive nature.

(v) Where work does not require personal skills of higher order.

Time wage system is suitable under following conditions:

(i) Where units of output are non-measurable as in case of office work and mental work is involved as in policy working.

(ii) When delays in work are frequent and beyond the control of employees, i.e. where output is uncertain and irregular.

(iii) When quality of work is especially important, e.g. artistic furniture, fine jewellery, etc.

(iv) When supervision is good and supervisors know what constitutes a “fair day’s work”.

(v) When employees have little control over the quantity of output or there is no clear-cut relation between effort and output as in some machine-paced or assembly line jobs.

(vi) When competitive conditions and cost control do not require in advance the precise knowledge of labour costs per unit of output.

(vii) Where machinery and materials used are very sophisticated and expensive.

(viii) Work is of a highly varied nature and standards of performance cannot be established.

(ix) Employees and trade unions strongly oppose incentive payments.

(x) When workers are new and learning the job.

(xi) When collective efforts of a group of persons are essential for completing the job.

Internal check as regards purchases

A separate department for credit purchases is usually maintained in business houses. The efficiency of such a department depends upon its policy of purchasing best goods at the cheapest price.

The Purchases Department should function separately and its work should be sub-divided between small departments, each of which should be headed by a responsible officer. To facilitate its operation, the whole work connected with purchases may be divided into five heads:

Assessment of Requirements

• Enquiry
• Placing Orders
• Receipt of Goods
• Recording and Making Payments

1. Assessment of requirements

This is the first important job to assess requirements of goods. Requisition Books should be issued to the various departments of a concern. The head of the department which is in need of goods should fill in a requisition slip duly signed and then send it to the Purchases Department.

The details about the quantity, quality, the price (if it can be quoted) and the time by which goods must be supplied, should be entered in the requisition slip. On receipt of similar requisition slips from the various departments, the Purchases Department can know exactly the volume of requirements of different goods to be purchased.

2. Enquiry

Then, the Purchases Department makes an enquiry about the terms and conditions of purchases from different suppliers. For this, tenders or quotations are invited from them.

The lowest tender should be accepted, and accordingly, a decision be taken by an officer or by a sub-committee of the Purchase Department if the amount of purchase is heavy and involves a huge expenditure.

3. Placing order

The Purchases Department places orders which should be recorded in the Purchases Order Book. Three copies of such orders should be prepared -one each for the supplier, the store and the Purchases Department itself.

A responsible officer should sign the order. After putting the number of the order on the requisition slip concerned and vice versa, such requisition slip should be filed in the Purchases Department.

4. Receipt of goods

On receipt of goods, the gate-keeper should enter the particulars of all goods received in the Goods Inward Book after having checked them properly. The goods then should be sent to the Store where they should be carefully preserved.

The stores Department should prepare a ‘Goods Received Note’ and send a copy thereof to the Purchase Department, the Accounts Department and the Production Control Department.

The goods received note should be prepared with the following details:

• The date when the goods were received.
• The name of the supplier.
• The advice note number.
• The description and code number of goods.
• The quantity advised.
• The quantity received

Besides, if a part of the goods has been rejected, the goods received note should contain the following additional information:

• The quantity rejected.
• The rejection note number.
• The quantity accepted into store.
• Signatures of employees concerned with having entered items on it.

5. Recording and making payments

Lastly, the Purchases Department should scrutinize the requisition slip, the order; the goods received note and the invoice. Invoices are usually checked by a separate person known as the Invoice Clerk.

The number of the order should be entered on the invoice and so on. All these documents should be marked as checked and signed, if necessary. The invoice should then be handed over to the Accounts Department where steps will be taken to make payments. It is to be seen that the invoices, when checked, have been properly stamped.

The Accounts Department should enter the invoice in the Purchases Book. If the goods are defective partially or wholly, the invoice should not be passed in such cases. It is, however, for the Purchases Department to make correspondence with the suppliers about the return of such goods which are defective.

The aim of an efficient system of internal check is to prevent the following errors and fraud in connection with purchases:

• Fictitious purchases may be recorded in Purchases Book so that payments withdrawn from the business may be misappropriated.
• The same invoice may be recorded twice so that double payment made may be misappropriated.
• Goods purchased may not be entered in that period so as to inflate profits.
• Goods not received in one period may be entered as purchases so as to show profits less than the actual.

Internal check as regards purchases returns

• There should be a proper system of control in regard to purchases returns so that full credit may be ensured for all goods returned.
• A statement should be prepared by the Stores Department for all goods returned.
• The Purchases Department should check such goods and prepare an advice note which should be sent to the Accounts Department.
• The Accounts Department should further examine the advice note with original invoice and enter it in the Purchases Returns Book.
• All goods returned should be entered in the Goods Outward Book.
• A credit note should be obtained from the supplier, i. e., the creditor, for each return of goods which should then be attached to the invoice if it is not yet paid.

It should be remembered that, if the system of internal check is not good, a credit note so received may be suppressed and the correspondence cash payment misappropriated.

Internal check as regards sales

The whole system of credit sales should be kept under proper control and supervision. There should be a separate Sales Department for the purpose. The Sales Department should have charge of receiving orders, supplying goods to customers, preparing invoices and maintaining accounts of goods supplied.

The Sales Department should function as a composite of some sub-departments. The procedure of its working may be like this:

1. All orders received should be entered in the Orders Received Book and properly numbered. The original order or its copy should then be sent to the Dispatch Department.
2. The Dispatch Department should take steps to pack the goods as per the order. It should prepare a statement showing the goods packed.
3. The statement so prepared by the Dispatch Department should be sent to the Counting House where the list of goods should be checked and rates, etc. entered in it. The invoice will then be prepared in triplicate by means of carbon papers.
4. Two copies may be sent to the customers who will then return one of them after signing it in token of having received the goods. Thus, it will serve the purpose of delivery note. The third copy will be retained for further reference.
5. The Accounts Department should prepare documents like Railway Receipt, Bill of Lading, etc.
6. All goods supplied on order should be entered in the Goods Outward Book which should be checked at frequent intervals with the Orders Received Book.
7. The Invoice Book should also be compared with the Goods Outward Book and the Orders Received Book.
8. The Sales Book should be written up with the help of the copies of invoices.

The following type of fraud may be committed in connection with sales:

1. Sales may be omitted from recording in the Sales Book.
2. Inflation of sales in the Sales Book in any of the following ways:

• Recording fictitious sales;
• Treating goods as sales sent on approval or by V. P. P.; but not yet accepted or sent on consignment but not yet sold by the consignee;
• Treating sales of fixed assets as sales of goods;
• Entering sales of the next year as sales of the current year; and
• Treating sales of consignment inward as own sales.

Internal check as regards sales returns

All goods returned by customers should be recorded in the Goods Inward Book.

The statement of goods so returned when received should be sent to the Dispatch Department which should check it and, then send it to the Accounts Department.

A credit note should then be prepared and signed by a responsible official before it is sent to the customer.

The Sales Return Book should be written up with the help of the copies of credit notes issued. The number and date of credit notes should also be entered in this book.

The aim of such a system is to prevent an improper credit being passed in the books for fictitious returns and to avoid fraud involved in misappropriating equivalent cash.

An internal check is a part of internal control. It is concerned with staff duties so that a single person is not allowed to record every aspect of a transaction. The purpose is to prevent or disclose. errors and frauds/ One person automatically check the work of another person without duplication of work. It is a built-in-device to facilitate the work of business concern. There is no additional duty for an internal check.

The work of one employee becomes dependent on another. The senior employee has powers to check the work of others. There is a need for complete harmony among the employees for doing their duties. The top-level management must be honest otherwise. Internal check cannot work properly, The effective internal check is desirable for large-scale business. In small business concern, it has no popularity due to less number of employees. There may be conflict among the workers. In this case, it has no utility at all. Anyhow it is essential for large concerns but it is a burden on small business.

Definition of Internal Check

Ronald A. Irish says that It refers to the organization of office duties in such a way as to prevent or disclose both errors and frauds.

L.R. Dickness says that It is an arrangement of book that error and frauds are likely to be prevented by the operation of the bookkeeping itself.

De Paula says that It means practically a continues internal audit carried on by the staff itself by means of which the work of each individual is independently checked by other members of the staff.

The internal check is an arrangement of the duties of the staff members of the accounting functions in such a way that the work performed by a person is automatically checked by another.

In the opinion of Spicer and Pegler, “A system of internal check is an arrangement of staff duties, whereby no one person is allowed to carry through and to record every aspect of a transaction, so that without collusion between two or more persons, fraud is activated and at the same time the possibilities of errors are reduced to the minimum.”

L.R. Dicksee defines internal check as “such an arrangement of book-keeping routine that errors and frauds are likely to be prevented or discovered by the very operation of the book-keeping itself.”

Internal check means practically a continuous internal audit carried on by the staff itself, using which the work of each individual is independently checked by other members of the staff.

Internal check has been defined by The Institute of Chartered Accountants of England and Wales (ICAEW) as; “the checks on -day to day transactions which operate continuously as part of the routine system, where the work of one person is proved independently or in complementary to the work of another, the object is the prevention or early detection of errors or frauds.”

An internal check is a continuous process and is part of the day-to-day routine. It relates to all the transactions that take place every day. An internal check is achieved by a complimentary allocation of duties and by independent verification of the work of one person by another.

Objectives of Internal Check

1. Fraud Prevention

The purpose of the internal check is to frauds. The management can achieve this objective through the distribution of duties. One employee is allowed to perform one part of the others complete the other parts. In this way, many hands complete the work

2. Assets Protection

The purpose of the internal check is to protect the assets. The management can take steps to safeguard the resources one person maintains the record and the custody are given to another officer. Top-level management makes the purchase and disposal. The assets are used for business purpose the periodical inspection of resources is necessary to avoid misuse of the resource.

3. Error Prevention

The purpose of the internal check is to prevent errors. The management can devise such a system of internal that mistakes are prevented altogether. If there is negligence on the pan of one employee, it is pointed out by another employee who can check the person of the first person.

4. Fixing Responsibility

The purpose of the internal check is to fix the responsibility of employees. The division of duties helps the management to locate the inefficient employees.’ The pending work provides chances of errors and frauds. The management can replace employees who are negligent in their duties,

5. Moral Check

The purpose of the internal check is to develop high moral values. The work of one employee is supervised and checked by another employee. Alt employees feel the sense of responsibility, They complete their work on daily basis. Thus the efficiency of workers increases.

6. Recording Facts

The purpose of the internal check is to record facts and figures in the books of accounts. The work of recording facts is divided among many employees, In this way, it is possible to prepare books of accounts, which can reflect the true and fair view of business work.

7. Accounting System

The purpose of the internal check is to devise proper accounting system, It consists of personnel, procedure, records, form and used by an organization in developing and communicating accounting information.

Principles of Internal Check                     

1. Sufficient Staff

The principle of internal check is sufficient staff, The employees can be appointed according to workload, The management can determine the amount of ‘work, which distributed among the departments. The persons are hired to perform their duties the overloading can create trouble for management.

2. Division of Work

Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such departments are responsible for completion of work according to a timetable.

3. Co-Ordination

Co-ordination is a principle of internal check. All departmental managers are bound to coordinate with each other in order to achieve the objectives of the organization. When there is a fault in one department, the work other departments suffers and the objectives cannot be achieved. It determines the degree of coordination among the managers.

4. Rotation of Duties

Rotation of duties is a principle of internal check/ the workers bored by doing the same work from year to year. There is a need for rotation of duties. It is in the interest of the concern as well as the employee. The efficiency improves due to change in duties.

5. Recreation Leave

The recreation leave is a principle of internal check. The employee can enjoy the recreation leave, It is necessary for the mental health of the employee, He cannot commit frauds as the new employee in his place can disclose the matter. The internal check system can work in the interest of the business, The weaknesses of one person are disclosed due to leave.

6. Automatic Machines

The principle of internal check is that machines must be used to do accounting work if permissible. The machines can do a lot of work without delay, The chances of frauds and errors are reduced to a minimum. The working of machines improves the efficiency of the accounting staff,

7. Checking

The principle of an internal check to check the work of other employees. Many’ persons perform the work. The officer can put his Signature to verify the work done by his subordinate. In this way one Work passes many hands, the chances of errors and frauds are minimized due to checking and counter-checking.

8. Simple

The principle of internal check is simple working: The employee can understand the working of the internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. Alt workers can understand their duties in the organization.

9. Documents Classification

The classification of documents the principle of internal check. The business documents are prepared, collected recorded and placed in proper files. The index is prepared to compile data. The filing system as useful to place letters. In case of need, the documents can be traced quickly.

10. Dependent Work

Dependent work is a principle of internal check. The work of one employee is dependent upon the others. One work passes through the hand of two or three persons till it is completed. The senior person checks the work of junior person, No person is, all In all, to start and complete the transaction,

11. Harmony

The principle of internal check is harmony among the employees and departments, the understanding is essential for business goals. The management is to achieve other social and national objectives. The harmony is the basis for the successful internal check.