Describe steps involved in the verification of the system of internal control for cash transactions.

Auditing and Assurance Revision Questions and Answers

Answer
a) The objectives of internal control in cash transactions are as below:
 To give protection against losses though fraud, waste, mistakes, etc.,
 To ensure that the transactions entered into are correctly recorded; and
 To enable the concern to take policy decision as regards cash or fund planning for smooth operation of the business at the appropriate time.

Steps involved in the verification of the system of internal control:
 Study the system according to which accounting routines are being carried out to ensure that these do not leave any receipt of cash, material or any other asset remaining unaccounted for, permit any payment of money being made without relevant goods or services having been received or tendered or any property being given away without its price having been received or being accounted for.
 Examine the authority vested in different persons and the conditions under which they can exercise such authorities.
 Confirm where the supervision over various managerial and accounting functions, exercised different members of the staff to whom these duties have been assigned, is adequate.
 Ascertain whether any mechanical aids are being employed to ensure proper accounting of receipts and prevention of pilferage of cash, stamps, etc.
 Observe the working of the accounting system and routine and determine, application of procedural tests, whether checks and counter-checks envisaged the system of internal control are being properly applied.
 Confirm that there is a system according to which the physical existence of different forms of assets is being periodically reconciled with their balance in the books of account and discrepancies noticed are reported and adjusted; also that balance of customers, creditors, bankers and persons with whom securities are deposited are reconciled periodically. Further, that persons who are in custody of valuable assets, have furnished bonds of adequate value which would protect the company in the event of any misappropriation or misapplication thereof such persons or the concern has obtained appropriate insurance coverage.
 Ascertain that the system of internal control is reviewed periodically and, where necessary, a change in procedures made to plug in any loopholes which might have been observed on such a review. Also, that policy decisions which are taken from time to time are translated into actual practice.
 Ascertain that the concern has system of banking all revenues or cash realization and expenses cannot be made from such realization.
 Ascertain that there is proper segregation of duties, i.e. cash custodian is not allowed to make accounting entries but records of cash payments and receipts only



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