Page 105 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes
Example: Please recall what happens when you visited a bank branch to encash a cheque.
First, you produce the cheque to a counter, where the official concerned issued you a token and
enters the token numbers on the back of the cheque and in the token book. The cheque is then
sent to the ledger clerk, who verify the balance in your account and makes debit entry therein.
The cheque then sent to an officer, who verify your signature on the cheque with bank records,
and if it tallies then he sends the cheque to the cashier to make payment. The cashier makes the
payment against the token handed over to you and records it in his cash register.
This is an excellent example of internal check. Here arrangement is such that the job of one
employee is automatically checked by other.
From the above discussion, we can summarize some characteristics of internal check:
1. Proper segregation of duties;

2. Automatic checking of job;
3. Multiple recording of same transactions;
4. Rotation of jobs;
5. Prevention of errors and frauds;

6. Separation of custodial and recording functions.

Notes External Audit is an audit conducted by an individual or firm that is independent of
the company being audited. These independent auditors audit the books of a company
generally once per year after the completion of the company’s fiscal year.
Let us understand the concept of internal check with a practical example of a medium sized
manufacturing company regarding its purchases.

 Purchases should be supervised by and organized by a separate department called purchase
department or procurement department. The department should be headed by a qualified
and trained senior officer.
 The department should maintain a list of approved suppliers with whom orders for making
purchases are regularly placed.
 The purchase process should invariably be start with the placing of a requisition duly
authorized by a senior official to the purchase department.

 Each department of the company should have a book of requisition slips bearing serial
numbers. The purchase department should maintain a register of books of requisition
slips issued to different departments.

 The purchase department should keep a separate record of requisition forms received
from different departments.

 Upon receipt of a requisition, the purchase department should send inquiry letter to the
listed suppliers for quotation of the price, fright and delivery terms.
 After examination of the terms quoted by suppliers, the purchase department should
place an order with the supplier selected by it. It should also send copies of the order to the
Accounts Department, stores department and the department which has made the
requisition. In case an order has been placed with a supplier other than the one who had
quoted the lowest price, the reason for the same should be recorded.

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