The debit side of cash book shows opening balance, cash sales, receipts from debtors, income from interest, dividend, rental income, commission received, subscriptions, sale of investments, bill receivable, bad debts recovered, insurance, claims, receipts from hire purchase, sale of fixed assets and miscellaneous receipts etc. Each item of receipts is discussed briefly.
1. Opening Balance
The first item to be checked on the receipt side of the cash book is opening balance. It should be checked with the balance shown in the audited balance sheet of previous year. Working papers may be referred to see that the closing balance of the cash recorded in the balance sheet is the result of many balances. Evidences to be vouched include previous year’s balance sheet and cash book.
2. Cash Sales
Chances of fraud are greater under this head. Sufficient care should be taken to vouch documentary proofs in support of sales. Various copies of cash memo, salesman’s diary, cashier summaries, counterfoils of receipt book etc., come under check.
Generally, carbon copies of cash memos or cash sales invoices would support entries for cash sales. The cash register will have to be carefully checked with the carbon copies of cash memos. Daily deposits of cash received in the bank should be verified. Dates of cash memos and dates on which receipts are entered should be the same. Cash memos cancelled if any should be kept in the book. Where automatic bills are in use, the entries in the cash book should be checked from bill records. Where automatic cash register is maintained, the auditor should resort to the summaries.
A test check with the goods outwards books may be conducted. The extent of such test check will depend upon the efficiency or otherwise of internal control in operation.
3. Income from Interest
The vouchers to be checked include passbook, bank advice, counterfoils, etc. Depending upon the nature of interest received, evidences are available for vouching. Interest income may be received on fixed deposits in bank, savings bank account, loans granted, securities held, etc. Interest received on fixed deposits in the bank should be verified with the bank advice. The arithmetical accuracy of such interest calculation should also be verified.
Interest on savings banks account should be vouched with bank advice. Interest on loan granted by the client organization should be vouched with reference to the loan agreement with the borrower. The terms on rate of interest, date of payment etc. should be checked.
Interest received on securities should be checked with reference to securities, correspondences made, covering letter, counterfoil receipts, etc., should be examined.
Vouchers to be verified include counterfoils, dividend warrant, passbook etc. Dividend received should be verified with the counterfoil or upper part of the dividend warrant and with the letters received along with the cheque for the amount of dividend. Where, shares have been bought cum-dividend or sold ex-dividend, broker’s note should be checked. This is to ensure that dividends due on those have been received later on.
Where the dividend warrant received is not yet collected, it should be shown as cheques yet to be collected.
5. Rental Income
Vouchers with regard to rental income include
lease deed and agreements,
correspondence with clients, etc.
Rental income may be received in respect of short term or long term leasing of real estates, plant and machinery, construction equipment, etc. The auditor’s role consists of verifying the rent rolls with the rent received. If the rent is collected through an agent, agent’s statement of account must be examined. The auditor should see that proper adjustments are made for rental income accrued but not due. Entries should be made in cash book immediately and everyday collections should be deposited in the bank the next day.
Documents to be verified include carbon copy of receipts book, agreement between the client and the party, etc. Commission is received for rendering service or labour in discharge of certain duties. It may be payable as a fixed percentage of the price or amount of business transacted. Commission received should be checked with the amount entered in the cash book. The accuracy of the third parties regarding rate of commission and basis of the working should also be verified.
The vouchers to be verified are: Counterfoil, register of subscribers etc. A subscription is a contribution towards a fund maintained by a society, club or school. The auditor can ensure the entitlement of the receipt of subscription by going through the bye-laws of association or club.
Subscriptions received should be checked with the register of subscribers and counterfoils of the receipt. The auditor should see that subscription due but outstanding is accounted for. Any unusual amount of subscription should be enquired into.
8. Sale of investments
Documents to be verified include
minutes of board of directors
bank advice, etc.
Investments through broker. A broker issues a note on details about the nature of investment sold, the terms of sale, mode of payment, etc. It is known as ‘broker s sold note’.
9. Bills Receivable
The documentary evidences available for inspection include cash book, pass book, bills receivable book, etc. The amount received on the bills should be debtors in the bills receivable account and credited in the sundry debtors account.
Amount received against the bill should be verified with the bills receivable book, cash book and bank statements. Bills accounted as dishonored might give way to misappropriation of funds.
The possibility of such fraud should be examined. Dishonored bills will be made available to the auditor. If not available. it is a clear cut case of fraud. Similarly, bills discounted should be duly accounted for. If discounted bills have not matured on balance sheet date, a foot note as to contingent liability should be there.
10. Bad Debts Recovered
The vouchers to be inspected are correspondences between the official receiver and the client, dividend warrant, counterfoil receipt, credit manager’s file etc.
Amount found to be irrecoverable is written off as bad debts. Receipts from debtors who have become insolvent should be vouched with the dividend warrants received from the official receiver or assignee.
Details of total debt and rate per rupee payable as dividend should be examined. The auditor should ensure that the amount recovered is deposited in the bank.
11. Insurance Claims
The vouchers in support of insurance claims received are the policy of insurance, correspondence with insurer, FIR in case of theft, accident etc. and the report of the valuer or assessors.
The calculation of the amount claimed should be verified. The amount received should match with the forwarding letter sent by the insured. The auditor should see that the amount received is deposited in the bank. Any dispute regarding the claim should be ascertained.
Expenses incurred towards repairs or renovation should be properly accounted for the books of accounts. After the receipt of the full settlement of claim. the loss should be appropriately treated in accounts.
12. Receipts from hire purchase
Documents such as hire purchase agreements and evidence in the nature of counterfoils of receipts are to be vouched.
The auditor can know about amount of instalment, number of instalments. hire purchase period and other related terms by studying the hire purchase agreements in detail. The auditor should keep in mind that instalment includes interest also. He should check that the whole amount of instalment is not credited to sales account. There should be bifurcation.
13. Miscellaneous Receipts
The documents to be verified are:
Fixed asset register
Broker’s sold note
Minutes of directors
Correspondences exchanged etc.
Sale of fixed assets by companies should be approved by the board of directors. Therefore, the minutes of the meeting of directors are to be verified. To ensure that the sale proceeds are deposited in the bank on the very next day, the auditor should verify the cash book, entries on sale of fixed asset and also the bank book. Calculations of profit or loss on sale of fixed assets should transferred to capital reserve.
Miscellaneous receipts should be vouched with the correspondence. contracts or any other related documents produced in support of the transactions.