Question

Ms. Reem is working as internal auditor, specify the major facts she should check while vouching of following cash receipt transaction.
I. Commission received from party from U.K. (it is a foreign exchange transaction)

II. Rent received in advance for 3 months, but rent agreement is not valid.

III. Sale of old furniture, building of business and personal car.

IV. Income received as interest from Bank Muscat on fixed deposit.
Answer

V. Outstanding amount received from Mr. Iqbal who is our customer.

Answer 1

The following are the major facts those are to be checked by Ms. Reem while vouching the below mentioned cash transactions.

Solution I

Commission received from party from UK

• The contract or the agreement with the party has to be verified.
• The basis on which the calculations were made and the percentage used are to be verified. Arithmetical accuracy is also to be checked.
• It is to be ensured that the correct exchange rates (on the specified dates) have been used for the calculations.
• Also, it is to be ensured that the gain or loss arising from the forex transaction has been correctly recorded.

Solution II

Rent received in advance for 3 months, but rent agreement is not valid

• Counterfoils of the rent receipts are to be cross checked with that of the entries made in the cash book.
• Since the rent agreement is not valid, the terms of the agreement may be confirmed directly from the client/ party.
• Also, it can be ensured that the rent collected is reasonable by collecting information with regards to the rent collected for a similar space in the same locality.
• It is to be ensured that the rent received in advance has been correctly recorded as a liability as this would be an unearned income.

Solution III

Sale of old furniture, building and personal car

• It is to be ensured that the above mentioned assets were sold after getting the approval from the board of directors (in case of a company). Therefore, the minutes of the board meetings are to be checked.
• The entries made in the assets register or the assets account is to be cross verified with the entries made in the cash book.
• The bank pass book is to be checked in order to trace the deposit of the sales proceeds in the bank.
• It is to be ensured that the gain or loss arising from the sale of the above mentioned assets has been adjusted to the capital reserve.
• Gain or loss on sale of the assets recorded in the books of accounts may be recalculated.

Solution IV

Income received as interest from Bank Muscat on Fixed Deposit

• Interest received from the Bank Muscat has to be cross checked with that of the entries recorded in the Bank Pass Book.
• Interest calculations are to be reperformed on the basis of the information that would be available in the certificate of the Fixed Deposit to ensure accuracy.

Solution V

Outstanding amount received from Mr.Iqbal, a customer

• Counter foils of the receipt issued to Mr.Iqbal has to be cross checked with that of the cash book entries.
• It is to be ensured that there is no time lag between the date of receipt and the date on which the entries were made in the cash book.
• The amount outstanding has to be confirmed with Mr.Iqbal by obtaining a letter from him.
• It is to be ensured that there were sufficient controls over handling of cash and that it was in safe custody.

In general, the existence of an efficient and strong internal control is to be checked while vouching cash receipt transactions. Also, the cash collected is to be deposited in the bank on the next day. This can be ensured by verifying the bank pass book. It is to be ensured that the correct entries have been recorded in the cash book and other relevant accounts and registers.