It is comparatively an easy matter to verify different forms of income earned by the client during the year in totality. In respect of some of the incomes which are collected regularly, e.g., rents on lockers in the case of Safe Deposit Vault, dividends on shares, subscription in case of clubs, advertisement revenue in case of publishers of newspapers, a record of income the basis on which it has been collected and the particulars of the party through whom it has been received are contained in a Demand Register; there is a separate Demand Register for each such form of income. For the verification of such an income, it should be seen that the Demand Register has been checked and the balance that was outstanding for collection at the close of the year has been adjusted as an asset. In cases where the income earned represent charges for services rendered, the particulars of services rendered by the client to different customers would generally be recorded in a separate statistical register, e.g., Job Register in case of the printer and Repairs Register in the case of a workshop, Patients Registering in case of a doctor, Clients Register in the case of solicitors, etc. By reference thereto it should be verified that the amount receivable in respect of services rendered before the close of the year have either been called or adjusted as an outstanding asset. The sale proceeds of goods which have been sold at a uniform rate of gross profit, e.g., boxes of tea, petrol, vanaspati, ghee, etc. can be verified by computing the amount of gross profit, which the firm should have earned on quantities of goods sold during the year comparing it with the amount actually earned.
In case of a manufacturing concern, the system of invoicing finished goods should be examined to confirm that the system of internal check in operation ensures that goods would be despatched only after they have been either paid for or the account of the purchaser have been debited. Also, the quantities of raw materials consumed during the period should be reconciled with the quantities of finished products manufactured. The rate of wastage, if any, should be compared with that in the earlier period. It should be verified that quantities of goods sold but not delivered in respect of which bills were not prepared before the close of the year, have been adjusted in the books. For ascertaining the trading profit of a year, it is also necessary that profits from trading transactionsm which were not completed before the close of the year should be brought into account by allocating the total profits on a reasonable basis over the different accounting periods in which these will be completed. The auditor should therefore see that discounting charges of bills of exchange earned on such sales, profits on contracts not completed, etc., have been distributed over their periods of accrual on a “reasonable basis”. Capital profit, e.g., profit arising on sale of assets, reissue of forfeited shares, etc., not available for distribution as dividend, are credited to the Capital Reserve. Any transfer to Capital Reserve out of amounts credited to the Profit and Loss Account should be separately disclosed. Similarly, income of an extraordinary and non-recurring character should be separately shown in the Profit and Loss Account [Part II of Schedule VI, Clause (3)(xii)(b)].