From time to time accounts of customers are credited with the value of goods returned and the rebates and allowances sanctioned on one account or another. The entries are passed on the basis of credit notes issued to customers. The credit note contains complete particulars of the credit allowed and the basis on which it has been allowed. In each such case the auditor should verify that credits for goods returned have been allowed on the basis of the record maintained in the stores in respect of goods received back in the Goods Returned Book; also that rebates and allowances have been allowed in accordance with the policies and practices of the business. To verify credits in respect of goods returned, the auditor must check entries in the Goods Inward Book kept at the factory gate. He must further verify, on a reference to the memo, prepared when the goods were returned, that the goods in fact were defective and the defect was not one which occurred subsequent to the case on which the goods had left the factory premises. If such a memo is not on record, the management should be advised that a responsible official should examine the goods on their return and prepare such a memo.
When there is long time lag between the date of the sale that of return of the goods, the reasons for the same as well as the conditions, in which the goods have been received back should be ascertained. For it could be that the customer had returned the goods on its price having fallen, on one or the other pretext with the connivance of the sales staff. The credit given to allied or associated concerns on account of goods returned them should be specially examined to verify that the goods have been returned due to some valid reasons and the credit does not represent the reversal of fictitious sales earlier entered in their account. Allowances are granted to customers of a number of reasons; goods having been supplied short or goods having suffered damage while they were in transit, some defect in their quality, etc. The auditor should verify that these have been granted under a proper authority and on a due consideration of a claim and of the policies of the business in these matters. If considered necessary, correspondence with the party, the quantities and value of goods supplied and those returned out of them also should be verified. We have considered earlier how a dishonest book-keeper might misappropriate the amounts received from customers entering false credits in their accounts on account of rebates and allowance on the return of goods. This possibility should be kept in view while verifying the aforementioned credits.