Reconciliation, Provisioning and Dividend Before Audit
At the annual closing of a district-level cooperative bank, the cash book shows a balance of ₹3,42,600 with the bank as on 31 March, while the bank statement shows ₹3,71,750. Investigation reveals: cheques issued for ₹48,200 were not presented; cheques deposited by members for ₹27,900 were not credited; bank charges of ₹1,150 appear only in the statement; a member deposited ₹15,000 directly into the society's account, which is not entered in the cash book; and the bank wrongly debited ₹5,000 against the society's account. Separately, the loan ledger shows ₹86 lakh outstanding: ₹72.2 lakh standard, ₹9.2 lakh sub-standard and ₹4.6 lakh doubtful. The society's provisioning policy requires 1 per cent on standard, 25 per cent on sub-standard and 100 per cent on doubtful assets. Surplus before provisions is ₹8.5 lakh; share capital is ₹10 lakh; the bye-laws require 25 per cent of net profit to be transferred to the reserve fund before any dividend. The board wants to declare an 8 per cent dividend.
1. Prepare the bank reconciliation and state the correct bank balance. Which items need adjustment entries rather than mere reconciliation?
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Starting from the cash book balance, adjust for items the bank has already recorded but the society has not:
| Item | ₹ |
|---|---|
| Balance as per cash book | 3,42,600 |
| Add: cheques issued but not presented | +48,200 |
| Less: cheques deposited but not credited | −27,900 |
| Less: bank charges not entered | −1,150 |
| Add: direct deposit by member not entered | +15,000 |
| Less: wrong debit by the bank | −5,000 |
| Balance as per bank statement | 3,71,750 |
The reconciliation now agrees with the statement, so there is no unexplained suspense.
Items needing entries in the society's books, not just a statement note, are the bank charges of ₹1,150, the member's direct deposit of ₹15,000 and any correction for the wrong debit of ₹5,000 (the society raises a reversal letter; the entry follows only when the bank reverses it, or a receivable is recognised). Cheques issued and cheques deposited remain reconciling items until they clear; an ageing check is needed for cheques outstanding beyond six months.
2. Compute the required provision and the maximum permissible dividend. Can the board declare 8 per cent?
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Provisions:
- Standard: ₹72,20,000 × 1% = ₹72,200
- Sub-standard: ₹9,20,000 × 25% = ₹2,30,000
- Doubtful: ₹4,60,000 × 100% = ₹4,60,000
- Total provision = ₹7,62,200
Available surplus: ₹8,50,000 − ₹7,62,200 = ₹87,800.
Reserve transfer: 25% of ₹87,800 = ₹21,950, leaving ₹65,850.
Dividend demanded: 8% of ₹10,00,000 = ₹80,000.
₹80,000 exceeds ₹65,850 by ₹14,150. The board cannot declare 8 per cent unless it first corrects the accounts - for example, by recovering the wrongly debited amount or by recognising income that is properly accrued and not already provided for. On the present figures the maximum is about 6.58 per cent, and even that should be left to the general body. The prudent course is to declare no dividend, or a lower rate, and disclose the reason.
3. As the auditor, what qualifications and recommendations would you place before the board?
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The audit note should:
- Qualify the provisioning. Provisions of ₹7,62,200 were created only at closing; if earlier years' provisioning was short, the prior-period effect must be disclosed and the surplus restated.
- Qualify income recognition. Interest on sub-standard and doubtful accounts should not be taken to income on an accrual basis; it is recognised on realisation. Check whether such interest has inflated the ₹8.5 lakh surplus.
- Record the reconciliation lapse. A difference of ₹29,150 arose from routine items not entered for up to a year; the internal control over bank entries is weak.
- Flag the wrong debit and confirm the reversal letter and follow-up.
- Recommend monthly reconciliation by an officer independent of the cashier, a provisioning calendar so that provisions accrue monthly, board approval of the write-off policy, and a bar on dividend until the reserve transfer and provisions are complete.
The board minute should record the qualifications and the corrective action with dates and responsible officers, otherwise the next audit repeats the same paragraphs.