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Discrete Dynamics in Nature and Society
Volume 2013, Article ID 715256, 6 pages
A Study on High-Speed Rail Pricing Strategy in the Context of Modes Competition
1State Key Laboratory of Rail Traffic Control and Safety, Beijing Jiaotong University, Beijing 100044, China
2School of Traffic and Transportation, Beijing Jiaotong University, Haidian District, Beijing 100044, China
Received 30 September 2013; Accepted 5 December 2013
Academic Editor: Huimin Niu
Copyright © 2013 Enjian Yao et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
High-speed rail (HSR) has developed rapidly in China over the recent years, for the less pollution, faster speed, comfort, and safety. However, there is still an issue on how to improve the seat occupancy rates for some HSR lines. This research analyzes the pricing strategy for HSR in Wuhan-Guangzhou corridor based on the competition among different transport modes with the aim of improving occupancy rates. It starts with the theoretical analysis of relationship between market share and ticket fare, and then disaggregate choice models with nested structure based on stated preference (SP) data are established to obtain the market share of HSR under specific ticket fare. Finally, a pricing strategy is proposed to improve the occupancy rates for Wuhan-Guangzhou HSR. The results confirm that a pricing strategy with floating fare should be accepted to improve the profit of HSR; to be specific, the ticket fare should be set in lower level on weekdays and higher level on holidays.
1. Introduction
High-speed rail (HSR) is currently regarded as one of the most significant technological breakthroughs in passenger transport developed in the second half of the 20th century [1]. Due to the advantages of rapidness, comfort, convenience, safety, and reliability [2], China has witnessed rapid development of HSR over the past years. However, its performance in operation is still restricted by the pricing strategy under the intense competition among various transport modes. The traditional fixed pricing strategy gives up the induced passenger flow generated by fares change [3] and the high pricing of HSR leads to low occupancy rates and resources waste. For example, statistics shows that the average occupancy rates of Wuhan-Guangzhou HSR can be as low as 20% except for the spring festival which is not satisfactory as expected. The lower the occupancy rate is, the less the profit is. Therefore reasonable pricing strategy should be researched to solve the pricing problems for HSR.
In order to solve the problem of pricing strategy, a number of recent researchers have been devoted to studying reasonable methodology for passenger transport pricing. Li and Tayur [4] and Labbé et al. [5] applied the Bilevel programming to the optimal pricing. Zeng et al. [6] put forward a new thought of combining the value of travel time and Bilevel programming to maximize the benefit of the railway agencies and the passengers' utility. Hsu et al. [7] and Adler et al. [8], based on game theory, analyzed the competition between two modes of transport and get optimal pricing in order to maximize the profits of operator. Zhou et al. [9] studied the pricing model for parallel rail lines under the situation of diversified property rights through considering the main influencing factors of the rail network pricing, including cost and supply.
Though extensive researches have been undertaken to search for optimal passenger transport pricing, few researchers have been devoted to studying the relationship between ticket fare and market share of transport mode. However, the demand (market share) for certain mode changes along with passenger pricing policy [10]; that is, certain mode price variation will affect the market share while market share variation will affect ticket fare in case of maximizing operators' profits. Therefore, ticket fare and market share cannot be separated from each other.
This paper analyzes a pricing strategy for high speed rail (HSR) based on the quantitative relationship between ticket fare and market share. The rest of this paper is organized as follows. In the second section, nested choice models for different income levels are established. The model parameters are estimated and individual preferences are analyzed in the third section. The fourth section studies the quantitative relationship between market share and ticket fare, and then a pricing strategy aimed to improve the occupancy rates of HSR is proposed. The conclusions are given in the fifth section.
2. Nested Choice Model
Disaggregate choice analyses, based on SP (stated preference), RP (revealed preference), or mixed data, are usually advocated by researchers as a proper methodology to assess and compare the preferences of travelers in the context of model competition [11]. To analyze the market share of HSR, disaggregate choice models based on the SP information provided by the survey are estimated for this study.
2.1. The Data
A questionnaire survey in Wuhan-Guangzhou corridor was conducted to obtain stated preference (SP) data for the model estimation. Questionnaires were distributed to public transport users in railway station, airport, and so on. The SP data was obtained by presenting 9 profiles, in which the attributes of HSR such as travel time and travel cost were varied. And the attributes of current alternatives were left unchanged. In each profile, respondents were asked to make a choice from the given alternatives: HSR, conventional rail, air, and road transport. Besides, personal information was also asked for in the SP survey such as age, profession, trip purpose, and income.
A total of 3078 valid observations were obtained from the questionnaire survey. Considering that the sensitivities to multiple attributes are different under various income levels, the obtained data can be divided into three datasets according to annual income: low-income group, middle-income group, and high-income group. And three models with different datasets are established, respectively. The distribution of income levels and the mode split in the sample are described in Table 1.
From the available information in the sample, HSR has an absolute advantage in attracting passengers and the new alternative will capture passenger flow from existing modes.
2.2. Model Formulation
Multinomial logit (MNL) model is the traditional and popular tool used among logit models. However, MNL model exhibits the independence from irrelevant alternative (IIA) property so that it fails to account for the existence of similarities among choice alternatives [12]. The nested logit (NL) model overcomes the problem by grouping alternatives into nests, and interdependence between the pairs of alternatives is allowed in the same layer to satisfy the IIA property [13–15]. A nested choice model is considered and the model structure is shown in Figure 1. The travel modes considered in this study are rail, air, and road. The rail mode is divided into two alternatives: HSR and conventional rail.
Disaggregate choice model has theoretical basis on the assumption of utility maximization. The probability that individual chooses alternative is given by where is the utility of alternative for individual ; is the deterministic term in the utility function of alternative for individual ; presents the random term.
When the random terms obey the distribution of Gumble, the probability that individual chooses an alternative is shown from (2) to (4). The probability of mode being chosen can be calculated by (2). The conditional probability of choosing route given that mode is chosen can be described by (3). Furthermore, (4) gives the probability that a route is chosen. Consider the following: where is the scale parameter; are the set of modes that exist in mode ; are the set of alternatives that exist in route ; is the fixed term in the utility function that varies with the combination of and ; is the fixed term in the utility function that has nothing to do with and only varies with ; is the utility composited based on the fixed term of . And the composed utility can be described in
For each of the utility functions in the three models, we take account for some attributes such as travel time, travel cost, profession, age, and trip purpose. As for the service attributes of transport modes (i.e., travel time and travel cost), the same parameter is applied to travel time of HSR and air and the same parameter is used to travel cost of HSR and air too. Given the airport location, a terminal time is taken into account in the utility of air transport. To take advantage of other attributes, it is essential to express the attributes as concrete numbers when used in the utility function. Through analyzing individual preferences of the sample, it is assumed that passengers over forty and those traveling for business purpose have a general preference for HSR and passengers with a variety of professions show different preferences for certain mode. For example, civil servants and managers prefer to choose HSR or air for travelling. On the contrary, workers are more willing to choose conventional rail. The dummy variables used in the utility function are shown in Table 2.
3. Estimation Results
With various influence factors considered in the utility function, maximum likelihood estimations for different income groups are presented in Tables 3, 4, and 5. Some conclusions can be summarized by analyzing and comparing the results in different tables.(1)The facts that all absolute -values are greater than 1.96 indicate that, for all coefficients, we can reject the null hypothesis that the true value is zero at the 0.05 significance level. Meanwhile, the likelihood ratio indexes for all models are over 0.2 which can be regarded as satisfactory goodness of fit.(2)For all models, parameters of travel time and travel cost have a negative impact on the utility function. This is consistent with common sense that passengers try their best to reduce travel time and cost when traveling. Besides, parameters of travel time keep increasing from Table 3 to Table 5, which shows that passengers become more sensitive to the variation of travel time as the income level rises.(3)From the estimation results of all models, the parameters of profession, age, and trip purpose have a positive impact on the utility function. It means that HSR is very attractive for passengers traveling for business purpose as well as those in old age. Civil servants and managers show a general preference for HSR and air. On the contrary, workers prefer to choose conventional rail for travelling.(4)As for the value of travel time (VOTT) of HSR, represented by the single ratio between travel time and travel cost, it appears that the VOTT keeps increasing as the income level varies. The results indicate that high-income passengers are willing to pay more money in exchange for the decrease of travel time when they choose HSR for travelling.
4. High-Speed Rail Pricing
In this section, a pricing strategy with the aim of improving occupancy rates for Wuhan-Guangzhou HSR is discussed. Firstly, the quantitative relationship between ticket fare and market share of HSR can be obtained based on the dataset calculated through calibrated NL models, and then the pricing strategy is presented through considering the different passenger flow between weekdays and holidays.
4.1. The Relationship between Market Share and Ticket Fare
Based on the NL models with parameters calibrated, the HSR market share under specific fare can be calculated by (6). And it is composed of the market share of low-income group, middle-income group, and high-income group (i.e., , , and ). And the market shares of different income groups can be obtained respectively from the following: where is the weight measured by the distribution of income levels shown in Table 1; is the probability of choosing HSR for a low-income passenger; is the probability of choosing HSR for a middle-income passenger; is the probability of choosing HSR for a high-income passenger.
To analyze the relationship between market share and ticket fare, 41 ticket fares are picked from 390 CNY to 590 CNY in order. And the later fare is increased by 5 CNY than the former one. Then the market shares under specific ticket fares are calculated. Based on the regression analysis method, the quantitative relationship is shown in Figure 2. The adjusted is up to 0.997, which indicates that logarithmic regression model is suitable to describe the relationship between the parameters. Given that the market share is a variable between 0 and 1, the ticket fare should range from 294 CNY to 673 CNY to make sure that the equation is effective. The relation equation is shown in (10) and the value range of is described in the parentheses. Consider the following: where is the HSR market share; is the HSR ticket fare, CNY.
4.2. Pricing Strategy
Based on the quantitative relationship obtained, a pricing strategy to improve the occupancy rates between Wuhan and Guangzhou is researched. It is assumed that the rate of passenger transport demand from Wuhan to Guangzhou ranges from 20% to 35% in the corridor. With the aim of 100% occupancy rate, the pricing strategy for HSR is shown in Table 6.
From the estimation results, 100% occupancy rate can be implemented when the fare is set at 407 CNY in weekdays and 533.5 CNY (or 420 CNY) in holidays. In weekdays, the fare is 50 CNY lower than the current one (465 CNY), so it will be beneficial to decrease the fare appropriately in exchange for the increase of occupancy rates. In holidays, the operation scheme in weekdays even cannot meet the transport demand. But when the carriages of each train are increased to 16, 420 CNY should be the satisfying fare for obtaining the 100% seat occupancy rate. Comparatively speaking, a strategy with floating pricing should be more positive to improve the earnings. Ticket fare should be set in lower level in order to attract more passengers in weekdays. As for the pricing strategy in holidays, both the rise of ticket fare and the adjustment in operation scheme could be effective.
5. Conclusions
This paper provides a pricing strategy for Wuhan-Guangzhou HSR based on the quantitative relationship between rail pricing and market share of HSR. Through considering the service attributes of transport mode and personal attributes, NL models using SP data are built to obtain the market share of HSR under specific fare. This method not only suits for assessing and comparing the individual preferences under the context of mode competition but also gives a pricing strategy to relieve the situation of low occupancy rates for some HSR lines. The results of nested choice model confirm that the sensitivities to multiple influencing factors are diverse as income level varies and passengers with high income pay more attention to the travel time of transport mode other than personal properties. Besides, the results of pricing strategy show that floating ticket fare will be more positive to improve the occupancy rates for HSR and to meet transport demand. The pricing strategy obtained could be beneficial to the full play of economic and social benefits under the rapid development of HSR in China.
Conflict of Interests
The authors declare that there is no conflict of interests regarding the publication of the paper.
This work is supported by State Key Laboratory of Rail Traffic Control and Safety (no. RCS2011ZT012) and National 973 Program of China (no. 2012CB725403).
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1. Purchases :- The system of internal control on purchases should be examined very carefully. Proper ordering procedure is necessary to ensure that purchases are made only on terms and conditions acceptable to the society. The auditor should see that payment is made only for goods which have been ordered and received.
The auditor has to examine carefully the system of internal check in existence.
(i) Effective control should be exercised over all the orders placed by the management and proper records maintained.
(ii) All orders for purchases should be made from the printed order book which should contain all the terms and conditions governing supplies.
(iii) The "goods inward book" showing particulars of goods received should be maintained up-to-date.
(iv) The invoice should be checked with goods inward book maintained by the store keeper. The princes should be checked with quotations estimates etc. and initialled by the clerks who check them.
(v) The invoices should then be passed on to the purchase Department to place orders. The person in charge of the Department will check the invoices and order for the payment.
The store keepers should prepare a requisition note or indent for the articles the stocks of which are to be replenished. The requisition note should be endorsed by a responsible official. Based on such notes orders should be placed in the printed order books. Where goods are received, quantities, weight etc. should be checked with the delivery notes and entered in the "Goods Inward Register" kept in the godown. The prices should be compared with the quotations. The invoices should be then passed for payment. Particulars of invoices should be entered in the purchases book. Persons who are responsible to submit requisition orders should not themselves be authorised to issue purchase orders.
The practice of inflating profits by means of suppressing invoices must not be resorted to. The auditor should therefor, examine the goods inward register and trace into the purchases during the last few weeks. If any of the purchases made at the end of the period are not entered in the purchase book, he should see that such items are not included in the closing stock, to avoid inflation of profit.
Fraud might also be committed by means of entering an invoice twice in the purchase day book in order to defalcate the amount of that item. Therefore, the auditor should take much care in examining vouchers with the entries in the purchase book.
2. Purchase returns :- When the goods are returned to the seller being not according to the sample or of inferior quality, or damaged, a credit note should be obtained, if prices are paid already. If the prices have not been paid, proportionately less amount may be paid to the seller. The suppliers should be requested to send their credit notes. It should be seen that credit notes from suppliers are received for all goods returned or the amount deducted from the total amount of the invoice.
The auditor should compare the credit note with the purchase return journal or return outward book or the stores records. Particular attention should be paid to the entries in the book for the period immediately following the previous year, to ensure that they are not for neutralising certain fictitious entries for the previous years purchase given and or with a view to manipulating the accounts.
3. Credit purchases :- When credit purchases are effected, the auditor should ensure that the credit bills are entered in the books of accounts properly and correctly. It is quite possible that credit bills are converted into cash bills and the amount involved in such bills misappropriated. In order to be sure of the nature of the transaction, the auditor should get statements of accounts direct from the suppliers. He may also obtain confirmation as to whether all the credit bills have been cleared by the end of the audit year.
4. Checking of invoices :- Invoices are to be checked both by the Buying Department and Accounts Department. The Buying Department will check the prices, quantities, discount allowed terms of payment etc. and the Accounts Department, their arithmetical accuracy. The invoices received should conform to the orders of the Buying Department. When more than one copy of the invoices are received, all other copies should be stamped to indicate that they are only duplicate copies. Invoices and credit notes are to be consecutively numbered on receipt and entered in the "Invoice Register".
The invoices after having been checked by the Accounts Department should be passed on to the concerned officials of the society who are responsible for effecting payments. The paying officials should be independent of the Buying Department.
The invoices should be initialled by the persons who check them. During the course of audit, the auditor should see that the society has followed the procedure prescribed for making purchases and payments to creditors. They should also check the arithmetical accuracy of the calculations etc. in the invoices. The entries in the purchase register should be checked with invoices and the 'Goods Received Notes' or materials received certificates stamped on the invoices. They should also check postings in to the stock ledgers. Casts and Cross-casts of the invoices and the purchase journal should be checked and got agreed with the amounts posted in the General Ledger. In the case of missing invoices the auditor should insist on the production of duplicate copies or other relevant records.
5. Allocation of charges :- Allocation of charges and credits to nominal accounts and cost accounts should be done by proper authority. The basis of allocation should have been indicated in the invoice of the credit notes themselves. With regard to the acquisition of or additional to fixed assets, it should have been authorised by the committee/Board by means of proper resolutions.
The statement of accounts received from suppliers should be checked with the respective ledger accounts. Wherever necessary, the auditor should also resort to direct verification with the suppliers.
The auditor should see that proper arrangements to ensure that all liabilities relating to goods received during the accounting period, have been duly brought into account. The concerned account in the general ledger should be frequently checked by an independent officer with the balances in the suppliers account.
6. Method of checking invoices :- While checking the invoices, the auditor should pay attention to the following aspects:-
(i) The invoices should be addressed to the Society and not to any individual director or officer of the society (i.e. it should not be in the personal name of anybody). All invoices should be compared with the original requisitions issued by the Buying Department.
(ii) The goods purchased should be such as are being dealt in by the society in the course of its trading transactions.
(iii) Quantities and rates should conform to the purchase orders. Where these are not specified in the purchase order, it should be verified with reference to the agreement, tenders of suppliers and other connected documents.
(iv) The store keeper should have recorded a certificate in the invoice regarding the receipt of the goods.
(v) All calculations, extensions and additions should have been checked an signed by the authorised persons in token of having complied with the above requirements.
(vi) The vouched invoices should be cancelled and it should be seen that the entries are made after deducting the trade discounts, if any. Where credit is allowed, the auditor should see that payment is made before the expiry of the credit period.
7. Organisation of purchase Department :- In the case of big processing and manufacturing units, the auditors should have a fair knowledge of the modern inventory control and management methods. They have to know how the purchase departments are to be organised on sound lines and made to function efficiently.
It may be seen whether.-
(i) A qualified and competent purchase officer is appointed.
(ii) Minimum, re-ordering and maximum level are fixed.
(iii) Proper material planning is done.
(iv) Economic order quantities are fixed and
(v) Procurement time is contracted properly.
The purchase Department should have a follow up register, in order to watch the pending orders, to find out the total cost of purchases, total procurement time and to evaluate the vendors before any order is placed. Usually the vendors are evaluated by considering the quotations received and placing orders with lowest cost suppliers'. While placing orders with the lowest cost supplier, care should be taken to see that products are of good quality.
8. Sales :- Retail sales are mostly confined to consumers' societies and other societies which deal directly with customers. The auditor should be careful in vouching sales, in view of the fact that the documentary evidence available is not as conclusive as in the case of purchases. Therefore, the auditor has to depend on the internal check system.
(i) Proper attention should be paid to the system of ordering goods by the customers with the society. All orders received should be entered in the 'Order Received Book' according to the date of receipt.
(ii) When an order is executed, an invoice should be prepared and despatched.
(iii) The invoices should be duplicated by means of carbon leaves, and from copies of actual invoices. The sales day book should be written up up-to-date.
(iv) A copy of the invoice should be sent to the gate-keeper who will record in the 'goods outward' and check the goods leaving the premises.
Where credit sales are made, the auditor has to examine whether the byelaws of the society contain necessary provision for selling goods on credit. He has also to ensure that credit sales are made only in accordance with the subsidiary Rules, if any, framed on credit sales.
9. Credit Sales :- Employees and other consumer Store/Societies allow credit sales to their members upto a certain limit depending on their monthly income/salary/wages. In such cases the auditor should examine the following points also:-
(i) Whether there is provision in the byelaws permitting credit sales and if so any limit fixed for the society and/or for each member.
(ii) Whether the society has obtained undertaking from the members authorising their pay disbursing officers to recover the dues from their salary, in the case of monthly salary earners.
(iii) Whether the amount outstanding against any member under credit sales has exceeded the limit fixed in the byelaws.
(iv) Whether the society used to obtain indent or acknowledgment duly signed by a member for issuing articles to him on credit basis or his signature obtained in the invoice in lieu of acknowledgment.
(v) Whether bond has been obtained by the society from the member agreeing to pay the amount and interest at prescribed rates after a fixed period.
The auditor should obtain confirmation from the members for the balance outstanding against them as on the last day of each year. He should also verify whether the repayments are regular and in case of default whether proper action has been taken by the society against defaulters.
10. Control over cash sales :- For every sale a cash memo is issued. The auditor should compare the entries in the Daily Sales Register with the cash memos issued. He should ascertain the system adopted by the society in fixing the prices. The societies should be instructed to maintain a price Registrar. The rates mentioned in the cash memos should be checked with the price Register.
11. Checking of cash memos and Daily sales Register :- Where the number of cash memos issued are enormous it would be difficult to check all the memos. In such cases, the auditor has to resort to a percentage check of the cash memos, to verify the correctness of the calculations and additions. Wherever sales tax is to be collected from the customers the auditor should see that the rates of sales tax charged are correct.
The total sales of the day, as is recorded in the Daily Sales Register is carried over to the main cash book/Day book. The total sales according to the sales Register should be checked with the cash received by the cashier. The accounts of Sales tax collected should be maintained separately. The societies should be advised to remit the sales tax collected to the Treasury monthly, before the due date and returns of sales tax in respect of the month should also be filed before the sales tax authorities in time.
12. Sales in manufacturing and Processing Societies :- In manufacturing and processing Societies, where goods are manufactured against orders, a register of orders received from customers should be maintained. Orders for manufacturing of each item should be accepted only on terms and conditions acceptable to the society. Where credit sales are allowed to customers, credit limits should have been properly fixed and checked before orders are accepted.
The society should review the incompleted orders periodically. Orders for manufacture should be executed as agreed to at the time of accepting the orders. It should be seen that for all sales effected, invoices are prepared and sent along with the despatch of goods. The auditor has to check the sale invoices with the entries in the Sales Register or the Sales Day Book. The acknowledgments of receipt of goods by the customers should be attached with the office copies of the invoices. In respect of all goods returned by the customers, or claims made in respect of short deliveries, incorrect prices, mistakes in calculation etc. necessary credit notes should be prepared and issued. Quantities sold as per sale invoices should be traced in the stock register and also compared with the issue of finished goods. In the case of societies, where the system of issuing proforma invoice is followed it should be compared with the sale orders and the goods despatched notes and also with the final sale invoices and receipt advice notes. As regards prices and terms of payment and delivery, the auditor should check the sale invoices with the sale orders. Calculations and additions are also to be checked. Credit notes issued for goods returned should be compared with the "Goods Inward Register".
13. Consignment Accounts :- Occasionally goods are sent to outstation for sale on consignment basis. In such cases the auditor has to ascertain the terms and conditions of the consignment. Separate accounts have to be maintained in respect of each consignment. The auditor has to examine carefully each consignment account. Goods sent on consignment should be included in stock on hand and not treated as sold until regular account sales are received from the consignee. The auditor should also get confirmation certificates from the consignee for all goods lying with him unsold.
When consignments are charged at proforma invoice plus a percentage above cost, the auditor should see that accounts are suitably adjusted at the time of balancing so as to have the same effect as if they were valued at cost price.
14. Sales returns :- When goods are returned due to defective supplies or any other reason they should be entered in the Inwards Return Book. It should also be recorded in the sales Return book and a credit note issued to the customer by a responsible official of the society. The auditor should scrutinise credits and if necessary examine the documents such as copy of credit notes, goods inward register etc. He should specially examine whether such returns just before the date of balancing the books are recorded in the stock as well as in the Sakes Return Book.
15. Goods on Sale or return :- Goods sent out on sale or return, cannot be treated as actual sales until the customers have approved the goods Therefore, they cannot be passed through the Sales Day Book, but be accounted in Sales Return or Purchase Return Stock Register.
Where such transactions are not very numerus, a Sale or Return Book is issued. The auditor should examine the details of this book and check the postings from sales column into the sold ledger. He should also ascertain that the goods in the hands of the customers unsold on the date of balance sheet are valued at cost price.
Where the number of such transactions are numerous, separate set of books viz., a Sale or Return Day Book, sale or Return Journal and a sale or Return Ledger should be maintained. The auditor should vouch the sale or return day book and journal with the original records and check the castings and postings of these books.
16. Packages and empties :- Where packages and empties are returnable by customers, they should be entered in the 'Issue column' of the 'Packages and Empties Register'. When they are actually returned, they should be entered in the recovery column in the register. Reference should be made in the register as regards the outward and inward slips for issue and recovery of packages respectively. At the time of balancing a reserve must be created for the value of packages and empties in the hands of customers, at the same time creating adequate reserve for depreciation on the same.
17. Bills receivable Book :- The particulars of all bills and drafts upon which the business in entitled to receive money are entered in this books. This book will contain particulars such as the date of receipt, from whom received, to whom payable, date of bill, the term, due date of the bill, amount and how they are disposed of etc. The auditor should see that the proceeds of the bills are accounted for or if the bill is dishonoured the amount thereof plus any expenses are debited to the particular debtor's account. He should inspect the bills on hand on the date of the balance sheet and see that the total of the amounts of such bills agree with the balance of the Bill Receivable Account in the ledger.
18. Bills payable Book :- All bills accepted by the business kin favour of its creditors are passed through this book. When the bills are met they should be marked off in the appropriate column of the Bills payable Book. The bills that have been paid will appear in the Cash Book and the returned bills should be produced as vouchers. The total of the amount of bills yet to be met, as shown in the Bills payable Book should agree with the bills payable account, in the ledger.
When a bill is dishonoured the concerned parties, account should be credited with the amount of the bill plus expenses, if any, incurred by him. The accounts of noting charges should be vouched and receipted accounts forwarded to the concerned creditors.
19. Bought Day Book :- The whole system of ordering and receiving goods, checking invoices, and authorising payment should be investigated. If strict control is not exercised in this direction, there is every scope for abuse and fraud.
A simple fraud may be perpetuated in connection with purchases by entering the invoices twice in the bought day book, in each case the creditor's account being credited. In due course and at different dates two cheques are drawn, one being sent to the creditor and the other misappropriated. These cheques are debited to the creditor's account. In order to provide a receipt support of the second and fraudulent payment, the bona fide receipt may be produced twice or a duplicate receipt may be obtained and produced before the auditor. Such frauds are difficult to discover and unless there is a perfect system of internal check, and the auditor carefully check all the invoices, these kinds of frauds can not be detected.
20. Bought ledgers :- Bought ledger contains the accounts of creditors'. The auditor has to check the opening of different account posted in the ledger with reference to the schedule of the creditors of the previous year duly checked by the them auditor. The postings in the bought ledger can be vouched from the cash book, bought day book, returns and allowances book, bills payable book and the journal. The most valuable check on the bought ledger balances is the production of creditor's statements and agreeing them with the books of creditors. In case some of the statements do not agree, it has to be presumed that some of the goods debited by the creditor on or before the date of balance sheet, may not have been received and credited in the books of creditors. In such cases, the auditor has to carefully trace such goods through the goods inward book and see that those goods are not included in the stock.
If the disagreement of the statement and the ledger account is due to some dispute, the auditor should go through the correspondences in such cases and adequate provision made for all outstanding and contingent liabilities.
If the auditor finds that the debit balance in the bought ledger is a bona fide balance he should include the item in the asset side of the balance sheet along with other debtors.
21. Sales ledger :- The auditor has first to check the opening balances of the debtors account with the help of the schedule of debtors of the previous year. He can check the postings from the sales journal, Sales Return Book, Cash Book, Allowance book, Bills Receivable Book etc.
While checking the Sales ledger balances, the auditor should check each account thoroughly with a view to ascertaining whether or not the provision for bad and doubtful debts is sufficient. If required the auditor can get a list of good, bad and doubtful debts, from the management.
After vouching the entries in the various subsidiary journals has been completed and their postings checked into the ledger, the Auditor should examine whether any item has been left out, unticked. If so he has to examine why it has been left out unticked and then satisfy himself as to its genuineness.
22. Stock Register :- The Auditor has to check the stock register with reference to the cash bills or invoices in respect of the purchases. The date of receipt of goods and other details are entered in the stock Register should correspond to the details in the cash bills or invoice. For issue of goods from the godown, the auditor should examine the indents and satisfy whether the quantity issued as per the stock register agrees with the indent. He should also check the correctness of balance of stock arrived at after each issue.
In the course of checking if the auditor comes across deficits in stocks, it should be carefully scrutinised to find out the actual causes for shortage. If it has occurred due to natural dryage or shrinkage, it should be examined whether the percentage of dryage or shrinkage allowed is reasonable and supported by necessary resolution of the Board. At the end of checking of stock register the Auditor has to workout the total receipts and issues for the whole year and verify whether the opening stock added to the purchases, tallies with the closing stock plus issues. If there is excess or deficit, he should carefully examine the reason for the same to make necessary adjustments in the ledgers and day book.
23. Production Register :- This register shall contain essentially the following details also.
(a) Cost Sheet
(b) Process Accounts.
(a) Cost Sheet:-Cost sheets are statements setting out the cost of a product giving details for all the elements of cost.
The first element is "materials" used. This is arrived at by adding opening stock of materials and purchases and deducting closing stock of materials. Carriage inward may be added to purchases or may be treated as part of factory expenses. Cost sheet should clearly indicate the prime cost, works cost, cost of production, cost of sales, profit etc. After adding factory or works expenses, money realised by sale or scrap or wastage should be debuted. The work in progress in the beginning of the period should be added at this stage and work in progress at the end of the period should be deducted.
The cost sheet will have the following columns also:
(i) Total expenditure;
(ii) Percentage of each element to the total cost of production eg., percentage of materials to cost of production.
(iii) Cost per unit.
(iv) Cost per unit in the previous period.
24. Inventory Control :- Inventory control is planned method/scientific system of determining what to indent, when to indent and how much to indent. Without proper control, inventories have to tendency to grow beyond economic limits. Unless stock is carefully planned and maintained, there is every likelihood of overstocking or a impending positive danger of running short of certain indispensable items at inconvenient times. Scientific and systematic methods of control are, therefore, necessary to maintain stock in right quality, quantity and value.
While checking the stock registers the Auditor shall ascertain whether proper inventory control has been exercised by the management. For a realistic assessment of the system of inventory control in the institution, information on the following matters are also essential.
(1) The minimum quantity of every item of stock that should be stocked at any given time.
(2) Fast and show moving articles and incidentally items which are not selling.
(3) Data for comparing the growing and falling demands of different items.
(4) Information for assessing the future requirements of the customers.
(5) Details of stock which have become old and unsaleable.
Every inventory control mechanism seeks to answer the following two basis questions, viz.
(a) How much to order?
(b) When to order?
There are two well known inter-dependant methods for answering the above questions. They are (i) fixed ordering system; and (ii) Fixed frequency ordering system.
(i) Fixed ordering system :- Under this system, quantity to be ordered is fixed b the management on the basis of market situation, demand pattern, economy of scales etc. The placing of orders will be fixed as to the quantity and intervals are concerned.
(ii) Fixed Frequency ordering system :- Under this system, the frequency of ordering is fixed, whereas the quantity to be ordered varies. Maximum stock level to be maintained is worked out with a view to finding out the quantity to be ordered on a fixed date.
Usually, order levels are set for various articles stocked in the godown, so that action is taken continuously for re-ordering when the stocks reach order level. Maximum stock level is also determined after taking into account, factors such as persistability, storage facilities, price trends, discounts, amount of capital necessary and available, seasonal trend of prices, availability of supplies etc.
The Auditor should ascertain and satisfy that the institution has not maintained unnecessary stock of raw material or finished products required for production/sale. He should also ensure that no indispensable item has gone out of stock and that a proper inventory control is exercised effectively by the Management.
1. Internal control over wages :- (a) Wages constitute a major item of manufacturing cost, in societies which undertake manufacturing and processing activities. The system of compilation of the pay rolls and payment of wages vary considerably with the size of the society and the nature of activities. The procedure of evolving a satisfactory system of internal control over payment of wages can be grouped as follows:-
Recruitment, promotions, transfers and dismissal of employees. Orders in writing should have been given for:-
(i) Appointment.
(ii) Fixing of pay and other allowances.
(iii) Retirement or dismissal.
(iv) Promotions, increments, punishment etc.
The societies should have framed necessary Sub Rules regulating the service conditions of employees. Approval of the Registrar should have also been obtained for the Sub-Rules. Every employee should have personal cards to record details such as appointment, promotions, rates of pay, retirement etc. These personal cards should be maintained by the Personnel Department. All general increase in pay, deduction from wages, payment of advances against wages etc, should have been properly authorised.
(b) Attendance and job recording :- If wages are paid for on time basis, the auditor has to ascertain the normal working hours and regulations regarding absentees.
(c) Compilation of wages sheets and analysis of wages.
(d) Disbursement of wages.
Muster rolls should be maintained to record the attendance of all employees. Where punching clocks are in use, the time keeper should be made responsible for maintaining of the muster rolls and also the attendance card of employees. Where wages are paid on piece rate basis, the system of maintenances of job cards and clock-cards should be studied by the auditor. The quantities produced by individual workers and entered on piece work, job cards, etc. should be checked with the Daily production report and entries in the Production Register. Where there is a large number of employees, a regular procedure should be prescribed for the periodical checking of records of the wages Departments. The method of preparing wages sheets or pay rolls should be examined by the auditor.
Salary slips containing necessary information are to be issued to the employees. These slips should indicate the gross wages payable and the deductions to be made therefrom.
2. Method of checking pay-rolls :- The auditor should first call for the office records viz. attendance cards, piece work cards, inspection reports, etc. and check them with the entries in the pay roll or wage sheets. The calculations and additions of pay rolls or wages sheets and acquittance rolls should be checked.
The totals of the pay sheets should be carried over to an abstract or summary sheet and the total wages paid should be checked with the cash book.
Deductions made in respect of Provident Fund, Employee's State Insurance, Income Tax etc. should be paid over to the respective authorities within the time limit (due date) and returns filed.
Where wages are paid on piece rate basis or additional wages are claimed under a scheme of enhanced bonus, the job cards, piece work or bonus cards, should be examined. The quantities as mentioned in the job cards should be carried over to the Daily Production Register.
The auditor at regular intervals should attend at the time of payment of wages and satisfy himself that the prescribed procedures are being regularly followed.
3. Payment of Overtime :- The society should evolve proper procedure for authorising overtime. Overtime should ordinarily be allowed only with the written requisition of the officer in charge of the section. The pay rolls in respect of overtime should be prepared separately. The auditor should as certain the necessity and basis for payment of overtime, method of calculation etc. The authority sanctioning overtime should be independent of the wages Department. The auditor should in additional to this examine the compliance of provisions of the Factory Act, the Shops and Establishment Act etc. in allowing overtime.
1. General :- Rule 27 of the Kerala Co-operative Societies Rules prohibits membership in two credit Societies. Where a person is a member of more than one credit society; prior sanction of the Registrar has to be obtained to continue as a member in two such credit societies.
Under Rule 56 the Registrar has been empowered to prescribe conditions for grant of loans to members including maximum amount to be advanced against different types of securities. In exercise of these powers, Registrar has issued a number of orders then and there regulating and restricting grant of loans by societies and banks. Auditors will have to study carefully the contents of these orders and watch their compliance during the course of their audit.
Section 21 of the Banking Regulation Act (Applicable to Co-operative Societies) gives wide powers to the Reserve Bank of India, to regulate and control advances by Co-operative Banks.
Under Section 59 of the Kerala Co-operative Societies Act, no loan can be given to a non-member or against the security of a non-member or on the security of its own shares. However, loans may be made to nonmember depositors against security of their deposits, to the extent of 90% of the amount of the deposit and for a period which does not exceed the date of maturity of the deposit. Although, inter-lending between societies has been prohibited, Registrar may permit such inter lendings in special circumstances.
Loans may be either secured or unsecured. Secured loans may be on hypothecation or pledges involving deposits of investments, life insurance policies etc.
In the case of secured loans, the verification involves not only an examination of the loans ledger, but also the security ledger. The auditor has also to satisfy himself that the loan is properly secured and that there is reasonable margin between the loan amount and the value of security offered.
In the case of loans issued on personal security, the financial position of the parties should be enquired into by the auditor. Wherever possible the auditor should obtain a written statement from the borrowers confirming the balances of loans on the date of the balance sheet.
2. Restrictions on lending :- Different types of Co-operative Institutions are set up with a view to providing financial assistance for different purposes.
Accordingly agricultural credit, and multipurpose societies are organised to meet the credit requirements of agriculturists. In towns and cities, Urban Banks are set up to cater to the needs of petty traders, artisans, small scale industries etc. Employers, Credit societies are organised to meet the credit requirement of employees of Government departments, large and small business concerns and of industrial establishments. Long term credit facilities are extended through Land Mortgage Banks for development of land, provision for irrigation facilities, purchase of tractors etc. Even-though the main object of these institutions is to dispense credit, their constitution and operations are different.
(1) Every borrowing member of an agricultural credit society is required to execute a declaration crediting a charge in favour of the society on the lands held by him or his interest in the lands cultivated by him as tenant for the dues of the society. (Subject to amendment is Registration Act).
(2) Every salary earner member of a society, while applying for a loan, shall execute an agreement authorising his employer to recover from his wages/salaries the dues of the society as requested by the society.
(3) Transactions of a society with non-members shall be subject to such restrictions as may be prescribed.
(4) Credit sales to non-members when permitted by the byelaws can be made to only such traders and other persons who will furnish an undertaking to the society to refer any dispute to Registrar of Co-operative Societies for arbitration.
There are restrictions on the loaning or credit operations of societies which are not permitted to undertake lending business. No society the objects of which do not include grant of loan or financial accommodation to its members, can grant loans or sanction credit to any member without the sanction of Registrar. However, a society, which has as one of its objects, supply of goods or services required by members for production purposes, may supply goods or provide credit against sufficient security on condition that the cost of goods supplied or services rendered shall be recoverable from the proceeds of the goods produced by the members. A consumer society may sell goods on credit to its members and other customers up to the extent of deposits received by them.
The above are certain important provisions and the auditor has got responsibility to see that the transactions of credit as well as non-credit societies are conducted or regulated according to the above provisions. Besides this, there are provisions and certain restrictions in the bye-laws of societies regulating advances to members. The auditor should also see such provisions and restrictions.
3. Checking of loan operations :- The byelaws of most of the Co-operative Banks and credit societies specifically provided that the loans to the members should be sanctioned by the committee or Board of Directors. In certain cases, where the loan operations are large, the byelaws provide for the constitution of sub committee to consider the loan applications. In the case of societies/Banks where the Secretary, President, Chairman, or the Managing Committee member are competent to sanction temporary/emergency/loans to specified limit, the auditor has to ascertain from the Society/Bank, the extent of and restrictions over the exercise of such authority by the official concerned.
The Managing Director, Secretary or Principal Officer of the society bank should verify the loan application with the records of the society/bank and satisfy the correctness of the information furnished. He has also to record his recommendation or otherwise on the application. During the course of examination of the loan transactions, the auditor has to be satisfy himself that in sanctioning the loan, the society/bank has observed the normal procedure prescribed.
The auditor has also to verify the proceedings of the managing committee in order to ascertain whether all the loans have been duly considered and sanctioned by the committee. He should also satisfy whether the society/bank and obtained application for loans, loan bonds or agreements, surety bonds or mortgage deed etc. executed by the borrowers. The auditor has to see that wherever necessary the documents executed by the members of Co-operative Societies are stamped. So far as credit societies are concerned, all documents executed by the members are exempted from stamp duty and registration fees.
The audit must satisfy himself:-
(1) that the loan sanctioned is a genuine one and not a renewal of an existing loan; or
(2) conversion of a debit balance, or
(3) a mere book adjustment; or
(4) entered as a fresh advance against repayment of an overdue loan with a view merely to extend payment;
(5) the date or dates of repayment of the previous loan and the date of remittance of the amount to bank will have to be ascertained;
(6) there must be sufficient time leg between the repayment of loan and disbursement of the fresh loan;
(7) all repayments of loans made by members are promptly credited into bank and not kept on hand and utilised for giving fresh loans;
(8) even if the society has not borrowed from the bank, all recoveries should first be credited to current account and cheques drawn for fresh loans.
4. Checking of loan bond :- The entries in the Loan Register should be compared with the details in the loan application and loan bonds to verify whether the following details correspond to:-
(i) Name and clear address to borrower.
(ii) Names and clear addresses of sureties and nature of security offered.
(iii) Date of advance.
(iv) Amount of advance.
(v) Nature, term and conditions of repayment of the loan.
(vi) Rate of interest charged.
(vii) Purpose for which loan was sanctioned and
(viii) Authority sanctioning the loans.
While checking the documents in connection with the loan, the auditor should see that loans are sanctioned only for purposes which are provided in the byelaws or for which special sanction has been obtained from Registrar of Co-operative Societies.
The following points should be noted while checking the loan bonds
(i) The loan bonds and application should be examined with the loan ledger, Day Book and Minute Book.
(ii) The signatures of the borrower and sureties should be examined. Thumb impression wherever obtained should be properly attested.
(iii) Whether the loan has been paid in cash or by cheque should be ascertained.
(iv) Where the loans are disbursed in cash, it should be disbursed in the presence of the President, Chairman or Committee member.
(v) In the case of loans disbursed partly in kind and partly in cash, the auditor should examine the arrangement made by the society for the supply of the kind component.
(vi) In the case of disbursement of loan in instalment, the auditor has to ascertain whether the installments have been disbursed only according to the purposes for which the loan has been sanctioned.
5. Scrutiny and verification of loans and advances by Urban Banks and other societies :- Urban Banks and other societies, make advances in the form of Loans and Cash credits and overdrafts, the difference being in the nature of operation of the accounts. Although, the advances made by the agricultural credit societies and Small Urban Banks take the form of loans repayable in suitable installments, Central Co-operative Banks sanction cash credit over-drafts to the affiliated societies, based on the loan requirements of the members. The main difference between an overdraft account and a cash credit is that, the overdraft presupposes existence of a current account, whereas the cash credit account beings with a debit entry. Both cash credits and over-drafts are arrangements under which cheques drawn by the constituents upto a certain limit are honoured by the bank, for a certain period. Sometimes the operations on these accounts are also subject to certain restrictions such as crediting the entire sale proceeds of goods sold in to the account, maintenance of minimum balance etc. Interest on this account is debited quarterly.
6. Loan against different kinds of securities :- (i) Fixed deposits :- Loans against fixed deposit is a facility made available to the depositor, without being required to furnish other security. Usually loans against fixed deposit are to be restricted to 85% of the deposit amount and the period for which the loan is granted should not exceed the date of maturity of the deposit. If the depositor fails to repay the loans with the period for which it was granted the Bank/Society will be at liberty to adjust the amount and interest against the fixed deposit and, only the balance, if any, shall be paid to the depositor on the date of maturity.
As deposits are not negotiable, they have to be got discharged and assigned in favour of the Bank/Society before a loan is granted against the deposit. For loans against the security of fixed deposit, the lending rate will be one or two per cent over the rate paid on the deposit. If advances are to be made against the deposits with another bank, the assignment, of the deposit receipt in favour of the lending Bank/Society will have to be get registered with the Bank issuing the receipt.
(ii) Insurance policies :- Insurance policies are accepted only as collateral security. Where insurance policies are offered as security, the following points have to be looked into.
(i) It should be seen whether the policy is in the name of the borrower himself.
(ii) Receipt for the payment of the latest premium should be attached to the policy. An undertaking should have also been obtained from the borrower agreeing to keep the policy alive.
(iii) The policy should have been got assigned in favour of the Bank/Society. The notice of assignment should be sent to the concerned office of the Insurance Corporation.
(iv) Loans should have been limited to the Surrender value of the policy. It required a certificate should be obtained from the L.I.C., for the surrender value of the policy. It should be ascertained whether the policy is subject to any charge, encumbrance etc.
(iii) Government and other securities :- Particulars of the securities pledged, their market value etc, should be verified by the auditor. The securities should have been endorsed in the name of the lending Society/Bank. In the case of debentures issued by the Central, Co-operative Land Mortgage Bank, the auditor should note the restrictions on the transfer of such debentures. He should also inspect the securities in possession of the Bank/Society during the course of audit and find out the margin between the loan amount and the present purchase value. In case the margin is small he should report.
If the securities have not been purchased by the borrower himself, the auditor should see that the last endorsement is in his name. He should also see that all interest warrants not due for payment are in tact. If the securities are not endorsed in the name of the lending Bank a letter of assignment should be got executed along with the bank transfer forms duly signed by the owner of the securities. In view of the restrictions on the transfer of shares of Co-operative Societies and the right of set off available to the societies against shares held by their members, shares of Co-operative Societies should not be accepted as security for loans. The auditor should also note that Co-operative Societies Act forbids societies to advance loans on the security of the shares issued by itself. In the case of certain bonds and debentures second charges are not recognised and hence it should be seen that prior encumbrances have not been created on such securities. Securities carrying Government guarantee should be preferred.
(iv) Gold and Silver Ornaments :- Every Bank/Society which make advances against gold and silver ornaments should have appointed a qualified appraise to test and value the ornaments offered as security. Adequate security should have also been obtained from him. Every advance should be supported
by a certificate of the appraiser containing a brief description of the articles pledged, their weight, rate at which valued, prevailing market rate, total value of the articles, and the amount of advance recommended by him. When the loan is repaid and the articles return to the borrower, his acknowledgment should be obtained for having received back the articles. The Auditor will ensure whether the society has strictly complied with the directions of Registration issued in Circular No. 1/78 dated 6-2-1978 (CRP3-50058/77), regarding custody, insurance etc. of the ornaments pledged.
(v) Advances against Mortgage of immovable properly :- The auditor should examine the sale deeds or certificates issued by the Revenue Department or by the Civil Courts showing the title of the immovable property, restrictions on its alienation or transfer and creating charges or encumbrances thereon, the legal opinion etc. and ascertain the right of the borrower to mortgage the property. The tax receipts should also be verified to ascertain that the property belongs to the borrower and continues to be in his possession. In order to satisfy the adequacy of the security, the valuation certificate of competent authorities should be verified. The mortgaged property should have been insured for its full value and the policy assigned to the lending Bank.
(vi) Advances against Hypothecation of goods :- In the case of hypothecation of goods, the possession of the goods will be with the borrower and he will be free to dispose of the goods, provided the remaining goods are sufficient to cover the outstanding balance of advances. The lending Bank, will have only a charge on the goods hypothecated.
The auditor should ascertain whether the Bank obtains, daily, weekly, fortnightly or monthly statements of stocks of the goods hypothecated. The Bank should verify and satisfy that the required margin is always maintained. It should be seen that the value of the remaining articles would be sufficient enough to cover the balance of loan outstanding.
(vii) Advance against pledge of goods :- When goods are taken into custody, intake notes' signed by the borrower should be obtained and certificate of receipt of goods by the Manager of the Bank/Society should be seen. Similarly when goods are released, "delivery orders" signed by the Manager mentioning the amount credited and the quantity released should be only against repayment of the advance.
A register of advances should be maintained indicating the particulars of the goods pledged, their quality, quantity, prevailing market rate, total, value, amount advanced and the margin required to be maintained and margin actually maintained. All the goods should have been insured and the insurance policies obtained in the name of the lending Bank/Society. There must always be a sign board bearing the name of the lending Bank/Society, hung over the main entrance. The locks should bear the seal of the bank. The stocks should also be got verified by the bank's staff frequently without advance intimation.
7. Discounting of bills and hundies :- Discounting of bills and hundies is a popular form of temporary accommodation granted mostly by Co-operative Banks and certain societies. Cheques and hundies received from the customers are immediately credited to their accounts and they are allowed to draw the amount of the unrealised cheques/bills upto the sanctioned limit. Bills or hundies may either be clear or documentary bills. In the latter case, they are accompanied by Railway receipt of other documents showing title to the goods which are to be delivered to the drawer or consignee only against payment of the bills. As regards clean bills, as in most cases, they are mere accommodation bills, careful enquiries are to be made about the material assets possessed by the borrower and his reputation before accommodation facilities are sanctioned. Limits should have been fixed separately for clean bills and other bills. Cases of misuse of hundi limits, discounting of hundies beyond the credit limit fixed, meeting of previous hundies already discounted, frequent dishonour of bills or delay in honouring them, etc, should receive particular attention of the auditor with a view to ascertain whether these transactions are conducted on sound lines.
The payment of cheques received for collection before they are realised is very important service rendered by the banks. Up-country cheques are required to be sent by post to collecting banks or the drawee bank and considerable delay occurs before the proceeds are realised and there would be considerable loss of interest. As such only in exceptional cases proceeds of the cheques should be credited to the account of the party before realisation. However there should be no objection for discounting the cheques or bills provided they have been received from approved parties to whom hundi limits have been sanctioned.
1. Statutory Provisions :- Section 55 of the Kerala Co-operative Societies Act states:
"A society may invest or deposit its funds:-
(a) in Government Savings Bank, or
(b) in any of the securities specified in section 20 of the Indian Trusts Act, 1882 (Central Act 2 of 1882); or
(c) in the shares or securities of any other society approved for the purpose by the Registrar by General or special order; or
(d) in any Bank approved for the purpose by the Registrar; or
(e) in any other specified manner".
So the auditor while vouching any investment made during his period should see that they are in accordance with the above provisions. Whereever the society has opened account with commercial banks, specific sanction issued by the Registrar for opening the account should be verified by the auditor. Whatever may be the mode of investment the auditor should vouch them with reference to the pass book, counterfoils of cheques, the correspondences as the case may be. All societies both Agricultural and non-agricultural are required to purchase shares of the District Co-operative Bank or other financing agencies from which they borrow. Marketing and processing societies facilitate the operation of Agricultural Credit societies by helping to link up credit with Marketing and processing. Hence agricultural credit societies have to purchase shares of the Marketing and processing societies operating in the area. Primary marketing societies are required to be affiliated themselves to their respective District Marketing Federation/Society and also to the State Co-operative Marketing Federation. Dairy societies are required to be affiliated to their Milk Unions. Primary/consumer stores to the wholesale stores and the latter to the consumer Federation. Similarly primary housing societies, if they want to borrow funds from the Kerala State Co-operative Housing Apex Society, have to become its member. Thus all primary societies are required to invest certain portion of then funds in the shares of their federal societies.
However, it should be seen that shares of only such institutions, which have been organised for the furtherance of the objects of the society or otherwise assist the society in its operations are purchased. The amount so invested should in no case exceed a reasonable percentage of the paid up share capital of the society.
2. Method of checking of investments in shares :- Receipts or other documents acknowledging receipt of the share money should be seen. Since payments are generally made by cheques or debited to current account, entry in pass book will also provide supporting evidence. The share certificate issued by the Bank or other society should also be verified.
3. Investment in fixed or Call Deposits :- Funds which are not immediately required for the business of the society, are generally invested in fixed, or call deposits, with the Central Bank. The auditor should verify the original fixed/call deposit receipt issued by the Bank. In the case of withdrawals, the advices or credit notes and entries in the Bank pass book should be seen. Call deposit and fixed deposit receipts, which have not matured, should be inspected by the auditor during the course of audit.
4. Purchase of debentures, trustee Securities, National Savings Certificates etc :- It should be seen that the securities are in the name of the society or bank transfer forms or endorsement from the last vendor have been obtained. If the purchase are made through the Banks, the Bank's memoranda of purchase or advice and entries in the bank pass book could be available for checking. If purchases are made through brokers, "brought notes", bank transfer forms or endorsement will have to be seen. The securities themselves should be inspected during the course of audit. In case, the securities are pledged with any bank for Custody, certificates will have to be obtained from the bank scrutinised by the auditor.
5. Purchase and Sale of securities on behalf of Customers :- Co-operative Banks and other financing institutions, which purchase and sell securities in respect of the purchase and sale on behalf of the clients should maintain separate accounts in respect of purchase and sale on behalf of the clients. The auditor should see that the income, rights and other benefits relating to them are properly charged and credited to the accounts of the customer concerned.
6. Investment in Treasury Bills :- Some of the societies, particularly Urban banks and Central banks, invest their surplus funds in Treasury bills or other short term investments which are generally sold at discount. The difference between the face value and the purchase price represents the return of the amount invested.
7. Investment in land and buildings :- In the case of purchase of land and buildings, the agreement for sale and the sale deed should be verified. The sale deed should have been registered. In order to verify the possession of the land and building, the tax receipt of the revenue department or municipality should be verified. The title deeds should have been carefully examined by legal advisers and should refer to the property purchased. The valuation of the building should have been made by a competent engineer. Stamp duty, registration charge and legal charges and architect's fees may be allowed to be capitalised. In the case of buildings purchased in auction, the auctioner's report or certificate granted by the court would be available for verification.
The resolution of the Board/Committee and general body as may be necessary under the provision of the Bye-law should be seen. Sanction of the Registrar as required under the Rules for the purchase of the land and building should be seen. When the purchases or construction are made out of the Reserve Fund, Building Fund or other surpluses, permission of the Registrar for utilisation of the amounts will also have to be obtained. In the case of Banking Institutions provisions of section 9 of the Banking Regulation Act, 1949 will have to be observed regarding the disposal of the non-banking assets.
8. Investment of General Fund in immovable properties :- As regards the investment of General Fund in immovable property, Rule 54 of Kerala Co-operative Societies Rules empowers societies to utilise or invest their General Fund in any immovable property specified by the Registrar by general or special order.
9. Construction of buildings and godowns by Co-operative Societies :- Before commencement of the construction, the plan and estimate of the building / godown as prepared by competent Engineer, should be got approved by the Registrar. All changes in the plans and estimates should be got approved by competent authorities. During the course of audit, the auditor will have to see that the terms and conditions subject to which the loans and subsidies have been sanctioned, are complied with.
Where construction is entrusted to contractors, it should be seen that the normally accepted canons of financial propriety such as calling for tenders or obtaining quotations, acceptance of lowest tender enquiries into financial position and past performance of the contractor etc. are duly observed. If contract is entered into by private negotiations, or the lowest tender is not accepted, reasons for not calling for tenders, or for not accepting the lowest tender should be ascertained by the Auditor.
The following points should also be looked into:
(i) Whether tender deposit has been collected from the contractor, and regular agreement executed.
(ii) The terms and conditions should be examined particularly with regard to the supply of materials, and deduction of the cost thereof from the bills, payment of advances, deduction of retention money from the bills, payment of damages for delay in the completion of works, etc.
(iii) The building supervisor, or other employee of the society who supervises the work should maintain measurement book.
(iv) All running bills should be duly checked by the Engineer. Quantities shown in the bills should be checked from the measurement books and rates with the rats furnished in the tender form filled in by the contractor.
The auditor should also see that the amount of subsidy received and credit to the funds of the society and the full cost of the construction including cost of the land are shown on the asset side. If the actual cost of the godown exceeds the amount of loan and subsidy received from Government, permission of the Registrar of Co-operative Societies for investing additional funds for the construction of the godown should be obtained. The final evaluation of the godown should also be certified by the P.W.D. authorities (not below the rank of an Executive Engineer).
1. Preliminary :- Before the Kerala Chitties Act, 1975 (Act 23 of 1975) came into force, the conduct of Chitty/Kuri transactions in Travancore-Cochin area was governed by the Travancore Chitties Act, 1120 (Act 16 of 1120), the Cochin Kuries Act VII of 1107 and the Cochin Starting of Kuries (Restriction) Act XII of 1120. Till 1975, there was no such statute in Malabar area for regulating conduct of Chitties. The Kerala Chitties Act, 1975 codified all the existing Chitty/Kuri Acts and was made applicable to the whole State of Kerala. This Act contemplates the terms and conditions for starting the conducting Chitty/Kuri.
2. Kerala Chitties Act :- Important provisions (Included in appendix) [Appendix II (i) ]
3. Provisions in the bye-laws :- Observance of other terms and conditions.-Before proceeding with the audit of Chitty/Kuri transactions/accounts, the auditor should ensure as to whether there is specific provision in the byelaws of the society/Bank to conduct Chitty/Kuri. He will also verify provision if any, which specifies the maximum Sale (amount of Chitty/Kuri) of a Chitty/Kuri, which it can conduct. The society should have got approval for its sub-rules to start the chitty/kuri, if so provided in the byelaws. The auditor should also go through the terms and conditions with regard to the conduct of Chitties and more especially about the minimum number of persons required to start a chitty, the period of chitty, the minimum and maximum lots that can be taken by a member, periodicity, drawal of prize amount, furnishing of security, execution of bond etc. It is the duty of the Auditor to verify whether the society is running the chitties in accordance with the provisions of the Kerala Chitties Act, 1975 and the Rules thereunder and provisions in the byelaws of the society.
4. Variola :- Means the document containing the articles of agreement and the terms and conditions agreed upon between the Foreman and subscribers of the chitty and includes vaimpu and kuri pattika or other similar instrument.
(1) It should contain the following particulars also:-
(i) Office where chitty is registered.
(ii) Year and Register. NO.
(iii) Full name and address of Foreman.
(iv) Occupation and age.
(2) Chitty amount and number of tickets.
(3) Duration of chitty.
(4) The time at which and the place where chitty is to be conducted (bid/auction).
(5) Particulars of security furnished or deposited by foreman.
(6) Mode of conducting chitty.
(7) Mode of payment of each instalment.
(8) Procedure for receiving prize amount by a prized subscriber.
(9) Disbursement of veethapalisa.
(10) Forman's commission and instalment as which the foreman is to get the prize.
(11) Transfer how to be effected.
(12) Balance sheet and subscriber's right to examine chitty records.
(13) Banks where chitty money will be deposited.
(14) Other miscellaneous details, if any.
Before commencement of audit, the auditor has to carefully study the important clauses of the Variola (Chitty sub rules).
(a) Starting :- The auditor has to ensure that the society has started the chitty subject to the provisions in its byelaws and Kerala Chitties Act and Rules.
(b) Registration of Variola by Registration Department :- As per Section 3 of the Kerala Chitties Act, 1975, every chitty is to be registered by the Registration Department.
5. Deposit of Security amount :- Every foreman shall, before first drawal/auction of the chitty, furnish security of immovable property equal to double the prize amount of chitty or deposit in an approved bank an amount equal to the chitty amount or invest in Government, securities of the face value of not less than one and a half times the chitty amount and transfer the amount so deposited to the Government securities in favour the Registrar to be held in trust by him as security for the due conduct of the chitty. The Auditor should ensure remittance of security deposit by verifying the original chalan receipt/Pass Book/deposit receipt. If the deposit or Government bonds are in the safe custody of Registrar, the auditor will verify the acknowledgments for the same.
6. Chitty transactions :- A know how.-Majority of Co-operative Societies dealing in credit, conduct chitty or 'Kuri'. Ordinarily the period of chitty runs to twenty five, forty, sixty months or even more than that.
Before starting audit of chitty accounts, the auditor should acquaint himself carefully with the important provisions in the Kerala Chitties Act and Rules, bye-laws and registered chitty Rules ie, the chitty variola/sub-rules etc. The foreman's commission, the maximum amount upto which a subscriber (Chittal) is permitted to bid in a chitty the rebate permitted for prompt payment etc., are to be thoroughly understood from the registered chitty sub-rules. The conduct of chitty is mostly guided by these rules, and the foreman is not permitted to deviate from them without prior sanction from competent authority. It is the duty of the auditor to check as to whether the society has scrupulously adhered to these rules.
7. Procedure in audit :- (i) Central :- After examining the previous year's audit note and ascertaining the figures relating to the chitty transactions, the auditor should carefully go through the chitty subrules (variola) and chitty minutes to know the important provision and procedures to be followed in bidding the chitties. He should also examine whether separate receipt books are used for each chitty or not. If the society conducts more than one number of chitty simultaneously, it is desirable that separate receipts are used for each series of chitties. The same procedure may be adopted in keeping the vouchers also.
The chitty Day Book is maintained with classified columns with separate columns for receipts and payments. (Form No. XVII of chitty Rules).
(ii) Checking of receipts with Day Book :- The amounts in the cash receipts shall be checked with the corresponding entries of the receipt side of the chitty day book. The amount to be remitted in 'cash' and 'veethapalisa' allowed for each class of chitty and for each instalment can be verified from the chitty instalment schedule or table of the society prepared after each monthly bid. The auditor shall ensure that amounts realised and veethapalisa allowed are correct, and that they are entered in the day book as appear in the receipt.
When the society is also a member of the chitty (ie. a chittal) the auditor shall be more careful in checking such receipts. He will see that the installments as credited in the General Day Book, are actually debited in the Chitty Day Book, on the same date itself.
(iii) Vouching :- The Auditor shall see that all expenses are supported by proper vouchers, which are serially numbered and filed. Chitty expenses or payments will include bid amount paid, securities deposited, Bank remittances, expenses for records, stationery and other contingencies etc.
For deposits made outside or bank remittances, the auditor shall verify the chalan or Bank pay-in-slips along with pass books. As far as the security deposit is concerned, the auditor has to see how the amount is raised, say by collection from chittals or by 'Advance from the Society'. In the case of prize amount not claimed by the bidder before next auction, the auditor shall verify the chitty minutes also and ensure that necessary entries are made therein about the undisbursed amount. While checking expenses like T.A. postage, stationery, records etc., incurred for chitties, the auditor should ensure that these vouchers/expenses are not again debited in the general accounts of the society.
(iv) Checking of day book with chitty ledgers, general ledger etc :- After vouching receipts and vouchers, the auditor shall cross check the chitty day book with the chitty ledger (Personal ledger) and ensure that all classified receipts and payment as entered in the chitty day book are posted correctly in the ledger. If advances are paid/received to/from the chitty Day book to the General Day Book, the auditor shall see that the entries in both the books are entered on same date and for identical amounts and purposes. Delay in recording any transaction in any one of the books may show unaccounted cash balance. Reasons for such delay, if any, should be enquired into in detail.
The postings in the chitty Day Books are to be then checked with the chitty General Ledger. The consolidated receipts of all chitty general ledgers will be the "chitty day book advance", found on the receipt side in the consolidated Receipts and Disbursement statement of the society. Similarly, the consolidated payments will be shown on the payment side of the Receipt and Disbursement statement as chitty day book advance. A statement consolidating receipts and payments under the classified heads in Chitty General ledger will help to arrive at the correctness of chitty day book advance on the two sides of the general statement of Receipts and Disbursement. The daily consolidated total of receipts and payments are taken to the General Day Book of the society, on each day when there is transaction of chitty. These figures which are transferred to the general day book and from there to the general ledger constitute the respective 'chitty day book advance' receipts and payments for the year, in the General Receipts and Disbursement statement.
(v) Bank account :- It is always desirable that the society maintain separate Bank accounts for each chitty. This will avoid diversion of funds. The Auditor should examine the pass books and obtain confirmation from the Banks and reconcile the balances as in the case of other bank accounts.
8. Chitty Auction :- In terms of provision of the Variola, the foreman has to conduct the auction (bidding) of the chitty, at the time and place and day specified for the purpose. The subscriber who is to get the prize (chitty amount) at any instalment shall be determined by lot or auction. In case the prize amount is determined by auction, every prized subscriber or a person authorised by him in writing shall sign the minutes of the proceedings relating to the drawing at which he obtains his prize.
9. Distinction - Prized and non-prized subscribers :- Distinction between 'prized' and 'non-prized' is of great importance for preparing the Balance sheet of chitty.
The chittals who had bid/auctioned the chitties are termed as prized and others as non-prized. The entire prize amounts are treated as loans and the recoveries made by way of installments from the prized chittals are adjusted towards the prize amounts. The installments collected from the non-prized chittals are treated as deposits. On the termination of the chitty, wherein complete payments and recoveries have been made, there will not be any loan amount under asset due from prized chittals and deposits under liability collected from non prized chittals.
10. Substitution of chittals in the place of defaulters :- There may be instances wherein some of the chittals cease to be subscribers or are removed consequent on making default in paying the installments in time. In their places, the forman might have admitted substitutes as per Rules. In such cases the discontinued chittals are eligible to get back the amount subscribed (after completion of the terms of the chitty, or as is prescribed in chitty sub-rules), less commission due to the society and loss, if any, sustained by it by such discontinuances. In such cases, the auditor should ensure that the rules and sub rules are followed and that no amount is paid in excess by the society.
11. Filing of Chitty minutes :- The auditor should verify the connected records relating to the filing of minutes of every drawing, with the Registration Department, and satisfy that they are filed properly and in time.
12. Payment of Chitty amount :- The auction proceedings and chitty minutes may be verified to ascertain the bidder, the bid amount as well as the bonafides of auction conducted. The prized amount is to be paid to the bidder within the time prescribed in the variola on furnishing reasonable security and on his executing the necessary agreement. If the prize amount is paid, the auditor shall verify the voucher and the bond executed therefor. He should also verify the resolution of Managing Committee authorising the payment of the bid amount. In case the prized subscriber, or his nominee fails to receive the prize amount within a month, the foreman shall deposit the amount in an approved Bank specified in the chitty sub-rules. The auditor should therefore verify the connected records to satisfy whether the remittances are done promptly. The auditor should also verify as to whether payment of bid amount has been made out of chitty collection or by diverting from the owned funds or borrowings of the society from the higher financing agency.
13. Verification of Pass Books :- The auditor may call for some of the pass books of the subscribers and verify the entries therein with the chitty ledgers (Personal ledgers) maintained in the society.
14. Verification of outstandings and valuation of overdues :- The schedules of outstandings prepared by the society have to be checked by the auditor with the chitty personal ledgers and the outstanding figures in the balance sheet reconciled. A statement of prize amount to be paid to the chittals at the close of the year and a statement of arrears under prized and non-prized chittals should be prepared and reconciled with the figures in the Balance sheet.
15. Action against defaulters :- After preparing the statement of arrears of prized and non-prized chittals, the auditor should ascertain whether the Foreman society has taken effective action against the defaulting chittals. The overdues of chitties are to be specially scrutinized and amounts under good, doubtful and bad are to be properly classified and adequate reserve created.
16. Books and accounts to be maintained by foreman :- As per Section 18 of the Kerala Chitties Act, 1975 of the Foreman shall keep:-
(1) a register containing.-
(a) the names and full address of the subscribers together with the number of shares held by each subscriber.
(b) the dates on which the subscribers signed the variola; and
(c) in case of assignment by a subscriber, the name and full address of the assignee with the date of the assignment and the date on which the assignment has been recognised by the foreman;
(2) a book containing the minutes of the proceedings of the drawing of chitty;
(3) a ledger containing-
(a) the amount paid by the subscribers and the dates of such payment.
(b) the amount paid to the prized subscribers with the dates of such payments; and
(c) in case of deposit in bank, the date and amount of such deposit;
(d) chitty day book and
(e) any other book as may be prescribed by Government from time to time
17. (i) Filing of balance sheet :- The auditor should examine whether the foreman has filled the balance sheet within the prescribed time with the Registration Department, as required under section 20 of the Chitties Act.
(ii) Chitty audit by approved chitty auditors :- There is provision in the chitty Act for auditing the accounts of the chitty either by Chartered Accounts or by Departmental Chitty Auditors. It is a statutory obligation on the part of the Foreman, to file the Balance Sheet of the chitty, duly audited by approved auditors.
18. Preparation of Receipts and Disbursements statement, Profit and Loss Account and Balance sheet :- As the terms of the chitty usually extend to more than one year, the Auditor shall prepare the Receipts and Disbursements statement of each chitty every year, irrespective of whether the chitty is terminated or not. The detailed Receipts and Disbursements statements of each chitty should be recorded separately in or appended along with the Audit report. The total receipts and the total disbursements should also be included in the general receipts and disbursements statement, of the society.
It deserves special mention, that chitty-war receipts and payments under various heads, Profit and Loss account and balance sheet should be exhibited in the audit note, as otherwise, the final closure of chitties will become difficult at a later date.
19. Chitty accounts how incorporated in audit notes :- After preparing the Profit and Loss account and balance sheet of each chitty, the auditor may carry over the profit or loss of the chitty to the General Balance sheet of the society under liabilities and assets respectively. The outstanding liabilities and assets of each chitty should also be included in the general balance sheet of the society under "adjusting heads".
20. Distribution of Profit :- The net profit of the chitty has to be divided as per Rules. [See Registrar's Circular No. 23/76 dated 11.4.1976, issued in No. IC (2)-38646/75 dated 11.4.1976]. Usually the chitty sub rules/Variola of chitties specify the mode of distribution of profit. The undistributed chitty profit has to be shown separately in the genera balance sheet. The net profits of terminated chitties can be distributed only after audit of accounts by the Departmental and chitty auditors.