Chapter-3 Vouching - Lecture notes 3 PDF

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Auditing - Vouching...

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Unit 3

Vouching Meaning: It is the process of checking the evidence between accounting system, book keeping (transaction) & supporting documents (invoices, bills, receipts) to detect or to find out errors & frauds, to check accuracy and reliability of records. It is an essence of auditing. Definition: “Vouching means testing the truth of item appearing in the books of original entry”. -J. R. Batliboi Objectives: 1. To verify that all the transactions connected with the business have been recorded in the books of accounts. 2. to check all the transactions recorded have documentary evidence. 3. to verify that no fraud or error has been committed while recording the transactions. 4. to check vouchers which support entries are legal, valid, authentic, addressed to the business & properly dated. 5. to see that every transaction recorded has been adequately authorized by a responsible person. 6. vouchers have been processed carefully through various stages of external check system. 7. to ensure that distinction is made between capital and revenue items while recording the transactions. 8. to have greater precision in reporting the financial information as true and fair. 9. to ensure reliability of figures entered in the books of accounts. 10. to confirm that no transaction has been recorded in the books of accounts which are not related to the entity under audit. 11. to ensure the accuracy in totaling, carry forwarding, recording of an amount in the books of accounts. Importance: It is an act of checking evidential documents to find out errors and frauds to know the authenticity, accuracy and reliability of books of accounts. 1. Vouching is the backbone of auditing. 2. Vouching is the essence of auditing 3. Vouching is important to see whether evidences are correct or not. I. Main aim of auditing is detecting errors and frauds. Vouching is the only way to detect errors and frauds and present a true and fair view of financial statements. So it is the backbone of auditing. II. Checks accuracy of BoA & also whether transactions are related to business or not. All transactions are performed after prior approval of concerned authority, transactions are real or not, because the accountant may include fictitious assets or transactions and commit frauds. So vouching is the essence of auditing III. Frauds may be committed presenting duplicate vouchers. All small and big amounts of frauds can be detected with the help of vouching. So, all evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching. IV. Importance of vouching was also highlighted in the case of armitage vs Brewer & Knott (1930). It says that if the auditor shows any negligence in exercising care while vouching the books of accounts, his client can claim damages. Types of vouchers: 1. Primary vouchers: when written evidence is available in original, it is known as primary voucher. Ex: sales invoice, cash memo, purchase invoice, minutes book of board meeting etc 2. Collateral vouchers: when there is no written evidence, but copies are made available for the purpose of audit with an aim to satisfy the auditor regarding correctness of transaction recorded. Ex: carbon copies of sales invoice. Copies of resolutions passed in a meeting etc.

Examples of vouchers for various transactions: 1. Cash payment: cash memos, pay-sheet, receipts received, pay sheet arrangements, demand draft etc 2. Cash receipts: carbon copies of receipts, counterfoils of receipts issued, contracts, correspondence etc 3. Purchases: invoices, copies of orders and correspondence, goods inward register etc 4. Sales: goods outward register, order, copies of invoices, cash memos etc 5. Opening journal entries, last year balance sheets entries, bills payable, bills receivables etc. Sources: Any document based upon which a financial transaction is recorded In Books of accounts (BoA) is known as source documents. In case of accountancy, the first step is identifying the foundation of a financial transaction based on documentary proof known as source documents. 1. Cash memo: on which the details of amount, date of cash sales and cash purchases of a company are given. Cash memos issued on cash sales and cash memos received on cash purchases. It is based on cash payment. Cash sales and cash purchases are recorded in the accounting books. 2. Cheques: if withdrawn, notes should be given on counterfoils and for deposit, use pay in slips 3. Invoice & bills: are used for credit sales & purchases. 3 copies are made- 1 for BoA as source document, and other sent along with goods. 4. Credit note: are issued during sales return. Customers’ accounts are credited with S. R. amount and further used as a source document. 5. Debit note: are issued during purchase return. The sellers account is debited with the amount of purchase return and the debit note is used as a source document. 6. Pay in slip: used to deposit either cheque or cash in bank. While main body is kept with the bank, duly stamped counterfoil is given to the customer. 7. Receipt 8. Miscellaneous Techniques of vouching: 1. Arranged vouchers: arranged according to entries made in the books provided by client. 2. Checking of date: comparison of date of voucher and entry been recorded in the books. 3. Compare words and figures: both should be same on the vouchers. 4. Checking of authority: should be passed only by an authorized person. 5. Cutting or change: if there are any changes on vouchers, it should be signed by authorized person. 6. Transactions must relate to business 7. Case of personal vouchers: personal vouchers should not be accepted. 8. Checking of account head: on which cash is deposited or drawn 9. Revenue stamp: vouchers bear revenue stamp or not 10. Case of cancelled vouchers: shouldn’t accept cancelled vouchers because the purpose is served as payment. There will be a danger of double payments if accepted. 11. Important notes: of evidences or explanation further required 12. Payment: whether done for partial or complete 13. Agreements: should check for agreements. Papers. 14. Printed vouchers: printed vouchers are considered as true and legally acceptable if not useless. 15. List of missing vouchers: auditor should prepare list of missing vouchers which are helpful in detecting errors and frauds. Vouching of cash transactions: Receipt side: (Debit) 1. Opening balance: closing balance of last year becomes opening balance of current year. Opening balance can be verified from last year audited balance sheet. If cash book has bank column also, he should check whether amount of opening balance is entered in the right column.

2. Cash sales: there may be misappropriation of cash sales i.e. salesman may make sale and may not enter the entry for cash received. Internal control system regarding cash sales must be effective. ▪ Cash register should be fully checked with carbon copies of cash memos ▪ To check the daily deposits of cash received in the bank. ▪ Dates of cash memos and date on which the receipts are recorded in cash book must be same. ▪ Where the company has a discount policy, if more discount is allowed in a transaction, it must be approved by a responsible officer. ▪ Where the cash memos are cancelled, all copies including original copy duly cancelled should be kept in the books. (Vouchers, duplicate cash memo, salesman abstract, cash summaries) 3. Cash received from debtors: ▪ auditor should verify amount received from debtors from counterfoils or carbon copies of receipt issued to customers. ▪ Sometimes there may be case of ----------▪ All these receipts should be serially numbered ▪ Amount should be entered in cash book on the day when received ▪ D/A to customers should be authorized by a responsible person. (Vouchers- counterfoils, correspondence) 4. Loans: ▪ While vouching the loan received, the terms and conditions contained in the agreement should be verified. ▪ If the loan is secured, what security has been offered, whether the fact has been disclosed in balance sheet. 5. Bills receivables: ▪ A verification of the bills discounted should be made. ▪ Whether entry for discount has been made. ▪ Such bills should appear as contingent liability in the balance sheet. (Vouchers: Bills receivable book, cash book, pass book) 6. Rent receivable: ▪ Terms and conditions of agreement and lease deed ▪ Rent receivable should be compared with list of properties maintained ▪ To check the counterfoils of the receipts issued to the tenants ▪ In case of heavy arrears of rent outstanding, the auditor should confirm the arrears from tenants with the consent of the client. ▪ Auditor should obtain a certificate from the responsible officer regarding the period for which the property remained vacant. (vouchers: house deed and agreement, CF, correspondence) 7. Income from interest: ▪ Interest received on the securities can be vouched from covering letters and schedule of securities. ▪ Interest on fixed deposits can be verified from the bank pass book ▪ If the interest on loan granted to a party, it can be checked from agreement made and counterfoil of receipt issued. ▪ It should be ensured that all interest received and accrued have been accounted for in the books of accounts and properly shown in balance sheet. (Vouchers: passbook, agreements) 8. Income from dividend: ▪ Auditor should check dividend warrant CF and covering letter received along with the cheques. ▪ If dividend is collected through bank, amount should be verified with bank statement ▪ If dividend warrant is issued and not been collected by bank, it should be shown as cheque yet to be collected (Vouchers: CFs, dividend warrants, passbook) 9. Commission received: ▪ Study the agreement for receiving commission ▪ Verify the commission received with counterfoils of receipts ▪ Check the calculation of commission according to the terms of agreement ▪ List of names of the aprties should be verified from whom the commission is receivable

In case of commission received on sale of goods on consignment basis, amount of commission should be verified from the copy of account sent to the consignor.(Voucher: agreement, CF) 10. Sale of investment: ▪ If sales has been effected though a bank, the auditor should examine the bank advice to know the various details ▪ Sometimes investments are sold through brokers, in such a case brokers’ sold note, commission note should be examined to verify sales proceeds and commission charged by the broker. ▪ If the investments are sold at cum- dividend price, auditor should see that proper apportionment has been made between capital receipts and revenue receipts. ▪ In case if investments are made against specified funds, profit or loss on sale of such assets (investment) should be transferred to such funds account. ▪ (voucher- bank advice, broker sold note) 11. Insurance claim: ▪ insurance claims received can be vouched with copy of insurance claim lodged, correspondence with insurance company, counterfoil of receipt issued. ▪ It should be verified that insurance claim recorded has been recorded in proper account. (voucher: accounts, correspondence) 12. Sale of fixed assets: ▪ Sale of fixed assets may be vouched with minutes books of Board of directors meeting, correspondence, agents, sales account, sale contracts. ▪ It should be seen that proper account has been credited ▪ Any profit arising from the sale of assets shall be credited to revenue account which is not available for distribution of dividend. ▪ If any expenses on sale of assets is paid, sale proceeds of the asset should be reduced by such amount and balance should be credited to assets account. (ex 100000- 10000; the amount to be shown as 90000 only. ▪ It should be seen that sale of fixed asset has been sanctioned by authorized person or Committee ▪

Vouching of cash book: Credit side: payments 1. Payment to creditors: ▪ It should be examined with the receipts issued by the creditors ▪ Receipts should indicate the purpose for which payment has been made ▪ If the payment is made in full and final settlement of account, the balance should be accounted for as discount received. ▪ Where the payment is made in excess, the bill, either excess payment is in advance or payment is made by mistake which should be recovered back from the creditors. (voucherstatement of accounts, receipts) 2. Wages & salaries: ▪ Names of workers included in wage-sheet should be compared with workers’ register. It helps in locating dummy workers and workers who have left the organization. ▪ Wages paid and calculated for various months should be compared. If auditors find any difference, he should look out for reasons. ▪ Random checking of wages calculations should be made. ▪ Should see that proper record is maintained for unpaid wages. ▪ Deductions for any advance taken by the worker should also be verified. ▪ Deductions made from the wages should be entered in proper account. ▪ Special attention should be given to payments made to casual workers. ▪ Auditor should check salary register with the entries made in cash book. ▪ He should examine carefully alterations in the amount of deductions on account of fines, funds, loans, insurance etc. (vouchers: wage sheet, job cards, wage records) (vouchers: salary register, CFs appointment letters)

3. Cash purchases: ▪ An adequate internal control system will be helpful in controlling manipulation of cash purchases. ▪ It should be seen that goods purchased are actually received by the store keeper. ▪ Cash memos can be compared with goods inward book to verify goods received. ▪ Only net amount should be entered into the books (after trade discount) (Vouchers: cash memos, goods inward note) 4. Travelling expenses: ▪ the staff of the company is paid travelling expenses according to the rules. ▪ Vouchers or receipts of the travelling expenses will serve as evidences for travel expenses payments. ▪ If travelling expenses are fixed as per rules, auditors can verify the amount from the rules, but where the actual expenses are reimbursed, the calculation of travelling expenses should be verified. ▪ The bill of travelling expenses should be sanctioned by a responsible officer. (Vouchers: receipts, bills) 5. Bills payable: ▪ bills payable honored on the date of maturity and are returned by the payer after receiving the payment ▪ these bills should be cancelled after being paid. ▪ Bills payable paid can be vouched with bills book. ▪ If payment is made through bank, bank statement, pass book can be examined to verify the payment of bill. (Vouchers: receipts, bills payable returned, pass book, bills payable book) 6. Insurance premium: ▪ Insurance policy or the cover note issued by the insurance company ▪ Insurance policies in case the policies are more than one ▪ Insurance premium receipts 7. Petty cash: ▪ All vouchers are serially numbered and sanctioned by responsible officers ▪ Petty cash received from the head cashier is recorded on the same day on which it is received ▪ Appropriate account is debited ▪ All payments must be verified from the supporting evidences 8. Loans: ▪ He should see that the loan voucher should be supported by the receipt given by the party ▪ Details regarding terms and conditions of the loan can be verified the loan agreement ▪ It should be seen that the installments of loan along with interest are received in time. ▪ Mortgage deeds, other documents should be examined 9. Freight, carriage and custom duty ▪ Check the freight invoice/ consignment note given by the transporter which gives you an evidence of the amount paid and whether actual transport happened or not. ▪ Whether transporter submitted PAN or not ▪ If freight is subjected to TDS and PAN is submitted, then TDS to be made at 20% ▪ If payment is made through cash, check the cash voucher and entry in books. ▪ If payment is made through bank, check bank statement and cheque register. 10. Customs duty: ▪ If custom duty is paid directly, in this case auditor should check the receipt bill of entry. ▪ Should check that all the changes have been treated correctly as capital or revenue items ▪ Checking of monthly accounts, bill of entry, wharfage receipts. (wharfage charge is one of the costs of transport goods within the distribution system used by a business to bring the goods to market)) 11. Carriage: • Verify Carriage Inwards Voucher with Delivery Challan. • No TDS will be applicable on Carriage Inwards if PAN is provided. • In some cases, where Goods & Service Tax (GST) is applicable, compare Carriage Inwards quantity with necessary forms. • Verify carriage inwards by payment, confirmation of account.

12. Fictitious Assets: It purely means fake or imagined. Fictitious assets are assets created by an accounting entry (under assets in Balance Sheet) that have no tangible existence or realizable value but represent actual cash expenditure. They are written off as soon as possible against firm’s earnings. They don’t have a market value. a. Preliminary Expenses b. Promotion expense of a business c. Discount in issue of Shares, debentures d. Underwriting commission e. Advertisement expenses, suspense account, etc Vouching of Trading transactions: Common Points: 1. Over-statement or under-statement of profit: a. Over valuation of closing stock b. Understatement of expenses c. Omission of amounts d. Understatement of purchases or sales 2. Distinction between Capital and Revenue items 3. Valuation of current assets – Actual amounts to be valued/real value 4. Fictitious Assets – should be calculated at the beginning so that net asset value can be determined 5. Stock-in-Trade – Value of closing stock is determined by physical stock count and values are applied to the count for a true and fair view of profits. Specific Points: 1. Credit Purchase: ▪ Auditor should examine the internal check system in force. ▪ Auditor should see that only credit purchases of goods are recorded in Purchases Books ▪ Purchases Book can be verified from Purchase invoices, copies of orders placed, goods received note, goods inwards book, copies of challans from supplier. ▪ The quantity mentioned in the invoice must be the same as shown in purchase order. ▪ Price charged by the supplier must be as per quotation/price list of the supplier. ▪ The supplier bill must be in the name of the business and for the period under audit. ▪ Goods purchased must not be for personal use of directors/officers. ▪ While vouching the purchase vouchers, each voucher should be stamped, so that it couldn’t be produced again. ▪ Totaling and casting of the purchases book must be verified. ▪ Goods purchased should be actually received by the client. ▪ Auditor should be more careful while vouching the purchases made in the first month and last month of accounting period, as, in these cases the P&L of current year may not present True and Fair position of Operating results. 2. Purchase Returns: ▪ An auditor should see that a Debit Note has been sent to the supplier or credit note has been received from the supplier. ▪ The quantity returned as per the Return note must correspond with the Store Keeper’s records, Return outwards register and Gate keeper’s outwards register. ▪ The amount shown in Credit note should be verified. ▪ He should be careful about recording of purchases return in the current year. Sometimes, the profits of the current year may be manipulated by recording the Purchase returns of current year in subsequent years. ▪ The P.R. of the first month and last month of the accounting year should be vouched carefully, to detect any manipulation of amounts. 3. Credit Sales: ▪ The Auditor should examine Internal control systems in force. He can assess the efficiency of the system by test checking. If he is not satisfied with the system, then thorough vouching of various transactions will be necessary.

Sales register should be examined with copies of sales invoices. Test checks should be applied on calculations made in Sales Invoices. The totaling and casting of Sales book should be verified. Sales Tax, duties collected through Sales invoices must be recorded under separate accounts. ▪ Trade discounts slowed to the customers should be checked. If trade discounts allowed are exceptionally high, possible reasons should be located. 4. Sales Return: The auditor must verify the following in respect of S...