Introduction to Vouching in Audit

2. Topics Covered
 Vouching
 Audit of Payments
 DocumentaryEvidences
 Safeguards
 Audit of CashTransactions
 Verifications
 Audit CheckPoints
 Enquiries for Internal CheckSystem
 Cash Receipts from Cash Sales
 Receipts from Customers
 Sale of Investments
 Rental Receipts
 Loans
 Sale of Assets

3. Topics Covered ‐contd
 Income fromInvestments
 Royalties Receipts
 Insurance Claims
 Sales Process of Junk Materials
 Audit of Purchases
 Control expenditure onPurchases
 Vouching entries for purchasing withinvoices
 Purchase Return
 Verification of Purchase Return
 Audit of Sales
 Verification of CreditSales
 Sales Categories
 Revised schedule
 Audit of Ledgers
 Audit of Bought Ledgers
 Audit of SalesLedgers
 Audit of Impersonal Ledgers

4. ‐ Verification a transaction recorded in the books of
accounts
‐ Confirmation that the amount mentioned in the
voucher
‐ Primary document of an entity based on which
primary books of accounts ismaintained.
Voucher is the foundation for maintenance of
transactions in the books ofaccount.

5. Points to Note:
1. The dateof voucher fallswithin theaccounting
period.
2. Thevoucher is madeoutof in theclient’s name.
3. The voucher is dulyauthorized.
4. Thevoucher iscomplete in all respects.
5. Account forvoucheramountadjustment

6. Audit Of Payments
The process of verification of entries in the books of accounts with the
documentary evidence is referred to as vouching.

7. Documentary Evidences:
(i) Internal & External. ‐the payments can also be cash
payments
(ii) Payment through bank which are payments through
cash/bank transactions.

8.  Payments by cash or by cheque should be
acknowledged by thepayee
In the event of payment payees acknowledgment of
receipts should be properly stamped underthe Indian
stamp act, 1899.
Tosafeguard that the payments not been made to
wrong person ,cheque forms should have on‘account
payee’ only printed onthem

9. Refer other connected documents, viz invoices, debit notes etc.
against which payments have been made before accepting such
receiptsas evidence of paymentof money.
The auditor would be well advised to obtain confirmation of
balances of personal accounts, wherever possible/ practicable,
these should beobtained directly by him.

10. Audit Of Cash Transaction

11. The system of accounting and internal control
operating in the organization should bereviewed
The recording of each transaction should bechecked ;
Eachrelevant voucher should have valid documentary
evidence
The statement is authorized byacompetentofficial
Its naturewould be trulydisclosed on inclusion in the
final accounts,.

12. (a) Internal control system : It is a combination ofseveral
proceduresadopted byan entitydesigned ;
• To give protection against losses through fraud, waste,
mistakesetc.
• To ensure that the transaction entered into shall be
correctlyrecorded
• To enable the concern to take policy decisions as regards to
planning and operation of the business at the appropriate
time.

13. b)Correctness of book–keeping records :
Detailed checking of the record of transactions forverifying
that entries have beenmade in the booksof account
according to the system of accounting which is being
regularly followed.

14. c) Observance of accounting principles:
The transaction should be recorded in the books of accounts having
record to the principles of accounting; the principles include
 Distinction being drawn between capital and revenue expenditures.
 Distinction being drawn between capital and revenue receipts.
 The expenses or cost should be matched to the income or benefit.
 The expenditure and income should be treated on accrual basis.
 That the fixed assets should be depreciated on a consistent basis.
 That fictitious assets are written off at the earliest, and
 Outstanding Assets and liabilities have been properly adjusted

15. d) Evidence of transactions:
‐ Two kinds of evidence
‐ Internal Evidence – the one generated within the
organization
‐ External Evidence – the one obtained from parties
with whom, theentityenters into transactions.

16. e) Validity of Transactions:
Reference to documentary evidence which may exist in any
of the following forms:
the legal provision, if any having bearing ofthe
accountsof theentity underaudit;
 the rulesorregulation governing the internal working
of the organization eg. Articles of association,
Partnership deed, Trust Deedetc.
 minutesof the proceeding of a meeting of membersof
the company, or that of the Directors or that of the
Managing Committee.
copy of agreement eg. Managing Director Agreement,
Lease Deed, Vendor’s agreement, Agency agreement,
Contract with an employee etc.

17. f) Disclosure in the finalaccounts

18. Audit of Receipts
1. The function of audit in respect of cash receipts being almost
the same as that in the case of cash payments; the procedure for
verification as stated shall beapplied.
2. The internal check in respect of cash receipts should be closer
and stricter, primarily because these have to be verified
generally only with reference to the internal evidence, eg. if in
respect of sale proceeds of goods or an item of miscellaneous
income no bill or voucher has been prepared, audit would not
disclose that the amount has been misappropriated.
3. Cash receipts are usually checked with counterfoils of the
receipts issued, but the issue of receipts with counter foil in
respect of amount collected by it would not ensure that all the
amounts collected have been fully accounted for or have been
correctlyadjusted.


19. i)Who opens letter, what record is kept, and whether all cheques or postal orders are
immediately endorsed to bankersand crossed “Account Payee Only”.
ii)Whose duty is to enter cash, cheques and other form of receipts /remittance inthe
pay‐in‐slipand whodeposited it in the bank?
iii) Are all receipts bankeddaily?
iv)Who prepares receipts and who counter signs the same before these are issued to
the parties from whom theamount have been received?
v) Whetherprinted receipts with counterfoils, numbered serially
bya machineare used and who maintains the stock of unused receipts?
vi)Are the receipt books kept in safe custody and are they issued only when the
current receipt book hasbeen used up?
vii)What internal check is being exercised over thecollectionof cashsalesand
miscellaneousincome?
viii)Are travelling salesmen allowed tocollectanyadvanceagainstorder booked and
whatcontrol existsoversuchcollections?
ix) Howoften are the banks statementschecked and compared with thecash book?
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xi) Are ledgers posted by thecashierorsomeotherpersons?

20. The system of internal check should beexamined;
Cash memos to be verified with carbon copies of cash memos and
traced in the summary book if cash sales are voluminous and
thereafter in the cashbook;
Dates on the cash memos should tally with those on which cash
collected in respect thereof has beenentered in thecash book.
If a cash memo has been cancelled, its original copies should be
inspected, for itcould be that theamount has been misappropriated.

21. 1. The cash receipts from the customers should be checked with the
counterfoils of receipt issued tothem.
2. Verification of a system of internal check in operation which acts
as a safeguard against the amount collected being
misappropriated.
3. Teaming and Lading
4. To safeguard the loop‐wholes, customer should be requested to
send statements of accounts from their books. On comparing
items in each statement in the entries in the customer’s account, it
would be possible to locate amounts which were not deposited on
theday thesewerecollected but subsequently.

22. The income from investments can be vouched by reference to the
dividend warrants and the interest on securities by reference to the tax
deductioncertificates.

23. In case of a company, the board of directors are authorize to sale
investment and in case of trust, by the board of trusties. The normal
method of selling investment is through stock broker. The sale
proceeds of investments are vouched by reference to broker’s sale note.

24. • Copies of rental receipts, Copies of bills issued to the tenants
should be checked by reference to copies of tenancy agreement and
bill of charges paid by the land lord on behalf the tenants, ie.
House tax, watertax, electricityetc.
• The amounts collected from tenants on account of rent should be
checked by reference to receipts issued to them and thereafter these
should be traced into rentalregister.

25. The authority under which the loan has been raised should be
verified.
A copy of the loan agreement should be referred to find out the rate
of interest, the terms of repayment and the condition as to the security
agreed by theclient.
If any guarantee has been provided for the repayment of the loan,
the particulars thereof should be ascertained for the purpose of
disclosure in the balancesheet.

26.  The authority for sale is most important, which should
receive the attention of the auditor:
The basis of sales, whether by auction or by negotiation for
purpose of determining that the assets were sold at the
maximum price thatcould beobtained.
It should further be confirmed that the sale proceeds have
been credited to an appropriate head of account and the
amount of profit arising out of it has been segregated between
revenue profit and capital profits, if any accordingly appropriate
accounts are credited, where there is a loss the same should be
writtenoff.

27. The auditor should see the relevant contract and examine the
important provisions relating to the conditions of payment of royalty.
In particular, the rateof royalty, modeof calculation and theduedates
should benoted.
If there is any deduction on account of recoupment of royalty for the
past period, the records for earlier royalty receipts should be seen to
ensure that theamountof deduction is as perthecontract.
should have been properly
Royalties due but not yet received
accounted for.

28. While vouching the receipts of the insurance claims the auditor
should examine a copy of the insurance claims lodged with the
insurance company. Correspondence with the insurance company
and insuranceagentshould also be seen.
A counterfoil of the receipts issued to the insurance company
should also beseen.
 The auditor should also determine the adjustment of the
amount received in excess or short of the value of the actual loss as
per the insurancepolicy.
The copy of certificate/report containing full particular of the
amountof loss should also beverified.
The accounting treatment of the amount received should be seen
particularly to ensure that revenue is credited with the appropriate
amount and that in respect of claim against an asset, the profit
and loss account is debited with the shortfall of the claim
admitted against the book value.

29. i) Review the internal control on junk materials as regards its
generation, storageand disposal and seewhether itwas properly
followed at everystage.
ii) Ascertain whethertheorganization is maintaining the reasonable
records forthe saleand disposal of junk materials.
iii)Review the production and cost records forthedetermination of
extentof junk materials that mayarise in agiven period.
iv)Compare the income from the saleof junk materialswith the
corresponding figuresof the preceding threeyears.
v) Check the ratesatwhich different types of junk materials have been
sold and compare the same with the rates that prevailed in the
precedingyear.
vi)See thatall junk materialssold have been billed and check the
calculations on theinvoice.
vii)Ensure that thereexists a properprocedure to identify the junk
materialsand good quality materialsare not mixed upwith it.
viii)Makean overall assessmentof thevalue of the realization from the
saleof junk materialsas to its reasonableness.

30. Audit Of Purchases
Verification by reference to the suppliers invoices supported by
copies of delivery notes disclosing the dates and particulars of
goods received and acknowledged by the receiving departmentare
alsoattached.

31.  Classification under the followingheads:
 Purchases of raw materials, for each materialseparately
 Purchases of finished goods.
 Purchases of consumable stores, fuelsetc.
 Purchases of packing materialsetc.
 Purchasesof articles likesstationary foroffice use
 Purchases for making additions toassets.

32.  Points to benoted:
 That thedateof invoice falls within theaccounting period
 That the invoice is madeout in the nameof theclient
 That the suppliers account has been credited with the full amount
of the invoice and that the deduction in the amount of the invoice if
any has been made on aproper basis.
 That the goods purchased are those that are regularly dealt in by
the concern or required for the process of manufacture and that the
price payable has been correctlyarrived at.
 That the cost of purchases has been debited to appropriate
accounts.
 That the invoice is signed by the accountant to show that he has
verified it as well as the store–keeper to indicate that the delivery of
goods have been taken byhim.
 That the manager or some other official competent to sanction
payment has authorized itspayment.

33. If a part or whole of consignment of goods found to be
defective or of a poor quality, the goods some times are
returned to the supplier and his account is debited. The
debit is raised in the purchase return book on the basis of
debit notes.

34. Verification of Purchase Returns
 Examine debit note issued to the supplier, which in turn may
be confirmed by the corresponding credit note issued by the
supplier. The relevant correspondence may also be examined.
 Verify by reference to relevant corresponding record in
goods outward book or stores record. Figures in the
documentary evidence should be compared with the
supplier’s original invoices for rates and other charges and
thecalculationshould also bechecked.
 Examine in depth to eliminate the possibility of fictitious
purchase returns for covering bogus purchases recorded
earlier.
 Cross‐check with reference to original invoices any rebates in
price or allowances if any , given by suppliers on the strength
of their creditnotes.

35. Audit Of Sales

36. The internal check system of credit sales should beexercised
Each item of sales relates toperiod of accountunderaudit.
Thegoodsare to be normallydealt in by theconcern.
The sales price has been correctly arrived at and the copy of the
requisition slip issued by the sales department and the copy of the
despatch note showing the date and mode of despatch of goods are
attached with theinvoice
Theamountof the invoice has been adjusted in an appropriate account
That the sale has been authorized by a responsible official and in token
thereof he has initialized the invoice
An alteration in the invoice has been attested by the same person.

37. i) Sale of rawmaterials.
ii) Sale of finished goods.
iii) Sale of empties and packingmaterials.
iv) Sale of assets.

38. a)In respect of company other than Finance company, sales revenue
shall be disclosed separately in notes form under “Statement of Profit &
LossAccount”:
Sale of products
Sale of services
Other operatingrevenues
Less exciseduty.
b)In respect of Finance company, revenue shall be disclosed separately
in notesform:
Interest
Other financialservices
The auditor should see that a separate record in respect of these items
has been maintained for purposeof disclosure.

39.  Ledgers are the secondary books of accounts in which posting are
made from the primary books of account. The audit of ledgers is thus
an important step in the process of verification of the correctness of
the finalaccounts.
 It is an occasion to review the transactions entered during an
accounting period, duly classified in thetotality

40. 1. Creditor’sledger.
2. The structure of every account in the bought ledger; opening
balance, credits on account of goods purchased and debits raised in
respect of return, allowances and discount receivable, advances paid
against goods payments andtransfers.
3. Theaccounts in the bought ledgersusuallyare in credit.

41. 4. When the amount of the opening balance of the account of the cost of
goods purchased earlier has not been paid for the goods purchased
subsequent thereto have been paid, the reasons for the non‐payment
of theamountoramountsshould beenquired into.
5. An account in bought ledgermay be in debit.
Finally theauditorshould insiston periodical and alsoyearlystatementof accounts
and balance conformation certificates from each party so as to ascertain the
correctness of the creditor’sbalance.

42.  Debtor’sledger.
 The structure of each account in the sales ledger is opening balance,
debits representing values of goods sold, payments made for goods
returned and transfers, credit representing amounts received for good
sold, advances received against order, discount and allowances allowed,
valueof goods returned back and debtswrittenoff.

43.  If the amount paid by a debtor has been misappropriated, though the
balance in the account would be outstanding for payment, it would
not berecoverable.
 Finally, the composition of balance outstanding of recovery should be
examined. In every case where the composition of balance is not clear,
the copy of the statement of the account received from the party
should be referredto.
 When any bad debt is written off, the client should be advised that a
record thereof should be kept in the bad debt register in order that if
subsequently any recovery is made out of it, may be possible to
identify theamount.

44. Audit Of Impersonal Ledgers

45.  Has two kinds of accounts, viz. nominal accounts which relate to the
Trading & Profit and Loss Accounts and Real Accounts which records
assets.
 If the accounts in the general ledger are incorrect, they will affect the
Profit & Loss accountand the balancesheet.
 It is the final review of balances which on inclusion in the final
account, cumulativelyreflect the financial positionof theconcern.
 The certificate which an auditor will sign, will, therefore, be incorrect
in the event the final accounts do not reflect the true financial
position of anyconcern.
 Entries in the general ledger usually are posted in a summary form
from the cash book, the journal, and other subsidiary books like
purchase book, sales booketc.

46. 1. Balances in all the incomeand expenseaccounts have been adjusted
i) According to standard accounting practices,and
ii) Consideration of the legal provisions which are applicable to the
concern.
2. Each ledger balance finally should be examined on a consideration
of its position in the final accounts to see how the financial position
of theconcernwould beaffected by the inaccuracy in the balance.
3. Balances in the general ledger should be traced simultaneously on to
the trial balance, grouping schedulesand the final accounts.
4. Accounts have been kept according to the accepted accounting
principle and the balance sheet and the profit & loss account have
beendrawn upon thesame basisas in the previousyear.
5. Clause 3 (XV) Part – II of the Schedule VI to companies act is
invited.