Auditing Chapter : IV - Vouching and Verification

Mangalore University GFGC Punjalakatte Belthangady Tq.

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BBA Final Year – 6th Semester

Subject: Auditing

Chapter : IV - Vouching and Verification

Learning Objectives:

Meaning of vouching Need and Importance Vouchers and Types Vouching of Various transactions and Books – - Cash receipts from Debtors, BILLS Receivables, Interest, Dividends,

Investments, Commission sale of fixed assets - Cash Payments – cash purchases . trade creditors, salaries, - Trading Transactions – credit purchases, credit sales, purchases returns, sales

returns

VOUCHING

Meaning:

Vouching is the essence of Auditing. It is an important part of Auditor’s duty to certify a s correct the transactions recorded in the books of accounts. The Accountant of the business is responsible for passing the entries in the books of prime entry. For every entry in the books of account. There must be some document or voucher in support of the entry made. This means there can be no entry in the books of account without supporting document and there can be no document without an entry in the books of account.

When the Auditor verifies the authority and authenticity of the entries made in the books of account and certifies that the accounts are complete, correct and free from errors or frauds, it proves that the entries passed in the books of prime entry are properly made, are supported by proper documentary evidence and are in order . This is known as Vouching.


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Voucher is known as the evidence in support of a transaction in the books of account. It may be bill, receipts, requisition form, agreement, decision, bank paying slip etc. The act of examining documentary evidence in order to ascertain the accuracy of entries in the account books is called "Vouching". Vouching is a technical term which refers to the inspection by the auditor of documentary evidence supporting and substantiating a transaction. Simply stated, vouching means a careful examination of all original evidence i.e invoices, statements, receipts, correspondence, minutes and contracts etc. with a view to ascertain the accuracy of the entries in the books of accounts and also to find out, as far as possible, that no entries have been omitted in the books of accounts. Therefore, vouching is the act of testing the truth of entries appearing in the primary books of accounts. It is initial for auditing. Voucher: A voucher is a documentary evidence in support of a transaction in the books of account.

Definition:

Lawrence Dicksee has defined vouching as an act of comparing entries in the books of accounts with documentary evidence in support thereof.

Ronald A. Irish has defined vouching as a technical term which refers to the inspection by the auditor of documentary evidence supporting and substantiating a transaction.

According to F.R.M. De Paula, Vouching does not mean merely the inspection of receipts with the cash book, but includes the examination of the transactions of a business together with documentary and other evidence of sufficient validity to satisfy an auditor that such transactions ole in order, have been properly authorised and are correctly recorded in the books.

According to Arthur W. Holmes, Vouching is the examination of the underlying evidence which is in support of the accuracy of the transaction. The process of vouching is intended to substantiate an entry by providing authority, ownership, existence and accuracy.


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Objectives: Main objective of vouching is to find out the regularity or irregularity of transactions, frauds and errors. Regularity means maintaining record and performing the work compliance with the rules, regulation and law. But irregularity means doing the work crossing to the line of rules, regulation and laws. Some of the major objectives of vouching are given below: 1. To Detect Errors And Frauds All transactions are to be supported by evidence. Each document should be proved by authorized authority. With the help of vouching we can detect errors and frauds by verifying each transaction. Planned fraud can be detected through vouching. 2. To Know The Truth Of Account Each and every transaction is checked and ratified on the basis of support document. So, we can easily know the truth of account. 3. To Find The Unrecorded Transactions Each and every transaction is checked and ratified on the basis of document. Vouching helps to find out the unrecorded or missing transactions. If any voucher is found unrecorded, auditor can suggest to record such transactions. 4. To Know That All The Transactions Are Authorized If the transactions are made on the consent of concerned authority, such transactions are known as authorized transactions. If transactions are not authorized, such transactions can be fictitious transactions. So, such fictitious transactions ca be found with the help of vouching. 5. To Know That Only The Business Transactions Are Recorded Sometimes, transactions are performed for individual purpose but payment is made out of business. Such transactions should not be recorded in account of


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business. If such transactions are recorded, we can find it with the help of vouching. To know the real profit or loss of business, such transactions are to be separated. Importance: Vouching is the act of checking evidential documents to find out errors and frauds and to know the authenticity, accuracy and reliability of books of accounts. Thus, it is important for an auditor due to the following reasons: 1. Vouching Is the Backbone Of Auditing – success of auditing depends upon the thoroughness in which vouching is completed. Main aim of auditing is to detect errors and frauds for proving the true and fairness of results presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the backbone of auditing. 2. Vouching Is the Essence Of Auditing Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing. 3. Vouching Is Important To See Whether Evidences Are Correct Or Not An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching. Therefore, it can be said that vouching is the heart of auditing because without the work of vouching, the work of auditing cannot be performed.


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Principles or Techniques of Vouching(point to be noted while examining the vouchers) At the time of vouching auditor should keep in view the following important principles in his mind : General :

1. Vouchers are Numbered and Arranged consecutively: First of all auditor should check all the vouchers provided by the client are properly arranged, numbered and filed. These are in the same order as the entries are made in the books.

2. Strike off Or Change: If there is any striking off or change on the receipts and vouchers figures it should be signed by the authorized officer. The auditor should satisfy himself by inquiring about it.

3. Case Of Personal Vouchers: The auditor should not accept the voucher in personal name. There is a chance that an officer of the company has purchased any item in his personal capacity.

4. Checking Of Account Head: Auditor must be satisfied about the head of account on which cash is deposited and drawn. He should examine the documentary evidence in this regard.

5. Case Of Cancelled Voucher: The auditor should not accept the cancelled voucher. Because it has already served the purpose of payment. There will be a danger of double payment if it is accepted.

6. Important Notes: The auditor should take some important notes about those items which need further evidence or explanation.

7. Payment: The auditor should check that whether payment is described partially or for complete transaction of sale.

8. Agreements: These provide the basic information to the auditor. He should check the agreements, correspondence and other relevant papers.

9. List Of Missing Vouchers: Auditor should prepare the list of missing vouchers. This list will be helpful in detecting the fraud and errors. He must demand for duplicate vouchers and also satisfy himself with regard to the reasons of them being lost.

10. Once the vouchers are examined by the auditor , the same shall be cancelled with a stamp so that they are not produced again.


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11. The vouching procedure should be as far as possible be completed at one stretch. Test checking should be resorted only in case where the auditor is satisfied with the internal check system

Specific :

1. Checking Of Date: The auditor should compare the date of the voucher with the date recorded in the cash book.

2. Transaction Must Relate to Business: The auditor should carefully examine that the entries must relate to the business.

3. It should be seen that the voucher relates to the period of audit 4. Printed Vouchers: Printed vouchers are considered true and these are

legally acceptable. If these are not printed then these are useless. 5. Compare the Words and Figures: The auditor should satisfy himself

amount written numbered consecutively. All the vouchers should be properly filed. On the vouchers, its figures and words are same or not.

6. Checking of Authority: The auditor should examine that all the vouchers are passed by the authorized officer. If the voucher is passed by unauthorized person it will not be correct.

7. If the voucher is a receipt for cash payment over Rs.500 , it bears the revenue stamp.

8. The contents of the vouchers should be examined with reference to the particulars of the relevant entry so as to ensure that they tally with regards to the date, amount etc.

9. Any alteration/change done in the voucher must be properly initialled by the invoice clerk.

VOUCHERS A voucher is a documentary evidence in support of a transaction recorded in the books of account. It is a written document or paper in support of an entry in the books of account. Types of Vouchers From the point of view of the auditor, the large number of vouchers available in various audit situations may broadly be classified as under: 1) Vouchers which are not prepared by the organisation under audit, such as, purchase invoices, insurance policy, receipts given by payees etc. These


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vouchers are generally considered reliable as evidence for the transactions represented by them. 2) vouchers which are prepared by the Organisation under audit, but validated by independent sources. For example, cheques prepared by the organisation under audit received by the payees, these vouchers also provide reIiable evidence. 3) Vouchers which are prepared and used completely within the Organisation. This category, comprises the majority of vouchers and their reliability as evidence depends upon various circumstances, such as, whether they bear the signatures of some responsible officer and whether there is a sound system of internal control. From the point of view of the nature of vouchers, they can be further classified as under : a) Primary Voucher: It refers to an original voucher in writing which is produced in support of transactions like purchase invoice., bank statement, confirmation letters received from Debtors etc b) Collateral Voucher : It refers to a subsidiary voucher which is produced in the absence of an original voucher in support of a transaction like carbon copies of cash memos, xerox copies of agreements. Sale deeds, carbon copies of sales invoice etc. Vouching of Cash Book: Vouching of cash receipts and cash payments involve scrutiny of the debit and credit side of the Cash Book. Before commencing the work of vouching Cash Book, the auditor should satisfy himself about the existence of a reliable system of internal check as regards receipt . and payment of cash. Most of the errors and frauds are committed in receipts and payments of cash. The auditor should, therefore, be very careful while checking items of cash and should ensure that no receipt or payment remains unrecorded in the Cash Book. Objectives of vouching cash book:

- Ensure all the receipts of cash are duly accounted for - Ensure that no fraudulent payments are made - See that all receipts and payments of cash are genuine and are properly

recorded


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Vouching of cash receipts: It has been observed that vouching of cash receipts is more difficult than checking of cash payments, because there is no proof of a cash receipt which is omitted. If an outsider pays an amount, he cannot ensure its recording in the books of the receiver. He may get a receipt for it. The only proof of receipt from him, therefore, is the carbon copy of the receipt issued and this may not be prepared or the amount on it may be understated. In short, there are more chances of misappropriation of receipts than payments. Errors and frauds in regard to cash receipts :

a. Not recording the cash sales in the books and cash being misappropriated b. Under recording of the cash sales and misappropriation of differential

cash c. Recording of cash sales as credit sales to fictitious debtors and

misappropriation of cash received d. Not recording the cash receipts which are rare, unusual or non-recurring

in nature and misappropriating the cash – for eg. Proceeds from sale of scrap, recovery of bad debt already written off etc

e. Allowing fictitious discounts or Overstating of discount allowed and misappropriation of differential cash

f. Understatement of receipt of cash and preparing duplicate receipts or counterfoil than the original

g. Not recording the cash receipts from the customers in the books and cash being misappropriated

h. Recording good debt as bad debt and misappropriating the amount i. Teeming and lading method of misappropriation j. Delaying deposit of money into banks or overstating the amount

deposited into bank pay-in slip counterfoils and misappropriating cash

VOUCHING OF CASH SALES: a. Auditor has to carefully examine the system of internal check b. Auditor can go into test checking c. He should compare rough cash book with original cash book d. He should examine the methods of depositing daily receipts e. He should check the bank pass book with the entries in the cash book f. He should vouch cash receipts by reference to evidence g. He should note that all the receipts are in printed forms h. He should enquire the bad debts written off


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The vouching procedure in regard to cash sales (i.e the vouching of cash sales by an auditor) should be on the following lines –

He should examine the system of internal check in operation in regard to cash sales

After ascertaining the efficiency of internal check he should vouch the cash sales as follows

i. Cash memos of each and every salesman should be checked at the end of the day

ii. He should compare the summary of daily sales of the salesman with cash analysis of the receiving cashier.

iii. If any cash memos have been cancelled, the cancelled cash memos should be retained in the cash book.

iv. He should examine the rough cash book v. In case there is automatic cash register in use he should check daily totals

entered in cash book vi. The summary of daily sales should be checked with the entries in stock

register vii. He should verify the daily deposit of cash received into the bank and the

daily cash sales memo summary, and see that all cash sale proceeds have been deposited daily in the bank.

Vouching of Receipts from Debtors: It is quite difficult to vouch cash receipts from debtors. The only evidence for cash received from them is the counterfoil of receipts issued to them. But this evidence is not very reliable. Fraud may be committed by entering lesser amount in the counterfoil, or by issuing receipts to debtors from the unused receipt book, or by entering less amount in the debit side of the cash book or by the process of “teeming and lading” or lapping or writing off the amount received as bad debt after receipt etc. In vouching receipts from debtors an auditor should take the following steps:

1. Examine the internal check system in operation in this regard. 2. Ensure that unused receipt books are kept in the custody and

control of some / responsible officer. 3. Ensure that original copies of all the spoilt receipt forms are

attached with the duplicate copies in the receipt book. 4. Tally the dates and the amount on the counterfoil with those in the

cash book.


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5. Ensure that payments received through cheques are entered in the cash book. If there is a practise of not issuing receipts in printed form for cheques received, the auditor should check daily Lists of cheques received with entries in the cash book.

6. Proper scrutiny should be made about discount allowed to customers. The auditors should inquire about the terms and conditions of allowing discounts and adopt test- checking to ensure whether discount allowed is in order. In many cases. misappropriations take place by inflating the discount amount or by inserting fictitious entries of discount.

7. Special attention should be paid to amounts written off as bad debts. There are chances that the amount from the debtors had been received and misappropriated and thereafter the debt had been written off as bad. The auditor should ensure that some responsible officer (with written approval of a competent authority) is allowed to write off bad debts.

8. The Auditor, with the permission of his client, can request debtors to certify the amount outstanding against them.

TEEMING AND LADING or LAPPING It is a method of concealing a shortage of cash by delaying the recording of cash receipt. It involves misappropriation of cash receipts from one or more customers and covering the shortage of cash receipts from other customers. Later this shortage may be made up with receipts from other customers. For Eg: A cash of Rs.1000 is received from Ramya, but no entry is passed in the cash book and the money is misappropriated. Later similar amount of Rs.1000 is received from Shwetha, which is credited to the account of Ramya. Further, Deepika pays Rs.1,000 that amount is adjusted by crediting Shwetha’s account. Later on, the cashier replaces the money he has used without authority and credits the account of the last customer (here Deepika) which he did not when she had paid the amount earlier. Though cash is replaced and there is no stealing of cash, it is still a bad practice as the cash is used by the cashier without authority. Detection of Teeming and lading – The Auditor shall –


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- Ascertain whether the name, amount and date as shown in the receipts or remittance advices are in complete agreement with relevant entries in the cash book.

- Compare individual receipts as recorded in the rough cash book with the receipts issued and posted to individual customer accounts.

- The details of the receipts as recorded in the rough cash book, main cash book and the receipts issued to individual customers, agree with the amounts shown in the counterfoils of the paying in slips.

- Ascertain whether cash receipts are duly deposited in the bank in tact and timely without delay

- Should get balances outstanding confirmed from individual debtors - Staff involved in receiving remittances must not be involved in the work

of sending statements of accounts to the debtors - Auditor has to verify the authority of the officer entrusted with writing off

bad debts, in no case shall cashier write off bad debts Receipts from Bills Receivables Bills receivables includes bills of exchange promissory notes and IOUs (I owe You) received from Debtors. The receipts from B/R can be in two ways –

A. Receipts from bills discounted B. Receipts from bills matured

If any bill is accounted as dishonored, then there is a possibility of misappropriation of funds. If a bill is claimed to be dishonored, the bill should be made available to the auditor. As a honored bill will not be available, the auditor can easily detect any fraud in such cases.

Vouching in case of discounted bills : a. Cash received on discounting bills receivable must be properly chacked

by comparing the cash book, the bank pass book and Bills receivables book.

b. The auditor should see that the discount deducted on the bills discounted should be separately debited to the discount account and thus is separately shown in the discount column of the cash book.


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c. If bills are discounted, the auditor should ensure that they are duly accounted. If discounted bills have not matured on balance sheet date, it shall be disclosed as a foot note to balance sheet and treated as contingent liability. Receipts from bills matured:

d. On verifying the receipt of the amount against the bill, the auditor should examine the bills receivable book, cash book and bank statements.

e. He should enquire about the bills which have matured but the amount of which has not been received.

Income from Interest – - Interest on Bank Deposits –

a. Interest received on deposits should be vouched with the bank pass book/statement

b. Authenticity of pass book / statement must be confirmed c. Check whether interest has been paid as per the terms of the deposit d. Corresponding entry for interest on bank deposit has been made in the

cash book. - Interest in Investments/Debentures or Bonds –

a. Interest received on investments must be vouched against investment ledger

b. Check if the interests have been received on due dates c. Check the calculations of interest d. Any outstanding interest or interest accrued on investments have been

brought into account. e. Income tax, if any deducted should be vouched with supporting

evidence. f. Counterfoils of interest warrants or bank statements should be

examined as to the receipt of interest. - Interest received on loans-

a. Agreement between the borrower and the lender should be examined for the terms like rate of interest , date of payment etc.

b. Interest received on loans should be vouched with the entry in the bank pass book/ statement.

c. The calculation of interest should be checked referring to the rate, date of payment, and amount of loan.

d. Counterfoils/carbon copies of receipts issued to the borrower at the time of receipt of interest

e. the terms of payment has to be verified and the timing of the receipt should be verified.

Dividends on Shares:


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a. Dividends should be vouched against dividend warrants b. Check if the dividends have been received on due dates c. Dividend rate and their calculations have to be verified d. Where the shares have been sold ex-dividend or purchased cum-

dividend , the sold notes or bought notes issued by the broker should be verified to ensure that the dividends have been received subsequently.

Sale of Investments: a. Investments must be sold only through authorised brokers. The brokers’

sold notes should be examined for the details on sale proceeds, commission paid, expenses and the amount received etc

b. If investments are sold through bank, then banker’s advice note must be verified.

c. If the investments have been sold cum-dividend , it should be ensured that the dividends have been received subsequently.

d. The auditor should see that the profit or loss on sale of investments have been properly accounted for.

Rent received

a. Examine the lease deed/agreements to ascertain rents amount, due date, provision for repairs etc.

b. Amount of rent must be verified against the rent agreement c. Rent rolls if maintained should be matched against the rent receipts

recorded in the cash book d. Counterfoils of the receipts issued should be checked e. If agents are appointed to collect rent, the statements submitted by the

agents should be verified f. Examine whether appropriate adjustments for outstanding rents / accrued

rent but not received. Commission Received:

- Examine the agreements between the client and the parties from whom commission is received to find out the rate of commission and, terms of commission etc

- Should vouch the commission received and recorded in the cash book with counterfoils of receipts issued

- If commission is received against the goods sold, then the amount of commission received should be vouched against the copy of account sales sent to the consignor

- Should check the calculation of amount of commission - Verify whether any commission is outstanding, the duration for which it

has been outstanding and reason for the same


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Receipts from sale of fixed assets – a. In the case of companies, the sale of fixed assets should be approved by

the board of directors.Therefore, the auditors should verify the minutes of meeting of the Board of Directors.

b. The auditor should verify the cash book, the entries relating to sale of fixed assets and also the bank book to ensure that the amount received on the sale of fixed assets is immediately deposited in bank on the next day.

c. He should also verify the calculation of profit/loss in sale of assets. He should ensure that the profit on sale is transferred to capital reserve.

d. An auditor has to verify the following documents while auditing Sale of fixed assets.

1. Fixed asset register. 2. Sale Agreement. 3. Statement of accounts from Auctioneers. 4. Brokers’ sold note. 5. Correspondence (if any) 6. Directors’ minutes book in the case of a company.

e. To vouch the amount received from sale of fixed assets such as land, buildings, furniture, machinery etc. the auditor should refer to the correspondence made with the purchaser:

f. If the asset has been sold through a broker, his note should be seen. If the asset has been sold through auction. the auctioneer’s note should be examined. The auditor can see the sale deed also.

g. Should see that proper fixed asset account has been credited with the sale proceeds.

h. In case of any prepaid expenses on assets sold and are partly unutilised, auditor should verify as to the adjustments made in this regard.

Note: Vouching of Cash Payment will follow in next document Compiled by: Chitra Padiyar, Assistant Professor – Management, GFGC Punjalakatte

Auditing Chapter : IV - Vouching and Verification

Documents

Transcript of Auditing Chapter : IV - Vouching and Verification