VOUCHING

Meaning:
After preparing Audit note book, audit planning, auditing
working papers, audit preparations etc., the next step is to proceed with the
examination of accounting entries passed in the books of account during the
period under review. In this step the auditor has to check the entries with its
supporting documents to determine the accuracy and authenticity of the
entries passed by verifying the vouchers, bills and other supporting
documents. This process of checking the evidence of the entries called
vouching. It may relate to cash as well as trading transactions.

Auditor is required to certify the financial statements prepared by the

accountant as the statement shows the true and fair view of the results of
operations and the state of affairs of the business. Unless he tries to
establish the accuracy and authenticity of all the transactions recorded in the
books of account, auditor will be falling from discharging his duty. The
exercise of establishing and verifying the accuracy and authenticity of the
accounting entries passed in the book of account with reliable evidences are
technically called 'vouching'. It means vouching is the testing the truth of all
the entries made in the book of accounts.

Definition:
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 are
in order, have been properly authorized and are correctly recorded in the
books.

Lawrence Dicksee had defined vouching as an act of comparing

entries in the books of accounts with documentary evidence in support
thereof.
Importance of Vouching:
Vouching is called the essence of auditing. So audit is not possible
without vouching. The object of vouching is to find out the accuracy of the
entries appearing in the books of accounts and detect that no entry has been
omitted from the books of account.

1. Proper Evidence:

The purpose vouching is to note that proper evidence is available for every
entry. The signatures, initials and rubber stamp are evidence that document
has been authorized and checked.

2. Proper Authority:

The purpose of vouching is to note that there is proper authority behind

every transaction. In the absence of any signature of manager the transaction
are not acceptable at all.

3. Right Period:

The purpose of vouching is to check that date of the vouchers relate to

accounting period. The adjustments in books are made on the basis of
current year record of transactions.

4. Correct Amount:

The purpose of vouching is to check that correct amounts have been

recorded in the entry. The vouching is useful to record only correct amounts
in the books of accounts.

5. Capitals and Revenue Analysis

The purpose of vouching is to examine the analysis of transaction into
capital and revenue. The expense relating to one year is treated as revenue
other wise it is called capital.

6. Purchase for Business

The purpose of vouching is to check that purchase relate to the nature of

business. The private purchase cannot be recorded as business due to
vouching.

7. Arithmetical Accuracy

The purpose of vouching is to see the arithmetical accuracy of books of

accounts. The auditor to confirm that books are accurate can check the total
subtotals, casting and posting.

8. Postings

The postings of total from journal to the ledger can be voucher by the
auditor. He can see through vouchers that posting are complete and correct.

9. No Error

The purpose of total vouching is to check that there are no errors in the
books of accounts. The errors are the result of carelessness or over work. But
audit staff is not over loaded so they can locate error.

10.No Fraud

The purpose of vouching is to examine that no fraudulent payments are

made. The fraud can be committed due to matching of minds of employees
and customer. The auditor can vouch the entries top disclosed such frauds.
Requisites of Voucher:

1. Correct Accounts

The auditor can check the accounts debited and credited are correct in all
respects. The rules of debit and credit can be followed for dividing the
transactions into accounts.

2. Agreements

The auditor must examine the agreements, correspondence and other papers
relating to business activities. Such agreement provides basic information to
the auditor. He can vouch the transactions based on such agreements.

3. By-Laws

The memorandum and articles of association are rules and regulations in

case to company. The by-laws of societies and clubs and used to determine
management power. The auditor has the right to go through these rules and
regulation.

4. Mortgage Deeds

The management may enter into agreement with any party for the purpose
and sale of assets. The deed or agreement is prepared. In case of loan against
immoavable property mortgage deed is signed. The content of deed must be
situated.
Outstanding Assets & Liability:

In financial accounting, a balance sheet or statement of

financial position is a summary of the financial balances of a sole
proprietorship, a business partnershipor
a company. Assets, liabilities and ownership equityare listed as of a specific
date, such as the end of itsfinancial year. A balance sheet is often described
as a "snapshot of a company's financial condition".[1] Of the four
basic financial statements, the balance sheet is the only statement which
applies to a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and
ownership equity. The main categories of assets are usually listed first, and
typically in order of liquidity.[2] Assets are followed by the liabilities. The
difference between the assets and the liabilities is known as equity or the net
assets or the net worth or capital of the company and according to
theaccounting equation, net worth must equal assets minus liabilities.[3]
Another way to look at the same equation is that assets equals liabilities plus
owner's equity. Looking at the equation in this way shows how assets were
financed: either by borrowing money (liability) or by using the owner's
money (owner's equity). Balance sheets are usually presented with assets in
one section and liabilities and net worth in the other section with the two
sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing
the entire bank balance at the end of the period, plus any cash in hand.
However, many businesses are not paid immediately; they build up
inventories of goods and they acquire buildings and equipment. In other
words: businesses have assets and so they can not, even if they want to,
immediately turn these into cash at the end of each period. Often, these
businesses owe money to suppliers and to tax authorities, and the proprietors
do not withdraw all their original capital and profits at the end of each
period. In other words businesses also have liabilities.
Assets
Current assets

1. Cash and cash equivalents

2. Inventories
3. Accounts receivable
4. Prepaid expenses for future services that will be used within a year

Non-current assets (Fixed assets)

1. Property, plant and equipment

2. Investment property, such as real estate held for investment purposes
3. Intangible assets
4. Financial assets (excluding investments accounted for using the equity
method, accounts receivables, and cash and cash equivalents)
5. Investments accounted for using the equity method
6. Biological assets, which are living plants or animals. Bearer biological
assets are plants or animals which bear agricultural produce for
harvest, such as apple trees grown to produce apples and sheep raised
to produce wool.

Liabilities

1. Accounts payable
2. Provisions for warranties or court decisions
3. Financial liabilities (excluding provisions and accounts payable), such
as promissory notes andcorporate bonds
4. Liabilities and assets for current tax
5. Deferred tax liabilities and deferred tax assets
6. Unearned revenue for services paid for by customers but not yet
provided
Equity
The net assets shown by the balance sheet equals the third part of the
balance sheet, which is known as the shareholders' equity. It comprises:

1. Issued capital and reserves attributable to equity holders of the parent

company (controlling interest)
2. Non-controlling interest in equity

Formally, shareholders' equity is part of the company's liabilities: they are

funds "owing" to shareholders (after payment of all other liabilities); usually,
however, "liabilities" is used in the more restrictive sense of liabilities
excluding shareholders' equity. The balance of assets and liabilities
(including shareholders' equity) is not a coincidence. Records of the values
of each account in the balance sheet are maintained using a system of
accounting known as double-entry bookkeeping. In this sense, shareholders'
equity by construction must equal assets minus liabilities, and are aresidual.
Regarding the items in equity section, the following disclosures are required:

1. Numbers of shares authorized, issued and fully paid, and issued but
not fully paid
2. Par value of shares
3. Reconciliation of shares outstanding at the beginning and the end of
the period
4. Description of rights, preferences, and restrictions of shares
5. Treasury shares, including shares held by subsidiaries and associates
6. Shares reserved for issuance under options and contracts
7. A description of the nature and purpose of each reserve within owners'
equity
Petty Cash Book
Definition and Explanation:

In almost all businesses, it is found necessary to keep small sums of ready

money with the cashier or petty cashier for the purpose of meeting small
expenses such as postage, telegrams, stationary and office sundries etc. The
sum of money so kept in hand generally termed as petty cash and book in
which the petty cash expenditures are recorded is termed as petty cash
book.

In large business houses , the cashier has to handle every day a large number
of receipts and payments and if in addition to this he is further saddled with
petty cash payments, his position becomes embarrassing. Besides, it is most
common to find with large commercial establishments that all receipts and
payments are made through bank. Since expenses like postage, telegrams,
traveling etc, cannot be made by means of cheques, the maintenance of a
small cash balance to meet these petty payments becomes all the more
necessary.

A petty cash book is generally maintained on a columnar basis - a separate

column being allotted for each type of expenditure. The is only one money
column on the debit side and all sum received from time to time by the petty
cashier from the chief cashier are entered in it. The credit side consists of
several analysis columns. Every payment made by the petty cashier is
entered on this side twice - Firstly it is recorded in the total column and then
to the appropriate column to which the expense is concerned. The total of
the "total column" will naturally agree with the total of all subsidiary
columns. The difference between the total of the debit items and that of the
"total column" on the credit side at any time will represent the balance of the
petty cash in hand and this should tally with the petty cashier's actual
holding of cash.

The posting from the petty cash book to the respective accounts in the ledger
are made directly in total at the end of every month or any other fixed
period.
The Imprest System:

The more scientific method of maintaining petty cash so for introduced into
practice is the imprest system. Under this system a fixed sum of money is
given to the petty cashier to cover the petty expenses for the month. At the
end of a month the petty cashier submits his statement of petty expenses to
the chief cashier. The chief cashier on the receipt of such statement refunds
to the petty cashier the exact amount spent by him during the month, thus
making the imprest for the next month the same as it was at the beginning of
the current month.

It is to be noted that the amount of cash in the hands of the petty cashier is a
part of the cash balance, therefore it should be included in the cash balance
when the latter is shown in the trial balance and the balance sheet. It should
also be kept in mind that petty cash book is not like the cash book. It is a
branch of cash book.

Format of the Petty Cash Book:

The following is the simple format of a petty cash book:

Printing
Amount Traveling
DateParticularsV.N. Total Postage and Cartage Misc.
Received Expenses
Stationary
Example:

Enter the following transactions in the columnar petty cash book of a cashier who was
given $100 on 1st March, 1991 on the imprest system:-

1991
March 2 Paid for postage stamps 8
" 2 Paid for stationary 10
" 3 Paid for cartage 4
" 3 Paid for postage stamps 6
" 8 Paid for paper 1
" 12 Paid for cartage 6
" 18 Paid for trips to office peons 2
" 23 Paid for ink and nibs 4
" 25 Paid for Tiffin to office peons 6
" 26 Paid for train fair 5
" 28 Paid for bus fair 4
" 29 Envelops and letter heads 6
" 30 Printing address on above 4
" 31 Taxi fare to manager 10

Solution:

Printing
Amount Traveling
Date ParticularsV.N. Total Postage and Cartage Misc.
Received Expenses
Stationary
$ 1991
$100 March1 To Cash
" 2By 8 8 4
" 2Postage 10 10
" 3By 4
" 3Stationary 6 6 2
" 3By 1 1 6
" 12Cartage 6 5 6
" 18By 2 4
" 23Postage 4 4
" 25By Paper 6
" 26By 5 10
" 28Cartage 4
" 29By Tip to 6 6
" 30peon 4 4
" 31By Ink & 10
" 31nibs 24
100 By Tiffin 100 14 25 10 19 8
24
76

to Peon
By train
fair
April 1By bus
" 1 fair
By
Envelops
et.
By
printing
By Taxi
fair
Vouching of cash & Credit Transactions:
Supporting Evidences
1. Agreement.
2. Calculation receipt of agent:
Mechanism
If goods are sold through an agent on consignment basis then agreement
clears rate of commission and other related terms and conditions. As
commission may be on effective sales and commission so rates of both the
commissions should be confirmed from agreement.
After the sale of particular lot, agent sends the receipt detailing the
computations for commission on sales. That receipt must be inspected with
great care because basis of sales either cash or credit and special
commission (del credere] for guaranteeing recovery from debtor is
mentioned on it.
He should see whether the payment is properly authorized and is properly
recorded in the Cash Book.
SALESMAN COMMISSION PAID
Supporting Evidence
1. Appointment letter.
2. Receipt from salesman.
Mechanism
Sometimes company employ salesman on commission basis and over fixed
salary, commission is paid if turnover is increased. In this context, auditor
should check number of order received though particular agent.
The inspection of appointment letter will tell that at what rate the salesman
will get commission?
All the voucher of cash payment regarding sales commission must be
supported by receipt received from salesman.
He should see whether the payment is properly authorized and is properly
recorded in the Cash Book.
DIRECTOR’S REMUNERATIONS
Supporting Evidence
1. Articles of association.
2. Minutes of board of directors.
3. Director’s attendance register.
Mechanism
Director’s fee: Director’s fee is a type of payment to directors for attending
board’s meeting. From three important legal documents of company articles
of association must be examined to see amount of fees payable to directors.
Sometimes these fees are decided in any resolution of board’s meeting. For
this purpose minutes of board’s meeting must be drawn for reference.
He should also confirm that fees are paid to only those directors, who have
actually attended the meeting and that can be checked from director’s
attendance register.
Director’s commission: Commission to director must be computed as per
terms. Usually it is a percentage on profit and examinable from agreement.
As per Companies Ordinance remuneration paid to the directors, either by
way of fees or commission etc., must be shown separately in the Profit and
Loss Account.

ADVERTISING EXPENSES PAID

Supporting Evidence
1. Bills from press.
2. Paper-cutting of advertisements.
3. Receipt from advertiser.
Mechanism
Auditor should see the bill of press if any advertisement is effected through
newspaper. Otherwise receipt received from any media is to be inspected
with payment voucher. He should also see that copy of related advertisement
is attached to voucher or not.
Sometimes advertising agencies advertise company’s product or service on
contract basis then terms of contract will tell how much is the expense of
advertisement? And after what period and of what amount bill will be sent
for payment?

TRAVELING EXPENSES
Supporting Evidence*
1. Manuals containing rules.
2. Receipt from traveling agency.
3. Minutes of board’s meeting.
Mechanism

In efficient internal control system, manuals are maintained by every

organization stating clear rules and regulations including policy for traveling
expenses so manuals should thoroughly be read.
All the payment vouchers regarding traveling must be supported by receipts
received from traveling agency.
If any amount is reimbursed that must be taken care and be deducted from
traveling allowance.
Whenever there is an extraordinary type of traveling, a responsible person
should authorize the voucher.
Director’s traveling expenses: Minutes of directors meeting decide that to
what extent director can spend for traveling so these should be vouched.
If traveling is for attending board’s meeting then attendance register can
confirm these expenses paid.
The auditor should see the resolution also, fixing the traveling expenses of
the directors per meeting. Generally traveling expenses are given to such
directors as normally stay at a place which is not the place of the meeting.

INSURANCE PREMIUM PAID

Supporting Evidences
1. Insurance policy.
2. Receipt from insurance company.
Mechanism
Original insurance policy is a source of checking periodical premium paid.
Insurance is usually prepaid so relevant unexpired and expired portion must
be given proper treatment as capital and revenue.
Insurance company issues receipt for the premium received so auditor
should check that whether these receipts are properly attached with voucher
or not.
Where the policy is not renewed, the auditor should inquire into the reasons.
 Assignment
Name :

Class : II, B.Com (Reg).

Roll No. : 09UK.

Topic : Vouching.

Submitted To : Ms. M.Rajeswari, M.Com.

Submitted On : 12.01.2011.