AUDITING

Unit – 5
Vouching

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Auditing
Contents:
Meaning – Vouching and verification– Audit of Payments – Audit
of cash receipts- Disclosure requirement to the statement of profit
and loss-Audit of trading transactions—Cut off arrangement-Audit
of ledgers-Outstanding assets- Outstanding Liabilities-Expenses
accounts- Income accounts- Analytical Procedures-Audit of
Purchases- Audit of sales.

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Meaning:
The examination of documentary evidence in support of
transactions contained in the books of accounts is referred to as
vouching. It is the technique followed in an audit for establishing
authenticity of the transactions recorded in the primary books of
accounts.

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Objectives of Vouching:
 To check that all transactions recorded in the books of accounts
are supported by documentary evidence.
 To verify that no fraud or error has been committed while
recording the transactions.
 To see that each and every transaction recorded has been
adequately authorized by a responsible person.

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 To ensure that the distinction has been made between capital
and revenue items while recording the transactions.
 To have a greater precision in reporting the financial
information as true and fair.
 To ensure the reliability of the figures presented in the books of
account.
 To ensure the accuracy in totaling, carrying forward and
recording of an amount in the accounts.

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Advantages of Vouching:
 Helps checking of all book entries duly authorized.
 Facilitates detection and prevention of errors, frauds and
irregularities.
 Imparts credibility and reliability to financial statements.
 Very essence of auditing.

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Importance of Vouching:
 To Detect Errors And Frauds
All transactions are to be supported by evidence. Each
document should be proved by authorized authority.
 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.

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 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.
 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.
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 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 business. If such transactions
are recorded, we can find it with the help of vouching.

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Voucher:
A voucher is documentary evidence in support of any
transaction in books of accounts. Voucher can originate within the
organization or outside the organization i.e. they can be internal or
external.

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Types of Voucher:
Two types of voucher are:
Primary voucher:
All written evidences in original are primary vouchers.
Secondary voucher:
Copies of original vouchers are called secondary/collateral
vouchers.

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Importance / Essence of Voucher:
 A voucher is an important documentary evidence of the
transaction.
 On the basis of voucher, entries in the cash book and other
books of accounts are made.
 It is easier for auditor to perform his duties more efficiently and
independently.

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 On the basis of voucher date of transaction, the amount and
concerned party can be confirmed and verified.
 It is easier to calculate profit for the purpose of income tax,
sales tax, excise, etc.
 Voucher gives description of the transaction. It is easier to
understand the nature of transaction.

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Audit of Purchase Transactions
Documents to be Checked:
 Purchase invoices
 Copies of orders placed
 Goods received note
 Copies of challans from supplier
 Goods inward register
 Stock records.

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Duty of the Auditor:
 The auditor should see that only purchases of goods are
recorded in Purchases Book.
 The invoice is prepared in the name of the client.
 The date mentioned in the invoice relates to the period under
audit.
 The invoice relates to the business, which the concern carries
on.
 Responsible official who have checked the invoice should initial
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 The names of the supplier as entered in the purchase invoice
agree with the entry in the Purchases Book.
 The price mentioned in the purchase invoice should agree with
the quotation given by the supplier.
 The quantity mentioned in the purchase invoice should tally
with the quantity recorded in the Purchases Book.
 The goods purchased must not be for the personal use of
directors, officers, secretaries, etc.

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Cash Sales
Documents to be Checked:
 Sales invoices
 Cash Sales Summary
 Copies of cash memo

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Duty of the Auditor:
 The system of internal check should be examined with the
objectives of finding out the defects therein.
 The practice followed in the matter of issuing cash memos
should be ascertained.
 The dates on the cash memos should tally with those on which
cash collected in respect thereof has been entered in the cash
book.

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 The computation of sales should be ascertained by the auditor in
order to verify whether the price of goods sold has been
calculated correctly.
 If cash collections are made through automatic cash registers,
the daily totals entered in the cash book should be checked with
the till rolls.

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Vouching of Trading Transactions
Credit Purchase
Documents to be verified:
 Purchase invoices
 Copies of orders placed
 Goods received note
 Copies of challans from supplier
 Goods inward register
 Stock records.

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Duty of Auditor:
 The main objective of vouching of credit purchases is to see that
all purchase invoices are entered in the purchase book.
 The auditor should examine the internal check system in force.
 It should be confirmed that the purchase of goods is sanctioned
by a responsible official.
 The goods purchased should be actually received by the client.

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Credit Sales
Documents to be Checked:
 Sales invoices
 Challans
 Sales register/Goods outward register
 Stock records
 Purchase order from customers.

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Duties of Auditor:
 The main objective of vouching of credit sales is to see that all
sales invoices are entered in the sales book.
 The auditor should examine the internal check system in force.
 The sales register should be examined with copies of sales
invoices.
 The sales tax etc. collected through sales invoices must be
recorded under separate accounts.
 Trade discount allowed to the customers should be checked.

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Collection from Debtors
Documents to be Checked:
 Sales invoices
 Receipts issued to customers
 Statement of customers’ accounts
 Existing and past discount chart
 Correspondence with the customers.

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Duties of Auditor:
 The auditor should first of all check the existing internal control
system in respect of cash collection.
 He should also ensure that amount received from customers has
been entered in the cash book on the day it is received.
 He should also ensure that all these receipts are serially
numbered.
 It should be seen that the discount allowed to customers is
authorized by a responsible officer.
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Foreign Travel Expenses
Documents to be Checked:
 Travelling Rules of the organisation
 Approved Tour Programmes
 Tour Report
 Board Meetings
 Minutes
 R. B. I. Permission Letter
 Air tickets etc.

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Duty of the Auditor
 Before conducting vouching work of travelling expenses, the
auditor should know the rules in the organisation on
admissibility and rates of travelling expenses and daily
allowances.
 The auditor should ensure himself first whether the travelling
expenses have been incurred only on those tour programmes
which are approved by the competent authority,

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 The auditor then should thoroughly check the travelling
expenses bills submitted by the employees along with the
supporting vouchers as may be appropriate.
 The auditor then should also confirm himself that the statement
of business done or tour report has been submitted by the
employees and reviewed by the proper authority,
 The auditor should also ensure that necessary permission has
been obtained from the Reserve Bank of India for foreign
exchange transactions in connection with foreign trip.
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Provision For Income Tax:
 The auditor should ascertain the tax liability and check the
computation of the assessable profit and loss account. Thus,
adjustments affecting taxable profit must be carefully
scrutinized.
 He should also go through past completed assessment in order
to know what sort of adjustments were actually made in the
past.

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 He should also check the amount of advance tax paid and the
calculations thereof. Advance tax is required to be verified in
order to provide the liability of future taxation.
 If income tax return has already been filed before the date of
audit, the auditor should also check the copy of the income tax
return.
 He should also obtain a certificate from the tax practitioner
regarding the amount of tax payable.

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Advertisement Expenses:
Documents to be Checked:
 Agreement between client and Advertising agency
 Necessary Bills or Vouchers
 Bank Statement.

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Auditor’s Duty:
 Getting more understanding of the nature of the advertising
expense
 Contract for the advertising service is subjected to be made and
signed as agreed by these two parties.
 Auditors should obtain those contracts and summary them to get
more understanding and their control on contract preparation.
 Auditor should obtain financial statements for the period of
auditing as well as relevant period.
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 The auditor should seek an explanation from the management of
the company if the differences are sound unusual.

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Sale of Investment:
Documents to be verified:
Usually, investments are sold through brokers. The brokers
issue a note giving details about the nature of investment sold, the
term of sales, mode of payment etc., It is called the Brokers’ sold
note.

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Auditor’s Duty:
 If the sale proceeds of the sale of investments are received
through bank, then bank advice should be verified.
 The auditor should also find out whether the investments are
sold at ex-dividend/interest or cum dividend/interest.
 The commission paid/payable to the brokers is to be verified.
 If the organization has sold quoted shares/stock, the auditor
should verify whether the investments are sold at the quoted
prices or not.
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 The auditor should examine whether the investments are long-
term or short-term investments.
 He should also ensure that the income tax liabilities relating to
capital gain on sale of investments are included in the return of
income filed with the Income tax authorities.

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Cut-off Arrangements:
The end of any accounting period is chaotic without the
right procedures in place to ensure everyone has the right
information and reports. Establishing set procedures for period-
ending reporting gives the accounting department time to plan and
sets the expectations of all departments to prepare. The accounting
department needs to work with business leaders to be on the same
page about the cutoff procedures for the company.

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 Inventory Cut Off Procedures:
If the accounting department is running its monthly reports,
it needs several days time to pull all that information together. This
means that warehouses must be given a firm deadline as to when
inventory is counted for the month. The first department is the
receiving and inspection department that takes in new shipments of
goods. Assume the month-end report is due on the 20th, the
procedure to close receiving could be four days earlier on the 26th
of the month.
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 Accounts Payable Cut Off Procedures:
All payments should be immediately entered into the ledger
when made. However, someone should be monitoring the month-
end incoming invoices and payments. It is important to classify the
expense and the liability in the right billing cycle. For example, if a
vendor sends an invoice on July 27 for work done June 27, this is a
liability for June and expense for July. The expense and liability
would be for the same month if the work was done in July and not
June.
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Types of Frauds that can be done in a Sales Ledger:
Create Fake Invoices:
One of the more egregious ways to boost sales is to create
fake invoices in order to boost sales. A clever perpetrator will
create invoices of relatively small size that are unlikely to be
audited, or invoices to foreign firms that the auditors may consider
to be too difficult to confirm through their auditing activities. A
fake shipping document will also be created to proof the sales
actually occurred.
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Accelerate Revenue Recognition
The client can do this by shipping goods earlier than
requested. When a company sells a mix of goods and services, it
overstates the price of goods (which can be recognized at once),
while under-pricing the price of the services (which are recognized
over a longer period of time).

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Bill And Hold Transactions
Under these arrangements, the seller recognizes the revenue
while retaining the goods that should have been shipped to the
customer, allegedly because the customer wants the seller to store
the goods on the customer’s behalf. The seller may forge
documents, stating that the customer has authorized this
arrangement.

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Delay Recording Of Discounts
When discounts are granted to customers on sales
transactions, the amount eventually collected from the customers
will be reduced, which means that the initial sales figure should be
reduced by the amount of these discounts. Delaying recording sales
discounts into a later period will result in a temporary boost in the
sales figure.

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Round Tripping
An organization sells certain assets to another party,
promising to buy back from them at a later date. By doing so,
creates revenue, even though there is no economic justification for
the continual shifting of assets back and forth.
The more elaborate forms of this arrangement may even
involve three parties, so the nature of the activity is more obscure
and difficult to detect.

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Consignment Sales
A business sends goods to a third party, which has agreed to
sell the goods to the ultimate buyer on behalf of the company.
Under a consignment arrangement, there is no sale until delivery is
made to the ultimate buyer. When business records a sale at the
point when it delivers goods to the consignee, this is a fraudulent
acceleration of the related sale.

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