VOUCHING AND VERIFICATION
VOUCHING
Meaning:- It is the act of testing or sustaining the validity, authenticity & accuracy of the entries made in the books of accounts with the help of relevant documentary evidence.
Vouching means a careful examination of all original evidence i,e, invoices, statements, receipts, correspondence, minutes & contracts etc., with a view to ascertaining the accuracy of the entries in the books & also to find out, as far possible, that no entries have been omitted in the books of accounts.
Definition:- Acc. 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 & accuracy".
OBJECTS OF VOUCHING
To ensure that the transaction, as recorded in the books of accounts are properly authorized & correctly recorded.
To ensure that all the entries made in the books are supported by necessary documentary evidence.
To see that all the transaction connected with the business have been recorded in the
appropriate books of accounts & nothing pertaining to the business has been left as unrecorded.
Detection of errors & frauds is also one of the objectives of vouching.
To check no entries are missing or omitted from the books of accounts.
To examine the transaction for which money paid or received relates to the business.
To examine that capital and revenue expenses and receipts of the business are properly classified.
Vouching is the backbone of auditing, because it is just a mechanical process involving the comparison of the entries in the books of accounts with the documentary evidence. But, it is an intelligent inquiry into the genuineness of the transactions, accuracy of the amounts involved & the proper recording of the transactions in the appropriate accounts & detecting all sorts of errors & frauds.
IMPORTANCE OF VOUCHING
Vouching is the backbone of Auditing:- main aim of auditing is to detect errors & frauds for proving the true & fairness of results presented by income statement & balance sheet, vouching is only the way of detecting all sorts of errors & planned frauds. So, it is the backbone of auditing.
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.
Vouching is important to see whether evidence is correct or not:- an auditor checks the books of accounts to detect errors & frauds. Frauds may be committed by presenting duplicate vouchers. All the small & big amounts of frauds can be detected with the help of vouching. So, all the documents & records are to be checked carefully & in detail by an auditor which is the scope of vouching.
PROCEDURE OF VOUCHING
Reading out. The voucher contents, including the organization's name, date, transaction amount, and several vouchers are read out to the senior auditor by the junior auditor.
Comparison. The senior auditor tallies all the items read out by the junior auditor with the entries stated in the book of accounts.
Marking. This refers to clearing all items that were compared by the senior auditor.
Signing or stamping. In this stage, the senior auditor signs all the vouchers as a safety measure. These vouchers can't be used for another entry. The vouchers can also be checked by the use of stamps in place of signatures. This is done to check or cancel a voucher.
Query. There might be a missing voucher or a doubt placed on a specified entry because of erasing and writing. The letter ''Q'' is placed next to the entry in question.
Management. Management is given time to clarify the objections.
Response. This is the response given by the management on the doubtful entries, usually within a day or two. The response is examined by the auditors who deliver a judgment on whether they accept management's explanation.
Clearing or finding explanations unsatisfactory. Auditors clear any entries that have been reasonably explained by management and reject replies that they are not finding reasonable.
Objections. At the closing of the audit, the management discusses the objections that were written in the working papers. An opinion is then formed concerning the complaint and a comprehensive report is submitted.
VOUCHING OF CASH RECEIPTS (DEBIT SIDE OF CASH BOOK)
Opening Balance of Cash Book - Opening balance of cash book represents cash in hand at the start of the year and should be verified from the balance sheet of last financial year.
Cash Received from Debtors - Consider the following points for verification of cash received from debtors −
The carbon copies or counterfoils of the cash receipt book should be verified.
Cash receipt should be serially numbered.
Cash received should be entered on the same date when the cash is actually received.
The discount allowed to customers should be properly authorized by a responsible officer.
Correspondence with customer and ledger accounts should be tallied.
Repayment of Loan by Others - Repayment of loan by others may be verified in the following ways −
Calculation of interest received and interest should be credited to the interest received account.
Verification from bank statement if directly deposited by party into bank.
Checking of carbon copies or counterfoils of cash receipts.
To ensure that there should be no violation of Income Tax rules as payment of loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques, Demand Draft, NEFT, RTGS or any other available banking channels.
Rent Received
To check rental agreement or lease deed.
In cases where the rental income is received from more than one property, separate accounts for each property should be maintained.
The Auditor should verify that the rent for all the twelve months is received or not.
The amount of rent should be verified from the rent deed or the lease deed.
If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of TDS.
Sale of Investments
To check the bank statement if the sales proceeds have reached the bank account.
To verify broker commission, note or debit note, if investments are sold through brokers.
To ensure separate accounting is being done for capital receipts and revenue receipts. Dividend or profit or loss on sale of investment is a revenue receipt and the sales proceeds of the investment cost should be booked as capital receipt.
Subscription - Subscriptions are received from the members of a club and the following points need to be considered by the Auditor while vouching subscription −
Subscription register should be verified.
Verification of subscription received during the year and the subscription receivable.
Counterfoil of cash receipt should be verified.
Sale of Fixed Assets
To check minutes of the meetings of the Board of Directors.
Sale agreement or sale contract.
Verification of agent account if sale is made through an agent.
Profit or Loss on sale of fixed assets should be booked to the revenue account.
Authorization of sale of fixed assets.
Sale proceeds of fixed assets should be credited to the fixed assets account after deducting expenses on sale of fixed assets if any.
Interest and Dividend Received
Verification of the dividend warrant letter along with the covering letter for verification of dividends in case of dividends received through cheque.
Verification of bank statement, if the dividend is directly credited to the bank account.
Interest on security can be vouched from the securities schedule.
Interest on fixed deposits can be verified from bank statements and TDS certificates.
Interest received from outsiders to whom company has granted loan could be verified from the statement of account of the party along with TDS certificates.
Provision should be made for interest accrued but not due.
All interest received and accrued should be properly accounted for in the books of accounts.
Commission Received
Verification of agreement on the basis of which the commission is received.
Calculation of the commission receivable.
The commission received should be verified from counterfoils, bank statements, cash receipts, etc. and the provision for commission receivable should be rightly accounted for in the books of accounts.
Commission receivable on “sale of goods sent on consignment” should be verified from the sale account.
Installments Received on Hire-Purchase Sale
Study of the Hire-Purchase agreement for hire-purchase-sale price, number of installment, rate of interest etc.
Segregation of principal amount and interest amount should be done and both should separately account for.
Profit on sale on hire-purchase should be duly calculated on the basis of installment received during the year.
VOUCHING OF CASH PAYMENTS (CREDIT SIDE OF CASH BOOK)
All the payments made to creditors, expenses incurred in cash and all other payments done appear on the credit side of the cash book and the Auditor is required to vouch for cash payments because chances of cash misappropriation are very high. Following points need to be considered for different types of cash payment −
Opening Balance - The opening balance of a cash book can never be credited because cash of company cannot be in negative but the credit bank balance represents the overdraft account from bank or utilization of cash credit limit as sanctioned from bank.
Payment to Creditors - Payment to creditors may be examined by the following −
Receipt issued by the creditors.
If the creditor is paid the full and final settlement, the balance amount, if any, stands in the ledger account of the creditor; this amount should be credited to the discount received.
If any advance payment is made to the creditor that should be clearly mentioned.
Statement of account of creditor.
Payment of Salaries - Depending upon the adequacy of the internal control system in an organization Auditor will decide his audit Program. It is very important for Auditor to check the following −
Attendance record of employee and salary register.
Appointment letter of new employees.
Comparison of current month salary with last month’s salary and if there is any abnormal change in amount, Auditor should verify the same.
Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.
Payment of Wages - At the time of vouching of wages paid, the Auditor should verify the following points to avoid misappropriation of cash −
Adequacy of Internal Control System.
Payment of wages at a higher rate than allowed.
Payment shown to ex-workers in the current month.
Lower or non-deduction of advance or other deductions due.
Payment to fictitious workers.
Payment to workers who were absent from duty.
Wages sheet should be compared with the wages register.
Comparison of current month wages with last month’s wages and proper verification should be there for extraordinary changes.
Detailed verification for payment to casual workers.
Vouching and verification of treatment accounting treatment for unpaid wages.
Purchase of Plant and Machinery - The Auditor should pay attention to the following −
Purchase invoice of machinery.
Freight inward charges, installation charges, erection and commissioning charges should be capitalized.
Treatment of Excise duty according to the excise rules.
Purchase of Land & Building - Purchase of Land and Building can be vouched as follows−
Study of Leasehold agreement, if land is purchased on leasehold basis.
Payment should be as per lease term.
All the expenses incurred to acquire leasehold property should be debited to the respective property account.
Auditors should study the conveyance deeds in case property is purchased under free hold basis.
For verification of payment, the Auditor can check the payment receipt and the conveyance deed.
Rent Paid - Consider the following points for the verification of rent by the auditor −
Rent Deed.
Rent receipt from Landlord.
Provision for unpaid rent at the end of the year.conveyance deed.
Insurance Premium - Consider the following points for the verification of Insurance Premium −
Insurance policy issued by the Insurance Company.
Insurance premium receipt
Insurance premium should not be related to any official of the company.
Income Tax - Consider the following for the verification of Income −
Advance Tax Challan
Self-Assessment Tax challan
Income Tax demand notice
Assessment order
Commission on Sale -Consider the following for the verification of Commission on Sale−
Agreement of sale.
Rate of commission on sale.
Calculation of commission on the basis of sale.
Cash receipt issued by agent.
Provision for commission payable
Director’s Fees - Consider the following for the verification of Director’s Fees −
Directors receive fees for attending the Board meetings.
Verification of attendance register.
Verification of payment receipt duly acknowledged by the directors.
VERIFICATION OF ASSETS AND LIABILITIES
INTANGIBLE ASSETS
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. (a) (a) Goodwill: Goodwill is an intangible asset. It is the value of the reputation of the firm It
enables the firm to earn more than the normal rate of profit. It has no physical existence as
such. It does not diminish in value with use. It has the potentiality of self-growth. It can be
raised merely by book entries.
Verification: To verify the value of a goodwill auditor has to examine the purchase agreement. Auditor should find out from the purchase agreement that the amount of this asset is correct. Good will usually appears in the balance sheet at cost. There is no legal compulsion to write it. If a company likes to write off then the auditor should see that the amount written off is according to the resolution of the board. Important point about goodwill is that it does not depreciate by use.
(b) Copyrights: A copyright is the exclusive legal right to produce or reproduce some kind of literary work. It is the legal protection provided to an author by which the publication of his work by others is prohibited. The period of copyright is for the life of the author and fifty years after his death.
Verification:
The auditor has to examine the written agreement of assignment along with the royalty paid to the authors etc., for such copyrights.
He has to see that such assignments are properly registered.
If the client is the owner of many copyrights, the auditor should ask the client to prepare a schedule of copyrights and get the detailed information to confirm that the same is shown in the Balance Sheet.
If any copyright does not command the sale of any books, then the same should be written off in such a year. The auditor has to verify the same in detail.
( c) Trade Marks: A trademark is a unique symbol or word(s) used to represent its products. Once registered, that same symbol or series of words cannot be used by any other organization, forever, as long as it remains in use and proper paperwork and fees are paid.
Verification: Auditors should verify the patents, trademark with the help of relevant documents. He should examine the schedules and check that all these are certified by the responsible officer or not. If any agreements are made it should also be checked by the auditor. Auditor should also check that renewal fees have been charged or not.
The auditor should see that they are registered in the name of the client and this can be done by examining the certificate issued by the Registrar. In case a trade mark has been purchased he should also vouch the payment.
2. FIXED ASSETS
Fixed assets indicate a firm's non-current assets that can generate long-term financial gain and provide an idea of the firm's operating performance.
(a) Land and Buildings :
Verification : In case of land and building, the auditor should verify the title deeds. If the auditor is doubtful about it then may refer the matter to the solicitors of the company. If the property is mortgaged then he should take the certificate from the mortgagee to that effect.
To verify the value of land cost price should be considered by the auditor. To know the original cost of the property auditor should verify the deed of transfer. In case of building valuation, builder's receipts and depreciation should be considered.
(b). Plant and Machinery
Verification: Auditor will verify the plant and machinery in the following way:
Auditor should vouch for the purchase of a plant with the receipts and invoices.
It should also be checked that all the expenditure on this account is a capital charge.
If the plant is erected by the client's own men then the auditor should check that allocations of the plant have been made correctly.
Auditor should check the schedule of the plant and machinery which should be certified by the engineer.
Auditor should also do the physical checking of the machinery if possible.
Auditors should also verify that a sufficient amount of depreciation is provided for this asset or not.
(c) Furniture and Fixtures
Verification:
The auditor has to see that a proper record showing quantitative details of furniture and fixtures owned by the client are maintained.
The auditor has to see that all expenses incidental to the purchase of furniture and fixtures is capitalized along with the purchase price paid for it.
The auditor has to inquire whether the furniture and fixtures have been properly insured or not.
The auditor has to see that adequate provision for depreciation on furniture and fixtures is made.
The auditor if possible can go for physical verification of furniture on test check basis or he can rely on the management certificate to that effect.
He has to further see that any damaged or unusable furniture, if existing, is fully written off in the books.
3. CURRENT ASSETS
(a) Cash in Hand
Special care is necessary with regard to verification of cash balances. There can be no certainty that the cash produced for inspection was in fact held by the custodian.
For this reason, the cash should be checked not only on the last day of the year, but also checked again sometime after the close of the year without giving notice of the auditor's visit either to the client or to his staff.
If there is more than one figure for cash balance e.g. when there is a cashier, a petty cashier, a branch cashier and in addition, there are imprest balance with employees, all of them should be checked simultaneously, as far as practicable, so that the shortage in one balance is not made good by transfer of amount from the other.
(b) Petty Cash
Petty Cash in hand should be verified with Petty Cash Book
Also check the balance of the Petty Cash Account in General Ledger.
Vouch the transaction of last month property to ascertain that fictitious payments are not entered into
Some of the points given for verification of cash in hand will be applicable for Petty Cash
(d) Bank Balance
1. To verify cash at the bank, the auditor should examine the bank pass book and compare it with the balance as shown by the bank column of the cash book.
2. Check bank reconciliation statement with bank statement / pass book of subsequent period.
3. The auditor should get a certificate regarding the balance at the bank directly from the bank. Ensure that the balance as shown by the cash book is brought into the balance sheet as 'Cash and Bank ‘and not 'Balance as shown by the pass book'.
(e) Bills Receivable
1. The auditor should examine the Bills Receivable Book with the Bills Receivable not matured but in hand on the date of the Balance Sheet.
2. When any bills are in the process of collection the details of the same have to be verified with bank certificates.
3. If the Bills Receivables in hand are many, the auditor should make a list of bills for his convenience.
(f) Sundry Debtors
Sundry Debtors represents the amount recoverable from the customers for sale of goods or rendering of services.
1. The under mentioned procedure should be applied for verification of 'Book Debts' or 'Sundry Debtors' after receiving a schedule or list of debtors from the client.
(a) Direct confirmation of balances from debtors by sending confirmatory letters.
(b) Year-end Scrutiny of ledgers.
(c) Verification of the position of debts considered bad or doubtful.
(d) Compliance with legal requirements or presentation.
2. The auditor should arrange to send the letter of confirmation of balances by the client as per client's records and see that the reply of confirmation is forwarded to his office directly. Usually this should be sent within 15 or 20 days of close of the year under the supervision of the audit staff. After the reply is received, the same should be tallied with the balances shown in the debtors ledger and difference properly reconciled.
VERIFICATION OF LIABILITIES
Verification of Trade Creditors
The correctness of liabilities depends upon the correctness of purchases. Hence, the auditor should compare the percentage of gross profits to purchase with that of the previous years to verify the correctness of purchases.
The auditor should obtain a Schedule of creditors and verify them with the balances of ledger accounts and statements of account received from creditors.
He should check the Purchases Book and Purchases Returns Book with the help of invoices, credit notes, etc. He should also check the postings into the Ledger.
He should examine the Goods Inward Book to ensure that the goods purchased have been actually received.
He should see that all the purchases made during the year have been accounted for especially at the end of the year.
He should examine the discount allowed to creditors during the period and see that these substantiate the credit balances.
2. Verification of Bills Payable: In case of bills payable, the auditor should follow the following verification procedure:
The auditor should obtain a Schedule of bills payable and its totals should be compared with the Bills Payable Book and Bills Payable Account.
The bills paid after the Balance Sheet date should be examined with the entries passed in the Cashbook.
The auditor should obtain confirmatory statements from the drawers directly with the permission of his client.
He should pay special attention to the bills that have been paid between the date of the Balance Sheet and the date of his audit has been duly written in the books.
3. Verification of Loans
The auditor should verify the existence of loans, if any. In case of a company he should examine the correspondence, contracts, and Directors' Minute Book.
The auditor should ascertain the terms of loan, amount of loan, period and nature of loan, etc. by referring to the loan agreement.
He should confirm the balances of the unpaid loans directly from the creditors of the company with the permission of his client.
In case of loans or overdrafts taken from a bank, an agreement with the bank and a certificate to that effect should be obtained and examined.
The auditor should see whether the interest due has been paid or not. If the interest is due but not paid till the date of the Balance Sheet, he should see whether the same has been clearly shown as liability therein.
In case of a Joint Stock Company, the auditor should examine the borrowing powers of the company. He should also examine the Register of Charges, and should see that a charge created has been registered with the Registrar.
It should be seen that the interest on loans has been paid up to date. If not he should see whether the amount due is recorded as unpaid in the books of accounts.
4. Verification of Outstanding Liabilities for Expenses
1. In case of outstanding liabilities, the auditor should obtain a certificate from a responsible officer of the company stating that all expenses that become payable have been brought into account.
2. He should see whether necessary provisions for all the outstanding expenses have been made by checking receipts and other vouchers.
3. He should see the expenses shown as unpaid during the current year with those of the compare last year and if he finds any difference, the same should be enquired into.
5. Verification of Capital
Capital is not the liability of an entity but still the auditor is required to verify it in order to report the genuineness and correctness of the Balance Sheet. In case of a firm, the auditor should verify capital with the help of Partnership Deed, Cashbook and the Passbook. He should see that it has been properly recorded in the books of account. In the case of a company, verification of capital can be discussed under the two heads:
(a) First Audit: In case of first audit, the auditor should examine the Memorandum of Association to see what is the maximum capital, which the company is authorized to raise. He should also check the Articles of Association.
The Cashbook, Passbook, and Minute book of the Board of directors should be examined by the auditor in order to find the amount of shares and different classes issued, the amount collected on each share, and the balance due from the shareholders in respect of calls, etc.
The shares allotted to vendors should be examined with the contract between the vendors and the company.
(b) Subsequent Audit : Normally, in case of subsequent years, the share capital would be the same as in the previous year unless the company has made any alteration or addition by fresh issue or otherwise. If he comes across any change, he should see that the relevant provisions of Secs. 94, 95 and 100 to 105 of the Companies Act have been duly complied with.
6. Verification of Reserves and Fund
the amount of reserves and funds to be created taking into account the circumstances of the Reserves and funds are appropriations out of profits. The directors of a company determine business. The reserve and funds are to be shown on the liability side of the Balance Sheet with footnotes.
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