Vouching

Types of VoucherPRIMARY

An original written evidence supporting a transaction is called primary voucher. E .g. invoice of a purchase.

COLLATERALWhen some original evidence is lost or destroyed , duplicate copies are produced in support as subsidiary evidence. This kind of evidence is called collateral voucher.

Cash sales

Primarily the system of internal check should be checked .

Cash sales usually are verified with carbon copies of cash memos.

To verify that cash price of goods sold has been calculated correctly , the computation of cash sales should be test checked.

where a trade discount has been allowed the sanction should be ascertain.

If a cash memo has been cancelled , its original copy should be inspected to check if the amount has been misappropriated.

Rent Recoverable

• Enquire about the genuineness of arrears of rent outstanding for a long time.

• Check the counterfoil of rent receipt with reference to entries in the cash book.

• Check the accounts of agents, where the rents are collected by agents.

• Ascertains that all rents have been received.

Dividend ReceivedCheck dividends received with reference

to dividend warrants.

See that no credit has been taken for dividend yet to received .

Check the rate of dividend ,amount of gross and net dividends and tax deducted at the source.

Check actual receipt with reference to cash book.

Check the reports of all the companies.

Interest Receipt

Check receipt of this account with the counterparts of the interest and dividend warrant.

Where the banker is authorized to collect interest or dividend ,check the entries in the bank pass book.

Check the bank pass book for interest on fixed deposits.

Check the agreement between the borrower and the business to note the rate of , date of payment etc.

Sale of InvestmentsInvestments are usually sold through

broker . Broker’s Sold Note should be examined to note the date of sale , the amount received and the commission charged.

In case the sale has been effected through bank, the bank advice should be examined.

You should note whether the sale has been cum-dividend or ex- dividend . See that ex-dividend has been received if in case of cum- dividend ,sale proceeds have been properly apportioned between capital and revenue.

Vouching of Payments.

While vouching payments you should satisfy yourself that the payment:

has been actually made for the business itself.

relate to the period under audit.has been made to the right personis properly sanctioned.is properly recorded. is supported by a proper voucher.the particulars given in the tally with the

cash book.

Vouching of capital Expenditure.

Capital expenditure defined by Spicer &Pegler “is all expenditure incurred for the purpose of acquiring ,extending or improving assets of a permanent nature by means of which the business may be carried on or for the purpose of increasing the earning capacity of the business”.

Land & Buildings• Ensure that payments are in order • are duly authorized.• Examine the documents of title of the

property.

• ascertain whether the land & buildings are purchased on freehold or leasehold basis.

• where the land & building is purchased on leasehold basis , ascertain the terms of lease .

See the account submitted by the auctioneer when the property has been purchased in auction.

• Examine brokers’ note in case the property has been purchased through broker.

• Examine the correspondence ,where the property has been bought direct from the seller.

• Examine the receipt issued by the contractor, where the property was erected through the contractor.

Vouch the expenditure on building material

purchased , wages paid to the workers, where

the building has been constructed by

engaging direct labour and

• Check that auctioneers’ commission , brokerage, architects ’ fees ,

registration fees and legal charges etc . have been

capitalized .

Vouch all such payments with

reference to receipts obtained.

Plant &machinery Examine the invoices from vendors and also the

receipt for payments towards the cost of assets.

Inspect the auctioneer’s statements of account where it has been bought in auction.

Examine the agreement and relevant vouchers when the plant and machinery has been purchased under hire-purchase agreement and also see that proper apportionment has been made between capital and revenue.

See that no repairs and maintenance are capitalized

See that the loss on sale of any obsolete plant etc. has been treated as revenue loss.

Investments In case of new issue ,the allotment letter and

banker’s receipt for the installment should be inspected if the share certificate have not yet been received.

In case share certificate or debentures have been received they should be examined.

The actual investments should be examined.

In case of cum-dividend purchase ,it should be seen that the expenditure has been properly apportioned between capital and revenue.

Loans Inspect the loan agreement and the security held.

Check that the loan has been properly authorized e.g minutes of the Board meetings and

See that loans have been given to officers of the company , the necessary approval of the central government under section 295 of the companies Act,1956has been obtained.

Travelling ExpensesTravelling expenses are paid to the

employees for official work . The auditor while vouching should :

see the rules and conditions for granting travelling allowance an ensure that payment is passed under an order by a responsible official.

see that these expenses are in connection with the business alone and have not been paid in excess.

see that the directors have not been allowed travelling allowance unless authorized by the Article of Association .

Commission

The auditor should :

check the commission book with reference to cash book and the receipts from commission agents.

check the calculations.

check the basis of calculation with reference to related agreement, i . e. whether commission is some percentage of sale or profit.

Insurance Premium The auditor should examine the premium

notice ,the insurance company’s receipts and the insurance policies.

Details about the amount of premium payable, mode of payment and the date of maturity of the policy can be verified from the insurance policy.

In case of new policies , the auditor should inspect the cover note or the receipt from the insurance company. In case of renewal, the renewal receipt should be examined.

Petty CashExamine system of internal check existing for

petty cash and find out its weakness if any.Tally the cheques drawn for petty cash with

the credit side of the cash book and debit side of the petty cash book.

See that the Imprest System of petty cash has been followed in the organization.

See that all the vouchers have been numbered consecutively and are in order.

Checks who approves vouchers.

Give surprise checks to petty cash balance.See that no credit to employees is given out

of petty cash.Check casts , cross casts and posting of this

book.Examine thoroughly all vouchers over a

certain amount.Check the petty cash balance by personally

visiting on the date of the balance sheet.

Director’s FeesDirectors of a company can claim fees for

attending meetings if the article of the company provide for it.

Examine the Article of association to know whether directors can be paid fees for attending a boarding or not.

Find out amount of fees payable to the directors for attending the board meetings.

Examine the director’s meetings and the attendance register to ascertain the number of meetings attended by them and the total fees payable to them

Payment to CreditorsPayment made against credit purchases

should be checked with reference to receipts issued by suppliers and the credit to their accounts on the basis of invoices entered in the purchases day book.

He should also see the evidence of the goods having been received.

In the case of goods purchased at the end of the year they have been included in the closing stock.

Partner’s Drawings

• The maximum amount permissible as drawings.• The maximum time for which a partner can

draw money.• The amount of drawings shown in the cash

book should be checked with reference to partner’s account.

• Each every drawing has been duly signed by the concerned partner.

Wages and Salaries• See the internal check system in force for wages ;• Check a proportion of addition and alteration;• Check some of the calculations at random;• Check the system of preparation of wage sheet

and the payment of wages;• Check that the wage sheet have been signed by a

responsible official;• Check by test check the totals and other

calculations;

• See that only exact amount of wages to be paid has been withdrawn from the bank;

• Try to pay a surprise visit in person at the time of payment of wages;

• Check the system of calculating overtime wages-who authorize overtime and within what limits;

• See that overtime does not exceed any statutory limit;

• Suggest to prepare separate wage sheet for overtime wages;

• Check any abnormal increases or decreases in total salary bills from month to month;

Bills Payable

• Examine the duly cancelled returned bills as an evidence of the amount having been paid.;

• Inspect Bills Payable Book at the same time;

• In case the payments on certain bills have been made through the bank, see the bank pass book and the banker’s advice

Vouching of Trading Transactions

Purchases

• The auditor should check the invoices and compare them with entries in the day book;

• The details relating to discounts and sales tax and the various calculations and extensions should be examined;

• The date of invoice falls within the accounting period under review;

• He should test check total s, sub-totals ,carry forwards and calculations in the purchase book

Purchases Returns

• Compare the notes sent by creditors and the entries in the purchase returns book.

• Proper adjustments regarding goods returned have been made before making payments to the creditors.

• Where payments has already been made ,ensure that full credit has been received subsequently.

Sales

• The auditor should check the system of internal check and control with regard to credit sale.

• He should check that no sale of an asset has been entered in the sales day book.

• Only profit or loss on sale of asset should be credited or debited to the profit and loss account.

Sales Returns

• Inquire into the internal control with regard to sales returns.

• He should carefully scrutinize large credits and test them with documents such as credit notes, Goods Inward Book etc.

Journal

The following transactions are generally recorded in the journal.

• Opening entries.• Entries for the issue and allotment of shares

and debentures.• Closing entries.• Entries for the forfeiture of shares.• Various adjusting entries.

• Entries for the acquisition of the various assets taken over from the vendors.

• Entries relating to consignment and dishonour of bills.

• Entries for making calls. • Entries for the acquisition of the different

liabilities taken over from vendors.

Containers and Packages• There are two methods in practice to record

containers .• One is to debit the amount to the party concerned

immediately after the transaction and to give credit when the same is returned

• Under the second method containers are not charged but are entered in the memorandum book . They are charged only if they are not returned.

• The auditor should carefully examine the system of recording these containers.

• Provision for depreciation should be ensured.

Goods Sent on Consignment

• Carry out a thorough examination of account sales received from the consignees.

• See that the consignee have strictly complied with the agreed terms and conditions .

• See that the unsold stock in the hands of consignee has been properly valued.

• See that the stock is correct with reference to goods sent , sold and returned.

Vouching of Impersonal Ledger

• Check the adjustments which are done at the end of the year . Such adjustments are outstanding assets , liabilities and depreciation.

• Check the balance of the various accounts in it and compare with the balance shown in the trial balance , Trading and Profit and Loss Account and Balance Sheet

General Consideration in Vouching Impersonal ledger

• Check the posting of cash transactions to the Impersonal ledger.

• Vouch the journal carefully.• Check their posting to the Impersonal Ledger.• Check the totals of various books of prime entry

with the accounts in the Impersonal Ledger.• Exhaustively test the posting from the cash

book.

Outstanding AssetsThe outstanding assets include two types of items

Expenditure which might have been paid in advance , i . e .prepayments or payments in advance.

Items accrued or due, not recorded in the books ,which will ultimately be received I .e . incomes still to be received.

Prepaid Expenses

• Some expenses may have been paid in advance.• Prepaid expenses represent working capital and

usually are items which will be converted into expenses in a short time.

• They should be excluded from the Profit and Loss Account ,must be shown in the Balance Sheet as assets . Examples of some of the prepaid expenses are given below.

Insurance premium paid in advance

• Vouch the amount with the help of premium receipt.

• If necessary ,inspect the actual policy taken.

• See that the premium is properly recorded in the Profit and Loss Account and the Balance Sheet.

Rents paid in advance• The auditor should make calculations to note

what part of the amount paid is in advance for the period subsequent to the date of the Balance Sheet.

• He should check that proper apportionment is made between two periods and are shown accordingly in the Profit and Loss Account and the Balance Sheet.

• He should inspect agreements , leases and receipts to note the correct position.

Prepaid taxes and rates

• Make himself thoroughly familiar with all types of taxes.

• Scrutinize the copies of tax returns and tax bills.• Consult the cash book for the taxes paid , so as to

find out the amount of taxes paid in advance.• See that these payments have been correctly

apportioned between the period s and correctly treated in the account.

Prepaid interest

• Trace if interest and discount s are prepaid by comparing the agreements , rate of interest , conditions of payment of interest , actual amount of interest paid as shown in the cash book.

• See that such amount of interest has been shown correctly in the final accounting statements.

Accrued Incomes

• Accrued incomes are those incomes which are due but have not been received during the year under audit . But ultimately they will be received by the concern.

• Such incomes should be included in the Profit and loss Account and be shown as assets in the Balance Sheet.

Rent receivable

• That portion of the rents receivables which may not be recoverable or is doubtful is not taken into account and a proper provision is made in the Profit and Loss Account.

• That the copy of the receipt given to tenants and agreements if any , to ascertain the balance of rents receivables.

Interest and dividends

• Interest on debentures or other investments which are accrued but not received should also be taken into account.

• Dividends on shares which are due but not received , should also be taken into account.

• However the dividends on ordinary share need not be taken into account unless information about the amount of dividend is available.

Deferred Revenue Expenditure• See that only the genuine deferred revenue

expenses are written off over a number of years.• Check calculations and examine all related

vouchers to ascertain the correct amount.• See all such expenses have been correctly and

properly spread over a number of years and debited to Profit and Loss Account.

• See that the balance of such expenditures are shown on the asset side of the Balance Sheet until they are written off fully.

Vouching of Outstanding Liabilities

In every business concern certain outstanding liabilities exist on the date of the Balance Sheet . All such liabilities which belong to the period for which the final accounts have been prepared , should be adjusted in the books of account. Such outstanding liabilities may be of two types.

• The unpaid expenses and• The unearned Income.

Unpaid Expenses

Unpaid expenditures are those which have already been accrued but not paid on the date of the Balance Sheet.

• Such expenditures must be shown in the Profit and Loss Account of the year.

• He should also check that they have been shown on the liability side of the Balance Sheet.

Freight and Carriage

• Ascertain the amount of freight and carriage unpaid.

• See that such expenses are brought into accounts.• See that such expenses are debited to the Profit

and Loss Account and shown in the Balance Sheet as liabilities.

• See that whole of outstanding freight and carriage for the year has been taken into account.

Rent, Rates , Electricity

• Ascertain such outstanding expenses by examining the relevant documents.

• Examine the rent agreement or lease ,the amount paid so far from the cash book.

• See that all such expenses have been shown in the Profit and Loss Account and also in the liability side of the Balance Sheet.

Purchases

• Call for a schedule of such purchases.• See that their total is debited to the Profit and

Loss Account and credited to outstanding liability account.

• Compare the Goods Inwards Book with the Purchase Book for the few days of the closing month of the year and

• Compare the creditors statement with their accounts in the Bought Ledger.

Audit Fees Whether the audit fees due should be treated as an

outstanding liability or not is a controversial point.• The audit fee payable should be brought as an

outstanding liability if the work of audit commenced before the closing of the books.

• In case the books have been closed and the auditor starts his work after that date , the audit fee debited to the next year during which the auditor checks the accounts.

• In any case, the auditor should be careful to note that the revenue account has not been debited with double the amount.

Unearned Income

• Certain income may be received during the year under audit though they might not have been earned during that period. They will be earned only in the following year.

• Such incomes ,which belong to the period subsequent to the date of the Balance Sheet ,should not be credited to the Profit and Loss Account as income but should be shown as liabilities in the Balance Sheet.

Contingent Liabilities See that the necessary provision has been made for contingent

liabilities . Divide the contingent liabilities into two main groups as follows :

• (i) The liabilities in respect of which a provision has been made in the Balance Sheet . These are shown under the heading “Current Liabilities and Provisions”.

• (ii) The liabilities in respect of which no provision has been made in the Balance Sheet. These are shown by way of footnote in the Balance Sheet.

Contingent Assets

• Contingent assets are normally not shown in the Balance Sheet either as a footnote or in any other manner. A footnote in respect of contingent liabilities helps the reader of the Balance Sheet to find out the burden on the company’s finance.