CHAPTER 7

VouCHING

of VouchingVouching and Routine Checking The

of VouchingmportanceAccountingAdvantages
aming-0bjectives
and disadvantages-Tutorial
e he-Types of VouchersMechanised
Vouc

Assignments

WHAT IS VOUCHING
evidence to ascertain the authenticityof
concerned with examining documentary
Vouching is the auditor of an evidence
In other words, it is an inspection by
entries in books
of accounts. auditor to judge
is a technique used by an
transaction made in the books. Vouching
SuIDDOrting the books of accounts.
entries appearing in the
the truth of entries must be supported by a
are made in the
boks of account. All such
Accounting entries entry unless he is having
a

accountant is not supposed to make any accounting

document. An not available or such
evidence to support. If a proper
documentary evidence is
documentary reason to doubt about
entries made, auditor has every
accounting
evidence is not fully supporting of accounts, goods or cash. Every
transaction must be
fraud or manipulation
the existence of error,
voucher.
supported by a and authority of
in which an auditor verifies authenticity
Thus, vouching is technique
a
that accounts
and on basis of which submits report, indicating
a
transactions recorded in the books
errors or fraud and complete.
are correct, free from Without
on the efficiency
with which vouching has been used.
Success of an audit depends evidence but
Vouching is not only examining the documentary
VOuching auditing is incomplete. of fraud.
sometimes auditor has to go behind
recorded evidence to eliminate any possibility
items appearing in the books of original
entry'.
Vouching means testing the truth of J.R. Batliboi

with documentary evidence in support

is act of comparing entries in the books of accounts
Vouching an -Dicksee
thereof.
books, including in
substantiation of entries in the
of the evidence offered in
,"VOuching is the examination have been omitted from the books".
examination the proof, so far as possible, that no entries
o -Taylor and Perry
but includes the
does mean merely the inspection
of receipts with the cash book,
oUching not evidence of
with documentary and other
exam
on of receipts with the transactions of a business, together and
ud are in order, have
been properly authorised
Vidity to satisfy the auditor that such transactions -De Paula
Aro
are
correctly recorded in the booksS.
of the vouchers or documentary
thought that vouching consists of the mere examination of
an ten comprises such an examination
evidence
W I n the book entries. however, is quite wrong for vouching
This,
 7.2
voUCHING VOUCHING 7.3
as aud
audit will on the
an depend with which
of
tne ledger entries will satisfy the auditor, not onily efficiency
has been success
vouching has been
The
thatthe entry is supported by doCumentary evidencebut he applied
properly auditing.
made upon the books of accounts. work is done
The
assessment ot accounting
of by the auditor on basis of
-Joseph Lancasta
process
is a the course
o
of vouching.
v
It may be referred as to
very essence ng
of auditing. Vouching in
transactions for the period are fairly, truly and sincerely reflected in the books. From thevario
device used to prove that a ndings be noted that
that various frauds can be detected only if
is
t should
definitions, it can be summed up that vouching is checking the accuracy of entries made in finan vouching is conducted in an
telligent and seard
manner. Whenever an auditor doubts a fraud, he should also
DoOkS With the help of available documentary evidences. It is to be seen that no transaction hao Some verify the
been evidence.
e . Sometimes fictitious bills of expenses and
purchases may be
source o mada be
omitted and all the transactions have recorded these bils may
properly Payments
made against misappropriated. This type of fraud can be
The auditor should obtain sufficient appropriate audit evidence through the pertormance of complia intelligent vouching.
procured.
conclusion therelrom on which to bae
ana suostantive procedures to enable him to draw reasonable detected by the hackbone of auditing. If vouching is done intelligently and faithfully, it will be a
opinion on financial information
base his the
Ihe whole process of auditing, infact, consists of mainly two functions which are baso.
of Profit and Loss account and Balance Sheet.
helpin establi

sed
youchinging reliability
evidence. Firstly collection of evidence by observation, inquiries, inspection, confirmation No doubt, vouching
Ouching is the significant part of auditing, but in all the cases it is not necessary to
of relevance, adequacy and etc. ch every
action in all the cases. In big organisation with effective and sound system of
transactioon

Secondly, sych evidence to be evaluated from view point validity.

ditor may apply test checks and scientifically selecting number of ransactions,
internal contr

transactions in-depth and if it reveals compliance of internal control system, on this

OBJECTIVE OF VOUCHING vouch
these
and
aboutthe remaining transactions. Vouching ofselected transactions is not
The main objectives are as follows: form his opinion
basis m a y ca se:
ases:
1. All the transaction which are connected with the business have been recorded in the hos the following
oooks desirable
in
control system isweak and inadequate as per the
of accounts properly When
internal assessmentby auditor.
2. To verify that all transactions recorded in the books of accounts are supportedhu (a) not
division of duties is adequate as in case of small organisations.
by a ) Where
documentary evidence. under audit are of specialized nature and number of transactions
where transactions
3. The vouchers which support the entries are legaly valid from the view point that thev: (c) checks will be failure like in case of heavy purchases, capital
are therein are limited where test
dated. expenditure etc.
authentic, addressed to the business and properly
4. To verify that no fraud or error has been committed while recorcing the transactions in
ROUTINE CHECKING
books of accounts. vouCHING AND
5. The vouchers have been processed carefully through various stages of internal chee of each, carry forward, posting to ledger,
Routine checking is simple checking involving checking
and transfer of balance to trial balance. Different types of tick marks are used
system. halancing of accounts
6. Every transaction recorded has been adequately authenticated by a responsible person. Vouching is a broader term and it includes routine checking. Both have
for routine checking.
Koutine checking is a mechanical device whereas in vouching an
7. While recording the transaction whether distinction has been made between capital and important place in auditing. transactions is made with the
of various help of documentary evidence.
revenue items. intelligent checking
S. Whether accuracy has been observed while totalling, carrying forward and recording an
amount in the account.
THE VOUCHER
a evidence is available to support
A transaction is recorded in the books only when documentary
It be in a meeting, cash
IMPORTANCE OF VoUCHING the transaction. may a receipt, counterfoil of a receipt, resolution passed
minutes of a meeting. Al such documentary
is or memo, pay-in-slip, purchase invoices, sales invoices,
Vouching is an important part of auditor's duty. Whether internal control system adequate evidence are known as vouchers.
not, business is small or large, the auditor cannot escape from his duty of reasonable care in regard to
vouching of various records and transactions. He may be held negligent if he had been vouching Eric L. Kohler defines a voucher :
carelessly. A document which serves as an
evidence of the disbursement of cash. For example,a
a
As in Armitage V. Brewer and Knott (1932), the fraud committed by client's clerk were undetected, receipted bill, a cancelled cheque, petty cash receipt, the carbon copy ot cheque.
the auditors were held guilty for being careless in vouching. It was the opinion, that auditors have to disburse cash. For example, an
()A document serving an evidence of the authority
not made a reasonable extent of enquiry and that the excuse "This or that was a small matter" was not
a pay roll.
accepted and the client was granted damages.
approved invoice from a supplier,
other evidences of
(11) (used with a
voucher system) to which bill, receipt and
A form for the payment, the particulars of
As in accounting, passing an original entry is very important, if this is done in a wrong
way, any indebtedness are often attached. Showing the authority
further work done will also be wrong or defective. Similarly in the
process of auditing, vouching voucher.
o
settlement, and other relevant details, a disbursement a
sometimes contained in
transaction
the same role, it is the essence of auditing. It acts as a foundation, on which the whole
plays evidence of a business or accounting
auditing structure is built up. ne Written
Single document without attachments. For example, a journal voucher.
 7.4
voUGHING
AMhile vouching, the auditor should not take any help from client's staf. 7.5
Types of Vouchers oUCHING iditor shoul examine that all expenses pertain to the business.
Vouchers can be classified into two
1.
types: ained from a party should bear the revenue
Primary vouchers, and pt stamp as per rules.
12.
A rece hould see
2. Collateral vouchers. should see that proper account is debited or
The auditor been done. credited and
13. has proper classification
accounts
1. of
Primary vouchers. When a writen evidence is available in original, it is known trans
as prin vouching transaction auditor should keep
While
in mind that
vouchers. For example, cash memo, purchase invoice. revenue items. distinction is made between
rimary 14. and
Collateral vouchers. In certain cases, evidence in original are not available. capital
certain
Copies ofof auditor may rerer the
transactions,
15. Forreholders or directors.
resolutions passed at the
evidences are made available for the purpose of audit. Aim is to satisfy the Such meeting of
a
directors. Sometimes the agreement made with
regarding the correctness of transaction recorded. For example : carbon
xamples
copies
of vouchers
f audit documentary evidence for the transactions arising out of this agreement.party may serve as
of resolution at a are the
invoices, copy passed meeting. Following examples of voua aces
When purchases are made on cash basis, auditor should see that such
for various transactions: 16. d twice, once in the cash book and then in the purchase book. transactions are not

Nature of Transaction Vouchers Available holl not resort to test a

checking unless satisfactory internal control system exists
17. a
1. For Cash Payments Cash memos, pay sheet, receipt received, pay sheets agreemo Audianisation. If the auditor has slight doubt, checking must be full.
in
demand notes. ments, As far as possible vouching of a book of accounts of a particular period must be completed
As
Carbon copies of receipt, counterfoils of receipts issued, cont 18. continuous
sitting.
2. For Cash one
Received in
correspondence.
contracts, terations in the vouchers nmust be supported by the concerned officer's initials.
Altera
19
3. For Purchases Invoices, copies of orders and correspondence, goods inward register 20.
4tor should use specific ticks for vouching cash payments, receipts, purchases, sales etc.
Auditorsi

etc.
Goods outward register, order, copies of invoices, cash memos etc.
4ForSales MECHANISED ACCOUNTING
5. Opening Journal entries, last year's balance sheet entries, bills payable, bill receivable etc.
various machines are used to facilitate and
In
t h e s e days recording presenting accounting
Points to be noted while Vouching o n s . These machines are also used to apply controls and checks. The auditor must be
Let us discuss the main points which must be taken care of while vouching the transactions: transd hefore introducing such machines, it will help to attain maximum benefit of such machine
1. While vouching a transaction, auditor must verify the authenticity of transaction, accurac raditional system of accounting, manual operations are used for maintenance of accounts,
iracy ofsteps are needed to record the transactions. This involved lot of expenditure and wastage
number
of amount recorded and proper classification of account.
2. Auditor should see that all the vouchers are numbered serially and dated. If these are not o f time.

Dav-by-day the demand from accounting system has increased. The accounting information is
arranged seriallyfirst of all they should be serialy arranged, otherwise auditor will be
within
short time. All such a be mechanised can met
voucher. needed
for various purposes requirements by
wasting time in locating a
3. The voucher, which has been checked by the auditor, should be stamped or tick marked system of accounting.

for a fictitious transaction. Mechanised Accounting System

with a special sign, so that it may not be used again Advantages of
4. The amount in the receipt must be shown in words and figures. If the two differ, then it are reduced to minimum as the machines can do the work efficiently.
1. The chances of errors
should be investigated. 2. It helps to reduce time and
cost of performing the task.

5. for which the payment has been made. It will show enhances the speed of work.
The receipt should indicate the period 3. The use of machines to record accounting information
the payments made in advance. than the work done by hand.
4. The work done by machines is more neat and legible
6. If the voucher is in the personal name of the manager, director or any other
partners, and in the desired form. It helps management
5. The past records can be reproduced quickly
seen
transaction has been provided in
person, it should be that proper treatment for such to analyse data and take decision quickly.
the books. can be minimised.
6. The expenditure on internal audit and internal check
and use special ticks for
7. If any voucher is doubtful, the auditor should proceed cautiously 7. The final statements can be prepared at any time with least possible delay.
such vouchers. because accounts can be finalised at any
8. The need for overtime payments is minimised
8. It should be seen that every voucher is certified by a responsible officer of the business. time.
9. For the concerned official. If no a nominal cost.
missing vouchers, auditor should ask for explanation from record can be made available with
9. Any number of copies required of a
satisfactory reply is received, then it should be further investigated.
 7.6 vOUGHING
Short
A n s w e rd u e s t i o n s 1:1
Disadvantages of Mechanised Accounting source and rectification
vOUCHI of vouchers which are available1for:
to locate its tion. atlon the types
becomes difficult 1. Mention

1. Once an errorcreeps in, it () Cash Payments

evidence the loose

cards and sheets maintained u h d
(i) Cash Received
2The courts do not acceptas
under it.
wrong data fed will Dr.
the data is very risky, resent Ci) Purchases
3. The initial stages of recording
results.
(iv) Sales.
understandable to outsiders.
accounts are not with e x a m p l e s
.Usually such narration. in b r i e f
are not supported by Explain
Primary Vouchers
5. Another limitation that entries 2

(i) Collateral Vouchers.

Mechanised Accounting and Auditor He must of vouching ?

veri. the objectives
under mechanised accounting.
same y the in
The procedure of audit remains aWhatare and vouching.
the actual and authorised transactions shall ho. routine
checking
transactions, only
stages of recording to the audit work. 4.
Explain of vouching ?
importance
thorough scrutiny of internal
control system will be a great help corded. What is
some responsible
officer of the
organisation #hat 5.
He shall demand a certificate from
common mistake is that of miscoding, he shall take appronachie
used were in order. One of the obtain it as entries are withoudte se
is needed, he must
towards it. Wherever any explanation
without narration
a mechanised system.
Questions
various points that should be taken into
1. of auditing". Explain
Vouching is backbone consideratio
while adopting technique of vouching.

2. Define Vouching' and explain its objectives.

auditor should take while examining a vo
3. What is "Vouching ?" Explain precautions that the voucher ?
4. Voucher is the essence of audit". Discuss.
voucher?
5. What consideration shall be given by auditor for a missing
6. What is the position of auditor in relation to mechanised accounting?
mechanised accounting.
7. Explain advantages and limitations of

Objective Type Questions

1. Tick () the right statements
verifies authenticity and authority of transactions,
() Vouching is a technique in which an auditor
books of accounts with documentary evidence h
(i) Vouching is an act of comparing entries in the
support thereof.
consists of examination of the vouchers or documentary evidence with the bo
(ii) Vouching
entries
The success of audit will depend on efficiency with which vouching has been applied during the
(iv)
process of auditing
()Intemal control is necessary for vouching.
2. Fill in the blanks:
() Routine checking is.. device wherein vouching an.. checking of various transaciwn
is made.
(i) A document which serves as an evidence of disbursement cash is known a s .
(ii) For Cash Payments.. . and....are used.
(iv) For Credit Purchases.. and..
(v) When a written evidence is available in original it is known *********
as..
(vi) When original vouchers are not available, the copies of such evidence are known
as.
 CHAPITER 8
VouCHING OF
TRADING TRANSACTIONS

Book tors Ducs w f Pirefias

vouching Credlt Purchese-VoucMogRenn
reeeived on Sale or Sesis a
Corel of Purchase Retn-Aaters dutGoods Sales-
Forwar rc.se uc. Credit Sales-Internal Control of Credie sent i
les BetnGoois s a sale or Retun Basis-Client as Consigne-Goods
c i e s e Seles-Sale of By-products-Sales d Serop-
d pockages ward
f iourelpropeonorlC erboS W vOchingtradingtransactons

and sale of goods on

covers vouching of trading transactions concerning purchase
ThIs hater vouching trading
considerations while
transactions. All such
wdtt a well as general
certain
return book and sales return
recorded in purchases book, sales book, purchases
trartsactions are and credit sales are recorded in purchases
book and sales
know only creait purchases
As we
if
transactions is to detect misappropriation of goods, any
hooh

ha The main ain of vouching trading

of

PURCHASES BOOK
1. VOUCHING OF book is to see that all purchase invoices are entered in
aim of vouching of purchases
The main

book and the goods entered in the purchases

book are actually received by the business
purchases
nd the client pavs for only those goods which are delivered by the supplier.

Internal Control for Purchases

the auditor in
The internal control of credit purchases in the organisation will help
adequacy of
book should be conducted. Each organization
ürtefmurung the extent to which vouching of purchases
to its needs. Normally it will depend on the
derv ciops internal contro! for purchases according staff
euency ot purchases, size of organisation and the employed. If the internal control system for
chasess inadequate, the auditor has to exercise à greater care in vouching the purchase

ansactions
Dorganisations, the Store-keeper or other departments
send a purchase requisition to
e department whenever certain goods are required by
them. The purchàse requisition must
O n e d by the Head of the department. The purchase requisition provides an authority to the
Purchase department cannot
department for making the purchase ofsanctioned goods. The
intormation regarding the goods to
Ods by its own. The purchase requisition will contain
Purchased, their quality, quantity and other specifications. After receiving the purchase requisition
of supply by inviting quotations. The
SunnisSE department will locate the various sources and conditions will be selected. A
Purcha feady to supply goods on most favourable terms
s

wll be sent to the selected supplier and a copy of this order will
also be sent to stores
depart
accounts department and Goods receiving department. On receiving the goods, good
leci
department will verify the goods with the purchase orders and after being satistied with
 OF TRADINGTRANSACTIONS
vouCHING OF TRADING TRANsA voUCHINGOFTRA

8.3
8.2
The goods will be TIONS stock records and challan from the
will be prepared. inward regist debited in the
supplier should be verified. The
the goods received note received sent ched note will be should be purchases account only if the
uality and quantity, A to Accouns es are received.
note.
Store-keeper alongwith goods
received copy of goods
espatched t Sometimes the purchases
purchases are inflated to reduce tax on the profit orgoods the goods may be
nSumed but the entry in the
department and P'urchase department. will verily the amount purchases account is omitted to reduce the
Accounts department fr purc
hased a the profits. A special attention must be given to locate such
On receiving the bill from supplier, ot passed for payment th loss r irregularities.
note. the bill supplier is pr
Finally m ade n o t for
not for the purpose of business of the
l'urchase order and Goods reeived is credited. When the suDnli bi purchase,
made client, must not be debited to the
acount of supplier
Purchases book and the purchases account.
Any
first entered in and supplier
account. It is seen thatS Pai 12.
will be made in cash book s licate invoices must not be entered in the purchases book if original invoices have
through a cheque, entries effective and adequate internal control svste m er
already been recorded.
persons are engaged
in purchase of goods. An
o r frauds but it cannot gurantee apa maya
errors
as a safeguard against manipulations, certain cases, statement from the suppliers may be obtained to verify his purchases
of goods may result in. T
frauds and misappropriations
manipulations through which for fraudulent invoicoe Perso n
commit fraud e.g. making payments 14.
incharge of purchase may recoras
tavoured supplier to quote lowest price in raou should be more careful while vouching the purchases made in the first month
tor should
or services or allowing
of auditor
delivery goods order to a particular supplier 0f The
kickback or receiting gifts etc. in return
of awarding purchase 15. 1ast month of the accounting period, because sometimes the purchases of the last
interest. The auditor should 80od and the
the
which they have L included in purchases of first month of the current year or
o r tavouring a particular supplier firm in ould design an purchases of the
n t h of the current year may be recorded in the next. In these cases the profit and loss
appropriate vouching procedure after:
in operation. last of the current year will not present true and fair position of operating results.
(a) studying the internal control system accouni

(6) persons involved in purchases,

their authority and responsibility.
voUCHING
OF PURCHASE RETURNS
(c)procedures relating to receipt of goods. 2. to the for the various reasons. The
mes the
purchased goods are returned back supplier
Auditor's Duties while Vouching Credit Purchases Sometod mav not correspond to the quality or the specifications ordered. The auditor should
see that followines a goodspurc to
1. The auditor should examine the internal
check system in force and exists a
record such returns. In such cases, the purchaser sends back
proper system
re
see that there a It
observed: alternatively
credit note may should be seen that
be obtained from the supplier.
(i) There should be proper record for all the purchase orders. A duplicate copy of the the invoe includes the amount which was originally included in the invoice. A separate returns
to record the returns.
order is kept in the office for record. maintained
book is
(i) A copy of purchase order shall be sent to Accounts department. of Purchase Returns
(ii) All goods received should be recorded on goods received note; a copy of it should be
Internal Control
In big organisations, receiving
the goods will verify the goods received from
department
sent to Acounts departnent. received do not correspond to the quality or quantity ordered, the goods may
SuDplier. If the goods
(iv) Payment to supplier is made only after verification of receipt of goods and the prie A the goods rejected should be
immediately sent to the Purchase
be rejected. rejectiorn report of If the
quoted in purchase order. department and the Accounts department. the goods
supplier replaces the
returned again
2. The auditor should see that only credit purchases of goods are recorded in purchases book. information must be sent to the Purchase department and Accounts department. If the supplier does
3. The purchases book can be verified from purchase invoices, copies of orders placed, goods not replace the goods, the invoice sent by the supplier should be cancelled. If only a part of the goods
received note, goods inward book, copies of challans from supplier. is rejected and returned, then only the value of goods returned should be deducted from the invoice.
4. The quantity mentioned in the invoice must be the same as is shown in the Purchase order.
The purchaser may obtain a Credit Note from supplier or send a debit note to supplier for the goods
returned.
5. The the supplier must be as
price charged by per quotation/price list of supplier.
6. The purchase of goods is sanctioned by a responsible officer and only those goods are Auditor's Duty
purchased in which the organisation deals with. 1. He should see that a Debit note has been sent to the supplier or Credit note has been
7. The received from the
.
supplier bill must be in the name of the business and for the period under audit. supplier.
The goods
purchased must not be for the personal use of directors or officers. 4 h e quantity returned as per the return note must corfespond with store- keeper's record,
9. While vouching the
purchase vouchers, each voucher should be stamped or initiated arter Feturn outward register and gatekeeper's outward register.
examination, so that it could not be produced 3. The amount
again. shown in Credit note should be verified.
10. The totalling and
all taxes, octroi and
casting of purchases book should be verified. It should also be e should be careful about the recording of purchases return in the current year.
seen ae
deducted.
freight are added to the purchases and trade discounts allowed ometimes the profits of current year may be manipulated by recording current years
11. The Purchases returns in the subsequent
year
goods purchased should be ods
actually received by the client. For this
purpose the go 5 returns of the first month and last month of the accounting year should be
purchases
vouched carefully, to detect any manipulation of amounts.
 TRADING
TRA
RANSACTIONS
8.4 OF
voUCHING
vouCHING OF TRADING TRANSAr 8.5
commission and exe
sales
ACTION kecution of sales order. Sometimes
of necessa
agents collect the
3. GOODS RECEIVED ON SALE OR RETURN BASIS OR CONSIGNMEN l a tion then it will provide payment
a T customers,
information for collection from e customer.
amount of Sales invoices either sales
BASIS from For collection
tion of department or Accounts
on sale or return
basis; Such onaj above
above amount after expiry of credit department may
m a k ec a u t i o u s
Sometimes the goods are received from the supplier efforts to collect period. An up-to-date record shall
such
departmer
tments.
decides to purchase such goods. Similarly, go0dsshal by
maintained
be treated as purchase unless receiver
and no part of such goods all be as treated ceived be
Auditor'sDuties
consiment basis belong to the consior
such goods should be made in the books unless spse. purchase
entry in the books of account for examine the internal control in torce. He can
assess the
treated receiver. Such goods accepted as purchases sho
till s 1. He should
system efficiency of the
agreed to be as purchase by the
checking.
include them.
If he is not satisfied with the system, then
stock shall not Record of such goode Oe k vstem by test thorough vouching of
separate in the stores and the closing t r a n s a c t i o n s Will
be necessary.
maintained in memoranda b0ok.
shouid various
separate
he Sales
register should be examined with copies of sales invoices. The sale of capital items
4 . FORWARD PURCHASES allnot be recorded in the sales book, otherwise the profits will be inflated.
on the calculations made in sales invoices.
ar
are made for future purchases
of raw materials at should be applied
In certain business forward contracts aTest checks
A for any loss expected is to be made ife and castings book should be verified.
T h e totallings of sales
are chances of losses
price, it is known as forward purchases.thereprovision from such transaction A eales tax, duties collected through sales invoices must be recorded under separate
anmounts and
agreement involves huge not done auditor's report should ma 5. The
balance sheet, if it is nention accountsS.
this regard shall be given alongwith in
this regard. that all sales nvoices are prepared on the basis of challans and then
Tt should be verified
are entered n sales book and from there, posted to the respective accounts.
cales invoices
5 . VOUCHING OF CREDIT SALES invoice should be left unrecorded in the Sales book, otherwise it will amount to
No sales
made on credit basis. The client himself prepares and thus decreased profit.
Usuallythe sales in big organisations are the understatement of sales
sales in the sales book. All auditor can do is to depend on sa
sales invoices and records credit in the current year must be recorded under that year only and shall not be
7. Sales made
credit sales in operation. sales of the preceding year or subsequent
invoices, and internal control system for treated as the sales of subsequent year. Similarly
not be recorded as sales of current year.
Internal Control of Credit Sales year shall
full details of t cancelled sales invoices must be kept together for verification by auditor, who
be recorded in a separate register, giving 8. All the
Any order received or booked should ordered should be available: invoices are properly treated in the books.
should see that cancelled
goods ordered. The following details regarding goods the customers should be checked. No separate entry for
9. Trade discounts allowed to
) Name of the customer discount should be passed
in the books. If a trade discount allowed is exceptionally high,
(i) Quantity ordered located.
the possible reasons should be
(ii) Selling price 10. The statement of accounts should
be verified by getting confirmation from the customers.
(iv) Reference number
(v) Date of delivery 6 . SALES RETURNS
(vi) Mode of delivery The Sales returns are the returns made by
the customers. On the return of goods by the customer,
Particulars sales tax, excise duty and insurance. customer. The Credit note should be issued only after obtaining sanction
(vii) regarding a Credit note is issued to the records
clerk wil a Credit note is issued, return inward register and stores
After the order, a
copPy of the same is
sent to despatch section. The despatch from the responsible officer. Before
receiving and
clerk will prepare the list of goods should be verified.
keep the goods separate for the purpose of despatch. Another
return book in which all
verify the
goods despatched with the customer's order. f the sales returns occurit is preferable to use separate sales
frequently, inwards register and
Credit notes of sales return will be recorded. The
auditor should verify the goods
Three copies of the challan should be prepared giving the full details of goods despatched. O the has
issued to the party only if party returned the goods.

copy wil be kept by the despatch department

and other two copies will be sent along with the goou stores records. The credit note should be of the Somehmes
One copy will be received back duly receipted. The receipts would serve as the proof of despatdnu the beginning year. tne
should be careful about the sales return in the current
he auditor cancelled in year Dy
of the last year and which are be analysed. The
goods. Cuous sales are shown in the end reasons for the return of goods should
The rerurn
On the basis of challan and customer's order, sales invoices are prepared by tne eorng these sales as sales return. verified by the person preparing note
department, which are verified by a senior officer. The original copy of invoice is sent to thecue y and quantity of goods returned must be
it should the as externd
note on returning the goods; taken
n e s s the customer sends a Debit basis of Credit note
and another copy to Accounts department. The details regarding execution of order will be e l
challan for verification and duplication in recording
of sales returns on the whiue
order register, which will provide information regarding orders still pending. On the basis c n attention to the following
be avoided. The auditor should pay special
note should
entries will be made in stock register and goods outward register. Vo
nt Vouching the Sales returns:
If the orders are received
through agent, a copy of sales invoice will be sent to the a3
 TRANSACTIONS
8.6
voUCHING OF TRADING TRANSA CHING OF TRADING
VOUCH
8.7
are retained or
containers
are
returned. Separate account for containers
1. Date on which the goods actually returned. ACTION whether the stock will show the
tock with customers and in the stores. These balances can be
2. Credit note or Debit note of sales returns. ala ne
compared
baland
We of sto nd the bbalance with physical
stores
in customers' accounts. The auditor
in
should obtain the statement of
3. book. balance
Gate-keeper's receipt f r o m the
from
th c u s t o m e r s . The vouching of container can be made from
containers
iners
sales invoices, gate
4. Return inward register. correspondence with customers, Credit note issued to customers.
p a s s e sr e c o r d s ,

5. Stores records. 1 1 . FORWARD SALES

customer's account.
6. the return of goods in
Corresponding entry for stock at cost f such Sales, it is agreed to seu a quanity of 8oods at a specified price on a future date.
the of closing price or mar
7. Goods returned should form part narket In case of
prite auditor
l d verify that no profit from such sales is taken into account before date
of
whichever is less. ery of goods. It
of goods. It may involve huge amounts. If goods are delivered partially, the
and delivery
Settlement be taken into account.
ortionate
profit may
7 . GOODS SOLD ONSALE OR RETURN BASIS
maintained for goods sold on approval basis. It shoule PURCHASE SALES
A separate record should be
customer has sent his approval
or after the expiry of time limis o 12. HIRE
treated as sales unless the is ownership of the goods is transferred
customer or expiry of
ime limit, sales invoice will be prepared. a sale5, hire purchase price
of last
payable in instalments,
methods are
receipt of approval from If within stipulated time the customer informs about the ra In shaser on the payment instalment. Various followed for recording such
which will be sent to the customer. to the p The main feature is that amount of profit is taken into accounts only when the amount
should be made to get back the goods. that on hire transactions is
goods, necessary arrangement raalments is realised. The auditor should vernty profit purchase
basis should be taken in the closing stock as stock with cue of insta hooks on the amount actually realised. The amount of profit on instalments which are
brought into book
The goods sent on sale or return custome
from the customer or still the time limit has not expired alised, provision:shall be created for such profit and in the Balance Sheet it shall be
if no intimation has been received due or a
customer that goods are lying with him on approval basjs not yet debtors.
auditor should get a statement from from the
deducted
CONSIGNMENT BASIS
8 . GOODS SENT ON 13. SALE OFBY-PRODUCTS
be considered as sal. as sales if the amount is siificant, it may also be reduced
basis by the principal to his agent should not is treated separately
The goods sent on consiment in Cale of by-products
be made the books. The gonde main as an alternative treatment. The auditor may follow some
entry for sale should of product
Only when such goods are sold by the consiee, stock. from cost of production
consiee should be taken into closing A separate boo as in case of main products. The auditor should, with the help
of
sent on consiment still lying with the ocedure for by-products
sent on consiment basis. At the end of the year, a ascertain for of by-products,
should be maintained to show the record of goods with official of production department, procedure recording
sold him and balance of closing sto discussion
account sale is received from consiee, indicating
the goods by agairnst misappropriations.
the sent on consiment basis from their stocks and safeguard
should verify goods
of goods sent on consiment basis. The auditor
and account sales.
proforma invoices, goods outward register, correspondence with consiee 1 4 . SALE OF SCRAP
is produced. The auditor should enquire into procedure
In the process of manufacturing, scrap shall
9. CONsIGNEE and
CLIENT AS followed for it segregation, storing safety. The standard procedure for its sale and storing
therefore
the deviation
When the client receives
goods as consiee the auditor should verify following points discussion with the officials of production department. Any
be determined by of
stock. be recorded separately or deducted from cost of production
(a) Unsold goods of the consior are not mixed up with closing must be verified. Sale of scrap may made
sold and receipts issued for payment
in his account. main product, vouching of quotations received, quantities
(b) Sales made on the behalf of consior are credited
consior are debited in his account. by the purchasers.
(c)Any expenses incurred on the behalf of
consior are not mixed up with the normal sales.
(d) Sales made on the behalf of 15. VOUCHING OF THE JOURNAL PROPER
(e) Commission earned from consior is properly recorded. are not covered by cash book, salesbook, purchase book, sales
All those transactions which entries are
return book or return book, are recorded in Journal Proper. The following
10. GOODs SENT IN CONTAINERS AND PACKAGES purchases
recorded in the Journal Proper:
Sometimes the goods are sent to customers in returnable containers. If the customers Tet
containers after the stipulated time or inform the seller about retaining the 1. Adjustment entries.
containers, a separate sl
invoice will be prepared for the sale of containers. Sometimes the sale of price goods includes the c 2. Transfer entries.
of containers also. When the customer returns the container, a credit note in favour of customet 3. Purchase and sale of assets.
prepared and the sales are reduced.
4. Allotment of shares.
The suppliers maintairn separate account for containers to indicate profit or loss made forfeited shares.
5. Share calls and forfeitures and reissue of
containers, purchases, sales and stock of containers and amount received and due from customers
account of containers. The 6. Consiment and joint venture transactions.
separate charges for sent on containers is made from all the cuso
 VoUCHING OF TRADING TRA
8.8 doubtful debts etc.
taxation,

for various provisions

for
TRANSACTION CHING OF TRADING TRANSACTIONS
.Providing Goods purchased butbill not delivered by the supplier.
interest etc.
depreciation, d)
8. Providing for bills. Goods sold proceeds of which have been misappropriated.
renewals of
Dishonour of bills
and the
9.
entries. Sen:e f Failure to adjust goods distributed as the samples or goods lost by fire.
closing entries. the above The nior
10. Opening and vouching intoeCutiv
should be
careful while a m o u n t s with the
Failure to adjust goods sent or received on approval basis or on consiment basis.
The auditor entries by manipuladng tne
from varione a ention n) Goods included in stock which should have been returned to suppliers.
the above the
commit fraud through the validity entries of salaS Source
should verify Non-inclusion of goods in stock which have been returned by the customer.
The auditor purchase
rchase invoices and sale invoices oc
or decrease profits. minute book, Because closing stock
resolutions, a1se closing
board's
stock of a year becomes opening stock of the next year, due to this fact stock must
accountinE practices, VOUCHING TRADING TRANG
assets, d from year to year, otherwise profits of one period will be shifted to the next.
beconsistentlyy valued.
cONSIDERATIONS
WHILE the corresponding entries in the stock account should be
GENERAL should verify
fy that.
ANSACTIO While verifying purchases and sales,
auditor that the (vi) difficult task where volume
understatement of profit:1he verified.
be a of sales and purchases is in large quantities. In such
Overstatement or be done by: amount Itwill
(i) understated). Itmay
when sound and effective system of internal control exists.
been overstated (or v a1uditor may apply test checks
profits has not
overvaluation of closing stock Questions
(a)
returns?
the sales amount duties of an auditor in connection with sales and sales
b) inflating 1. What are the
sales returns discover fictitious sales in the course of an audit?
c) omission of 2. How would you
returns ?
of auditor proceed to vouch credit purchase and purchase
(d) understatement purchases 3. How would an
submitted for audit by
frauds that be perpetuated in the following records
may
understatement of expenses the various
(e) for doubtful debts or 4. Describe
or inadequate proviSion the client's staff:
count or
(undercharging of depriciation (a) Sales Book
debtors. (b) Purchase Book
debt recovered. Sales Return Book
g)omission of bad of the business. Similad.. (c)
statements will not
show true and tair position Purchase Return Book.
In all such cases final 1956 (Schedule VI. Pa (d)
are not
understated. Companies Act, auditor in connection with audit of the following?
that the are the duties of an
auditor should verify profits reserve. Likewise excess provisian 5. What
must be treated as on approval basis.
excess provisiorn
clearly restrains that any to reserves. (a) Goo s purchased
or liabilities must
be transferred sale-or-retum basis.
depreciation, bad debts distinction is not properly mad
(b) Goods sold on
(c) Returnable containers.
and revenue items: If such
(ii) Distinction between capital and the balance sheet will nt (d) Consiment sales.
will be over or understated
while recording the transactions, profit of large in a organisation.
an internal control
system regarding the purchase goods recorded in
show true and fair position. 6. Suggest are
books. State what transactions
If these are overstated than their realisable value, current years 7. A company maintains
all the necessary subsidiary Journal Proper ?
(iii) Valuation of current assets: will proceed to audit the
and as an auditor how you
Journal Proper
which are not realisable, such is a loss and
will be inflated like debtor include certain amounts of:
profit 8. Explain procedure relating to vouching
must be provided for whenever it comes to light
be writen Goods sent on consiment
worthless patents or trade marks should (a)
(io) Fictitious assets: Development expenses, Goods sent on sale or return basis
be real. (b)
off at the earliest so that net assets value of business calculated shall Hire Purchases Sales
for stock. The o (c)
(o) Stock-in-trade : In financial records no running account is maintained value (d) Sale of scrap
The
closing stock is determined by physical quantities being counted and values are applied. closmg (e) Sale of by-products
of for which is available n
stock corsIsts purchases during the year or in the earlier years information Objective Type Questions
the stock records. For determining the true and fair profits, closing stock must be recordea
books by debiting closing stock account and
crediting trading account. The method of valuato 1. Tick() the right statements misappropriation of goods.
and transaction is to detect
stock, its correctness and verification is of great importance. The quantities of opening stock of trading invoices are properly
() The main aim of vouching to see that all purchase
should of Purchases Book is
be equal to quantities sold and in stock. The Themain aim of vouching
produeion or purchases must closing must i auditor () Book.
veriy dlosing stock for there entered in Purchases Transactions.
vouching of Trading
is no misappropriation, theft, loss or
causes of any leakage of goods. I of Internal Control System for recorded in purchase
discrepancy which may be due to: need of goods are
(n) There is no cash and credit purchase
that both
(a) Loss of goods should e n s u r e
(IV) Auditor Book.
in Purchase
during processing, loading and unloading.
(b) Goods purchased but in transit. book. business must
not be recorded
purpose of
made not forthe
A n y purchase
(c) Goods sold but not
delivered.
8.10
vouCHING OF TRADING TRANSAC
2. Fill in the blanks:
purchaser sends back the goods.
obtained from.
(i) Credit note is CHAPTER
. i s written on the basis
of debit note
( the basis
(im) iS written on of credit note.
.
recorded i n . . . .
(iv) All orders received are it
on the basis of. and..
(v) Sales invoice is prepared
true or false. VouCHING OF
3. State whether following statements are
(a) Sale of scrap is recorded as normal sales. CASH TRANSACTIONS
or retum must be recorded as nomal sales.
(b) Sale
on future purchases.
(c) There is need to make provision of expected loss
several instances of fraud.
(d) Joumal Proper may conceal
from cost of production of primary product. Vouching of cash.receipts-How1 vouch Cash Receipt-Opening balance Cash sales
(e) Sale of by-product may be deducted
4. Wnte a note on vouching of : Tntroduced
Casht
from debtors-Loans Return of loansby others Bills receivableRent receivable-Sale of
ncome from interests and dividendsReceipts from Hire-Purchase -Commission received
(a) Stock in Trade invest om Sale of Fixed Assetsnsurance Claims=Royalty received Subscription-Sale of Junk
(b) Under-or over-statement of profits. ProceouChing of Cash PaymentsOpening balance-Cash Purchases Payment to Creditors-Bills
i l l s receivable discounted hut dishonouredWages-salaries-Loans-Returm of loan taken
Purchase
of vestmentsPlant andMachin Purchase of Land and Building-Acquisition of Copy tights
of Agents commission-DirectorS fees-Director's RemunerationRent paid
Datents Payments
andr mde under Hire-Purchase Agreement Insurance Premiums-Travelng Expenses- Director's
on to Assets-Petty
ranExpensesnterest
Travellin
-loan Dividendsncome Tax Excise DutyRepair
Cash-Tutorial Assignments.

INTRODUCTION

cash book is maintained to account for receipts and payments of cash.

In business concern,
a
see that all receipts have been recorded in cash book and no fictitious payment
Aditor should
on the payment
side of cash book. In most of the cases, errors and frauds arise by
appear
the and payments of cash.
receipts
manipulating
his work, he should study the internal control in existence and verify its
Before an auditor begins
He should find out chances of frauds in the system and the
effectiveness and adequacy. of
concealment of incomes, introduction of fictitious payments, manipulation
circumstances for of different
he should look into the accounting routines and financial authority
accounts etc. Further, the cash
After all this, he should ask for cash book and various vouchers evidencing
officials. Where voucher is in
in serial and chronological order. any
transactions. Vouchers must be arranged
name of an official it should
be verified that it related to the organisation.
the personal

AUDIT OF CASH TRANSACTIONS

Itinvolves the followings characteristics
)Internal Control System Evaluation: The system should have the following
unaccounted for and permit payment without
any cash
(a)It shall not leave any cash receipts
goods or services being received. It should be verified under
must have financial power.
6) The person authorising the payment
what conditions it can be exercised.
be recorded and acknowledged.
All receipts shall immediately
All must be crossed "Account payee only" immediately on receipt.
4 cheques
9.2
TRANSACTIONSs
vouCHING OF CASH TRANSACTO
(e) Cash LONS nlICHING OF CASH 9.3
VOU
receipts issued and amount credited to debtors shall be reconciled daily. altogether be omitted from cash book. It should be seen that cash received on a date is
( Cash receipts shall be the bank on the same 1shbook may
deposited into day. Bank recon t
book on the same date. The auditor should see that a
statement should be he cash proper method is used to
prepared regularly. onciliation ecorded i i n t o bank. A proper record of pay-in-slips is maintained. The receipts must be issued
(g) Petty cash account should be maintained on imprest system. Aeposit Caie received. All the receipts must be serially numbered. Either counterfoils or carbon
hen cash is
mus
must be maintained. Only competent officer should be authorised to sign the
(h) All payments other than petty cash should be made by cheques. receipts
of musti t be kept in the custody of senior officer.
copies Unused
receipts
(i) Voucher against which cheques have been issued should be cancelled so as to prevent a receipts.
misuse of being presented again for payment. their ch various Cash ceipts (Receipt side)
(ii) Correctness of accounting records : Vouching of cash transactions involve HoW n o Balance. Closing cash balance of last year becomes the opening cash balance of the
checkin. ) Openi
balance can be rified from the last year's audited balance sheet. If cash book
records to verify that entries have been made as per the accounting system which
is re ning
curr
are not entered in
followed. The checking of records may disclose mistake or manipulations eg. larly urent column also, it should be ensured that opening balances the wrong
ank
has
(a) Omission or commission of a transaction which may be accidental or incidental. column.

(b) Errors of principle 'hSales. There are more chances of mis-appropriation of cash sales. The concermed
i) maymake the sale and may not make entry cash received. Intermal control system
for
(c) Compensating errors. salesman ffective. In big concerns salesman is not allowed to receive cash from
be effe
must
cash sale
ding are also delivered by some other person. He is simply to prepare four copies
(ii) Evidence of Transactions: Whether evidence available for transaction recorded in
cash bol regardingren
book customers. goods of which two copies are handed over to customer; salesman will send one
sold
is acceptable or not? of the goods
bf n e m o to thedelivery clerk. In the mean time customer will make payment to cashier,
(io) Whether the transaction made is according to provisions of law, rules and regulations alongwith goods
copy of memo. Customer can get the goods livery clerk over a copy
resolution passed at a meeting ofBoard of Directors or Shareholders? ons, will stamp
a copy from
of the day, salesman, cashier and delivery clerk will prepare summaries, all of
W At the end check summaries and cash b0ok to detect any error or fraud.
VOUCHING OF CASH RECEIPTS hmust tally. Auditor should
with carbon copies of cash memos.
In vouching
cash sales, cash register should be fully checked
Auditor should keep in mind the following points in regard to risk of errors, frauds or the of cash received in the bank. Dates of cash memos
the auditor should verify daily deposits
manipulation while vouching the cash receipts Then, are in cash book must be same. Where the cash memos are
the recorded
(a) False particulars of cash deposited in bank may be entered in counterfoils of pay-in-slips. and date on which receipts
cancelled, all copies including original copy duly cancelled, should be kept in the book. Where the
the
(b) Cash received may not be erntered in cash book particularly bad debts recovered, sale of it discount is allowed in a transaction, it must be approved by a
company has a discount policy, more
assets, over payments to creditors etc. responsible officer.

Salesman's abstracts, Cashier summaries).

(c) Duplicate receipts may show sum less than the original receipts Vouchers--Duplicate Cash Memo,
(d) Cheques received from customer may be deposited in bank without being entered in cash debtors. When cash is received from customers, a cash memo is issued; a
(it) Cash received from can be
of such cash memo is retained by the receiving clerk. A fraud
book and later on an equivalent amount may be withdrawn. counterfoil or carbon copy a
less amount is the counterfoil than what actually is received or by issuing
e)Incorrect totalling of cash book and thereafter false bank statements may be prepared. committed by inserting of of cash from
is concealed, by delaying the recording receipt
fictitious receipts. Sometimes shortage
( Overstatement of discount allowed and excess cash received may be misappropriated.
a debtor.
(g) Debtors may be shown as bad, cash received therefrom may be misappropriated. Sometimes payment received from a customer
is misappropriated without making entry in his
of
received from another customer, it is posted to the account
h) Cash sales may be shown credit sales to fictitious parties and amount received may be account and later on when cash is
former customer. This is known as "teeming and lading".
misappropriated.
) Cash in hand may include personal cheques without any intention to deposit these cheques debtors from the counterfoils or carbon copies
The auditor should verify amount received from be
should be serially numbered. Amount should
into bank for collection. of the receipt issued to customers. All these receipts
allowed to customers should be
entered in the cash book on the day when
received. Discount
) Chequesreceived may be credited to suspense account and then later on cash may be made with the customer can also be
authorised a responsible officer. Sometimes correspondence
by
withdrawn and misappropriated.
The vouching of cash receipts will depend to a large extent on the strength of verified the receipt of cash fromn
internal control With the can contact debtors, to verify
system in existence. Test checks can be applied to the audit of cash receipts if internal control system permission of client, the auditor
is to them.
is satisfactory and adequate. Auditor may check a few receipts at random if everything found pe
in order; he may presume that all recorded are correct. The auditor (Vouchers-Counterfoils, Correspondence etc.)
other receipts should keepn banks or other financial
mind that there are more chances of fraud where cash is received. Cash receipts may be totail have to borrow, may be from are
omitted. Where client maintains rough cash book or daily diary, receipts appearing in daily alay
D)Loans. All the business concerns to borrow. Restrictions
Auditor should enquire whether the client is empowered with al
should be compared with those appearing in pash book. Receipts which may be recorded in roug" utions. whether the company has complied
nposed by Companies Act 2013 on limited companies,
 9.4
vouCITNG OF CASH TRANSACTIC
the to raising of loans. A company is required to
TRANSACT CHING OF CASH
legal provisions relating maintain
ain aa s ACTIONS ceived a
received
and
n d is not yet collected by the 9.5
for the public deposits accepted. bank, it
separate regist has
been should be shown as
ted.
While vouching the loan received, the contained in the
terms and conditions ar cheque yet too be
est received on the securities
be verified. If the loan is secured what security has been offered, whether the fact has nt shonl. vouched
can be
coterest t on fixed deposits can from letters and schedule
in the Balance Sheet. securitic
ties. Inte it can be
be verified from the bank covering of
disclosedould to a p aarty, checked from the pass book. If the interest is on the
granted agreement made and counterfoil of
()Return of Loan by na loan nd receipt issued.
Others. The loan may be granted by the client and when the
the loan, the following points should be verified. It should
s h o a ereceived
ensured that all interest ceived a and accrued have been
party retums in the balance accounted for in the books
1. Check the counterfoil with the entry made in the books. roperly shown
and (Vouche-For
proP For dividend counterfo11s, DIvidend warrants, Pass book.
For Interest-Pass
2. If the amount is deposited in the bank, verify the fact from bank statement. Counterfoils) Book
Agreement

3. If the () Rece
int from Hire-purchase.
corr the
ne auditor can examine the receipt from
credited in the interest account.
payment is made alongwith interest, check that the amount received is correct and is
agreement checking
by agreement copy, counterfoil of receipts. Hire-purchasehire-purchase
2cessary
the
details regarding number of instalments, rate of agreement
provides interest, duration of
(F)Bills or payment of It
instalment.
date
the various details
Receivables. Bills receivable book may be verified because should be kept in mind that
bills are the amount regaro agreemernt, aPportionn:ent sho
instalment amount includes
a proper
be made between sale and
matured and discounted available in it. Auditor should check
but
received werding rest also;
interest.
statement. Some has been received. (Voucher-HI
bills might have become due no amount Whether a n interes -Hire-Purchase agreemer Counterfoil, Receipts)
may The
for dishonour of such bill has been made. An enquiry may be made from such party. It
lead to auditor should keep in mind the while
detection of a fraud, as the amount may be received and misappropriated by the cashíer. ri) Commission Keceived. following points
vouching commission received
A of the bills for receiving commission.
Such
verification discounted should be made. Whether entry for discount has beenmade. 1. Study the agreement
appear as contingent liability in the balance
bilis should sheet; if the date of maturityisaftern the commission received with coùnterfoils of receipt
date of balance sheet. the 2. Verify
a Check the calculation of commission according to the terms of agreement.
(Vouchers-Bill receivable Book, Cash Book, Pass Book) the be verified from whom the commission is receivable.
A List of names of parties should
(ri) Rent Receivable. The following points regarding rent receivable be examined by sale amount of
ne E In case of commission received on of_goods on consignment basis,
auditor: commission should be verified from the copy of account sale sent to consignor.

1. Terms and conditions of agreement and lease deed (Voucher-Agreement, Counterfoils)

2. Rent received should be compared with list of properties maintained. In case the rent is (ri Proceeds from the Sale of fixed assets. Sale of fixed assets may be vouched with minute
collected by the agent, then it should be compared with the account submitted by the agent. be seen
hook of Board of Directors, correspondence, agents sale account and sale contract. It should
has been on
the sale of asset shall be credited to
3. Check the counterfoils of receipts issued to the tenants. account credited. Any profit arising
that proper of dividends. If any expense the sale assets on

4. In case of heavy arrears of rent outstanding, auditor should confirm the arrears from ovenue account which is not available forbedistribution
of the asset should reduced by such amount and balance should be credited
tenants with the consent of client. is paid, sale proceeds sanctioned
assets the authorised
has been person
It must be seen that sale of fixed by
toassetaccount.
5. Auditor should obtain a certificate from the responsible officer regarding the period for or committee.
which the property remained vacant. Broker's Sold Note, Correspondence)
(Voucher-Sale deed,
Claims. Insurance claims received can be vouched
with copy of insurance claim
VouchersLease deed and Agreement, Counterfoils, (xiin) Insurance
a
Correspondence)
the auditor should examine with the insurance company
counterfoil of the receipt issued. It should be
(vii) Sale of Investments. If sales has been effected through bank, lodged, correspondence been recorded in the proper account.
Sometimes the investments are sold through broker. verified that insurance claim recovered has
the bank advice to know the various details.
Note or Commission Note should be examined verify the sale proceeds and (Vouchers-Accounts, Correspondence)
Broker's Sold
commission charged by the broker. be examined from the following:
(riv) Royalty Received. Royalty received can
should see that proper apportionment of
If the investments are sold at cum-dividend price, auditor (a) Terms and conditions for payment royalty.
has been made between capital receipt and revenue receipt.
(6) Correspondence with the lessee.
funds. Profit or loss on the sale of such
Sometimes the investments are made against specified (c) Calculation of royalty.
account. (d) Counterfoils of receipt issued.
investments must be transferred to such funds and
of subscription
(Vouchers-Bank Advice, Broker's Sold Note) received can be vouched with the register
Subscriptions. Subscriptions
auditor should check counterfoil of receipts issued.
(ix) Income from Interest and Dividend. While vouching dividends,
counterfoil and covering letter received alongwith the cheques. If the dividend i3
dividend warrant warrat (Vouchers-Register of Subscription, Counterfoils)
bank statement. If the dividend
collected bank, anmount should be verified with the
through
 VOUCH
HING OF CASH
9.6 ASH TRANSACTON
.

(Ti) Sale of Junk Materials. The auditor should review the internal coni. TRANSACTTO
materials like its storing and disposal and verify that it is followedSyster voUCHTNG OF CASH
generation, at 9.7
each stage. T (u) B i l l r e c e i v a b l e
following points to be examined: liscounted but dishonoured. Sometimes the bills
maintained for sale of
junk materials () . if on the date of receivable are discounted
(a) Whether reasonable records are
maturity, drawee dishonours the bill, amount of the bill has
from tne f the account is maintained with the same bank, bank to be paid
b)Esamine the production and cost records for determining the extent of junk may debit the account of customer
to the receiving payment. Auditor should
may arise during the given period. junk materials th stea is also returned the bank. The
by
verity dishonour of bills discounted from bank's
Bill payment side of the cash book can be checked for the
(c) Sale of junk materials should be compared with the corresponding salee : advice. D"f cu1ch bill with bank's advice and the dishonoured bill. It
should be checked that drawee
vears.
the last htrg dishonodehited with the amount of bill plus any charges incurred thereon.
d) The rate of sale of junk material should be compared with the rates in the last (vi) Wa r e s , Payment of wages involves large amount. There are many chances of fraud and
year. oriation in wages payment. The auditor should
(e) Bills of sale of junk material should be verified along with calculations. study the system of internal control in
misap
p e r a
Eraud and misappropriation n wage payment can arise in the following ways:
(There should be proper procedure to identify junk materials and good materia (a) Inclusion of dummy workers in the workers' register.
be mixed with it. shall n b) Payment of wages tor the time or the work for which worker was not present at the work

VOUCHING OF CASH PAYMENTS (CREDIT SIDE) place.

of wages at higler rate than allowed.
Before vouching the credit side of cash c) Payment
book, the internal control system for payments s d) Including in the records the name of those workers who have left the organisation.
evaluated. While vouching various payments auditor should see that:
(e Less amount of deductions is taken for calculation of wages.
(a) Payment is made to right person.
Work for preparation of wages sheet and calculation of wages should be divided among numbers
(b) Payment is for the purpose of business.
nersons. Work of one person is automatically checked by the other while doing the part of his
(c) Amount recorded in the cash book is the amount appearing in the voucher. Grk. Payment of wages should be disbursed department-wise. A senior officer of the concerned
(d) Payment is duly sanctioned by the authorised officer. should be present on of Time recorded by the gate-keeper should
department wage the day payment.
(e) Proper account has been debited with the payment. compared with the time spent by the worker in the various departments. This will be helpful in
be
while locating the dummy workers whose names have been included in the wage sheet. As far as possible
(Provisions of Companies Act has been complied with recording the payment.
wages sheet should be prepared department-wise.
Rough cash book should be compared with the cash book to locate the fictitious paymens
) Opening Balance. Cash book may have credit balance in the bank column. This balance cank Wages Sheets. Information needed for preparing wages sheet is to be collected from the records
verified from the previous year's balance sheet. maintained by various departments. Each clerk should initial against the entries made by him in the
wage sheet. This will be helpful in fixing up the responsibilities in case of fraud. After completing the
GiCash Purchases. In emergency, cash purchases of goods may be made. Purchases ofstoes
and stationery are made usually on cash basis. An adequate internal control system will be helpftulia
wage sheet, the amount equal to total wages payable shall be withdrawn by cashier from the bank.
As far as possible cash payable to the workers should be put in envelopes.
controlling manipulation of cash purchases. While vouching the wage sheet the following points should be kept in mind :
It should be seen that are
goods purchased actually
received by the store-keeper. Cash mems (a) Names of workers included in the wage sheet should be compared with workers' register
can be
compared with goods inward book to verify the goods received. Only the net amount (ater It will help in locating dummy workers and workers who have left the organisation.
trade discount) should be entered in the books.
(Voucher-Cash Memos, Goods Inward Note) b) Wages paid and calculated for the various months should be compared. If the wages of a
particular month differ from the preceding month, the auditor should look into the reasons
(11) Payment to Creditors. Payment to creditors should be
examined with the receipts isSued for difference.
the creditors.
Receipts should indicate the purpose for. which the payment has been
mau ()At random checking of wages calculations should be made.
paymentis made in full and final settlement
of account, the balance should be
discount received. Where the accounteu (a) Auditor should see the proper record is maintained for unpaid wages.
payment is made in excess of the
bill, either the excess is n
advance or the
payment is made by mistake, which should be recovered back from the payi (e) Deductions for any advance taken by the worker should also be verified.
creat Deductions made from the wages should be entered in
(Voucher-Statement of accounts, Receipts) the proper account
(io) Bills Payable. Bills payable honoured on the date of e paye Special attention should be given to the payments made to casual workers.
after and are returnea
receiving the payment. These bills should be cancelled maturity aid
paid
Cal (Vouchers-Wage Sheet, Job Cards, Wage Records)
be vouched with
bills can De
after being paid. Bills paya
book. If the be conducted will
examined to en of Salaries. To what extent vouching of salaries paid should
the
payment is made by bank, bank statement or pass
verify payment of bill. depend he t
adequacy of internal control system for the payment of salaries. Auditor should See
(Vouchers-Receipts, that salaries bill Further he should check
Bills Payable
Returned, Pass book, Bills prepared with the sanction of responsible officer. there is
Payable Book) attenda Oras, salary bill of earlier months and appointment
letters of new employees. It
 vouCHING OF CASH TRANS TRAN
CASH TRANSACTIONS 9.9
9.8 yOUCHING
OFCASH
.
on the basis of sales effected
over the salaries of previous (xiv) Payment
ont of
of Agent's Commission. Sales commission is paid
an abnormal increase in salaries of
a month
month, he sho
din
ANSACTON nan. Agreement with the agent will for the rate of commission and
provide other
the payment ofsalaries, following
pointe re importan
into the reasons for such change. In vouching should vouch the payment of commission with the receipt issued by
throu
entries made in cash book. hrough a ditions. Auditor
register with the and agreement made with the agent.
(a) Auditor should check salary amount of deductions on. terms aac statement of the agent
alterations in the accou of fins, Directors receive fees for
(b) He should examine carefully Fees. attending Board of Directors meetings. Provisions
Director's
is in Articles of Associations. Director's Attendence Register
funds, loans, insurance etc. (A7) made
of fees to directors
who the board's on
Counterfoils, Appointment Letters) o
the paymentames of directors, attended meetings. Director's signatures
(Voucher-Salary Registers, and the of directors the
voucher should be supported by the obtained o
onn the receipt b0ok signatures attending meeting.
see that the loan ill prov are
re obtained
fees
(cii) Loans. Auditor should and conditions of
loan can be verified ptg receiving
Book, Attendance Registers)
Further details regarding terms (VoucherMinutes

by the party. with interest are receithe

seen that instalments
of loan along
agreement. It should be received in ime Remuneration o f D i r e c t o r s
examined.
documents should also be
Mortgage deeds and other to power of company to lend the remuneration of managerial personnel:
the provision relating Companies
Act, 2013 limits
In case of limited companies, The remuneration.
with. loans
should be complied limit to managerial
directors, managing director etc. 1. Overall
the amount receivedis. remuneration payable to each managerial personnel.
the loan taken is returned, sho over
(ix) Return of Loan Taken. When the loan returnedW 2 limits
Where the interest is also paid alongwith
the payment side of Cash Book.
should compare the payment of l Overall Limit
interest account. Auditor loan with
be seen that interest is debited to managerial remuneration
shall be 11 percent of net profit of public company
the receipt issued by the receiver. Cn 197, the overall
shall not include fees payable to directors for attending the
financial
Such remuneration
The auditor should compare
the investments purchased year.
(x) Purchase of Investments. investments should be made. Invo of any Board.
verification of of the
meeting is determined the Articles or
by agreement with
Broker's Bought Note. If possible, physical are purchased at cum-intereet directors by
the n a m e of the company.
Where the investments rremuneration payable to
must be in of the company but subject to overall limit as
in the interest account and the balae resolution passed at general meting
should be debited ony or by a
interest induded in the purchase price Compa
received on the investment, it should be credi
interest is redited
in per the Act.
investment account. Later on when the
calculated in the manner as specified u/s 198 of the Act.
the interest account. The net profit shall be
Share Certificates) there are no profits or inadequate profits or loss, the
(Vouchers-Brokers remuneration. If in any year,
Bought Note, Pass Book, Minimum of the
to the managerial person not exceeding the higher
auditor can vouch the purchase
of machinery with inyaio minimum remuneration
ompany may pay
(xi) Plant and Machinery. The on the and installation of machinerya b as
of schedule V of this Act.
incurred purchase limits as in A and per the provisions
received from the supplier. The expenses
case of imported machinery, a
concerned asset account. n
to be capitalised by debiting to the asset account. (A)
should also be debited to the
import duty and clearing charges (1) (2)
Purchase of Land and Building. Land may be purchased either on leasehold or freehold Limit of yearly remuneration payable shall not exceed
(xi) effective capital is
under leasehold basis, auditor should study various terms and Where
basis. In case the land is acquired be as per the terms of (InRupees)
made for leasehold land should
conditions of lease agreement. The payment 30 lakhs
the payment with lease agreement and the receipt issued by the
agreement. Auditor should vouch ) Negatie orless that5 crores.
the leasehold land should also be debited to leasehold 100 crores. 42 lakhs
lessor. All the expenses incurred for acquiring i) 5 crores and above but less than
land account. 60lakhs
of land on freehold basis. Auditor should
vouch (i) 100 crores and above but less than 250 croes. 0.01% of effective capital in excess of
Conveyance deed is prepared for the purchase and above. 60 lakhs plus
amount should be (iv) 250 crores
seller and the paid
the payment for freehold land with the receipt issued by the 250cores.
deed.
compared with sale price as shown in conveyance (B). In case of a
person who was not a security
managerial holder holding securities of the
basis and
The discussed above are also applicable to purchase of building on leasehold or more or an or a director or not related to any
principles company of nominal value five lakh employee -

freehold basis. as mineral person 2.5%

director or at time two years prior to his appointment
promoter any during
(Vouchers-Title Deeds-Receipts-Contract) of current relevant profit.
should a special resolution.
(xii) Acquisition of Copyrights and Patents. The acquisition of copyrights and patents The above limit shall be doubled if the resolution passed by a shareholders is
vouched with receipt issued by seller, agent's note, agreement, the purchase of patenis.
copyrights. All those expenses which are incidental to the acquisition of patent rights should ä.so Specific Limits
capitalised. Ifthe patents and copyrights are developed through research and development,a d shall not exceed s of net
and 4) the remuneration of Managing director or whole time director
expenses incurred on research and development should be capitalised as the cost of copyrig than it shall not exceed 10%of net
if more one,
profit if there is only one such person and
patents. profit for all of them.
(Vouchers-Agreement, Receipts, Agent's Account)
 TR
VOUCT CASH
CASH
TRATN.
TRANSACTIONe OF 9.11
ACTIONS yOUCHING

not e x c e e d 3% of net profits hs

(xoi)Insurance P r e
m The auditor should examine the
following for the
dircctors shall vouching of the
remuneration of director or exceodhere
re is
The director or manager, it shall not
time insurancepremium
(11 or whole
ed 1% of
director the cover note.
also managing ne Insurancepolicy.or issuedby the insurance company.
in case thejpolicies are more that one.
proit. exceed 5% of net profit. ce policies
it shall not
case of manager, remuneration sum in ev premiumreceipts.
() In of any Insuranc
or indirectly, by way of
If a director receives, directly of the Central Government,
he shallS ) to the
CS. The staff of the company is paid travelling expenses
fund such ( x i x )T r a v e l l i n

mentioned above without the prior approval voucher and

mits
woceipt of travelling expenses will serve as an evidenceaccording
for vouching
director for attendin. h e
as
ymen
mount to the compan
nt Tf travelling allowance is fixed per rules, auditor can
shall not include any
fees paid to a nding boards les verify the
are
remuneration nature. xpense P but where actual expenses
The term or of professional reimbursed, the calculation of travelling
services as a technical expert avelom the verified.
«
a
be
eetings or rendering
ied. The Bill of travelling expenses should be sanctiorned by responsible
attention to the following points in connection.
connection with should
Auditor The auditor must pay
Duty: the U e
remuneration of the directors: (Vouchers-Receipts, Bills)
officer.

Directors to know the names of the direet

of
should refer to the Register Directur's travel travelling expenses. Directors are paid travelling expenses either for attending the
() The auditor
the company. Articles of Associations, the min. or for other
purposes. The payment of travelling expenses for attending the Board's
check the provisions of the eetings ied from the provisions for such expenses in Articles of Association, director's
i) He should thoroughly Boara

the entered nto by the company witho meeings can be

and Agreement there
the Board of Directors, to the directors.
attendancer e g i s t e r a n d the receipts.
The Articles of Association may permit the
payment of travelling
remuneration payable
directors regarding the for
director
the purpose of business. All such payments must be supported
remuneration is to
by the
ensure that director's paid not free of income-tax. expenses
payment. the
(üi) He should and the receip
eceipts for
remains unpaid to the date of a.. uchers
that any remuneration which the les of
(Vouchers-Articles «
Association, AttendanceRegister)
(iv) The auditor should verify liabilities.
as outstanding
Balance Sheet is properly shown (Vo t Loan. Interest is payable on loan as per the terms of loan agreement. Auditor
on Loan.
on
that the total remuneraton paid
ensure
to the directoF has been duly compl
(xxi) Interest interes on loan does not differ from the terms and conditiorns of loan
(v) He should with provisions hat rate of
of the company in accordance of ththe ould verify interest can be verified from debentures interest book. All the
with while calculating the net profit Debenture payments of
Act. nent. vouchers and receipts.
must be supported by
interest
of directors has been duiu
(1) He should further see
that any increase in the remuneration Vouchers-Agreement, Counterfoils, Receipts)
and resolution passed at the geneeneral
approved by the Central government by special
of idends on shares can be examined from the resolution
meeing of the company. ividends. The payment
(xi)
on the basis of net
profits of the companv Board of Directors meeting and the annual general meeting of the shareholders.
(ii) If the remuneration to the directors is to be paid ny, sed at the
have been calculated according provisions of the are to the are bank. A transfer is made to
he should spedifically see that the profits end warrants issued for the purpose of
shareholders which paid through
The counterfoils of dividend warrant
Act. Uaal accOunt opened dividend payments.
directors is within the specified and the bank statement can be vouched for the payment of dividend.
(vii) The auditor must ensure that the remuneration paid to the
statutory limits and he should vouch the amount paid to directors by way of remuneration. (Vouchers-Dividend Warrants, Pass Book)
(ix) In case a special remuneration has been paid to a director the auditor must see the Minutes
(zit) Income Tax. The payment of income tax can be verified from the demand notice and
Book to verify the special resolution passed by the company.
receipted challans. The auditor should see that proper entries are made in the accounts keeping in
view advance tax, previous year's tax, and current year's tax payments. If any penalty is also paid,
If the directors are paid traveling expenses, the auditor should see that of
Articles Association
provides it or resolution is passed for such a payment, he should further satisfy that such expenses separateentry shall be made in the concerned account.
were incurred in connection with company's business. He should vouch such payments with bills (Vouchers-Assessment Order, Demand Notice, Pass Book)
and receipts. If the director has travelled by air, the counterfoil of the air-ticket should be examined, (xrio) Excise Duty. In certain manufacturing units/organisations, excise duty is payable to the
the auditor should also see that the director was
duly authorizes to travel by air. government. Goods can be cleared only if excise duty is paid. The auditor should verify the payment
are Rent Paid. Auditor should verity the payment of rent from the agreement. The rent voucher of excise duty from receipts and entries made in excise records. The payment of excise duty shall be
Should be supported by rent receipt from the landlord. It should be seen that payment of rent is a officer. The calculation of excise shall be made at the rates
sanctioned by responsible officer. Sanctioned by responsible duty
prescribed the by govermment.
(17) Payments under Hire-Purchase
Agreements. Under hire-purchase agreement, goods are are
supplied, payment for which is to be made in instalments. Instalments include interest also. It should Xx0) Kepairs to Assets. If the repairs to buildings, plant and machinery and other assets
be seen that interest payment is recorded separately. Payment of instalments should be verified rOm outside
the
eby thethe parties, then separate payment shall be made for each repair job done.
receipts for the contract is assigned for heavy
payment and the hire-purchase agreement. e sthe repairs. Following points shal be considered while
vOuching for
payment repairs.
(Vouchers-Agreement-Receipts) 3) Bills of
repairs and the receipts issued by the party shall be verified.
 TRANSACTIONS
9.12 CASH
vouCHING OF CASHTRANSACc
voUCHING OF 9.13
ACTIONS vouch the following:
shall be sanctioned
by a responsible officer. you
6) The repair job 13. How would
of investments.
shall be made according to its nat Sale
()The allocation of repair expenditure i)
it should be charged to asset, not to repairs acce It (i) Royalty.
ependiture is of capital nature, unt. he of scrap.
.
Sale
Cash Book is vouched with the following objectives (ii)
(iv) Income-tax Refund.
( a t ) Petty Cash Book. The Petty
with the balance appearing in Petty cash book
(a) Verification of actual cash balance Bonus to workers
is effective in detection of
(v)
hat are the duties of an auditor in connectiorn with cash sales and cash purchases ?
(b) Whether the internal control system detection of frauds
misappropriations. and Objective Type Q u e s t i o n s
transactions recorded in the petty cash boo
() Determining the
validity and accuracy of ook. statements:
the right
the auditor should examine that: 1. Tick (
While vouching the payments from petty cash, ensure that all receipts are taken in vouching is done.
All vouchers are serially numbered and
sanctioned by a responsible officer. To
i
account while
Vouching ensures that all tems are appearing in the books of original entry.
(a)
is recorded orn the same on verifies cash in hand and at bank.
cash received from the head cashier day Vouching also
(b) Petty which (ii)
actually received.
is cannot show a credit balance.
(iv) Cash Book
debited. vouching of payments date of invoice and nature of payment should be given the
C)Appropriate expense account, is While
the supporting evidence. importance.
(d) All the payments must be verified from
Fill in the blanks
2.
Questions see that a proper record is kept o f . . . . f o r depositing cash into bank.
() Auditor should
sales.. . S h o u d be fully checked with carbon copies of cash memos.
1. In vouching receipts, the auditor does not merely seek the proof that cash has been received (i) In vouching cash
else does he seek ?
What Auditor should check... . a n d . . . b o o k to detect any error or fraud.
(ii)
2. While vouching the payments, to what points the auditor should direct his special attention ? the auditor should check t h e . . .with the entry made in
(iv) In case of return of loan by others,
the books.
3. As an
auditor, what considerations should be given by you for missing vouchers ? are
be verified because the various details regarding
(v) Bills receivable book may
How would you vouch the receipt side of your client's cash book ? available in it.
5. Explain clearly the meaning and objectives of vouching. How would you vouch salaries in an office ?
the following items:
3. How will auditor verify
6. 'Vouching is an essence of auditing'. Explain the points to be borne in mind by auditor whie
() Opening Balance
examining vouchers.
(i)Cash Sales
7. What are duties of an auditor in connection with vouching of payment side of cash book ?
loans be verified by auditor ?
4. How should sale of investment and
8. How would an auditor vouch the wages paid to workers ? ?
What points should be kept in mind by the auditor while vouching commission received
9. What are the objectives of vouching ? Describe how you will vouch the following : 5.

(a) Travelling expenses. Short Answer Questions

(b) Salaies. 1. Explain teeming and lading.
(c) Director's fee. as to vouching of Petty Cash Book.
2. Explain Auditor's liability
10. Define vouching and give its importance in auditing. How would you vouch the following: 3. Explain procedure relating to vouching of wages.
(a) Credit Sales
4. Explain procedure relating to vouching of salaries.
(b) Purchase of Investments ? from debtors ?
5. What documents should be examined while vouching receipts
11. How would you proceed to vouch the following:
(i) Bad debts recovered.
(i) Income-tax.
(i) Bills receivable.
(iv) Payment made by Debtors.
(v) Purchase of Building.
12. How
would you vouch the following:
(i) Dividend to shareholders.
(i) Interest payments.
(ui) Commission on sales.
(v) Insurance premium.
 CHAPTER 10

VoUCHING OF LEDGER

mtiction Purchase LedyerSales Ledgermpersonal Ledger Qutstanding Assets and Liabilities

Untrod
Outstanding Asset Income Hecoverable Prepaid Expenses Deferred Revenue Expenditure-Outstanding
Liabilities Wages and Salaries Audit Fees PurchasesInterest on Loans and Debts Commission
Royalty Payable Freight and tarriage Contingent Liabilities ContingentAssets Tutorial Assignments
Objective Type Questions.

INTRODUCTION

The business transactions are recorded in the subsidiary books and posting therefrom is made to
for
proper accountsin the ledger. In case of small
organisations one
only ledger
may be maintained
all the accounts-personal and impersonal. But if the number of transactions of a business is large,
then the business may maintain two ledgers.
1. Personal.
2. Impersonal.
In the personal ledger, all the personal accounts would be opened. Impersonal Ledger is used for
all real and nominal accounts. In big concerns, the personal ledger may further be split up into
purchase ledger and sales ledger. The purchase ledger would include all the accounts of suppliers
and sales ledger would include all the accounts of customers. Any other personal account would be
maintained in impersonal ledger.
1. Purchase Ledger
Personal 2. Sales Ledger

Ledgers
Impersonal

he audit procedure requires that audit of primary records should succeed audit of ledgers,
nch provide the basis for ledger posting. The following points should be watched while checking
the posting
0 The date, the name of the account, the description of entry and amount.
() No transaction shall remain to the
unposted ledger.
Any figure written badly or altered should be re-written neatly in coloured ink.
1.PURCHASE LEDGER
The
shouldit of purchase ledger shall proceed with verification of opening balances. The auditor
SK tor the audited accounts of last year and the list of creditors balances of that year. The
 UCHING O FLEDGER
10.3
vOUCHING OF LED halances. The summary of balances of debtors accounts shall be compared
balances.

10.2 of
re- Summary
ales ledger. It should be seen that each account's balance is included in
verified from cash book, the purchase balances

ledger shall be the ii) of sales

with

posting to the purchase return book, journal

and other relevant books. While Bils the summa

account o n the correct sida aud ccount. Against each entry in the account there will be reference
payable book, the purchase
a m o u n t s a r e posted
to the correct
The audito checking ofeacha
see that correct
should forwards and brouoi
Specific credit note receiving the amount. This will help to locate any
totals and casting of
each account. The carry invoice and or
should then check auditor should see that summary of balan account
left out, amount posted wrongly,
ances ofTorwa
bought (of sales i n in the
the account regarding any posting
checked. In the end, the
should be properly discreparncy
accounts in the ledger. etc.
to the balance of creditors of goods
ledger correspond despatching
in the ledger should also be shows the sales ledger. It may be the practice in certain concerns to
which the credit is given Reviewing credit
dit balances in
The bill number for account is debited for the pavmo
is debited milar to despatch of goods. It may lead to large number of credit
a d v a n c e prior
bill number should be
made when party payment made amount of
reference to A the All
All such balance
balances should be included in Sundry Creditors.
ledger.
auditor to locate: get t h e sales ledger.
this will enable the in #he sales it may also
done. halances be despatched but sales irnvoice may not be prepared;
o r is wrongly t h e goods
the goods may
is Sometimes customers account if the payment has been received. Auditor
)whether any posting left out b a l a n c e in
advances. credit
have been received
against to sales invoices are prepared
while despatching the goods.
(i) whether goods lead
ad to
confirm
that all the
accounts.
of balances in the creditors should the customer's ledger can be confirmed by sending
(ii) composition closing afion of
balances. Balances in
the for confirmation. Such statements of accounts
be a credit balance in suppliers account. But many a times audi to the customers
Normally there should Co
(vi) statementtofo f accounts in the
which arises due to advance payments made. A.o
th
the year. It will serve as evidence to support balances
debit balance in such accounts, or sernt at the close of customers whose balances
may discover such advances. On the receipt of should
to those
a r e received against uld be statement should be sent
Even the
customer's
should verif whether the goods accounts showw credit hale 's ledger.
of advance payment, suppliers may
account must be credited. In spite balance the day on
are nil. show the true value of assets
due to certain other bills unpaid. balance
debts. The sheet must must not be
details of such debits which remain unadjusted at the close ofthe and doubtful which is doubtful of recovery
The auditor should verify the sheet is prepared. Any debt for more
than three years,
scrutinised to see whether goods in question have ho surhen balance the debt is outstanding
cases
inward register should be certain the
vear. The goods in the list of good debts. where be recovered. But in
the goods which are still in transit, appropriate entry should ha included barred debt.
Such debt canrnot
received o r not. If the party has sent time customer's
dishonoured
to send periodical detailed
statement to the respective pario
arties it becomes where a cheque gets
passed. The client should be requested to pay thereafter also, the
c11stomer may agree be considered asdoubtful of recovery. Sometimes
for their confirmation. the amount due may due from
hme and again, are made irregularly, the amount
the bills regularly or payments
To sum-up, the audit purchase ledger shal involve following steps
of u1stomer renews the
doubtful of recovery.
control system in operation. become
(i) Examination of internal them may credit policy should be made.
time to time review of
balances. of Credit Policy. From customers and credit
(i) Verification of opening hriil Examination actual credit availed by the
etc. terms of credit allowed, terms of the client are not
(ii) Checking of totals, casting, posting Data regarding Where the credit
should be collected.
Confirmation of balances from the suppliers. terms of competitors should be made.
(iv) credit policy investigation
according to the s o m e debts may
become doubtful or
2. SALES LEDGER Out of the goods debts
Reserve for doubtful debts. shall be made, if adequate r e s e r v e
It involves the clients capital blocked in sundry ix) debts which are doubtful of recovery
The sales ledger contains the debtors accounts. cash may bad. A r e s e r v e for auditor in his report.
control is not maintained over these accournts, has not been created,
the fact should be reported by
debtors and bills receivables. If appropriate but also for doubtful debt
will not only lose capital
not be collected in time and it may
become time barred. The client doubtful debts
with customers, and any r e s e r v e for
ensures good relations of auditor regarding affairs of
the business may decrease. Timely collection of debts Legal position fair view of state of
whether balance sheet exhibits a true and he does not
dispute with customers will be settled at the earliest. The auditor has to report of duties if
The auditor will be held negligent in the performance provision
the company or not. for him to see that adequate
Steps in Sales Ledger Audit So it becomes necessary doubtful debts has
The audit of sales ledger should involve the following steps: verify the book debts of the company. debts. If inadequate provision for bad and
bad and doubtful
of sales ledger
1) Examination of balances and posting. The opening balances
opening
has been made for or loss shown in profit and loss account will also be incorrect.
Deen provided, profit for bad
accounts of the previous year sufficient provision
should be compared with statement of balances of
debtors the directors to make to the
receivable book, the auditor to persuade fact in his report
sales register, bills sales retur
becomes the duty of then he should report
The posting to the ledger from cash book,
correce do not agree to this, Bank 1895). The
careful that London and General
registerand the should be verified. The auditor should be
joumal and aoubttul debts; if they will be held liable (The debts. It he
he r e s e r v e for
doubtful
amounts are posted on the correct side of proper account. enolders. If he acts negligently, the adequacy of
ounts, o w n estimates regarding he can be held liable
uld make his prove to
be wrong,
(ii) Verification of totals and After checking posting, the totals of various accou
castings. a
l which may
careul reserve for bad debts, Lta. 1980.
should be examined. The auditor should be a0 tne estimates of Discount Corporation
w a s in Arthur
Central Advance and
carry 1orwards and brought forward E. Green and Co. Vs. The
there are more chances of mistakes while totalling and casting
 vovCHING
OFLEDGE
10.4 GER
10.5
journ.
voUCHINGOF LEDG the uITnal to arrive
at the correct
profit or loss. It will be better if
through
To sum up., the procedure of audit of sales ledger involves the following steps: DGE througn
s
is mai Such outstanding
book
book should be certified
maintained.
(a) Test posting from relevant subsidiary books. passed
andum
if there is s o m mistake on
byy a responsible
officer. The auditor
of responsibility,
esponsibility, some memorandum
menieved fhis each and every outstanding book. He
(b)Test additions and calculation outstanding item. The auditors
s
of balances. the
vhe corresponding
should compare expenses of
corresponding month some
month of the previous
(c) Prepare the summaries and the classifications. year. If
10ereforewith
must0nth will be less. expenses are outstanding,
closing expenses
(d) Obtaining of confirmation of balances from the customers. months
closing
(e) Reviewing credit policy. A.
theOutstanding A s s e t s

(Reviewing truthfulness of balances in the customer's aCcount and Suchassets include

doubttul debts.
adequacy of (a) Income Receivable.
eserve fo
(gWhether the internal check system is adequate. (b) Prepaid Expenses.

Revenue Expenditure.
Deferred
IMPERSONAL LEDGER (c) Receivable. There are certain incomes which might have occurred but might not have
[ncome Receivab.
balance sheet, such as
the time of
The ledger containing the accounts other than debtors and creditors
accounts, is kno received
at
been
impersonal ledger. This ledger contains nominal accounts, real accounts, capital and some outstanding.
accounts other than debtors and creditors accounts. The balances of all ) Rent receivable
incomes and onal declared by a company but not received.
accounts are ultimately taken to profit and loss account and in case of real or Dividend
capital accOunte accrued but not received.
balance sheet. These are given below. to the Interest
ii) commissiorn, shipping rebates might have become due not received.
(a) Prepaid expenses like salaries, commission, rent, interest etc. fu) Taxation claims,
must be included in the profit and loss account. The auditor should be careful
(b) Accrued incomes like interest, commission etc.
are
given effect in the boOks only if these are likely to be recovered.
(c) Accrued liabilities like compensation to employees, pension, chincomes
gratuity, lease rent, taxes etc. a
As the number of accounts Peepaid Expenses. Such must expenses are paid
not be debited
for
in the
periodand falling within the current
notloss account of current
appearing in the impersonal ledger is not large, auditor should he profit year.
able to check all the entries in detail. The entries in the be atine year. These expenses
accour
are
impersonal ledger are made from subsidiar expenses
books ie., Sales Book, Purchase Book, Cash Book and The examples of prepaid
(i) Insurance Premium.
Journal Proper. The possibilities of renderin
misleading accounts by recording fictitious vouchers are great in case of revenue expenses. Hence
becomes necessary that impersonal ledger must be examined it rates and taxes.
critically, otherwise profit and los (i) Rent,
account may not give true and fair view of (i) Subscription etc.
profit or loss.
The audit of vouch such expenses with the help of nominal accounts, demand note
impersonal ledger involves the following steps: The auditor should
of the original documents. The auditor should be careful that correct
i) Reviewing the adequacy of internal control system in operation. The system should be such Teceipts and actual inspection
as is between the two periods on the date of balance sheet. All such expenses
reduces the chances of fraud and mistakes to theminimum. amount apportioned sheet.
(i) The opening balances of impersonal should be checked from the statement of should be shown on the assets side of the balance
audited accounts of the
ledger Such expenses are of non-recurring type which affect the
previous year. (c) Deferred Revenue Expenditure.
financial benefit of number of accounting years. Deferred revernue expenses are those where benefit is
(i) Postings are made from all the subsidiary books
into the impersonal ledger. At the regular
a number of accounting years. Generally expenditure is heavy. The benefit of which will
intervals of time summaries from Sales Book, Purchases Book. Sales Returns Book and spread over
Purchases Returns Book are posted to the be derived in subsequent years. Examples of such expenses are
impersonal ledger. Entries from cash book and
journal are also posted to the impersonal ledger, while checking the postings, the auditors () Discount allowed on issue of deberntures
should see that correct amounts are in the correct account on the
posted side. NO
correct (Gi) Expenditures of advertisement campaign.
entry should be left unposted or posted twice.
ii) Research and development expenditure.
(v) After checking the posting the next
step is checking of totals and castings. The auditor (Giv) Heavy repairs of non-recurring nature.
should be careful that correct amount are carried forward on the
correct side. (v) Development expenditure on mines.
(v) The next step is checking of various balances of accounts in
the trial balançe. The total or (vi) Experimental expenditure.
debit side and credit side of the trial balance
must tally. vii) Preliminary expenses.
It is an
OUTSTANDING ASSETS AND LIABILITIES forward to be written off in the future.
The
portion of the above expenses is carried while checking such expenditure should see
profitand loss account
may not show true profit or loss for the
period naing asset and also a fictitious asset. The auditor which are nature
ertain expenses and incomes which are ought to be included in the
because there 1
Proper and legitimate amount is carried forward. Expenditures of capital
adjustments entries and mus
 10.6
HING OF LED voUCHINGOF
OF LED
LEDGER
and
shall not be treated as deferred revenue expenditure. For example, renovations
building should not be treated as heavy repairs to be written off over a number of an EDGER -es and salaries for the mornth are paid in the 10.7
deterred revenue expansions and salaries
first
not be
ependiture shall one year i.e.
charged to year of the spend:he wh alaries must be aedited in profit and loss next
t h e p r o f i t a r r i v e d aat would be account of the e month. Such
unnecessarily reduce the profits of the year. The auditor see the
should that n
unwritteng. This overstated. To
the revenue expenditure is shown on the asset side of the balance sheet
his Ole of the Ped and
outstanding lhabilities should begive effect, wages and under audit otherwise
salaries account
deterred Porti on
untilit is complete be debi credited. should
written off. Ahether the audit fees should be
Audit fee a11ditor is treated as
Following are some of the cxamples of deferred revenue expenditure and now we gued paid for the audit of outstanding or
liability not. It is
we hat audit fees should be debited to accounts of the
how to treat such items in the books of accounts. ill discuss appropr that year, even period under audit, it is
s e of the year. The auditor is it has not been
1. Preliminary expenses. When a new is or a by the to hold officethough paid
company incorporated new ral meeting and he 1s to appointed till the conclusion
dep report on the
established some promotional expenses are incurred. The whole of such exper nent profit and loss account and the of next
is
annuala b hefore annual general balance
not be debited to profit and loss account of year but it should be written off ov ure shs sheet rable for the audit
meeting which to discuss the annual accounts.
3to 7 years. No doubt, such expenditure of nature but it is not woTk should be debited to profit and loss Therefore,
is capital represen Period uld be account even
assets. So it must be written off over a number of years. by any thoug or hand, it is shown as an
On the
that auditor work is
argued outstarnding
2.
+ fee should not be debited to
commenced after the close of theliability.
books,
Heavy repairs and alterations to the plant. To improve and increase the earnine hence in the next financial
profit and loss account. It can be said that audit
business, sometimes heavy expenditure is incurred on alterations and overhaulinpacity ot work
mmenced year. Audit tee paid should be
Such expenditure is not of recurring nature : hence whole of the expenditure sh Plant
treated as expense
of next year.
debited to profit and loss account of year in which it is incurred. But it should not be the above arguments has its own support. If the audit work is
over in an appropriate number of years. commenced before
On the other
sing of books, the audit fees should be treated as outstanding liability.
3. Advertising and sales promotions. When a new department o r business is e[tablishod hand the auditor commences his work after the close of books, the
audit fee should be
or next financial year.
new product is introduced in the market, exceptionaly heavy expenditure is incurrora treated as expense
advertising and sale promotions. Such expenditure should be spread over a red on ases. Sometimes the goods are received from the supplier at the close of the year but
er of (iii)
accounting years and profit and loss account should be debited with the amo rchase invoice is not received from the supplier. For all such purchases, the purchase
written off every year. The balance of such expenditure should be shown as an asset in e account should be debited and credited to outstanding liabilities account. The auditor
n the
balance sheet till it is completely wiped off. should compare the purchases book with goods inward register of the last month of the
period under audit.
B. Outstanding Liabilities Tnterest on loans and debts. If on the date of balance sheet interest on loans and debentures
At the close of the year, there may be some outstanding liabilities for expenses. Such liabilities but not paid, then it be taken into
is due must account as outstanding liability. The auditor
examine the accounts, of paid so far and the
must be brought into account to arrive at the correct profits. If any outstandingliability for expenses
is not included in the profit and loss account of the current year, the profit arrived at will be over should s
past year rate interest, interest
agreement. He should also see that proper entries are made for such items in the books of
stated. It is the duty of auditor to see that all such liabilities are brought into account before the
accounts.
current year's profit is arrived at. If the auditor fails to do so, he may be held responsible for the or directors
Commission. Salesmen, agents may be paid commission on the basis of sales.
dividends being declared out of capital. By experience the auditor can know from cash book and past (v)
From time to time agent may withdraw against the commission. All such withdrawals are
officer that there areno
years accounts.The auditor should get a certificate from the responsible the commission due
at the end of the year. The commission is calculated at
incurred which
adjusted against
have not been brought into account during the accounting period. The on the basis
of the agreement made with the agent. On the basis of these
expenses the end of the year
the purchases of the first few months of the made for the commission due after adjusting
the
auditor should go through the cash book payments and calculations the provisions are
next if he finds that expenses of the period under audit
are paid in subsequent year, he should
made the f the have overdrawn, excess should be considered
year; withdrawals by agent. agents
this fact to the notice of his client.
bring as advance to them.
be with the agent, the
income o r unpaid expenses. Expenses may the sales as per the agreement made
The outstanding liabilities may be unearned If the commission is payable on
which is made after the under audit. Such expenses calculations for commission but also the sales made by
incurred for the current year, payment of period the
shown as liability auditor should check not only for the sales
debited in profit and loss account and the adjustments must be made
are called unpaid expenses, which should be such agent. All the sales must be genuine,
received in the current year but a part
or whole of it must also be adjusted.
i n the balance sheet. income may be made in the next accounting period
Similarly income should not be credited
in profit returns, e v e n the returns The
Such be due to a party. auditor
may be related to the subsequent accounting period. At the close of the year, the royalty may
balance sheet. (vi) Royalty Payable. due but not paid by the
and loss account and be shown on the liabilities side of the in
is made in respect of royalty
have been made should check that proper provision
The auditor should examine the voucher to see that appropriate adjustments end of the period under audit. close
current year's profit and loss account. remain unpaid at the of the
and carriage may At the
Freight and Carriage. Freight rendered by the concerned agent.
The following are some of the examples of outstanding expenses and outstanding liabilues (V not been
whereas
the accounts have
of the month, accounting period if
books are closed on the last day
Wages and salaries. Generally
 10.8 vouCHING OF LEDGE youCHING OF LEDGER

and carriage should be ascerta. 10.9

close of the year the amount of such freight
see that no
part of carriage and freight is lofend br
incd and broug the company not acknowledged as debts
into account. The auditor should 1Claimsagainst
ncalled liability on shares partly paid up.
recorded Ani
C. Contingent Liabilities 2 Arrears of fived cumulative preference dividends
is not actual on
A contingent liability liability but which will become a liability . The timated amount
on
mOunt of contract remaining to
an event in future. It may
mature as actual liability on the happening of an evens n be eecuted the capital account and not
nappening provided tor.
If there is possibility in f.ture
future is uncertain, the event may or may not happen.
amounts for which the is
is
client liable for a particular amount, such a liability contingent
on the
happening of.hakin Other
company contingently liable.
event. 5 tirough
c h Ibooks of accounts,
w.B. Meigs defines contingent labilities as "potential obligation which may in future develom while going
correspondence, minute books, bank statements etc., the
such liabilit
out
He may inquire from the bank
liabilities or may dissolve without necessitating any outlay' find about the
actua ditor
can of bills which
ired
The uncertainty as to obligation to pay may make it a contingent liability. Furthe
ill the close of the year. Investments in the shares made by thenumber
client can be looked
havei
ot matue
into which.
paid up. He can also tind out the arrears of preterence dividend on
says, "The term 'contingent liability' should be used in the accounting sense to designat Mor om cumulative
liability of presently determinable or indeterminable amount which arises from past circun Ponab preferenceshares
The audito should
hold consult solicitor ot the client to assess the
of
value and genuineness such
action which may or may not become a legal obligation in the future, and which if so
a loss or an expense or an asset of doubtful value.
paid, e gives rise t
to liabilities

amount
of
af econtingent liability may be detinite as in case of bills receivable
discounted. In
Simply stated, contingent liability is not an actual liability but will become a liahils. The amount of contingernt liability may not be definite as in the case of pending suit tor
certain cases
on he
happening of an event in future. the company.
against
The examples of contingent liabilities are as follows: damages

Contingent A s s e t s
a) Bills of exchange discounted. As such bills are discounted from the bank before the
a r e those which may arise on the an uncertain event.
maturity, if the party meets the bill on the date of maturity no liability will arise. If the date of The
ntingent assets happening of Usually.
are not shown
shown at
at the foot of the balance sheet on
e not
assets
the assets side. Following are the
contingent assets
refuses to meet it on due date, the bank will recover the amount from the client. So when accep
aa Lbill is contingent

enamplesof
discounted from a bank, it becomes a contingent liability till the acceptor meets it. The amomu
nt of share capital of the company.
such liability is known and can be casily ascertained. Uncalled
a)
(b) Suits pending for damages. A suit may be pending against the clie AalClaim from
the acceptor ot bills receivable which has been discounted by the client from the
under which damages
be dishonoured
may be claimed for the breach of contract or infringement of copyright etc. Damages are payable bank but might
i
the court decides so. If the client is of the opinion that he has committed a breach, the liability js for intringement of a copy right.
certain.
c) Claim
for the retund of sales-tax, octroi etc.
d) Claim
() Contingent liability on account of unexpired letters of credit issued by the bank. as
but additional
ltis logical
dalso
the contingent liabilities are shown in the balance sheet, the contingent assets
be shown. Otherwise the true and fair state of affairs may not be disclosed by the balance
(d) Disputed liability of income-tax, sales-tax, of the past years. uld

e) Contingent liability on account of indemnity bonds issued by the bank on behalf of the dht The Companies Act does not require disclosure of contingent assets in the balance sheet.
company Questions
) Contingent liabilities on account of the guarantees given by the bank on behalf of the
1. Discuss the dutes of an auditor in rospect of verificaton of Purchase Ledger.
company
The contingent liabilities may involve 2. Discuss the legal position ot the auditor of a company regarding the adequacy of reserve tor bad and
doubttul debts.
1. An expenditure
Give also the relevant cases in support of your answer.
2. Acquisition of an asset.
3. Describe the duty of an auditor in regard to book debts, indicating how lar you would accept
1. A liability may involve an ultimate loss e,g. suit for damages, speculative transaction in
stock responsible ofticial's view as to what debts should be writen off as irecoverable
exchange market etc. All such liabilities involve an expenditure or a loss. 4. As an auditor, how would you proceed to vouch (a) Sales Ledger (b) Purchases Ledger
2.
in mind
A contingent
5. How would you undertake Ledger ? What special points should be køpt
liability may involve acquisition of an asset eg. when goods
have Dec vouching of Debtor's
purchased for future delivery or under an agreement of service. No mention while vouching the bad and doubtful debts ?
liability should be made in the balance sheet but if the ot su ?
information be
amount involved is heavy 6. What is delerred revenue ? How wouid you verity this expenditure
expenditure
may
?
As
provided at thhe footnote of balance sheet. . liabilities By what method would
per P'art I of Schedule VI of What are contingent liabilities ? How would you vouch contingent
sheet to show: a to the at the time of audit that all liabilities have been disclosed in the balance
Companies Act, 1956, footnote may be added, bald yousatisty yourself contingent
sheet ?
10.10 voUCHING OF LEDG
8. As an auditor how would you vouch :
(a) Income received in advance.
(b) Deferred revenue expenditure.
(c) Reserve for bad and doubtful debts.
9. Explain with examples contingent liabilities and contingent assets.
10. What do you understand by "outstanding assets" and "outstanding liabilities" ?
11. While vouching personal ledger, how can you, as an auditor, find out whether all
Are Accounted For ?
outstanding assets

Objective Type Questions

1. Tick( the right statements:
()Impersonal ledger is a general ledger.
Gi) (i) Impersonal ledger is a nominal ledger.
(ii) Outstanding liabilities may be of two types-unpaid expenses and
unpaid incomes.
(iv) Contingent liability is a liability involving an ultimate loss on disputed case.
(v) Revenue expenditure is not incurred in the ordinary course and
administration of business.