PRACTICAL AUDITING

UNIT - II

VOUCHING AND VERIFICATION

VOUCHING

Meaning and Definition

• Vouching is concerned with examining documentary evidence to ascertain the

authenticity of entries in the books of accounts.
• In other words, it is an inspection by the auditor of evidence supporting the transactions
made in the books.
• Vouching is a technique used by an auditor to judge the truth of entries appearing in
the books of accounts. Some important definitions of vouching are:
• According to L.R. Dicksee “Vouching is an act of comparing entries in the books of
accounts with documentary evidence in support thereof.” -
• According to J.R. Batliboi “Vouching means testing the truth of items appearing in
the books of original entry.”

Objectives of Vouching:

• All the transactions which are connected with the business have been recorded in the
books of accounts properly.
• To verify that all transactions recorded in the books of accounts are supported by
documentary evidence.
• The vouchers which support the entries are legally valid from the view point that they
are authentic, addressed to the business and properly dated.
• To verify that no fraud or error has been committed while recording the transaction in
books of accounts.
• The vouchers have been processed carefully through various stages of internal check
system.
• While recording the transaction whether distinction has been made between capital and
revenue items.
• Whether accuracy has been observed while totalling, carrying forward and recording
an amount in the account.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 1
VOUCHERS

Meaning

• A documentary evidence in support of any business transaction recorded in the books

of accounts is called as a Voucher.
• A Voucher may be a receipt, invoice, bill, cash memo, bank pay-in-slip, counterfoil of
a cheque, correspondences, agreements, resolutions passed in the meeting etc.
• Voucher substantiates the entries in the book of accounts and confirms the genuineness
of the transaction. All vouchers relating to the business transactions should be carefully
preserved and properly filed.

Types of Voucher

There are two types of Voucher. They are: -

• Primary Voucher
• Collateral Voucher

Primary Voucher:

• Primary voucher refers to the written evidence in original.

• Examples of primary voucher are purchase invoice, cash memo, bills, confirmation of
balances, bank statements, contracts, etc.

Collateral or Secondary Voucher:

• When the original voucher is not available, copies thereof are produced in support or
as subsidiary to remove suspicion and to satisfy the auditor, such a voucher is known
as Collateral Voucher.
• Examples of collateral voucher are copies of sales invoice, receipts, copy of resolution
passed in a meeting etc.
Contents of Voucher / Essentials of a Valid Voucher

The points to be noted by the auditor while vouching the voucher or the contents of the
vouchers include:

Name and Address of the Firm: Every Voucher must contain the name and address of the
company, in printed form, at the top.

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Voucher Number: Vouchers bear a unique serial number, for the purpose of easy
identification. This also helps in differentiating with other vouchers and entering their reference
in the account books. So, the vouchers are sequentially numbered and their number is added
against the posting made.

Date: A voucher carries a particular place to indicate the date on which the voucher is written
when the transaction took place.

Details of Party to be Debited: This section contains the name and address of the party with
whom the transaction is performed by the company and payment has been made. Further, the
objective and description of such payment are also entered.

Details of Party to be Credited: The payment made via cash or cheque/demand draft. So, the
cash or bank account is credited, along with the number and date of issue of the cheque and
demand draft.

Proof of amount received: When payment is given in the form of cash to any party, full details
with amount, purpose and date of payment received by the party is mentioned in the voucher
and the signature of the receiver is obtained. However, when the payment is made via account
payee cheque, the receiver’s signature is not mandatory.

Revenue stamp: In every voucher, as per law, every payment of Rs. 500 or more, revenue
stamp needs to be affixed. and the receiver of the payment must touch a certain part of that
stamp.

Signature of the Accountant: The voucher must bear the signature of any designated person
of the firm be it an accountant or any other officer along with his/her name. Once the
verification is performed, it has to be signed by the owner or any other authorized officer of
the company.

VOUCHING OF CASH TRANSACTIONS

Vouching of Cash Receipts or Debit side of Cash Book

Opening Balance of Cash Book

• Opening balance of cash book represents cash in hand at the start of the year and should
verified from the balance sheet of last financial year.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 3
Cash sales:

• In vouching cash sales, cash register should be fully checked with carbon copies of
cash memos.
• Then, the auditor should verify the daily deposits of cash received in the bank dates of
the cash and the date on which the receipts are recorded in cash book must be same.
• Where the cash memos are cancelled, all copies including the original copy duly
cancelled should be kept in the book.
• Where a company has a discount policy, if more discount is allowed in a transaction it
must be approved by a responsible officer.

Cash received from the debtors:

• The auditor should verify amount received from debtors from the counterfoils or
carbon copies of the receipt issued to the customers.
• All these receipts should be serially numbered.
• Amount should be entered in the cash book on the day when received.
• Discount allowed to customers should be authorized by a responsible officer.
Loans:

• While vouching the loans received, the terms and the conditions contained in the
agreement should be verified.
• If the loan is secured what security has been offered, whether the fact has been disclosed
in the balance sheet.

Bills receivable:

• Bills receivable book maybe verified because the various details regarding the bills
matured and discounted are available in it.
• Auditor should check the amount received with the bank statement. Some bills might
have become due but no amount has been received.

Sale of Investment:

• If the sales have been affected through a bank, the auditor should examine the bank
advice to know the various details. Sometimes the investment is sold through the
broker.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 4
 • Broker’s sold note or commission should be examined to verify the sale proceeds and
commission charged by the broker.
• If the investments are sold at cum-dividend price, auditor should see that proper
apportionment has been made between capital receipts and revenue receipts.

Sale of Fixed Assets:

• Sale of fixed assets may be vouched with minute book of board of directors,
correspondence, agents’ sale account and sale contract.
• It should be seen that proper account has been credited. Any profit arising on the sale
of asset shall be credited to revenue account which is not available for distribution of
dividends.
• It must be seen that sale of fixed assets has been sanctioned by the authorized person
or committee.

Vouching of Cash Payments or Credit Side of the Cash Book:

Cash Purchases:

• Good purchased are actually received by store keeper. Cash memos can be compared
with goods inward book to verify the goods received.
• Auditor should verify only the net amount (after trade discount) should be entered in
the books.

Payment to Creditors:

• It should be examined with the receipts issued by the creditors. The receipts should
indicate the purpose for which the payment has been made.
• If the payment is made in full and final settlement of account, the balance should be
accounted for as discount received.
• Where the payment is made in excess of the bill, either the excess payment is in advance
or the payment is made by mistake, which should be recovered back from the creditor.

Bills Payable:

• Bills payable honoured on the date of maturity and is returned by the payee after
receiving the payment. These bills should be cancelled after being paid.

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 • Bills payable can be vouched with bills book. If the payment is made by the bank, bank
statement or pass book can be examined to verify the payment of bill

Payment of Salaries:

• In vouching the payment of salaries, Auditor should check salary register with the
entries made in the cash book.
• He should examine carefully alterations in the amount of deductions on account of
fines, funds, loans, insurance etc.

Purchase of Investment:

• The auditor should compare the investment purchased with Broker’s Bought Note.
• Investments must be in the name of the company.
• Where the investments are purchased at cum-interested price, interest included in the
purchase price should be debited in the interest account and the balance in investment
account.
Rent paid:
• The auditor should verify the payment of rent from the agreement.
• The rent voucher should be supported by rent receipt from the landlord. It should be
seen that payment of rent is sanctioned by responsible officer.

VOUCHING OF CREDIT SALES

While vouching credit sales the auditor should examine and see the following points

• The sales register should be examined with copies of sales invoices.

• The sale of capital items should not be recorded in the sales book, otherwise the profits
will be inflated.
• Test check should be applied on the calculations made in sale invoices.
• The totalling and the castings of sales book should be verified.
• Sales Tax, duties collected thorough sales invoices must be recorded under separate
accounts.
• It should be verified that all sales invoices are prepared on the basis of challans and
then sales invoices are entered in sales book and from there, posted to their respected
accounts.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 6
 • Sales made in the current year must be recorded under that year and shall not be treated
as sales of subsequent year.
• All cancelled sales invoices must be kept together for verification by auditor, he should
see that cancelled invoices are properly treated in the books.
• The statement of accounts should be verified by getting confirmations from the
customers.

VOUCHING OF CREDIT PURCHASES

While vouching credit purchases the auditor should examine and see the following points.

• There should be proper record for all purchase orders.

• A copy of purchase order shall be sent to the Accounts Department. A duplicate copy
of the order should be kept in office for record.
• All goods received should be recorded on goods received note; a copy of it should be
sent to Accounts Department.
• The auditor should see that only credit purchases of the goods are recorded in purchase
book.
• The purchases book can be verified from purchase invoices, copies of orders placed,
goods received note, goods inward book, copies of challans from suppliers.
• The quantity mentioned in the invoice must be same as is shown in the purchase order.
• The price charged by the supplier must be as per quotation/pricelist of the supplier.
• The supplier bill must be in the name of business and for the period under audit.
• While vouching the purchase vouchers, each voucher should be stamped or initialled
after examination, so that it could not be produced again.
• Any purchase, made not for the purpose of business of the client, must not be debited
to purchase account.
• Duplicate invoices must not be entered in the purchase book if original invoices have
already been recorded.
• The auditor should be more careful while vouching the purchase made in the first and
last month of the accounting period, because sometimes the purchase of last year may
be included in the purchases of first month of current year or purchases of the last month
of current year may be recorded in the next.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 7
VOUCHING OF PAYMENT OF WAGES

At the time of vouching of wages paid, the Auditor should verify the following points to avoid
misappropriation of cash

• Adequacy of Internal Control System.

• Payment of wages at higher rate than allowed.
• Payment shown to ex-workers in the current month.
• Lower or non-deduction of advance or other deductions due.
• Payment to fictitious workers.
• Payment to workers who were absent from duty.
• Wages sheet should compare with wages register.
• Comparison of current month wages with last month’s wages and proper verification
should be there for extra ordinary changes.
• Detailed verification for payment to casual workers.
• Vouching and verification of accounting treatment for unpaid wages.

VERIFICATION AND VALUATION OF ASSETS AND LIABLITIES

Verification: Meaning and Definition

• Verification means the procedures normally carried out at the year end, to confirm the
ownership, valuation and existence of items at the balance sheet date. In simple words
verification means, ‘proving the truth or conformation.’

• According to Spicer and Pegler “The verification of assets implies an enquiry into the
value, ownership and title, existence and possession, and the presence of any charge on
the assets.”
Objectives of Verification
The objectives of verification are as follows:
• To show the correct value of assets and liabilities.
• To know whether the Balance Sheet exhibits a true and fair view of the state of
affairs of the business.
• To find out the ownership, possession and title of the assets appearing in the
Balance Sheet.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 8
 • To find out whether assets are in existence.
• To detect frauds and errors, if any while recording assets in the books of the
concern.
• To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.
• To verify the arithmetic accuracy of the accounts.

• To ensure that the assets have been properly recorded.

Auditor’s Duty Regarding Verification

• The auditor of a business is required to report in concrete terms that the Balance Sheet
exhibits a true and fair view of the state of its affairs.
• In other words, he has to examine and ascertain the correctness of the money value of
assets and liabilities appearing in the Balance Sheet and this examination is known as
verification of assets and liabilities.
• The auditor has to keep in mind the following points while verifying the assets:
• Ensuring the existence of assets.
• Acquiring the assets for business.
• Legal ownership and possession of the assets.
• Ensuring the proper valuation of assets.
Valuation: Meaning

• Valuation means to set the exact value of an asset on the basis of its utility.

• Valuation forms an important part of the everyday audit. It is because the accuracy of
balance sheet depends much upon how correctly the estimation of the value of various
assets and liabilities has been made.

• Both over valuation and under valuation of assets and liabilities would exhibit wrong
picture of the financial affairs of a concern.

• The auditor has to see that the assets and liabilities appearing in balance sheet have been
exhibiting their proper value i.e. neither they have been over-valued nor under- valued.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 9
Methods of Valuation:

Cost price: The price which is paid for the acquisition of an asset is known as cost price, of
course the expenses incurred in the purchase of an asset and its installation in its cost price.
Market value: A value which an asset can fetch in the market when sold is known or termed
as Market value.
Replacement Value: It is a price at which a particular asset can be replaced. The assets such
as commission, freight etc. is included in such a value.
Book Value: A value at which an asset appears in the books of accounts is known as its book
value. It is usually the cost less depreciation written off so far.
Going Concern value or Conventional value or token value or Historical value: It is
equivalent to the cost less reasonable amount of depreciation written off. No notice is taken of
any fluctuation in the price of the assets. Reason for this is that these assets are acquired for
use in the business and not for sale.
Net Realisable Value: A value which will be realized in the market and received from the sale
of an asset it is known as its realizable Value.
Scrap Value: A value which is obtained from the asset if it is sold as scrap.
DIFFERENCE BETWEEN VERIFICATION AND VALUATION

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 10