Unit – 2
Vouching and Audit Note Book
It is necessary to establish authenticity of the financial transactions which are entered in the books of accounts. It can be done by examining various vouchers which are prepared in support of the transactions.This practice of examining vouchers is referred as Vouching.
An auditor has to keep certain things in mind while vouching. These are:
- That the date of the voucher falls within the accounting period.
- That the voucher is duly authorised.
Vouching of books of original entry can be divided into two parts –
Vouching of Journal proper and Vouching of Subsidiary books.
Vouching of Journal proper:
Journal proper is meant for recording all those transactions which cannot be recorded in the other subsidiary books viz purchase book, sales book, purchase return book, sales return book, cash book, Bills Receivable book and Bills Payable book.
An auditor should vouch the journal proper on the following lines:
1) He should verify that every entry in the journal proper is supported by a voucher or evidence.
2) When the evidences are not available for some entries in the journal proper, the auditor should check those entries from the evidence of parties.
3) He should see that every entry in the journal proper is explained by narration.
Vouching of Subsidiary books:
1) Vouching of Purchase Book:
The Auditor needs to verify the following in the Purchase Book and the Vouchers-
a) Date of Invoice
b) Name of Supplier
c) Amount in Voucher vis a vis Bill issued by the supplier
d) Inspection of Quality Report and amount of rejected goods to be verified
Besides checking the Purchase Book and Vouchers, the Auditor needs to verify the following:
- Quotations,
- Authorization of purchase,
- Statement of accounts' received from the suppliers.
2) Vouching of Sales Book:
The Auditor needs to verify the following in the Sales Book and the Bills-
a) Name of debtor in an invoice against the name in the subsidiary book
b) The date of invoice should be within the accounting period
c) The authority for granting discount
d) The invoice should be authorized by a responsible officer
Besides checking the Purchase Book and Vouchers, the Auditor needs to verify the following:
- Procedure of dispatch of goods,
- Sales contracts, if any,
- Exchange conversion rates, Clearing and Forwarding Bills, Banker’s advice, etc. in case of Export Sales.
3) Vouching of Purchase Return Book:
The Auditor needs to check the system of recording goods returned by the company.
After checking and evaluating the internal control system, the Auditor should vouch the following:
a) Credit Notes received from the suppliers with the returns outward book and the relevant correspondence and
b) The returns outward book with goods outward book.
4) Vouching of Sales Return Book:
An Auditor should inquire into the system of recording goods returned by customers and credit notes for the same.
After checking and evaluating the internal control system, the Auditor should vouch the following:
a) The credit has been authorized by a competent authority and
b) No credits have been suppressed or inflated
General Points:
(1) Cash is a highly liquid asset. Hence it is necessary that the Auditor satisfy himself that the all the cash transactions entered in the books are genuine and correctly recorded in the books. Further the auditor has to ensure that every cash payment voucher has sufficient appropriate documentary evidence.
(2)Check the following
- Internal Control System
- Check the correctness of Book Keeping records
- Check whether accounting policies have been observed
- Check the documentary evidences of transactions
- Check the disclosures in the Financial Statements
(3) Casting (Totalling)
The totals of particular expenses may be inflated and this is a sign of fraud. Similarly, a cashier may misutilise the receipts by under-totalling the receipts column of the Cash Book. Such frauds may be detected only by checking the total columns of the cash columns and the respective ledgers.
(4) Bank Reconciliation Statement:
It is an important document for internal accounting control and it should be checked by the Auditor with due diligence and utmost care. Cheques issued but not presented for payment before the closing date, cheques deposited before the closing date but not cleared have to be appropriatelyinvestigated.
Audit of Payments:
While auditing the payments, following areas have to be audited:
(1) Purchase of Goods: Cash purchases should be verified with receipts issued by the suppliers. Evidence can be received by verifying Stock Ledger for the goods inward.
(2) Remuneration paid to Directors: Following points must be considered
- To verify the entitlement
- To examine adherence to legal provisions
(3) Payment for acquiring assets: Following points must be considered
- To check the receipt for the amount paid.
- To check the title of deed
- To verify the authority of purchasing an asset (Board of Directors in case of a company)
- To confirm whether no value for repairs have been capitalised.
(4) Payment of any expenses: As per the standard rules, every expenditure should be charged in the year for which the expenditure is incurred. It should be verified accordingly. Further, any expenditure personal in nature should not be charged in the business.
(5) Payment towards Taxes:Payment on account of Income Tax should be verified with the copy of the assessment Order and the receipt (Challan). Interest allowed on advance tax should be recorded as an Income while Interest or Penalty paid fornon-payment or late payment of the taxes should be debited as an expenditure.
(6)Travelling Expenses: There are generally approved rules regarding travelling allowances in business organisations. So, this expenditure should be vouched accordingly. In absence of the rules, the Auditor should verify the actual amount incurred with the help of bills, etc.
The auditor shouldalso satisfy himself that the expenditure were incurred in the interest of the company.
(7) Salaries and Wages: The payment of Salaries and Wages need tobe vouched carefully. Following internal checks should be done:
- Appointment and promotion of employees
- Attendance of the employees
- Wages sanction
- Confirm that all payments made to the workers and other employees have been acknowledged by them. This can be done by verifying that ‘receiver’s signature’ is present on the voucher making payment towards Salary.
(8) Petty Cash:Petty cash should be verified as follows:
- Trace the amount advanced to the petty cashier for meeting petty office expenses in the petty cash book
- Vouch the payments, wherever possible, by external evidence like Invoice or Cash Memo, etc.
- Check the column totals
- Verify the Cash balance in hand
(9) Advertisement expenses: Advertisement expenses will be vouched in the following manner:
- Obtain the complete list of advertisement, media wise, along with the amount paid in respect of each category
- To ascertain whether there is a regular contract with an advertising agency
- Check the receipt for amount paid for the advertisement expenses incurred
- Verify that outstanding advertising expenses have been properly disclosed on the liabilities side of the balance sheet
(10) Payment of Dividend:
- Examine the provisions in the memorandum and articles of association regarding payment of dividends
- Examine the boards minutes regarding rate of dividend
- Verify the shareholders register and ensure that the names of all shareholders for entitled to receive dividends have been included
- Check the computation of Dividend
- See the counterfoils of cheques of amounts paid to shareholders
Cash receipts:
(1) Cash Sales:
To vouch cash sales, the system of internal check should be examined with finding out loopholes there in, whereby cash sales could have been misappropriated.
Cash sales are usually verified with the carbon copies of cash memos.
Is a cash memo has been cancelled its original copy should be inspected it could be that the amount their off have been misappropriated
(2) Receipts from Account Receivables:
Receipts from account receivables should be checked with the counterfoils receipts issued to them. Comparison of the entries of Amount deposited in the bank account with closed on counterfoils of the pay in slip book should be made.
(3) Income from Investments:
If investments are many that light generally would have an investment register. In such a case the dividend income is first vouched by reference to the counter files of dividend warrant. In case of interest on deposits with banks, verification should be done by reference to the bank statement and the rate of interest.
(4) Rental receipts:
Copies of bills issued to the tenants should be checked by reference of tenancy agreements.
Meaning – Audit Programme:
An audit programme is a detailed plan of the auditing work to be performed. The auditor plans the whole procedure of audit from beginning till the finalization of audit report.
It specifies the procedures to be followed in the conduct of audit more efficiently and competently. In short, it is a tool for planning, directing and controlling the audit work.
Objectives of Audit Programme:
1) To facilitate coordination among various parts of audit work.
2) To fix responsibility and accountability of each audit assistant.
3) To serve as a guide for planning the audit work in future.
4) To ensure uniformity in the performance of audit work and to avoid duplication and repetition of work.
5) To serve as evidence of methods or procedures undertaken, persons involved in completion of audit work etc.
Contents of an Audit Programme:
1) Name of the client.
2) Nature of operations and business of client.
3) Date of commencement of audit work.
4) Duration of audit work.
5) Review the report of the previous auditor.
6) Review of system of internal check.
7) Accounting system followed in client organization.
8) Examine the various ledger accounts and subsidiary books.
9) Examine the statutory books and registers, profit and loss account, and balance sheet.
Books Recommended :
1 N. L. Nadda —Ankekshan
2 Spicer and Pagler — Practical Auditing
3 De Paula — The Principles of Auditing
4 T. R. Sharma — Auditing
5 R. R. Gupta —Text Book of Auditing
6 B. N. Tandon —Auditing
