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UNIT II

Audit Procedure

Q1) What is Vouching?

A1) Vouching is an important procedure for obtaining audit evidence. Normally, entries in the books of account are made on the basis of documentary evidence such as bills, receipts, cheque counter-foils, pay-in-slips, pay roll and so on. Such documentary evidence is called a voucher. Vouching means the critical examination of such vouchers. Vouching is the inspection of documents supporting an entry in accounts. It is the act of examining vouchers to establish the authenticity (genuineness) of the transactions recorded.

Q2) What are the objectives of Vouching?

A2) Auditing is the critical examination of accounts to determine whether they are true and fair and free from errors and frauds. Vouching is said to be the essence of auditing. Vouching is the method of critically examining the documents which support the entries in the accounts. Vouching is important as it achieves the following aims or objectives-

TRUE AND FAIR

Vouching enables the auditor to ascertain whether the entries in the books are true and fair, which is the basic objectives of auditing.

1) Occurrence

Vouching helps the auditor to ascertain whether the transaction actually occurred.

2) Amount

Vouching helps the auditor to check whether the transaction is recorded for the right amount.

3) Relevant Entries

Vouching helps the auditor to ascertain whether the entries recorded in the books are relevant i.e. they relate to concern and to the current accounting year.

4) As per Standards

Vouching enables the auditor to verify whether an item is accounted as per the recognized accounting standards, policies and practices.

5) As per Law

Vouching ensures that the transaction complies with the provisions of Law e.g. the Companies Act, the Income-tax Act etc.

6) Disclosure

Vouching enables the auditor to ensure that an item is properly disclosed in the final accounts as required by Schedule III of the Companies Act, 2013.

Q3) What are the points to be considered in Vouching?

A3) POINTS TO BE CONSIDERED IN VOUCHING

Checking the Voucher

Checking the supporting documents and

Checking the entry in the Books.

CHECKING OF VOUCHER

Name of the concern.

Date of the Voucher.

Serial number of Voucher.

Heads of Account Debited and/ or Credited.

Description of transaction and Name of Parties Involved.

Amounts in Figures and Words.

Signature of Authorized Official.

Signature of Person Preparing Voucher.

Signature of Person Making Entry In a Day-book.

Signature of the payee.

CHECKING SUPPORTING DOCUMENTS

PERTAINS TO CLIENT.

PERTAINS TO Current Year.

3 serial Number of Bill.

Details of transaction.

Quantity.

Amount.

Signature of Party.

Approval of Bill.

CHECKING ENTRY IN BOOKS

Client’s Books.

Date of Entry.

Serial number of voucher.

Heads of Account Debited and/or Credited.

Quantity.

Amount.

Q4) Explain:

a) Vouching of receipts.

b) Vouching of payments.

A4) i) Vouching of receipts:- Cash Receipts is defined as a form of liquid funds given by a consumer to a provider of goods or services as compensation for receiving those products. • In most domestic business transactions, a cash payment will typically be made in the currency of the country where the transaction takes place, either in paper currency, in coins or in an appropriate combination. • Terms used in Vouching of Receipts – Cheque, Cash in hand, Vouchers, Voucher Numbers, Bank Reconciliation, Blank Cheques, Monthly accounts, Discounts, Payment authorities. In vouching, receipts shown on cash book, an auditor should see that receipts have been received wholly and exclusively for the business of the client and that it is properly authorized by the person who is competent to do so.

ii) Vouching of Payments:- In vouching, payments shown on cash book, an auditor should see that payment has been made wholly and exclusively for the business of the client and that it is properly authorized by the person who is competent to do so.

An auditor should keep in mind the following special points while vouching payments:-

Name of the concern.

Date of the Voucher.

Serial number of Voucher.

Heads of Account Debited and/ or Credited.

Description of transaction and Name of Parties Involved.

Amounts in Figures and Words.

Signature of Authorized Official.

Signature of Person Preparing Voucher.

Signature of Person Making Entry In a Day-book.

Signature of the payee.

Q5) What is Verification of assets?

A5) Spicer and Pegler have defined verification as “it implies an inquiry into the value, ownership and title, existence and possession and the presence of any charge on the assets”. Verification is a process by which an auditor satisfies himself about the accuracy of the assets and liabilities appearing in the Balance Sheet by inspection of the documentary evidence available. Verification means proving the truth, or confirmation of the assets and liabilities appearing in the Balance Sheet.

Thus, verification includes verifying :-

The existence of the assets.

Legal ownership and possession of the assets.

Ascertaining that the asset is free from any charge, and

Correct valuation.

Of course it is not possible for the auditor to verify each and every asset. It was held in Kingston Cotton Mills case that “it is not part of an auditor’s duty to take stock. No one contend that it is. He must rely on other people for the details of stock in trade in hand”.

However, as per the decision given in Mc Kesson and Robins case (1939) the auditor must physically inspect some of the assets. Now the auditor has to report whether the balance sheet shows true and fair view of the state of affairs of the company. Hence, he is required to verify all the assets and liabilities appearing in the balance sheet. In case of failure, the auditor can be held liable for damages.

Q6) What are the points to be considered for verification?

A6) POINTS TO BE CONSIDERED

While conducting verification following points should be considered by the auditor –

Existence: The auditor should confirm that all the assets of the company are physically existing on the date of balance sheet.

Possession: The auditor has to verify that the assets are in the possession of the company on the date of balance sheet.

Ownership: The auditor should confirm that the asset is legally owned by the company.

Charge or lien: The auditor has to verify whether the asset is subject to any charge or lien.

Record: The auditor should confirm that all the assets and liabilities are recorded in the books of account and there is no omission of asset or liability.

Audit report: Under CARO the auditor has to report whether the management has conducted physical verification of fixed assets and stock and the difference, if any, between the physical inventory and the inventory as per the book.

Event after balance sheet date: The auditor should find out whether any event after the date of balance sheet has affected any items of assets and liabilities.

Q7) What are the objectives of verification?

A7) OBJECTS OF VERIFICATION

Following are the objects of verification of assets and liabilities

To show correct valuation 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 and title of the assets

To find out whether assets were in existence

To detect frauds and errors, if any

To find out whether there is an adequate internal control regarding acquisition, utilisation and disposal of assets.

To verify the arithmetic accuracy of the accounts

To ensure that the assets have been recorded properly.

Q8) What are the advantages of verification?

A8) ADVANTAGES OF VERIFICATION

Advantages of verification are as under :-

It avoids manipulation of accounts

It guards against improper use of assets

It ensures proper recording and valuation of assets

It exhibits true and fair view of the state of affairs of the company.

Q9) What is Valuation of assets?

A9) Valuation of assets means determining the fair value of the assets shown in the Balance Sheet on the basis of generally accepted accounting principles. The valuation of assets is very important because over-statement or under-statement of the value of assets in the Balance sheet not only distorts the true and fair view of the financial position but also gives wrong position of profitability.

The valuation of the assets is the primary duty of the officials of the company. The auditor is required to verify whether the value ascertained is fair one or not. For this, he may rely on the technical certificate issued by the experts in the field.

Valuation of assets means not only checking value of the assets owned by an organization as on Balance Sheet date, but also critical examination of the value of these assets (comparative analysis of different assets).

Q10) What are the methods of valuation of assets?

A10) Methods of Valuation-

The following are the various principles of valuation of assets

Cost Price (Going Concern Value): Under this method actual cost of assets are reduced by the depreciation provided. Usually this method is applied to value fixed assets.

Market Value: This refers to the market value of the asset i.e. the price at which the asset is being transacted in the market. This is applied to value the current assets only when this is lower than cost of the asset. Usually market value is adopted to value items having perishable nature.

Scrap Value: Assets which are useless for the enterprise may be sold as scrap in the market. The value for which such assets can be disposed of as scrap, is called as scrap value of assets.

Replacement Value: This represents the value at which the existing assets can be replaced. That means the price to be paid to acquire such type of assets in the market on the date of the balance Sheet.

Realizable Value: The value that can be obtained if the asset is sold in the market i.e. anticipated selling price. Usually, expenses such as commission, brokerage etc. are deducted from it.

Q11) What is verification of liabilities?

A11) Meaning: The verification of liabilities implies an enquiry into the nature, extent and existence of liabilities.

It involves ensuring the following:

That all the liabilities have been clearly stated on the liability side of the Balance Sheet.

That all the liabilities relate to the business itself.

That they are correct and authorized.

That they are shown in the Balance sheet at their actual figures.

It is an important duty of an auditor to verify the liabilities appearing in the Balance Sheet of the company. The object of verification of liabilities is to ascertain whether there is any improper inflation or deflation of values or improper creation of an imaginary liability in the books. This form of manipulation is done in most cases to inflate or deflate the profits of the concern and thus make the position of the business appear stronger than what actually is, to create a secret reserve. As a result of such manipulation, the Profit and Loss Account and the Balance Sheet prove to be incorrect and thus the Balance Sheet does not exhibit a true and fair view of the state of affairs of the concern. So, the auditor must take all possible steps to ensure that all liabilities are recorded properly in the books of accounts of the business. It is advisable that the auditor should, besides verifying the liabilities as shown in the Balance Sheet, get a certificate from the management that all liabilities of any nature have been included in the books of accounts and the contingent liabilities have been shown by way of a foot-note to the Balance Sheet or have been provided for.

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