VOUCHING

According to F.R.M. De Paula, Vouching does not mean merely the inspection of receipts with the cash book, but includes the examination of the transactions of a business together with documentary and other evidence of sufficient validity to satisfy an auditor that such transactions ole in order, have been properly authorized and are correctly recorded in the books.

Objectives of Vouching The main objectives of vouching are :

1) To examine the accounting entries recorded in the books of accounts with reference to documentary evidences known as vouchers.

 2) To examine the adequacy and reliability of such documentary evidences.

3) To examine the authenticity of the transactions recorded in the books of account.

Importance:

Vouching is the act of checking evidential documents to find out errors and frauds and to know the authenticity, accuracy and reliability of books of accounts. Thus, it is important for an auditor due to the following reasons:

1. Vouching Is the Backbone Of Auditing – success of auditing depends upon the thoroughness in which vouching is completed. Main aim of auditing is to detect errors and frauds for proving the true and fairness of results presented by income statement and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the backbone of auditing.

2. Vouching Is the Essence Of Auditing Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transactions to commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.

3. Vouching Is Important To See Whether Evidences Are Correct Or Not An auditor checks the books of accounts to detect errors and frauds. Frauds may be committed presenting duplicate vouchers. All the small and big amounts of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in detail by an auditor which is the scope of vouching.

Therefore, it can be said that vouching is the heart of auditing because without the work of vouching, the work of auditing cannot be performed.

Types of Vouchers

 From the point of view of the auditor, the large number of vouchers available in various audit situations may broadly be classified as under :

1) Vouchers which are not prepared by the organization under audit, such as, purchase ' invoices, insurance policy, receipts given by payees etc. These vouchers are generally considered reliable as evidence for the transactions represented by them.

2) vouchers which are prepared by the Organization under audit, but validated by independent sources. For example, cheques prepared by the organization under audit receipted by the payees. These vouchers also provide reliable evidence.

3) Vouchers which are prepared and used completely within the Organisation.

This category, comprises the majority of vouchers and their reliability as evidence depends upon various circumstances, such as, whether they bear the signatures of some responsible officer and whether there is a sound system of internal control.

From the point of view of the nature of vouchers, they can be further classified as under :

a) Primary Voucher : It refers to an original voucher in writing which is produced in support of a transaction like purchase invoice.

 b) Collateral Voucher : It refers to a subsidiary voucher which is produced in the absence of an original voucher in support of a transaction like carbon copies of cash memos.

Principles or Techniques of Vouching(point to be noted while examining the vouchers) At the time of vouching auditor should keep in view the following important principles in his mind : General :

1. Vouchers are Numbered and Arranged consecutively: First of all auditor should check all the vouchers provided by the client are properly arranged, numbered and filed. These are in the same order as the entries are made in the books.

2. Strike off Or Change: If there is any striking off or change on the receipts and vouchers figures it should be signed by the authorized officer. The auditor should satisfy himself by inquiring about it.

3. Case Of Personal Vouchers: The auditor should not accept the voucher in personal name. There is a chance that an officer of the company has purchased any item in his personal capacity.

4. Checking Of Account Head: Auditor must be satisfied about the head of account on which cash is deposited and drawn. He should examine the documentary evidence in this regard.

5. Case Of Cancelled Voucher: The auditor should not accept the cancelled voucher. Because it has already served the purpose of payment. There will be a danger of double payment if it is accepted.

6. Important Notes: The auditor should take some important notes about those items which need further evidence or explanation.

7. Payment: The auditor should check that whether payment is described partially or for complete transaction of sale.

8. Agreements: These provide the basic information to the auditor. He should check the agreements, correspondence and other relevant papers.

9. List Of Missing Vouchers: Auditor should prepare the list of missing vouchers. This list will be helpful in detecting the fraud and errors. He must demand for duplicate vouchers and also satisfy himself with regard to the reasons of them being lost.

10.Once the vouchers are examined by the auditor , the same shall be cancelled with a stamp so that they are not produced again.

11.The vouching procedure should be as far as possible be completed at one stretch. Test checking should be resorted only in case where the auditor is satisfied with the internal check system

Specific :

1. Checking Of Date: The auditor should compare the date of the voucher with the date recorded in the cash book.

2. Transaction Must Relate to Business: The auditor should carefully examine that the entries must relate to the business.

3. It should be seen that the voucher relates to the period of audit

4. Printed Vouchers: Printed vouchers are considered true and these are legally acceptable. If these are not printed then these are useless.

5. Compare the Words and Figures: The auditor should satisfy himself amount written numbered consecutively. All the vouchers should be properly filed. On the vouchers, its figures and words are same or not.

 6. Checking of Authority: The auditor should examine that all the vouchers are passed by the authorized officer. If the voucher is passed by unauthorized person it will not be correct.

 7. If the voucher is a receipt for cash payment over Rs.500 , it bears the revenue stamp.

8. The contents of the vouchers should be examined with reference to the particulars of the relevant entry so as to ensure that they tally with regards to the date, amount etc.

9. Any alteration/change done in the voucher must be properly initialled by the invoice clerk.

VERIFICATION-

The purpose of verification, therefore, is to examine the existence, ownership, possession and valuation of assets. An asset may appear in the Balance Sheet of the company. But this does not automatically guarantee that the money paid for an asset has actually brought it into the business. Even if an asset has been included in the Balance Sheet, the risk is that :

a) it does not exist at all,

b) it exists but is owned by somebody else,

C) it is owned by the company, but is in the possession of someone else, or

d) it exists and is owned by the company, but has not been shown at correct value

Process

Verification is an integral part of the audit of Balance Sheet. It is one of the fundamental duties of the auditor to verify the assets and liabilities as appearing in the Balance Sheet. The auditor wants to satisfy himself that the various items shown in the Balance Sheet are in order as regards their existence, ownership and value. It is an enquiry and a process of confirmation. Even if an asset is properly acquired, the auditor has still to verify that as on the date of the Balance Sheet:

(i) the asset was not sold to another party, or

(ii) it was not pledged or mortgaged outside the business. In particular, the areas of enquiry in course of verification of assets are :

1) Is there any reliable' and relevant evidence to prove that the asset is owned by the company?

2) Does the asset physically exist at the date of the Balance Sheet?

3) Is the basis and principle of valuation of asset used by the company give it a correct figure?

4) Has the company followed the disclosure requirements in showing the asset in the Balance Sheet?

Thus the process of verification of assets is virtually a process of their confirmation. It is done with the help of documentary and other evidences. The idea is to verify the following:

 1) Existence: That the assets actually existed on the date of the Balance Sheet.

2) Acquisition: That it was a duly authorized acquisition for the purposes of the business.

3) Ownership: That the assets are legally owned by the company.

4) Charges: That the assets are free from any lien, charges or encumbrances.

5) Valuation: That the assets have been correctly valued on the basis of their current condition.  

6) Disclosure: That the value of the assets has been correctly disclosed in the Balance Sheet

VERIFICATION OF ASSETS

 “Verification of assets implies an enquiry into the value, ownership and title, existence and possession and the presence of any change on the assets.”

Spicer and Pegler According to Joseph Lancaster “Verification of assets is a process by which the auditor substantiates the accuracy of the right-hand side of the Balance Sheet, and must be considered as having three distinct objects :

(a) the verification of the existence of assets

(b) the valuation of assets and

(c) the authority of their acquisition”.

GENERAL PRINCIPLES REGARDING VERIFICATION OF ASSETS

The auditor should verify the following points while conducting verification of assets (As laid down by ICAI):

 1. That the assets were in existence on the date of balance sheet;

2. That the assets had been acquired for the purpose of the business and under a proper authority;

3. That the right of ownership of the assets vested in or belonged to the undertaking;

4. That they are free from any lien or charge not disclose in the balance sheet;

 5. That they are correctly valued having regard to their physical condition; and

6. That their values are correctly disclosed in the balance sheet.

7. Where a company or partnership has taken over the assets of a going concern, the agreement of sale should be inspected and that amount paid for them ascertained. It should be further verified that the allocation of total cost among the various assets is fair and reasonable.

8. The cost of assets acquired piecemeal should be verified with their invoices, purchase agreements, or ownership rights and the receipts of the sellers in respect of the price paid. It should be verified that expenditure on assets newly acquired and that on the renewal and replacement of old assets has been correctly recorded, consistent with the method that has been generally followed in the past.

9. When an asset is sold, its sale-proceeds should be vouched by reference to the agreement, containing the terms and conditions of sale, counterfoil of the receipt issued to the purchaser or any other evidence which may be available. If the sale of fixed assets resulted in capital profit, it should be transferred to capital reserve. However, the profit limited to original cost or a loss should be transferred to the Statement of Profit and Loss.

10. It is obligatory for a company to provide for depreciation out of the profits in accordance with provisions under sub section (1) of section 123, before any profits can be distributed as dividend. The law requires that depreciation should be provided in the manner as specified in Schedule II of the Companies Act, 2013. 11. The existence of fixed assets, where practicable, should be verified by a physical inspection and, or by comparing the particulars of assets as are entered in the Schedule attached to Balance Sheet, with the plant or property register and reconciling their total values with the General Ledger balances.

12. Wherever possible, all the securities and document of title, cash, negotiable instruments, etc. representing the assets, should be inspected at the close of the last day of the accounting period. If this is not practicable and the examination is undertaken at the later date, a careful scrutiny of transactions subsequent to the date of the balance sheet must be made to ensure that the changes in their balance that have subsequently taken place and are supported by adequate evidence.

13. It should be ascertained that no unauthorized charge has been created against an assets and all the charges are duly registered and disclosed. Where shares or securities are lodged with a bank to secure a loan or an overdraft, a certificate should be obtained from the bank showing the nature of the charge, if any.

14. Where assets, e.g., government securities, share scrips and debenture bonds are in the custody of a third party other than bank, they must be inspected.

 15. Where depreciable assets are disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately

VERIFICATION OF LIABILITIES

The auditor verifies liabilities also along with assets and for doing so he has keep the following points into consideration:

 1. To verify the existence of liabilities shown in balance sheet and liabilities shown in the balance sheet have arisen out of business operation.

 2. To verify that liabilities as shown in the balance sheet are actually payable.

3. To verify the correct value of such liabilities.

4. To verify that all existing liabilities are actually included in the account and doubtful liabilities should not be included in the actual liabilities.

 5. To verify the adequacy of disclosure

Verification of liabilities may be carried out by employing following procedures:

 1. Examination of records;

2. Direct confirmation procedures;

3. Examination of disclosures;

 4. Analytical review procedures;

5. Obtaining management representation.

GENERAL PRINCIPLES REGARDING VERIFICATION OF LIABILITIES

 It is not possible to detail the procedures for verifying all possible liabilities. However some general principles can be discerned and these should be applied according to the particular set of circumstances met with in practice in an examination. These are:

a) Schedule: Request or make a schedule for each liability or class of liabilities. This should show the make-up of the liability with the opening balance, if any, all changes, and the closing balance.

 b) Cut-off: Verify cut-off. For example a trade creditor should not be included unless the goods were acquired before the year end.

c) Reasonableness: Consider the reasonableness of the liability. Are there circumstances which ought to excite suspicion?

d) Internal control: Determine, evaluate and test internal control procedures. This is particular important for trade creditor.

 e) Previous date clearance: Consider the liabilities at the previous accounting date. Have they all been cleared?

f) Terms and conditions: This applies principally to loans. The auditor should determine that all terms and conditions agreed when accepting a loan have been complied with.

 g) Authority: The authority for all liabilities should be sought. This will be found in the company minutes or directors? minutes and for some items the authority of the Memorandum and Articles may be needed.

h) Description: The auditor must see that the description in the accounts of each liability is adequate.

 i) Documents: The auditor must examine all relevant documents. These will include invoices, correspondence, debenture deeds etc. according to the type of the liability.

 j) Security: Some liabilities are secured in various ways, usually by fixed or floating charges. The auditor must enquire into these and ensure that they have been registered.

k) Vouching: The creation of each liability should be vouched, for example the receipt of a loan.

 l) Accounting policies: The auditor must satisfy himself that appropriated accounting policies have been adopted and applied consistently. m) Interest and other ancillary evidence: The evidence of loans tends to be evidenced by interest payments and other activities which stem from the existence of the loan.

n) Disclosures: All matters which need to be known to receive a true and fair view from the accounts must be disclosed,

o) External verification: With many liabilities it is possible to verify the liability directly with the creditor. This action will be taken with short-term loan creditors, bank overdrafts and by a similar technique to that used with debtors, the trade creditors.

p) Materiality: Materiality comes into all accounting and auditing decisions.

q) Accounting Standards: Liabilities must be accounted for in accordance with the accounting standards.

r) Risk: Assess the risk of misstatement.