VOUCHING OF CASH PAYMENTS (CREDIT SIDE OF CASH BOOK)

All the payment made to creditors, expenses incurred in cash and all other payments done
appear on the credit side of cash book and the Auditor is required to vouch cash payments
because chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment -

 Opening Balance

The opening balance of cash book can never be credited because cash of company cannot be
in negative but the credit bank balance represents the overdraft account from bank or utilization
of cash credit limit as sanctioned from bank.

 Payment to Creditors

Payment to creditors may be examined by the following −

 Receipt issued by the creditors.

 If the creditor is paid amount as full and final settlement, the balance amount, if any
stands in the ledger account of the creditor; this amount should be credited to discount
received.
 If any advance payment is made to creditor that should be clearly mention.
 Statement of account of creditor.

 Payment of Salaries

Depending upon the adequacy of internal control system in an organization Auditor will decide
his audit Program. It is very important for Auditor to check the following −

 Attendance record of employee and salary register.

 Appointment letter of new employees.
 Comparison of current month salary with last month’s salary and if there is any
abnormal change in amount, Auditor should verify the same.
 Alteration in amount of deductions on account of advance, loan, fine, funds, insurance,
TDS, etc.

 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 treatment accounting treatment for unpaid wages.

 Purchase of Plant and Machinery

The Auditor should pay attention to the following −

 Purchase invoice of machinery.

 Freight inward charges, installation charges, erection and commissioning charges
should be capitalized.
 Treatment of Excise duty according to the excise rules.

 Purchase of Land & Building

Purchase of Land and Building can be vouched as follows −

 Study of Lease hold agreement, if land is purchased on lease hold basis.

 Payment should be as per lease term.
 All the expenses incurred to acquire lease hold property should be debited to respective
property account.
 Auditor should study the conveyance deeds in case property is purchased under free
hold basis.
 For verification of payment, the Auditor can check the payment receipt and the
conveyance deed.

 Rent Paid

Consider the following points for the verification of rent by the auditor −

 Rent Deed.
 Rent receipt from Land lord.
 Provision for un-paid rent at the end of the year.

 Insurance Premium

Consider the following points for the verification of Insurance Premium −

 Insurance policy issued by the Insurance Company.

 Insurance premium receipt
  Insurance premium should not be related to any official of the company.

 Income Tax

Consider the following for the verification of Income −

 Advance Tax Challan

 Self-Assessment Tax challan
 Income Tax demand notice
 Assessment order

 Excise Duty

Consider the following for the verification of Excise Duty −

 Rate of Excise Duty

 Excise records and sale invoice for verification of excise duty

 Commission on Sale

Consider the following for the verification of Commission on Sale −

 Agreement of sale.
 Rate of commission on sale.
 Calculation of commission on the basis of sale.
 Cash receipt issued by agent.
 Provision for commission payable

 Director’s Fees

Consider the following for the verification of Director’s Fees −

 Directors receive fees for attending the Board meetings.

 Verification of attendance register.
 Verification of payment receipt duly acknowledged by the directors.

 Internal Control System for Cash Transactions

Following are the main features of a good internal control system −

 All cash received should be accounted for immediately.

 All received cheques should be crossed immediately on receipt.
 Cash receipt should be issued to debtors and daily reconciliation of account should be
done where the debtors pay cash on daily basis.
 All cash receipts should be deposited in bank on a daily basis.
  Bank reconciliation account should be prepared on a regular basis.
 Payments other than petty payments should be done through crossed cheques.
 Cash receipt should be obtained for every cash payment to creditors.
 Cash expenses should be duly supported by proper and genuine bills or vouchers.
Auditing - Vouching of Ledger

We will start by discussing the types of ledger accounts and proceed to their verification and
also the verification of other accounts.

Personal Ledger Accounts

All personal accounts are opened under this category. In big organizations where the number
of transactions is quite high, a personal ledger may further be split up into two more ledgers −

 Purchase ledger
 Sales ledger

Purchase ledger

Purchase ledger is verified from the following −

 Creditor balances of last year

 Cash Book and Bank Book
 Purchase register
 Purchase return book
 Bills payable book
 Journal and other relevant books

An Auditor should carefully verify the following −

 Posting of all vouchers in ledger account should be done without any omission.
 Verification of all opening balances should be properly checked with last year’s balance
sheet.
 If the creditor balance shows debit balance it may be due to advance payment made to
him, the Auditor should confirm whether the material against advance is received or
not.
 Periodical statements of creditor should be reconciled.
 Examination of internal control system.

Sales ledger

Sales ledger will be verified from the following −

 Debtors’ balances of last year

 Cash book and bank book
  Sales register
 Sales return book
 Bills Receivable book
 Journal and other relevant books

Auditor should carefully verify the following −

 Posting of all vouchers in ledger account from cash and bank book, sales register, bills
receivable register, sales return register and journal should be verified.
 Verification of opening balances, castings, balances carried forward should be carefully
examined.
 Credit balance of the debtors’ account may represent the advance received against the
supply of goods; the Auditor should examine and confirm whether any material is
supplied against it or not.
 Periodical reconciliation of account from debtors should be done without any fail.
 Provision for doubtful debts and bad debts should be done.
 Review and examination of credit policy should be made from time to time.
 Checking of posting in ledger account from subsidiary book.
 Checking of calculations.
 Reviewing truthfulness of debtor balances in customer account.
 Reviewing of Internal Control System.

VOUCHING OF IMPERSONAL LEDGER ACCOUNTS

All the nominal account, real account and capital account fall under impersonal ledger
accounts. Income and expenditure account (nominal accounts) transferred to profit and loss
[Link] account, real accounts, debtors and creditors account are transferred to balance
sheet. Following steps are involved in the audit of impersonal ledger account −

 Opening balances should be verified from last year’s Balance Sheet.

 Timely posting of balances of subsidiary books (Sales Book, Purchase Book, Sales
Return Book, and Purchase Return Book) to ledger accounts.
 Checking of totals and castings.
 Checking of balances transferred to trial balances, debit and credit side of trial balance
should be tallied.
 Checking of adequacy of internal control system in organization.

 Outstanding Assets

It is necessary to include some expenses and income in current year though passing adjustment
entries to show the correct profit or loss of the company. Therefore it is must for an Auditor to
check each and every outstanding entries. Following are outstanding assets –

 Prepaid Expenses
These expenses are paid in advance for next coming year(s), hence should not be debited to
profit and loss account of current year to arrive at true financial results. For example; Insurance
of Fixed assets is normally paid on annual basis and if we paid insurance premium in the month
of October for one year, then insurance for this current year will be calculated from October to
March and from April to September it will be treated as prepaid insurance. Prepaid insurance
will be shown as prepaid expenses under the head of current assets in the balance sheet.

Auditor should vouch every nominal account to confirm whether correct amount of expenses
is debited to profit and loss account or not. Other examples of prepaid expenses are −

 Rent Rates and Taxes

 Subscription
 Annual maintenance Contract, etc

 Income Receivable

Following are the examples of Income Receivable −

 Interest accrued but not due or received

 Taxation claims
 Commission
 Declared dividend by company yet to receive

All the above income should be included in the Profit & Loss account of the year to arrive at a
correct figure.

 Contingent Liabilities

Contingent liability may be payable in future or may not be payable in future it depends on the
event. For example, if any person filed a suit against company, possibilities are there, it may
be in favor of company or it may be against the company, in case it will decide against the
company, company has to pay such amount of suit as the court decides. Therefore, contingent
liabilities are said to be possible liabilities. In case of above, no actual provision is made in the
books of account but as a footnote of Balance sheet, it is compulsory to show the probable
amount of liabilities.

 Contingent Assets

Contingent assets are not shown as footnote of the balance sheet. Following are the examples
of Contingent Assets −

 Claim for the refund of the Income Tax, Sales Tax, Excise Duty, etc.
 Uncalled share capital of the company.
 Claim for infringement of a copy right.
Revenue Expenditure (Rev-Ex)

Definition: Revenue expenditure refers to spending that is incurred for the day-to-day
operations of a business. These expenditures are intended to maintain the operational efficiency
of the business and are expensed in the financial period in which they occur.

Examples:

 Paying for routine maintenance and repairs.

 Salaries and wages.
 Utility bills and office supplies.
 Rent for office space

Capital Expenditure (Cap-Ex)

Definition: Capital expenditure refers to funds used by a company to acquire, upgrade, or

maintain physical assets. These expenditures are typically aimed at enhancing the long-term
value of assets and are capitalized on the balance sheet rather than being expensed immediately.

Examples:

 Purchasing new machinery or equipment.

 Constructing or renovating buildings.
 Acquiring patents or trademarks.
 Upgrading software systems.

Capital Expenditures

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain
physical assets such as property, plants, buildings, technology, or equipment. CapEx is often
used to undertake new projects or investments by a company.
Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of
equipment, or building a new factory. This type of financial outlay is made by companies to
increase the scope of their operations or add some economic benefit to the operation.

Revenue Expenditures

Revenue expenditures are short-term expenses used in the current period or typically within
one year. Revenue expenditures include the expenses required to meet the ongoing operational
costs of running a business, and thus are essentially the same as operating expenses (OPEX).

Revenue expenditures also include the ordinary repair and maintenance costs that are necessary
to keep an asset in working order without substantially improving or extending the useful life
of the asset. Revenue expenses related to existing assets include repairs and regular maintenance
as well as repainting and renewal expenses. Revenue expenditures can be considered to be
recurring expenses in contrast to the one-off nature of most capital expenditures.

Other examples of revenue expenditures include the following:

• Salaries and employee wages

• Any overhead expense, such as salaries for the corporate office, which typically fall
under selling, general, and administrative expenses (SG&A)
• Research and development (R&D)
• Utilities and Rent
• Business travel
•

Revenue Expenditure (Rev-Ex)

Definition: Revenue expenditure refers to spending that is incurred for the day-to-day
operations of a business. These expenditures are intended to maintain the operational efficiency
of the business and are expensed in the financial period in which they occur.

Examples:

• Paying for routine maintenance and repairs.

• Salaries and wages.
• Utility bills and office supplies.
• Rent for office space

Capital Expenditure (Cap-Ex)

Definition: Capital expenditure refers to funds used by a company to acquire, upgrade, or

maintain physical assets. These expenditures are typically aimed at enhancing the long-term
value of assets and are capitalized on the balance sheet rather than being expensed immediately.

Examples:

• Purchasing new machinery or equipment.

• Constructing or renovating buildings.
• Acquiring patents or trademarks.
• Upgrading software systems.
•
DIFFERENCE BETWEEN CAPTIAL AND REVENUE EXPENDITURE:

Meaning:
CE: Expenditure incurred for acquiring assets, to enhance the capacity of an existing asset that
results in increasing its lifespan
RE: Expense incurred for maintaining the day to day activities of a business
Tenure:
CE: Long Term
RE: Short term
Value Addition:
CE: Enhances the value of an existing asset
RE: Does not enhance the value of an existing asset
Physical Presence:
CE: Has a physical presence except for intangible assets
RE: Does not have a physical presence
Occurrence:
CE: Non-recurring in nature
RE: Recurring in nature
Availability of Capitalisation:
CE: yes
RE: no
Impact on Revenue:
CE: Do not reduce business revenue
RE: Reduce business revenue
Potential Benefits:
CE: Long-term benefits for business
RE: Short-term benefits for business
Appearance:
CE: Appears as assets in the balance sheet and some portion in the income statement
RE: Always appears in the income statement