Module 2

Audit Procedures
Vouching
Vouching is a careful examination of documentary evidences supporting accounting
transactions Vouching is the essence or vital part of auditing. The reliability of accounting
records can be ensured by examining the evidences and documents that support the
accounting transactions. Vouching ensures the authenticity and amount of transactions
recorded in the books of accounts.

Definition of Vouching
According to Dr. L.R. Dicksee "Vouching is the act of comparing entries in the books of accounts
with complimentary evidence in support thereof".

Objectives of Vouching
1. To verify that all transactions entered in the books of accounts are supported by valid
documentary evidence.
2. To see that the vouchers are genuine, relate to the period in question and carry the signature
of person authorised at appropriate levels.
3. To verify whether all transactions are authorised by responsible persona
[Link] see that there are no errors or omissions in recording of transactions
5. To check whether there is any fraud or manipulation in the conduct oftransactions.
6. To see that the entries are made for each transaction according to accepted accounting
principles.
7. To see that proper distinction is made between capital and revenue recording transactions.
8. To see that arithmetic accuracy is maintained at all stages of accounting that is, recording,
posting, balancing, casting, etc.

Importance of Vouching Or Vouching is the essence or back bone of auditing

'Vouching is the essence of auditing'. Success of any auditing assignment depends to a great
extent on the quality of vouching. The auditor checks the authority of each transaction and
ensures that it is correctly entered in the books of accounts In that sense voucher forms a core
document and the very basis of auditing.
Vouching can bring to light many types of irregularities like recording unauthorised transactions,
complete omission of a transaction, recording different amount, error in posting to ledger
accounts, error in the treatment of particular transaction, etc.

Features of Vouching
1. It helps the auditor in understanding the types of evidence available and its adequacy and
liability to support accounting entries.
2. It is the first step of auditing before doing anything else.
3. It helps the auditor to satisfy himself as to the accuracy and completeness of the transactions
recorded in the books of accounts.

Meaning and definition of voucher

A Voucher is defined as the documentary evidence supporting a transaction. According to J.B.
Batliboi "a voucher may be defined as documentary evidence in support of an entry appearing in
books of accounts". Voucher includes receipts, cash memos, pay-in-slips, purchase invoices,
cash bills, sales invoices, debit and credit notes, minutes and resolutions of meetings, contracts,
etc.

Types of Vouchers
Vouchers are classified into:
1. Primary Vouchers and
2. Secondary or Collateral Vouchers.
1. Primary Vouchers: Primary Vouchers are original written documents evidencing
transactions. These include cash bills, pay-in-slips, invoices, etc.
2. Secondary Vouchers: Secondary or Collateral Vouchers are not original documents but only
photo copies or duplicate copies of original vouchers. It happens when originals are given to
other parties or destroyed. For example, carbon copies of sales, invoices, copies of resolutions
passed, etc., are secondary vouchers. Secondary vouchers are as good as primary vouchers
provided their authenticity can be ensured with reasonable examination.

Vouchers for Different Transactions

1. Cash receipts: Counterfoils or carbon copies of receipts, sales invoices, correspondence
from debtors, passbook entries, contract notes, etc.
2. Cash Payments: Purchase invoices, original receipts or vouchers issued by payees, entries
in goods inward register, correspondence with creditors, pass book entries, contracts, etc.
[Link]: Copies of cash bills issued, orders received, entries in Goods outward register, credit
notes, etc.
4. Purchases: Purchase invoices, entries in Goods inward register, debit notes, etc.
5. Specialised transactions: Entries as per previous Balance Sheet, pass book entries,
dividend warrants, share certificates, debenture certificates, contract notes, sale deeds, job
cards, wage sheets, minutes of meeting, resolutions of Board, etc.

Important Considerations in Vouching

There are two basic principles of vouching
1. Conformity: The auditor should verify how far the voucher conforms to the transaction
vouched. If the voucher does not contain sufficient information or does not fully support the
transaction, he may seek additional evidence to establish the transaction.
[Link]: Reliability of every voucher should be established by careful examination. In this
respect the auditor should verify whether the voucher originated from a third party or by the
client firm itself. Generally vouchers originating from third parties are more reliable than those
created within the firm.

Vouching of Cash Book

Vouching of Receipt Side of Cash Book
1. Opening balance: Opening balance of Cash Book can be verified with the balances of cash
and bank as shown in the audited Balance Sheet of the previous year.
2. Cash sales: The auditor should check the date, amount and serial number of the counterfoil
and the same should agree with the entry made in the Cash Book.
[Link] from debtors: The counterfoil or carbon copy issued to debtors is the documentary
evidence for cash received from debtors. The auditor should check the content of the receipt
like date, the name of the customer, the amount received, discount allowed, etc. The entry
made in the Cash Book should correspond with the details in the receipt. He should verify that
the amount is entered in the Cash Book on the same day as shown in the receipt.
4. Bills received:To verify cash received on account of bills, the auditor should check the entry
in the Cash Book with that entered in the Bills Receivable Book. When bills are collected
through bank check the entries made in the Cash Book with the Bank Statement.
[Link] received: The auditor should check the entry in the cash book for interest received
with the original deposit certificate/Bank statement and Investment Ledger of the client. Details
of Tax Deducted at Source can be verified with Tax Deduction Certificate.
6. Dividend received: Entry for receipt of dividend on shares can be verified with counterfoils of
dividend warrants. Dividend credited through Electronic Clearing System [ECS] can be verified
with entries in Bank Statement.
[Link] received: Entry in the cash book for commission received should be verified
with the counterfoils of receipts. The auditor should also check the details of agreement
containing receipt of commission like rate of commission, amount of commission, names of
parties, etc.
[Link] of fixed asset: Cash received from sale of assets should be vouched with the copies of
sale deed, minute book containing the resolution passed by the Board of Directors and
correspondence with buyer of asset. The auditor should check whether the amount entered in
the Cash Book is the actual sale price less any expenses incurred on sale.
9. Sale of investment: The auditor should check the details in the broker's contract note for
vouching the sale proceeds of investments.
10. Loans from banks: The auditor should verify the contents of the Articles of Association
regarding the borrowing power of the company and make sure that the internal formalities for
taking loans are complied with. While vouching loans raised, details of the agreement like
nature of loan, period, rate of interest, repayment schedules, charges created, instalments
outstanding, etc. should be verified.
11. Rent received: The auditor should examine the lease deed and agreement to ascertain the
exact amount of rent receivable, the due date and the provisions regarding repairs,
maintenance, etc. The rent received as per cash book should be compared with the list of
properties maintained.
12. Income from hire purchase agreement: When assets are sold on hire purchase basis, the
auditor should check the hire purchase agreement in order to ascertain the amount of
instalment, the rate of interest charged, etc. He should vouch the instalments received with the
help of the counterfoils of the receipt issued to customers.
Vouching of Payment Side of Cash Book
(a) all payments are related to the business of the client.
(b) the payments are duly authorised by responsible persons.
(c) the right amount is entered in the Cash Book and posted in the ledger accounts.
(d)the payments are suitably classified and distinction has been made between capital and
revenue.
(e) all payments are supported by documentary evidence.
(f) no fictitious payments are made.
(g) payments are received by right persons by verifying the signature of the payees
[Link] purchases: Entry for Cash Purchases in Cash Book should be verified with supplier's
invoices. The auditor should see that the amount calculated is correctly entered after deducting
trade discount, if any. Also verify the Goods Inward Book to see that the goods were actually
received.
2. Payments to creditors: Payments to Creditors are generally made through cheque.
Therefore the auditor should verify the Bank statement and also receipt issued by the creditors.
3. Wages: The auditor should evaluate the Internal Control System for calculation and payment
of wages. If the internal control system in not efficient, detailed examination is required in
respect of attendance of workers, time booking, preparation of wage sheets and payment of
wages. The auditor should collect these particulars from the personnel department. The auditor
should check whether all calculations made in the wage sheets are correct and the amount of
cheque drawn for payment of wages for a period agrees with the total of amount shown in the
wage sheets.
[Link]: Salaries paid for a period should be vouched with the payroll or salaries bill
prepared and approved by responsible officer. The auditor should check the attendance register
of employees, details of their pay and particulars of allowances, leave availed of, increments,
deduction from salaries, etc.
[Link] paid: Entry for rent paid should be vouched by checking the receipts issued by the
landlord. The auditor should also verify details of the lease agreement like area taken on lease,
amount of rent payable, etc.
6. Office expenses: The auditor should examine the vouchers for payment of office expenses
like lighting, stationery, postage and telegrams, etc. Also verify that the expenses paid are
authorised by responsible persons.
7. Travelling expenses: The auditor should see that travelling expenses are paid to eligible
employees and sales persons as per rules framed by the client. All travelling expenses and
allowances paid are authorised by responsible persons. The amount paid should be checked
with vouchers and travelling bills.

Objectives vouching cash book

1) To ensure that all receipts of cash are duly accounted for.
2) To ensure that no improper payments are made.
3) To see that all receipts and payments of cash are actually and properly recorded.
4) To see that all payments have been made to proper persons and the payments are true
payments.
5) To see that cash and bank balance correct and really exist. Vouching of cash book or cash
transaction covers the vouching of receipt side and vouching of payment side.

Vouching of petty cash book

(a) Cheques drawn for petty cash should be recorded in the cash book onthe same day itself.
(b) He should check the payment entered in cash book for petty expenses to petty cashier.
(c) He should examine the vouchers available. He should insist on vouchers for expenditure.
(d) He should examine the totals, balances, etc.
(e) If vouchers are not available for expenses, he should call for a summary of such transactions
which should be duly signed by a responsible official.

Vouching of Trading Transactions

Trading transactions include transactions other than cash transactions like credit purchases,
credit sales, purchase returns, sales returns, bills received, bills accepted, credit purchase of
assets, opening entries, closing entries and adjusting entries, etc. These are entered in the
respective Day Books.
Credit Purchases
Credit Purchases are entered in the Purchase Book. While vouching of Credit Purchases the
auditor should examine the following:
1. Effectiveness of the internal control system for purchasing.
2. Purchase order and ensure that the goods ordered are actually requiredfor the business of
the client.
3. Whether purchase orders are duly authorised by the Head of the department or Stores
Controller.
4. Details of the invoices received from the supplier correspond to the Purchase order and
Goods Received Note.
Credit Sales
[Link] auditor should verify that the internal control system for credit sales is sound and
adequate. He may apply some test checks of sales by correlating entries in the Sales Book with
orders, despatch notes and invoices.
2. Verify that details in the invoice agree with that the order placed by customers and goods
despatched note.
Purchase Returns
1. The correspondences with suppliers regarding return of goods, Inspection Notes and Debit
Notes, the entry in the Purchase Return Book with corresponding Debit Note.
[Link] Debit Note contains the same pricing method as that contained in the supplier's invoices.
Sales Returns
1. The entry in the Sales Return Book with details of the corresponding Credit Note and entry in
Goods Inward Register. +
2. Details of Credit Note and ensure that the amount has been calculated correctly by cross
checking with original invoices.
3. The customer's account in the ledger is credited with the exact amount as entered in the
Sales Return Book.
4. Sales Return towards the end of the accounting year where possibility of manipulation is
higher.
Bills Receivable
1. On bills matured the Auditor should verify whether the payment received is recorded on the
receipt side of cash book. If money is received through bankhe should check the bank pass
book.
2. He should check the entries in cash book and pass book for bills discounted.
3. Bills in hand not matured should be physically verified by the auditor. If they are deposited in
bank, a certificate to that effect should be verified.
[Link] bills dishonoured the auditor should see that it is recorded in the financialbooks.
5. He should see that the liability on bills discounted is shown as a contingent liability.
Bills Payable
1. Bills on which payment is made on the due date
2. Bills which are not yet matured.
Entries in Journal Proper
Following transactions are generally recorded through journal proper:
1. Opening entries
[Link] entries
3. Entries for the issue and allotment of shares and debentures
4. Entries for the forfeiture and reissue of shares
5. Adjusting entries for outstanding expenses, prepaid expenses, accrued income, income
received in advance, provisions for doubtful debts, depreciation, etc.
6. Entries for acquisition of liabilities taken over from vendors
7. Entries for acquisition of assets taken over from vendors
8. Entries relating to sale or return, consignment or joint venture
9. Entries for making calls

Verification - Meaning and Definition

It is the process of establishing the existence, valuation and ownership of assets as disclosed in
the Balance Sheet. Verification is not merely vouching of assets and liabilities with supporting
documents. It is the confirmation of their existence, verification and propriety of their acquisition
or incurrence. Verification relates to assets and liabilities shown in the Balance Sheet. It means
confirmation about items appearing in both sides of the Balance Sheet as assets and liabilities.
In fact, it is the audit of Balance Sheet items.
According to Spicer and Pegler "verification of assets implies enquiries into the value,
ownership and title, existences and possession and presence of any change on the assets.”

Objectives of Verification
[Link] ownership and title: The auditor can certify the ownership of assets by verification of
title dee agreements and other supporting documents.
2. Position of assets: Verification also reveals the nature of assets, whether these assets are
free or subject to encumbrance, charge or lien in favour of third parties.
3. Certify true and fair view: The object of verification is to satisfy himself that the Financial
Statements disclose a true and fair view of the state of affairs.
4. Existence: Sometimes assets may be sold, discarded or destroyed. The auditor should
ascertain the existence of the assets by physical verification.
5. Detect fraud and errors: Verification is needed to check whether there is any fraud or
misuse of assets. The Auditor should also ascertain that no asset is left unrecorded in the books
of accounts.
6. Check arithmetic accuracy: Another object of verification is to check the arithmetic accuracy
of books of accounts.
Techniques of Verification
1. Personal inspection: The auditor can verify the existence of assets and liabilities by
inspection of documents of title, possession certificates, loan agreements, etc.
2. Disclosure in balance sheet: The auditor can verify whether all items of assets and liabilities
are disclosed in the Balance Sheet as per accounting conventions.
3. Assets under safe custody: Assets under safe custody like Cash balance, inventories etc.
can be verified by physical checking, counting, measuring, etc.
4. Valuation technique: The auditor can check the basis of valuation of assets like cost price,
lower of cost price or market price, etc., for valuation of certain assets like investments,
marketable securities and inventories.
5. Expert opinion: The auditor can seek opinion of experts regarding valuation of Land and
Building, Plant and Machinery, Capital-work-in progress, etc.
6. Checking authority: The auditor can ascertain the authority for purchasing, transferring and
disposing of assets, keeping standby equipment, discarded assets, etc.
7. Confirmation: The auditor can obtain confirmation of third parties for assets like debtors or
liabilities like loans from Directors, loans from subsidiaries, etc.

Difference between Vouching and Verification

1. Vouching is examination of entries in the books of accounts with documentary evidences.
Verification is the process of confirming the existence, ownership and valuation of assets and
liabilities presented in the Balance Sheet.
2. Vouching relates the checking entries of financial transactions.
Verification relates to items of assets and liabilities appearing in the Balance Sheet.
[Link] of Vouching is to check the arithmetic accuracy and authority of financial transactions.
Object of Verification is to help the auditor to satisfy himself that the items disclosed in the
Balance Sheet really exist and to report that the Balance Sheet discloses true and fair view of
financial position.
4. Vouching is done by examining documentary evidences like vouchers, receipts, agreements,
etc.
Verification is done by inspection, observation, valuation, confirmation, etc.
5. Vouching may be carried out at any time.
Verification is done periodically after preparing the Balance Sheet.
6. Vouching may be carried out by the audit staff whereas verification should be carried out by
the auditor himself as it requires greater skill and experience.
Valuation - Meaning
Valuation refers to the process of assigning appropriate values to assets or liabilities for the
purpose of disclosing them in the Balance Sheet. In valuation the auditor makes a critical
examination and testing of the value of assets and liabilities so as to ensure that the value
disclosed in the Balance Sheet represents the fair value. An auditor may not be an expert in
valuation, but he can ascertain whether the valuation of assets and liabilities done by the
management is based on generally accepted accounting principles.

Difference between Verification and Valuation

1. The term Verification is wider in meaning. It includes Valuation also. Verification is the process
of checking the existence, ownership and valuation of assets and liabilities.
Valuation is a critical examination and testing of values of assets and liabilities determined by
the management.
2. Verification is done by the auditor by checking documents of title, inspection and physical
verification. Valuation is done by examining the basis of valuation, accounting principles
followed and legal provisions affecting valuation.
3. Verification is the primary responsibility of the auditor. Valuation is the responsibility of the
management, the auditor only certifies the valuation done by the management.
4. Verification is done by the auditor himself or by his senior assistant. But valuation is done by
the auditor with the assistance of technical experts, if necessary.
5. Auditor guarantees accuracy in verification. But the auditor does not give any guarantee for
the accuracy of valuation of assets.
Valuation of Assets
[Link] Assets: In case of fixed assets, depreciation should be provided after considering the
cost of asset, expected life and scrap value. Fixed Assets like freehold land is not subject to
depreciation. Therefore such assets are to be valued at cost. In case Land and Building are
revalued, the auditor should check the basis of valuation and ensure that it is done by following
accepted accounting policies and legal provisions related to revaluation.
2. Current Assets: Current Assets include inventories, book debts, prepaid expenses,
marketable securities, cash at bank and cash in [Link] are valued at cost or market
price whichever is lower Current Assets like loose tools may be valued at replacement cost
method.
3. Intangible Assets: Intangible assets include Goodwill, Patents. Trademarks and Copyrights.
These assets should be shown in the books at cost incurred less amount written off to date. The
auditor should satisfy himself regarding the justification for their continuance in the Balance
Sheet. The auditor should verify compliance of AS-26 (Intangible Assets) by ICAI regarding
valuation of Intangible Assets.

Valuation of Liabilities
1. Long Term Liabilities: Long term liabilities represent long term borrowings of an entity.
These include bonds and debentures, loans from Banks and Institutions, loans from subsidiary
Companies, etc. The auditor should verify that the borrowings are made within the limit and
subject to the provisions in the Articles of Association. Long term liabilities should be equal to
the principal amount or amount actually borrowed by the client. However, the terms of borrowing
may specify the amount payable on maturity.
[Link] Liabilities: Current liabilities are short term borrowing repayable within a period of
one year. These include creditors for goods, bills payable. outstanding expenses, working
capital loans from banks and directors, etc. These are recorded at the book value and do not
pose any special problems of valuation. The auditor should verify the supporting documents,
agreements, etc., for testing the valuation of current liabilities. He should also obtain
confirmation from creditors for determining the amount due to creditors.
3. Contingent Liabilities: Contingent Liabilities are not actual liabilities, but are likely to arise on
the happening of any event. These include liabilities for bills discounted, claims against the
client not yet settled, guarantee given to other parties, amount unpaid on partly paid
investments, etc. Contingent liabilities are to be disclosed in the Balance Sheet by way of
information or as footnote. The auditor should verify their nature and make sure that these are
not actual liabilities.

Verification of various types of Assets & Liabilities

Verification of Assets
Cash in hand:
●​ Auditor use cash weighing machine to count cash.
●​ He should count cash, stamps, IOUs ("I Owe You") in hand.
●​ He should check remittance from branches.
●​ He should check purpose of holding large cash balances.
●​ Documentary evidences should be verified in case of cash in transit.
Cash at bank
●​ Auditor should verify pass book with cash book.
●​ He should compare pass book with BRS (Bank Reconciliation Statement). He should
obtain certificate regarding bank balances.
Loans advanced
●​ He should examine loans granted through loan agreements.
●​ He should see that loan amounts are confirmed by the borrower
●​ He should examine the mortgage deal.
●​ He should determine adequacy of security offered.
●​ He should see there is no change in loan agreement terms.
Bills receivable
●​ He should get a list of total bills receivable.
●​ He should see that bills are properly drawn, accepted.
●​ He should see that bills are subsequently matured.
●​ He should enquire from the bank regarding bills sent for collection.
Debtors
●​ He should obtain duly certified list of debtors.
●​ He should scrutinize accuracy of debtors list.
●​ He should verify actual existence of debtors.
●​ Sales ledger balance should be checked with debtor's ledger.
●​ He should see debtors shown on balance sheet are recovered.
●​ He should see adequate provision made for bad debt.
Stock in trade (Inventory)
●​ He should check stock sheet with stock register.
●​ He should examine management control of issue of stock.
●​ He should check totals, balances and extensions of stock sheets.
●​ He should check physical existence of stock in hand.
Copyright
●​ He should verify copy right agreement.
●​ He should obtain schedule of copyright.
●​ He should see that copyright are shown in balance sheet separately at cost less
depreciation.
Goodwill
●​ He should verify purchases agreement to ascertain value of goodwill.
 ●​ He should see written off in accordance with resolution of board.
Loose tools
●​ He should obtain loose tools register.
●​ He should verify receipts of issue of loos tools.
●​ He should see that loos tools are shown in balance sheet separately at cost less
depreciation.
Verification of liabilities
Sundry creditors
●​ He should obtain schedule of creditors from management.
●​ He should compare creditor amount with balance of creditor ledger.
●​ He should verify purchase and purchase return book.
●​ He should verify goods inward book.
Bills payable
●​ He should verify bills payable from bills payable book.
●​ He should examine the bills payable retired under rebate.
Bank overdraft
●​ He should verify overdraft agreement with bank.
●​ He should check the pass book and cash book.
●​ He should verify whether overdraft is secured or unsecured.
Loans
●​ He should verify loan agreement.
●​ He should see that loans and advances shown in balance sheet.
●​ He should verify whether loan is secured or unsecured.
Debentures
●​ He should verify memorandum and articles of the company.
●​ He should verify debenture trust deed.
●​ He should obtain a certificate from debenture holders to verify amount of debenture
issued. +