ACM – 301 Unit - IV

Unit - IV

Lesson – 10

Audit of Books of Accounts

Context:
This lesson deals vouching of cash transaction vouching of trading
transactions and Audit of Impersonal Ledger Transactions.
Objectives:
After studying this lesson you should be able to understand –
- Meaning of vouching
- Element of vouching
- Importance of vouching
- Types of vouching
- Rules for vouching
- Difference between Routine checking and vouching

Meaning and Definition of Vouching

According to L.R. Dicksee, “Vouching consists of comparing entries in

the books of accounts with documentary evidence in support there of.”
According to R.B. Bose, “By vouching is meant the verification of the
authenticity of transactions as recorded in the books of accounts.
According to Taylor and Perry, “Vouching is the examination of evidence
offered in substantiation of entries in the books including in such examination the
proof, so far as possible, that no entries have been omitted from the books.”
As per Joseph Lancaster, “It is often thought that vouching consists of
more examination of the vouchers or documentary evidence with the book
entries. This however, is quite wrong, for vouching comprises such an
examination of the ledger entries as will satisfy the auditor not only that the entry
is supported by documentary evidence but it has been properly made upon the
books of accounts.”
According to De Paula, “Vouching does not mean merely the inspection
of receipts with the transactions of a business, together with documentary and
other evidence of sufficient validity to satisfy an auditor that such transactions are
in order, have been properly authorized and one correctly recorded in the book.”

Elements of Vouching

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1. Examination
2. Checking
3. Vouchers
4. Records
5. Documentary evidence
6. Accuracy.

Nature of Vouching
1. Vouching examines the entries relating to the transactions recorded in the
books of accounts.
2. Vouching is based only on the documentary evidence.
3. Vouching of books of accounts is done for the transactions of the whole year.
4. Vouching indicates that a particular asset must be possessed by the concern.
5. Vouching does not primarily concern with valuation.

Objects of vouching
1. Vouching is to ensure that all the receipts are accounted for.
2. Vouching is to ensure that no fraudulent payment have been made.
3. Vouching is to check that all the receipts and payments have been properly
entered in the cash book.
4. It is to verify the cash in hand and at the bank.
5. It is to ensure that all the payments have been made to the proper person and
the payments made are true payments.
6. The main purpose of vouching is to determine the –
(a) Authenticity
(b) Accuracy of the amount recorded in the books
(c) Proper classification of the account
(d) Ownership

Importance of Vouching

According to De Paula, “Vouching is the very essence of auditing. He says

the whole success of an audit depends upon the intelligence and thoroughness
with which the part of the work is done.” In the opinion of Joseph Lancaster ‘The
very nature of vouching renders it a practically indispensable phase of every
audit and that where curtailment of the auditor’s duties in this direction is
contemplated, the risk that may be incurred should not be over looked.’
Thus, vouching is a sort of preliminary work which forms an important part
of audit work.
The vital importance of exercise of care in the vouching of documents is
brought out in Armitage vs Brewer and Knott (1932). His lordship stated in the
course of Judgment that it was clear that a good many documents were
suspicious on their face and called for inquiry. In this case damages were
claimed against the auditors as a result of frauds committed by one of the
employees and the judgment was given against the auditors.

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Vouchers

A voucher is documentary evidence in support of any entry or transaction

in any of the books of account. A receipt or a counterfoil of a receipt, a resolution
passed in any board meeting or the shareholders meeting, a cash memo,
purchase invoices, sales invoices, Pay-in-slips, cheques are the example of
vouchers.
As per L. Kohler, “A document which seems as an evidence of the
disbursement of cash is called voucher,”
As per Batliboi, “A voucher may be defined as a documentary evidence
in support of an entry appearing in books of accounts.”
As per A.W. Halmes, “A voucher is any documentary evidence in support
of a transaction.”
As per R.A. Irish, “A voucher may be a receipt, invoice, an agreement, a
written requisition slip or in short any suitable written evidence which confirms a
written transaction.
According to Joseph Lancaster, “A voucher may be defined as any
documentary evidence by which the accuracy of books entries may be
substantiated.”
Thus, a voucher is a documentary evidence for supporting in the books of
accounts the act of establishing the accuracy and truth of the entries in the
account books is called vouching.

Elements of Vouchers
1. They may be written or printed.
2. They are documentary evidence.
3. They are based of vouching.
4. It may be support of any entry or transaction in any of the books of
account.
5. It may be in a receipt, bill or certificate from.
Examples of Vouchers

1. Receipts
2. Invoice
3. Agreement
4. Contract
5. Bill
6. Certificate
7. Documents
8. Tickets
9. Report
10. Copy
11. Wages sheets
12. Letters
13. Confirmation

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14. Minutes
15. Correspondence
16. Debtors List
17. Creditors List
18. Rolls
19. Registers
20. Carbon Copies
21. Cards
22. Copies of Order
23. Outward Books
24. Pass Books
25. Statements
26. Note
27. Dividend Warrants
28. Deeds
29. Broker’s sold note
30. Policy
31. Requisition slip
32. Directors Meeting
33. Resolutions
34. Job Cards
35. Salesman’s abstract
36. Articles of Association
37. Prospectus
38. Memorandum of Association
39. Annual reports
40. Registers
41. ATM slips
42. Paper
43. Tender copy
44. Admission card
45. Appointment letter
46. Guarantee cards
47. Warranty cards
48. Menu
49. Order
50. Bin card

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Self Check Question

1. What is vouching?
2. What is voucher?
3. State any two elements of vouchers.
4. State the objectives of vouching.
5. Give any two examples of vouchers.
Objective Questions
1. Which is an example of voucher?
(a) Prospectus (b) Job cards
(c) Policy (d) All of these.
2. A voucher is a –
(a) Documentary evidence (b) Department
(c) Vouching (d) All of these.
3. Vouching is based on –
(a) Documentary evidence (b) Valuation
(c) Auditing (d) All of these.

Types of Vouchers

Voucher may be classified into two types, viz. –

I. Primary Vouchers: An original written evidence supporting a transaction is
called Primary Vouchers.
II. Collateral Voucher: When some original evidence is lost or destroyed,
duplicate copies there of are produced in support as subsidiary evidence
to remove suspicious from the mind of the auditor.

Nature of Voucher

1. It is a documentary evidence.
2. It is an evidence in black and white
3. It is a documentary evidence in support of an entry in the books of
accounts.
4. It may be in a simple form like receipt.
5. It presents the full description of a transaction
6. It helps in substantiating the accuracy of books entries.

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Lesson – 11

Vouching

Context:
This lesson deals Rules for vouching and Audit of Books of Accounts.

Objectives:
After studying this lesson. You should be able to understand –
- Rules for Vouching
- Vouching v/s Routine checking.

Rules for Vouching

1. All the vouchers are serially numbered and filled in the order of the
accounts.
2. An auditor must see the date of the voucher and see that the entry in the
cash book is made on the same date and that the name of the party is
entered in the cash book as recorded in the voucher.
3. The voucher checked should be cancelled by affixing a stamp, so that it
may not be reproduced.
4. Subsidiary documents such as the invoices connected with the voucher
should also be cancelled.
5. Special care should be taken for those voucher which are in the personal
name of one or more of the partners, directors, managers or secretaries,
as such a voucher may not relate to the business at all.
6. If a duplicate voucher is produced. It should be thoroughly investigated.
7. The items relating to the revenue and capital are not mixed up as they
would affect the Profit and Loss account.
8. In case any explanation or clarification is desired with respect a to any
voucher, the same should be noted in the Audit Note Book.
9. A voucher should, on the face of it, appear to be genuine and complete as
regards all legal and procedural formalities like –
- Date
- Name of the Organisation
- Phone No.
- Amount in words and figures
- Total
- Details
- Singed
- Rubber Stamped
- Print.

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10. Overwriting or erasion on a voucher should not be accepted. Alteration of

any kind should be supported by signature of the maker with attestation by
a responsible officer.
11. The auditor and his staff should not be afraid to express their ignorance as
to the nature and import of a transaction, or the method of its record.

Thus, it will be noted that while comparing vouchers with the entries made in
the books of account, the auditor should be able to verify the following:
(i) The authority of voucher
(ii) The authenticity of the voucher
(iii) The accuracy of the voucher
(iv) The authenticity of the transaction
(v) The proper classification of the books of accounts
(vi) The proper classification of the vouchers.
(vii) The accuracy of the amount
(viii)Amount in words and figures
(ix) Date of the issue of vouchers
(x) The correctness of the details of vouchers and its connected with an entry.

Difference between vouching and Routine checking

Basis of Difference Vouching Routine Checking
1. Definition Vouching is the Routine checking is the
examination of evidence checking of common
offered in substantiation records and books.
of entries in the books
including in such
examination the proof, so
far as possible, that no
entries have been
emitted from the books.
2. Work Reformed Vouching is done by the It is the done by the staff
auditor. of the auditor.
3. Objectives It helps in the verification It helps in checking the
of the authority and arithmetical accuracy of
authenticity of original entries.
transactions as recorded
in the books of accounts.
4. Functions It involves only Routine checking
examination of the involves checking of the
vouchers with the books. following –

(i) Casting
(ii) Subcasting
(iii) Carry forward
(iv) Calculation
(v) Posting in to the

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ledger.
(vi) Casting and
balances in the
ledger.
(vii) Transfer of
balances from
the ledgers to the
trial balance.

Self check Questions

1. Explain the rules relating to vouching.
2. Distinguish difference between Routine checking and Vouching.

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ACM – 301 Unit - IV

Lesson – 12

Vouching of some special transections

Context:
This lesson deals Vouching of some special transactions.

Objectives:
After studying this lesson you should be able to understand –
Application of Vouching in case of –
- Cash Sales
- Purchase Return
- Consignment Sales
- Goods sent on consignment
- Expenditure on Foreign traveling
- Floating Charges
- Remuneration Paid to Director
- Outstanding Assets
- Goodwill.

Application of vouching
I. Cash Sales:
(i) Examine the system of internal check regarding cash sales.
(ii) Ascertain the practice followed in the matter of issuing cash
memos.
(iii) Verify cash sales with carbon copies of cash memos. Trace
cash memos into cash sales summary book, if maintained,
particularly when sales are heavy and subsequent tracing into
Cash Book from the total of the summary book.
(iv) Ensure that the dates of cash memos tally with those of their
consequent entry in the cash book.
(v) Verify that prices of goods sold have been correctly calculated
and computation of sales should be ascertained.
(vi) Examine original copy or cash memo which is cancelled since
misappropriation of amount thereof is possible otherwise.
(vii) Check daily total entered in Cash Book with the till rolls where
automatic cash registers are used.
II. Purchase Return:
It constitutes goods purchased being returned to the supplier in part or
in for relevant reason which may be defective or of poor quality etc. The
auditor should carry out the following procedures:
(i) Examine the accounting basis for such transactions with reference
to corresponding Debit Note issued by the supplier which in turn
may be confirmed by corresponding Credit Note issued by the

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supplier acknowledging the same and attached to Debit Note. The

relevant correspondence may also be examined.
(ii) Verify by reference to relevant corresponding record in Goods
Outward Book or the stores records. Further the figures in these
documentary evidences should be compared with the original
supplier invoices for rates and other charges and calculations
should also be checked.
(iii) Examine in depth to eliminate the possibility of fictitious purchase
returns for covering bogus purchases recorded earlier when such
returns outwards are in substantial figure either at the start or end
of the accounting year.
(iv) Cross check with reference to original invoice any rebates in price
or allowances if any given by supplier on strength of their Credit
Notes.
III. Consignment Sales:
(i) Ascertain the credit has been taken only for the profit on the goods
sold through the consignee before the year end. No profit should be
taken for the profit on goods remaining in the hands of the
consignee.
(ii) Verify credits in the Consignment account with the help of the
Account Sales received from the consignee. The gross sales
proceeds should be credited to the Consignment Account and
debited to the Consignee’s Account.
(iii) Verify the terms of agreement between the consignor and the
consignee to check the commission and other expenses debited to
the Consignment Account and credited to the consignee’s Account.
(iv) Ensure that the stock lying with the consignee at the end should be
taken in the balance sheet at cost on consistent basic and credited
to the Consignment Account to arrive at the result of the
consignment transactions.
(v) Obtain confirmation of the balance in the account of the consignee
from the consignee.

IV. Goods sent on consignment:

Such transaction should be vouched and verified as under –
(i) Proforma invoice sent with goods.
(ii) Freight evidences given by the transporter like Challan, Bill,
Receipt for freight charged.
(iii) Insurance charge to be verified from cover note and premium
receipt issued by Insurance Company.
(iv) Account sale sent by consignee, referring to sale price of the
goods sold, expenses incurred by him and stock remained
unsold.
(v) Unsold goods should have been taken in the closing stock
valued properly inclusive of expenses (Proportionate) incurred
by consignee.

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(vi) Journal entries relating to such transaction be verified from the

books of the Company.

V. Expenditure on foreign travelling:

Such expenditures should be vouched on the basis of actual expenditure
incurred for which the following matters should be taken into consideration –
(i) The counterfoil of the air ticket to inspect.
(ii) Visa entry on passport to be verified.
(iii) Foreign currency drawn from authorised dealers for expenses abroad
to verify.
(iv) Sanctions by the Board of Directors be verified.
(v) If any advances taken against such traveling expenses should be
authorised by some responsible official.
(vi) Such expenditures are insurred in the interest of the business.

VI. Floating Charges:

Floating Charges refers to a general charge on some or all the assets of a
concern which is not attached to specific assets and are given as a security
against a debt. It has the effect of creating an immediate charge on the property
of the company leaving it to deal with the same in the ordinary course of
business, but subject to the limitations imposed in the instrument creating the
charge. The floating charge, however, becomes fixed or crystalised and the
creditors become entitled to proceed against to assets to assets on which charge
was created, on violation of any of the terms of the instrument of charge. This
charge is required to be registered within 30 days of its creation under section
125 of the Companies Act, 1956.

VII. Remuneration Paid to a Director:

Under section 309 (4) of the Companies Act, 1956, a Director who is not in
the whole time employment of the company, may be paid on the
monthly/quarterly /annual basis with the approval of the Central Government or
by way of commission if the company passes a special resolution. However, the
remuneration so paid shall not exceed–
(i) 1% of the net profits of the company if the company has a managing or
whole-time director or a manager; or
(ii) 3% of the net profits of the company in any other case. However, company
with the approval of the Central Government in general meeting may approve
payment exceeding these specified percentages.

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Self Check Question

1. How to vouch Goods sent on consignment?

2. How to vouch outstanding Assets?
3. What is Vouchers?
4. Explain the process of vouching of cash sales.
5. Explain the process of vouching of Purchase return.

V. Outstanding Assets:
As per matching concept, all expenditure pertaining to the year alone
should be charged against year’s revenue and all income whether received or
not should be accrued for the year but has not been received, the amount that
has so accrued is usually brought into books at year end adjustment and thereby
creating an outstanding assets account.
Generally, outstanding assets are those items for which amounts are yet
to be received though services, etc. have been rendered to items for which
benefit of service will be received later. For example, in case municipal expenses
has been paid in advance then the proportion thereof applicable to the period
subsequent to the date of the balance sheet should be calculated and shown as
an outstanding assets. Other examples of outstanding assets are rent receivable,
commission receivable, advertising amount paid in advance.
VI. Goodwill:
It is an intangible assets but a fictitious one. Goodwill is the value of super
profit over and above the normal profits which a business can earn due to
goodwill.
Normally goodwill will appear in the balance sheet only if it has been
purchased by the client from some firm or individual. The auditor should examine
the agreement for purchase of goodwill appearing in the balance sheet. However,
in case no sum is specified for goodwill in the agreement, then it can be
ascertained by deducting the net assets taken over from the price paid. The
difference will represent goodwill.
 Ensure that as required by AS-10 on ‘Accounting for Fixed Assets’
goodwill has been recorded in the books only when some
consideration in money or money’s worth has been paid for.
Goodwill arises from business connections trade name or
reputation of an enterprise.
 Check the vendor’s agreement on the basis of which assets of the
running business have been acquired by the company at a price
existing in the book value of the assets or where a specific sum has
been paid for the goodwill.
 See that only the amount paid to the vendors not represented by
tangible assets has been debited to the goodwill account.
Therefore, it is not prudent, that goodwill should be shown in the
company’s account by way of writing up the value of its assets on

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revaluation of writing back the amount of goodwill earlier written off

by the company.
 See whether goodwill has been written off as a matter of financial
prudence.
VII. Wages paid to seasonal labourer:
The auditor should properly assess the efficiency and effectiveness of the
internal check system operating in the wages department of the company. In
case he is satisfied that the internal check system in respect of maintaining wage
records, preparation of wage sheets and payment of wages is alright, he can
proceed to vouch the wages as follows –

 Auditor should check calculation and totals of wages sheet.

S.No. Name of Time Wages D.A. T.A. Others

Workers

 Auditor should test check the wage calculation in detail and

deduction made from wages on account of contribution to Provident
Fund. Employee’s state Insurance. Workmen’s Compensation Act,
etc. for a few workers-selected at random carefully.
 He should verify the total time spent, overtime work, if any and the
rate of wages payable. He should check that payment for overtime
is properly authorised by some responsible officer. He should
ensure that each part of the work of the wages department i.e.,
maintenance of time of piece work record, preparation of wages
sheet and payment of wages has been performed by independent
persons and signed or initialed by them accordingly.
 He should cross check the names of some workers given in the
wages sheet with wage card, gate keeper’s record, Forman’s
record and the provident fund, E.S.I. record etc. This will enable
him to ensure that wage have not been paid to ‘dummy’ workers.
 To check inclusion of dummy workers or impersonation, he should
test check at random the signature of a few workers for a number of
months say three or five months.
 He should pay special attention to the payment made to casual
workers. He should enquire as to the system of engaging such
workers.
 He should ensure that those workers have been employed after
proper authorisation.

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Self Check Question

1. Floating charges refers to –

(a) General charge (b) Tax
(c) Salary (d) Wages
2. Goodwill is a –
(a) Tangible assets (b) Intangible assets
(c) Cost (d) Value
3. Wages is related to –
(a) Labor (b) Manager
(c) Director (d) All of these
4. Fixed Assets is –
(a) Plant (b) Wages
(c) Tax (d) Profit.

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