This e-Lecture was Recorded on:

March 19, 2013

Vouching – Analytical Review

Procedures
IPCC Paper 6: Auditing & Assurance Chapter: 5A
CA. P. Anand, FCA

© The Institute of Chartered Accountants of India

1
Disclaimer
• This lecture has been delivered by faculty members to supplement the
Study Material, Practice Manual and other content
1

• The views expressed in this lecture are of the Faculty Member.

2
• The content of this video lecture has not been specifically discussed
by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views
3 of the Council or any of its committees

© ICAI, 2013 2

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© ICAI, 2013
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March 19, 2013
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Analytical Review Procedures

1 • What is Analytical review Procedure?

2 • Why do we do the same?
3 • How do we do it

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What Is Analytical Procedure.

When we are doing

an Audit based on
By carrying this
a sample, this It is based on the
procedure you can
procedure enables principle that
reliably do a
us to have a Industry do follow a
Balance Sheet
comfort that no particular pattern
Audit
serious mistake
could be there

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Why Analytical Procedure

When complete checking is not possible you as an Auditor

should be assured of reasonable correctness of the
financial statement

This procedure enables you to prove that you had

carried out the audit in the best possible manner

By comparing major expenses vis – a – vis income you can

come to a fair amount of assurance of no serious error
creeping in

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How Do We Do It

Comparison of Significant Ratios and Trends

Compare with Prior periods major expenditure

Analyze the Comparison for any major deviation

Compare with similar industry trends

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Advantages of Analytical Procedure

It assists the
Auditor to Plan the
Audit.

The analysis of
Creates
the significant
documentation
deviations
to prove that he
allows the
has carried an
Auditor to adopt
assignment as
substantive
expected.
procedures.

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Learning Objectives

• What is a voucher
1

• What are the requirements of a

2 Voucher

• How to audit an voucher

3

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Voucher

Basic document from which a transaction is

recorded in the books

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Vouching

Examining a voucher for its correctness

Establishes the authenticity of the

transactions recorded in the primary books of
account
Vouching
Acts as an evidence and along with a
supporting third party evidence lends
authenticity to the transaction

Going through a voucher the auditor can

understand the transaction

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Voucher Examination - Essential Points

Date of the voucher which records the transaction should be within

the accounting period which is under audit

Voucher is made in client’s name

It is duly authorised by those delegated with such powers

It is an evidence of the transaction having happened and hence it

should be complete in all aspects to reveal the same

Account head should be clearly fixed to show the character of the

transaction . for example., Capital or revenue

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Audit of Cash Transactions
Highly Liquid Asset

Exposed to a greater risk of fraud and defalcation

Cash
Need for requisite control measures while entering
transactions

Cash Transactions should have requisite

authorisation

Protects against losses through fraud, waste,

mistakes etc.,

Internal Control System: Transaction entered into are correctly

entered.
Enable the concern to take policy decision as
regards planning and operation of the
business at the appropriate time.

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Steps in Verifying Internal Control

Study the system by which controls are exercised after which the
accounting entry is made.

How any receipt of cash or expenditure of cash is monitored

corresponding to the service to be rendered .

Delegation of authority

Internal audit system of the internal control

Whether any mechanical aids are being used to ensure proper

accounting of receipts and payments

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Steps in Verifying Internal Control-2

Observe the working of the accounting system and determine by application of procedural
tests whether checks and counter checks envisaged by the system of internal control are
being properly applied

Internal control should be reviewed periodically to ensure that any loopholes which might be
observed is suitably plugged

The process of verification of entries in the books of account with documentary evidence is
referred as vouching

When verifying the vouchers it should be checked for its validity viz., Whether it is paid to
persons who are shown as recipients and is correctly accounted according to law and facts
of the case

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Forms of Documentary Evidence

Legal provisions having a Rules or regulations

bearing on the accounts governing the internal
under audit working of the organisation

Documentary
Evidence Forms

Minutes of the proceedings

of a meeting - Members of
Copy of Agreements
Company, Directors or
Managing Committee

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Banking Transactions:
To verify the correctness of the bank balances reflected in the bank book and
that of the bank statement a reconciliation statement is made

This gives us an idea of the banking operations carried on by the client,

effectiveness of internal control and the correctness of accounting

A bank reconciliation statement duly signed by the accounts in charge should be

part of the working papers

Ascertainment of cheques honouring after the accounting year gives us an view

whehter any window dressing has been carried on

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Verifying Purchase of Goods
• Cash purchases should be verified by reference to cash memos or receipted invoices
1 by suppliers

• Credit purchases to be verified with reference to the accounting of invoices of

2 suppliers and later their acknowledgement of the payments

• The receipt of material to be verified from the stores department

3

• Advances for supplies to be verified as to its correctness as sometimes loans are

4 disguised as advances for supplies which we are required to specifically report

• Invoice accounting should have a proper internal control so that duplicate /bogus
5 invoices should be filtered and not accounted for

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Transactions with Directors

Directors stand in a
different footing vis a vis the
company since transactions Hence when vouching
entered by them should transactions with directors
have the approval of the or their interested parties
board, sometimes the the law has to kept in mind
shareholders and for compliance
sometimes prior approval of
the government

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How to verify Director Interested Transactions

The Directors and their interested parties list has to

be obtained from the Company to verify the above

The Company has to update this list on an annual

basis at the beginning of a Financial Year

The transactions should also find a place in the

Statutory Registers maintained by the Company

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Remuneration to Directors

Legal Compliance Has to be looked into

The Quantum, Nature Of Job and Approval Wherever

Necessary Will decide the Salary Payable to A Director

For Employees it arises On A Contractual Arrangement

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The Legal Requirements for Payment of
Remuneration to a Director is Contained in :

• 309(3) & 309(4) – FOR the manner of payment of Managerial

1 Remuneration

• 198 which prescribes the overall limitation

2

• 310 which provides increase in remuneration

3

• 314 which provides for remuneration to director interested person

4 through special resolution

• Schedule XIII for the remuneration package which is approved by the

5 central government

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Payment for Acquiring Assets

In Case of Immovable Property the Payment can be

verified by verifying the title Deeds

For other Properties by Invoices and Receipts for

Supply of the Asset

The Asset should be in the name of the Client Who

has Paid for it and has Accounted it as his Asset

Compliance of Company Law formalities wherever

required to be Complied With

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Law to be Followed

Payments Controlled by
Companies Act 1956:
Personal Expenses debited
to profit and Loss Account
(227 (1A))

Powers to be exercises only

after approval by a General
Meeting.
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Law to be Followed
Sell, Lease or otherwise dispose of The whole or substantial part of the Undertaking
Powers One undertaking where there more than one
to be
Remit or give time for repayment of
exercises any debt due by Directors
only after Invest otherwise than in Trust
approval Securities of compensation received.

by a Borrow monies exceeding Net Worth.

General
Meeting Contribute to Charity beyond a limit

Restrictions on Political Contributions

Contributions to National Defence

Fund.

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Acquisition by Lease

Terms and conditions of the Lease Deed to be looked into

To determine Whether it is a Operating Lease or Finance Lease

If Operating Lease Payment to be Charged to Profit and Loss

If Finance Lease only Interest gets charged to Profit and Loss

To show Assets under Finance Lease separately from fully Owned

Asset

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Hire Purchase Transactions

Approval of the Board for acquiring under Hire Purchase

Asset description to match agreement and invoice

Terms and conditions as per agreement

Accounting as Finance transaction by the hire

Disclosure in Balance Sheet

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Vouching of Expenses-Compliances

Payment of Expenses:

Accounts being
Maintained on
Accrual basis all
Expense Relating Expenses
Expenses Relating
and for the No Personal Adjusted at Year
to the period
Purpose of Expenses to be end Especially
Whether Paid Or
Business Should Charged to Large Sums to be
Payable to be
alone be Charged Revenue Carefully looked
included. If paid
to Business Into
for a future period
should be shown
under “Prepaid”

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Payment of Taxes Vouched
Payment on Account of Income Tax and other Taxes Consequent upon a
regular Assessment Should be verified with reference to a copy of The
Assessment Order along with a notice of Demand

Other Tax Payments should Be Verified Based On The Receipted Challan

For Such Payment

Any Interest received On refund of Tax Is assessable as Interest Income.

Any Payment of Interest on Tax Payment has to be Debited to Profit and
Loss Account

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Indirect Tax Expenses

Normally relates to Customs and Excise Duties.

Customs Duty on Excise Duty on Hence documentation
Imports. manufacture is different

Customs Duty – Rate – Import –Export Policy

Based on Tariff rate and value declared in Bill of Entry

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Excise Duty / Import Duty

Imports – Clearing Agent bill includes • Duplication of duty

duty amount payment to be avoided

Excise Duty paid on exports is • Claim for the same to

refunded as Draw Back be made

Excise Duty arises on manufacture

and paid when cleared from Factory

Normally collected from the sale

party

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Excise Duty Payment

Registers as prescribed by Rules to be maintained

Periodically to reconcile with financial records

Input Credit of Excise duty paid available

To adjust against payment made

Verify correctness of the adjustment

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Travelling Expenses-verification
Company’s Policy on Travelling and the Internal Control Measures to
be Studied

To see that only Expenditure Relating to the Business as per

Applicable Rules are Claimed and Allowed.

No Personal Except on Contractual Arrangement should be

Permitted

Wherever Possible Third Party Evidence Like Tkt., Hotel Bill Etc.,
has to be verified

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Repairs to Assets

Repairs is done to bring it

back to working condition

Control No
mechanism for enhancement
carrying out in useful life or
repair work value of asset

If so to treat as Capital
Expenditure

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Preliminary Expenses

Expenditure incurred to bring into existence a Company or

its expansion

Consists of expenses in formation ,like charges paid to

various works connected to the same

For reimbursing the same to Directors/Promoters

resolution to be made

Disclosure as per AS 26 to be kept in mind

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Salaries and Wages

• The evidence for vouching this payment is mostly internal

1
• Internal control measures on preparation of wage bill to be studied and satisfied
• Internal control should cover – recruitment, compensation package, attendance and
other incentives
2 • Control on number of employees actually employed

• Statutory compliance like E.S.I., E.P.F., etc.

3

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Salaries & Wages - Contd.

Unpaid wage on appointed day – control measures

Direct remittance to bank – control measures

Remittance of statutory dues on Due dates of the

respective law

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Petty Cash

Petty Cash relates to small amounts

of routine payments

Pooled together for a month and then

transferred to the respective account
head

Internal Control measures of

sanction to be verified

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Payment of Dividends - Procedure

Whether The Articles of Association Permit the Declaration of Dividend

Whether Dividend Is Declared Out of the Profits of The Company

Whether Transfer to Statutory Reserves have been made

Whether Proper approval of the Shareholders have been Obtained

before Disbursement of the Dividend

Whether Dividend Is Paid to those Persons Whose Name Appear on the

day Of Annual General Meeting

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Payment of Dividends- Contd.

Provisions of Income Tax Act relating to declaration dividend

to be complied with

In case of interim dividend the other procedures do apply

except the approval of Shareholders

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Advertisement Expenses

To Check whether it relates to advertising company products

Advertisement for recruitment of staff

Advertisement to comply with statutory regulations

No personal advertisement

If any Agency is involved in advertising statutory compliance of TDS

to be carried out

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Retirement Gratuity Of Employees

Applicability of the Gratuity Act to the Employees

Calculation of Gratuity Liability on an Yearly Basis

Investment of such Liability in Approved Securities

Disclosure Norms as per Accounting Standard

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Cash Receipts

Internal Control system for receipt of Cash

Teeming and Lading resulting in revenue loss

Issue of receipt

Date of receipt and date of entry in Cash Book to be

matched

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Cash Sales

Cash received especially on retail sales

– internal control to be studied
If control weakness is found to
strengthen the same
Cash / Cheque received from
customers to match their outstanding

If not matched to analyse reasons

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Income From Investments / Deposits

Investments – maintenance of an investment register is ideal

To match dividend received with investments

To verify dividend declared but not received and account for the same

To verify interest accrued and provide

In case Tax deducted to account in gross

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Rental Receipts

Check tenancy • Agreement also

agreement for denotes other charges
to be met by whom
rent due

When vacancy • If any rent arrears –

arises to verify realiability to be
and adjust verified
advances.

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Bankruptcy Dividends

Due from a person declaring bankruptcy – claim to

made to the receiver

The claim is based on the property the receiver has

and the likelihood of your receiving out of the same

As part amounts are received to keep a track of

recoverability

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Sale of Investments

To verify whether the authorised person alone has carried

out the purchase / sale

Proper documentation from a Broker or an agreement

Verify Investment Register for purpose of accounting and

control investments

Valuation of Investments as per AS13

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Loans Obtained

• Legal compliance for loans obtained

1

• Private Companies barred from accepting deposits from public

2

• CARO reporting to be complied with , if loans are taken from

3 interested parties

• Conditions of loan – whether complied with

4

• Guarantee if any provided for the loan has to be ascertained

5

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Bills Receivable

Ideal is to keep a separate Register of Bills to be collected

If discounted with a Banker the discount charges to be properly

accounted

Contingent Liability on the day of Balance Sheet of Bills

discounted to be disclosed

If bills are dishonoured by the third party whether any provisioning

for outstanding bills realisability has to be looked into..

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Sale of Assets

Sale proceeds to
Company procedure Statutory
be separately To account for
for sale of Assets – compliance
credited then by Profit or Loss
Auction / Tender like VAT etc.,
including it in on sale
etc., to be met
normal sale

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Royalties Received

Royalties normally are received on supply of Technical Knowhow

It is agreement based

To check agreement for arriving at receivable amount

To check the other party account also for correctness

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Insurance Claims

Insurance claims for loss of Assets are to be verified

Company accounting policy on insurance claims to be

seen

All claims made – list to be obtained.

Recoverability status to be obtained for accountability

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Miscellaneous Sales

Scrap / Junk
Mode of
material -
disposal –
internal
periodical or
control as to
annual
its generation

Closing stock
Revenue to
if material to
be accounted
be valued

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Recovery of Bad Debts

Sundry Debtors not possible for recovery is

written off

On recovery after write off to be accounted

as income

Court recovery to be monitored and

accounted

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Refunds from Insurance

Refund of excess Ascertain

insurance reasons for
premium paid refund

Refund Check
because of communication
cancellation of with Insurance
policy Company

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Bank Balance Verification

Verify balance as per bank book and bank statement

Obtain confirmation of balance

Prepare bank reconciliation statement

Get Charge details from the bank and compare

Accounting of post date cheques in the year to which they relate

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Reversal of Receipts

Bills discounted sometimes dishonoured

Obtain list from the bank and verify it with book records.

Check on action taken by Management

Reverse parties account and check recoverability

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Bank Balance Verification – Contd.

Un cleared cheques beyond reasonable period to be verified

Physically verify documents like Fixed deposit etc.,

If not available reasons for the same for correctly disclosing

them

Balances held in Foreign branches – if difficult to transfer / fact to

be disclosed

Possibility of teeming and lading in depsoiting should be kept in mind

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Cash Verification

Physically verify cash on the day of balance

Sheet or to a near date to that

Large balance
than normal I O U to be
requirement – counted as
enquire part of Cash
reasons

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Lesson Summary

Vouching is evidence based

Evidence should be reliable and appropriate

Knowledge of the transaction to be understood to know

which is the ideal evidence

Voucher is the primary record from which the entire

accounting emanates

Hence it has to be checked carefully

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Review Questions
 Explain what do you mean by Analytical Procedures. How such
procedures are helpful in Auditing.
 While conducting the audit of the accounts of a manufacturing
company you discover that the ratio of gross profit on sales has
sharply arisen in comparison to the previous year. State the steps
you would take to satisfy yourself.
 Extent of reliance on Analytical procedures.
 How will you vouch and verify the following:
◦ Recovery of Bad Debts written off.
◦ Goods sent on sale or return basis.
◦ Borrowings from Banks

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Review Questions – contd.

 How will you vouch /verify the following:

◦ Goods sent on consignment
◦ Foreign travel expenses
◦ Receipt of capital subsidy
◦ Provision for income tax.
 In vouching payments , the auditor does not merely
check proof that money has been paid away -
Discuss

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Review Questions – contd.
 How will you vouch/verify the following:
◦ Sale proceeds of scrap material
◦ Machinery acquired under Hire Purchase system
◦ Sales returns.
 As an auditor comment on the travelling expenses of 2.25 lakhs shown in
Profit & Loss Account of x Ltd including a sum of Rs.1.10 lakhs spent by
director on his foreign travel for company’s business accompanied by his
mother for medical treatment.
 How will you vouch the following:
◦ Sale of investments
◦ Rental receipts
◦ Payment of retirement gratuity
◦ Production incentive paid to workers.

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 Thank You

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