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Unit Iv-Vouching, Verification and Valuation
Unit Iv-Vouching, Verification and Valuation
VERIFICATION AND
VALUATION
• TOPICS TO BE COVERED
1. Vouching: Meaning, Objectives ,Difference with Routine Checking , Factors to be Considered during
Vouching of Different items (to be specified)
2. Verification and Valuation: Concept, objectives, Importance, Difference with Vouching, Difference
between Verification and Valuation, Verification and Valuation of Different Items (to be specified)
Vouching- Meaning
• Vouching is a procedure followed in the process of the audit to authorize the credibility of the entries
entered in the books of accounts. In simple and easier words, it is a precise investigation of the presented
documents of the firm by an auditor to check the correctness and accuracy of such documents. It is the
foremost step of the auditing process based on which auditor performs his work and prepares an audit
report.
Objectives
• To ensure that all the transactions took place during the financial year for the business purpose only (not
for personal use), and are appropriately recorded in the books of accounts with true and fair evidences.
• To check the accuracy of the totaling and carrying forward amount recorded in the financial statements.
• To ensure that the person responsible for the business has verified his records or not.
• To make the financial records free from malpractices.
• To make sure that financial records are prepared in a lawful manner.
Voucher
• Documentary evidence in support of any business transaction is called as a Voucher. It may be a receipt,
invoice, bill, cash memo, bank pay-in-slip, counterfoil of a cheque, correspondences, agreements,
resolutions passed in the meeting etc.
2. Collateral Voucher: When the original voucher is not available, copies thereof are produced in support or
as subsidiary to remove suspicion and to satisfy the auditor, such a voucher is known as Collateral Voucher.
Examples of collateral voucher are copies of sales invoice, receipts, copy of resolution passed in a meeting
etc.
3. Missing Vouchers
While vouching vouchers or supporting documentary evidences are not available for the entries made in the
books of accounts, such non-availability of vouchers is called as missing vouchers. It may be deliberate
(purposeful or indicative of a big fraud) or accidental (innocent misplacement).
Vouching vs Routine checking
• Vouching traces the sources of information beyond the books of accounts whereas routine checking is
limited to recorded entries.
• The auditor verifies the arithmetical accuracy of the entries through routine checking. In vouching entries
are checked with the help of related documentary evidence.
• The work of routine checking is generally done by junior audit clerks, whereas vouching is done by
senior audit clerks.
• Vouching also includes examination of documentary evidence in support of recorded transactions besides
routine checking. Thus routine checking is a part of vouching.
Factors to be considered during Vouching
1. An auditor should check the records whether they are supported by evidential documents or not.
2. All the documents related to income and expenditures are to be separated and separate files should be maintained. If not, auditor should
ask to do so.
3. An auditor should use special sign in tested vouchers so that they cannot be used again.
4. While vouching, an auditor should check whether the general principles of accounting have been followed or not and clear-cut
demarcation of capital and revenue is made or not.
5. Whether the documents presented for testing are related to the current year or not.
6. All the documents which are presented for auditing must be authorized by the concerned authority. An auditor should check whether it is
done or not.
7. An auditor should ask duplicate copies of missing vouchers, but if important vouchers have been missed and auditor is not satisfied with
the reasons presented, s/he should write in report to this fact.
8. If an auditor finds the correction in the evidential document, then such figures should be verified with documents and to be noted down
in audit notebook for consideration while preparing report.
9. All the documents are to be reviewed before closing the work of audit which helps to check again those facts where special sign is given.
Vouching of Cash Transactions
Recorded in Debit Side (Cash Receipts)
1. Opening Balance: Closing balance for the last financial year will be the opening balance or cash-in-hand for the current financial year.
2. Cash Received from Debtors: Points to be considered for vouching the cash received transactions-
• Actual date and time of cash received should be entered.
• The responsible authority should accredit any discount allowed to the customers.
3. Loan Repayment: The following points should be considered:
• Interest received on loan should be credited to interest received account.
• Substantiation of bank statement, i.e., verification of bank statement is necessary as the client can also deposit the amount directly in the
bank.
4. Rent Received: Following transactions should be vouched properly:
• Records of the different rental properties should be maintained separately to record the rental income earned from various properties.
• Tax deducted at source should be properly accounted for if deducted by the party.
5. Commission Received: It can be vouched as follows-
• Agreement verification of the commission being received.
• Computation of commission receivable.
Recorded in Credit Side (Cash Payments)
1. Opening Balance: Credit opening balance represents bank overdraft because cash-in-hand of a company can never be negative.
2. Payment to Creditors: Examination of creditors payment can be done in following ways-
• Creditors account statement should be inspected.
• Any issue of receipt by creditors should be inspected.
• Any advance payment should be evidently quoted.
3. Payment of Salaries: It can be examined in the following ways-
• Salary register of the employees should be managed month wise.
• Amendments in the amount of TDS, advance payment, insurance, funds should be noted.
4. Purchase of Plant and Machinery: It can be vouched as follows-
• Excise duty treatment, according to excise rules.
• Go thoroughly to the purchase invoice or receipt of the machinery.
• All the charges incurred along with purchase such as freight inward, commission charges should be properly verified.
5. Income Tax: Following points should be considered for income verification-
• All the tax challans, whether it is of advance tax or self -assessment tax should be checked.
• Check for any demand notices from the income tax department.
• Check for any assessment orders by the income tax department.
Verification- Concept
Verification means the inspection of assets appearing in financial statements, whether the assets are
according to legislation or not. Verification of assets and liabilities are done to confirm the following −
• Existence
• Ownership
• Proper valuation
• Possession
• Freedom from encumbrances
• Proper recording
Objectives of Verification
• Confirmation about the existence of assets through physical verification.
• Legal and official documents relating to assets are checked to confirm the ownership of assets.
• It is confirmed that assets are free from any charge of lien.
• Proof regarding proper valuation of assets.
• To confirm that assets are properly accounted for in the books of accounts.
Auditor’s Duty Regarding Verification
• The auditor of a business is required to report in concrete terms that the Balance Sheet exhibits a true and fair view of the
state of its affairs. In other words, he must examine and ascertain the correctness of the money value of assets and
liabilities appearing in the Balance Sheet and this examination is known as verification of assets and liabilities. Therefore,
an auditor must keep in mind the following points while verifying the assets: