CHAPTER 4: VOU CHING OF TRAN SACTIONS

College of Economics and Business Administration

Course : Principles of Auditing
Course Code : BSAC2104
Specialization: Accounting and Finance
 Learning Outcomes

1. Describe the meaning of vouching, its objectives, and examination of

vouchers including vouching of cash book, cash receipt, cash payments,
and vouching of purchase and sales ledger.

2. Get acquainted with the vouching process of selected ledgers and

transactions.
Contents
Vouching of Transactions

 Meaning of Vouching

 Objectives of Vouching

 Voucher and its types

 Examination of Vouchers

 Vouching of Cash Book

 Vouching of Cash Receipt Transactions

 Vouching of Cash Payment Transactions

 Vouching of Purchases and Sales Ledger

 Meaning of Vouching
Vouching refers to the “Examination of Documentary Evidence in support
of entries made in original entry in order to verify their accuracy, validity &
authenticity”

The details of each business transaction should be documented with

evidences, which is known as a “Voucher”, like sales and purchase invoice,
credit note, receipt, memo etc. In any accounting transaction, the original
entry should be entered with the help of information found on the relevant
voucher.

Any improper transactions should not be entered in the books of original

entry by the accountant. Hence, no entry should be made without voucher
and no voucher without its entry.
Continued….
Vouching is an important part of an auditor's duty to verify whether all
the transactions in the books of accounts are recorded accurately.

Auditor verifies transactions’ authenticity recorded in the books of

accounts and submits his report, that they are maintained correctly and
free from errors & frauds.

So, the auditor’s main responsibility is to see that the entries passed in
the books of accounts are properly made & supported by proper
documentary evidence, which is known as “Vouching”.
Objectives of Vouching
In vouching of transactions, all auditors verify the authority and authenticity
of transactions as recorded in the financial books, so that he can satisfy
himself that:

1. All transactions related to the business have been recorded in the

books of accounts and nothing pertaining to the business has been left
unrecorded

2. No transaction which is not connected with the business has been

recorded

3. All entries for transactions are authorized, genuine and supported by

documentary evidence.
 Vouchers
Vouchers are the documentary evidence in support of transactions entered in
the books of account.

Some examples of vouchers are listed below:

a) Cash Receipts - Copies of Receipts, Contracts, Minutes etc.
b) Cash Payments - Invoice, Bill, Wage Sheets, Payroll, Contracts,
Correspondence, etc.
c) Purchases - Invoice, Goods received Notes, Orders placed.
d) Sales - Copies of Invoices, Orders Received.
e) Deeds and Certificates – Certificate of Origin in Export and Import,
Certificate of Deposit.
Types of Vouchers

Vouchers can be of two types:

Primary Vouchers: These are written documentary evidences in

its original form. Examples - purchase orders, original invoices,

counterfoil of cash receipts, etc.
Collateral/Secondary Vouchers: Copies of the original evidence /

primary vouchers could be used in the absence of the original

document known as Secondary/ Collateral Vouchers.
 Examination of
Vouchers

In comparing vouchers with entries, the auditor should

be able to verify the following:
a) Authority of Voucher.

b) Authenticity of Voucher.

c) Proper classification of the accounts.

d) Accuracy & Correctness of the details connected with the

entry.
 Vouching of Cash Book

A. Cash Book is a very important financial book of record

for a business entity.

B. Most of the errors and frauds arise in connection with

receipts and payments of cash.

C. In vouching cash-book, the checking of cash receipts

is more difficult than cash payments.
 Vouching of Cash
Receipt Transactions
1. Internal Check: The auditor has to satisfy himself that a good system of
internal check is in operation.
a) Fully understand the procedures and rules governing the receipts,
making records and dealing with the bank etc.
b) Auditor can only resort to test checking if he is satisfied that there is an
efficient system of internal check.

2. Control over the use of Receipt Book: Auditor should check the receipt book
is kept under proper control.
c) All receipts are in printed forms.
d) Counterfoil receipts are used for cash receipts
e) All receipt & receipt books should be numbered properly.
f) Details regard to date, amount, name on the receipt should be compared
with cash book.
g) Receipts has to signed by a responsible person.
h) Responsible person should keep the unused receipt book.
Counterfoil – Duplication Record
For Future Reference

PAY- IN- SLIP – Currency Details

Continued…
3.Depositing Receipt into Bank: Method of depositing
daily receipt into bank should be checked properly
through.
 Cash Sales
 Debtors Receipts
 Bills Receivable
a. Cash Sales:
i. Auditor should examine the effectiveness of internal
checks with cash sales.
ii. Auditor should check the duplicates of cash memos
with cash sales and compare the abstract of
salesman copy with cash book.
Continued…
b. Debtors Receipts: Cash received from debtors must be
vouched in line with the receipts issued through proper
documentary evidence and considered to be reliable.
 Recording smaller amount of receipts than actual received
one.
 Recording smaller amount on the debit side of the cash
book.
 Issuing receipt from unused books due to improper safe
custody.
In all the above cases, the auditor must be aware of these
practices & guard against cash book & pay-in-slips. Auditor
must pay attention to discount allowed and bad debts written
off by establishing contacts with debtors from time to time.
Continued….
c. Bills Receivable: Details about amounts receivable will be recorded
in Bills Receivable Book. The receipts from Bills Receivable can be in
two forms:
 Receipts from Bills Discounted: In case of Discounted bills
received but not matured at the Balance Sheet date, the cash
received should be recorded in the Cash Book. The amount of
discount on such bills should be separately debited to the
Discount Account.
 Receipts from Bills Matured: Receipt from bills receivable for
cash received on the date of maturity should be checked by
comparing the Bills Receivable Book and Cash Book.
 Others: Special enquiry should be made about bills that have
matured on the amount in respect of which has not been
received.
Continued….
4. Income from Interest and Dividend:
a) Interest received on fixed deposits in bank should be vouched in
bank pass book.
b) Interest received from securities account should be well-kept by
some responsible official.
c) On half yearly basis, the interest on debenture received should be
attached to debenture.
d) For receipt of dividend counterfoils, dividend warrants and letters
received along with the Cheque should be examined.
5. Sale of Investments:
e) Investments are usually sold through a broker. Hence, broker's sales
note should be examined to vouch the amount received from sale
of investments.
f) Broker's sold note contains details about the actual amount
received and the commission paid to the broker.
g) If the sale has been made through the bank, the bank advice should
be examined.
Continued….
6. Rent Received:
a) Lease Deeds and Agreements should be checked to ascertain the amount of
rent, the due date and the provisions maintenance.
b) Counterfoil of rent receipts issued to tenants should be checked.
c) Agents appointed to collect rent, the accounts or statements submitted by
them should be carefully checked.
d) The auditor shall confirm the outstanding rent with the tenant
7. Commission Received:
e) Commission received on agreements from clients & parties should be
examined for commission & rates.
f) Counterfoil (Part of Cheque or Receipts) receipt should be compared with
details posted in cash book.
8. Proceeds from Sale of Fixed Assets: Whenever fixed assets are sold,
correspondence is made with parties willing to purchase them. This correspondence
should be examined
g) When Fixed assets are sold through brokers, broker sold note must be checked.
h) Sale deed executed should be examined by the auditor.
i) Profit or Loss on sale are followed as per accounting policies.
 Vouching of Cash
Payment Transactions
Vouchers related to cash payments must be properly authorized, serially
numbered and filed in order. Moreover, the auditor must satisfy and confirm
himself that the payment has been made and confirm the payment related
issues:

 Has been made for the business itself.

 Relates to the period under Audit.
 Made to the right person.
 Is properly sanctioned.
 Is properly recorded.
 Is supported by a proper voucher; and
 Particulars in the voucher tally with the cash book.

In vouching cash payments, the auditor must ensure that payment is correct,
genuine & properly authorized.
Continued….
1. Cash Purchases:
 Auditor should see if the goods paid, have actually been received.
 Examine the entries in cash book are in line with cash memos &
purchase invoices from suppliers
 Ensue Purchases and verify if Trade Discount has been recorded in the books.

2. Payment to Creditors:
 Payment to creditor must be vouched with receipts issued by creditor;
 Money due must be compared with the accounts of creditors;
 Before passing an entry as being correct, the auditor should refer the contracts
and other documentary evidence for support.

3. Wages:
 Check the totals & calculations.
 Check if the Cheque drawn for payment of wages tallies the Wage Sheet.
 Compare the names of workers in wage sheet with the wage records.
 Confirm that the wage sheet has been properly authorized by authorized
person.
Continued….
4. Salary:
 Auditor should compare and check Salary with Cash Book
 Examine the Salary accounts of a sample of employees if separate Cheques are issued
to employees.
 In case of Cheque drawn for the amount of salary, the totals of Cash Book and Salary
Book may be examined.
 Confirm that the salary book is duly signed by an authorized officer and any increase in
salary are properly authorized by him.

5. Bills Payable: Bills honored and returned by payees should be examined together with the
bills payable records. If payments are made through the bank, the bank statement
should also be examined.

6. Land & Buildings Purchase:

 Title Deed for Freehold Land & Building purchase must be examined.
 If Property acquired is leasehold, the lease contract must be examined.
 If Property acquired through broker or agent, the broker's or agent's note should be
checked.
 Expenses incurred (Ex:) Broker's Commission, Registration Fee, Architect's Fee must be
vouched with receipts obtained and confirmed should be capitalized.
Continued….
7. Plant & Machinery Purchase: Auditor must check Plant & Machinery invoice receipt
obtained from the supplier. All attributable costs i.e. costs that bring the machinery and
equipment to the place and into condition for use must have been capitalized.

8. Purchase of Investments:
 Payments made on purchase of investment should be vouched with reference to
Brokers Bought Note.
 In case of investments purchased through bank, the relevant bank records must be
checked.
 In case of new issue of shares, letters of allotment and share certificates must be
examined.

9. Traveling Expenses: Auditor must check that the traveling expenses paid in connection
to business travel;
 Voucher should contain details (e.g.) Name, Designation of the person, Journey
Particular, Amount of the fare & other related travel costs.
 Travel cost must be approved & authorized by proper officer.
 Receipts obtained from those receiving payment must be checked.
Continued….
10. Advertising:

 Auditor should check the expected budget and actual amount spent on
advertising
 The amount allotted by company and the balance on budget also should be
verified by the auditor.
 In the case of heavy advertising expenses, the carry forward of expenses
from one accounting period to another allowed as per the firms policy
should be verified.
 Such expenditure is known as deferred revenue expenditure and part of it
charged to the current period and is treated as “Revenue Expense”.

11.Interest on Loan:
Terms of loan must be confirmed with rate of interest with the given in the loan
agreement.
 Interest payable on debentures should be examined in debenture interest book.
 In case interest payments were made by cheque, the bank records must be
verified.
 Continued….
12. Dividends:
 Dividend Payment can be checked with the help of dividend warrants.
 In case of payment made through bank, dividend warrant and the relevant bank
statements must be compared.

13. Directors Fees:

 Directors’ Minute Book, Attendance Register & Directors Payment Receipts should be
examined.
 Auditor should also examine the Articles of Association and check the provisions with
regard to the payment of Directors fees.
 Resolution of shareholders must be seen to ensure correct payment has been made.

14. Commission:
 Commission Payment with legal condition may be examined with client and agent
agreements.
 Commission paid on net sales amount after deducting discounts, and allowances from
the gross sales should be checked.
 Statement of accounts submitted by the agents or representatives should also been
seen.
Continued….
15. Bank Charges:
 Vouching of bank charges such as bank commission, interest on overdraft and loan can be
examined with bank statements.
 If necessary, the auditor should check the calculation of interest.

16. Insurance:
 For payment made on insurance premiums, the receipts from insurance company and policy
must be examined.
 In case of renewal, the receipt & premium can be referred.

17. Petty Cash Book: The auditor should check the system of internal check through petty cash
transactions. Since, there are no proper vouchers, chances of misappropriations of cash exist. The
petty cash is usually maintained on the “Imprest System”. If he finds that the system of internal
check is sound, he should adopt the following course of action.

 Should check the payment entered in the cash book by the petty cashier for all petty
expenses.
 Should examine the totals and balances in petty cash book.
 Should insist upon having vouchers for every expenditure.
 For Expenses without vouchers, he should ask the details from the petty cashier, which should
be duly signed by a responsible officer.
 Should check the petty cash book is periodically checked and initialed by responsible persons
for all petty cash payments.
Vouching of Purchases & Sales
1.Purchase Book: Auditor should satisfy himself with the internal check
operation. Moreover, the procedure involved in placing orders, receiving goods,
checking invoices and maintaining records should be checked by keeping the
following points in mind:

 Name of the client in the Invoice

 Date of the invoice relates to the period under audit.
 Invoice has been checked & initialed by an appropriate person.
 Supplier Name should be registered in the purchase Book.
 Trade discounts have been deducted and only net amounts are entered in
the purchase book.
 No invoice has been entered twice in the books of accounts.
 In case of unavailable voucher, a duplicate must be obtained. If not
provided, the auditor must mention this fact in his report.
 Should especially check a few entries made at the beginning and close of the
financial year.
 Sales return total should be checked and posted in ledger accounts.
Continued….
2.Purchase Ledgers: The purchase ledger contains accounts relating to creditors,
the auditor should note the following points:

 Opening balance of different accounts must be checked with the audited

balances of the previous year.

 All supporting books like Purchase Book, Goods Returned, Cash Book
should be investigated.

 Creditors statements should be examined and compared with the

purchase ledger balances.

 Provision for reserves on discount and discount made to creditors should

not be excessive.
Continued….
3. Sales Ledger: Sales ledger contains debtor’s accounts. The auditor should note the
following in vouching the Sales Ledger:
 Ensures the work of each clerk is separately checked.
 Ensures the ledger entries are made by person other than ledger clerk.
 Verify the ledger is balanced frequently and extraction of the balances is
independently checked.
 Confirm bad debts write-off are properly authorized.
 Opening balances should be checked with the balances in the previous years
audited accounts.
 Schedule of debtor’s accounts must be carefully checked.
 List of bad debts & debts details should be provided and carefully checked.
Glossary
• Invoice: An invoice is a time-stamped commercial document that
itemizes and records a transaction between a buyer and a seller. If
goods or services were purchased on credit, the invoice usually
specifies the terms of the deal and provides information on the
available methods of payment.
• Credit Note: When a customer returns goods purchased on credit
he/she also expects some form of confirmation from the seller along
with the cancellation of related dues. A credit note is a
document sent by a seller to the buyer as a notification to
acknowledge that the goods have been registered as (return inwards
) and a credit has been provided to them for the eligible amount.
• Debit note: A debit note is a document used by a vendor to inform
the buyer of current debt obligations, or a document created by a
buyer when returning goods received on credit.
• Certificate of origin: A certificate of origin (CO) is a document
declaring in which country a commodity or good was manufactured.
The certificate of origin contains information regarding the product,
its destination, and the country of export. For example, a good may
be marked "Made in the USA" or "Made in China”.
• Certificate of deposit: A certificate of deposit (CD) is a time deposit, a
financial product commonly sold by banks, thrift institutions, and
credit unions in the United States. CDs differ from savings accounts in
that the CD has a specific, fixed term (often one, three, or six months,
or one to five years) and usually, a fixed interest rate.
• Counterfoil: A part of a document, such as a bank-check or draft,
which is retained by the person giving the document, and on which is
written a memorandum of the main particulars contained in the
principal document; a stub.
• Receipt Book: A book containing forms to be used in giving receipts
for payment of money. It has detachable forms of receipt
consecutively numbered with counterfoils or duplicates
correspondingly numbered.
• Internal Check: The term internal check implies that the work of
various members of the staff is allocated in such a way that the work
done by one person is automatically checked by another. It is an
arrangement of the duties of the staff members of the accounting
functions in such a way that another automatically checks the work
performed by a person.
• Cash Memo: Cash Memo is a source document used in case of a cash
transaction between the seller and a buyer. In case of a cash sale,
the seller prepares the cash memo and hands it over to the
purchaser. It acts as a proof for ‘cash sales’ made by a business.
• Bills Receivable: A bill receivable is a bill of exchange drawn by a
vendor on its customer/buyer. It serves as proof of debt. When the
drawee (customer) accepts the bill and sends it back to the drawer
(vendor), it becomes a bill receivable for the drawer as the money is
receivable for him.
• Dividend Warrant: A document that shows that a shareholder is
entitled to a dividend. It is a cheque sent by a company to a
shareholder for payment of dividend to the registered address of the
shareholder.
• Broker’s Note:
A memorandum given by a broker to a seller or buyer of goods, stating the
fact that certain goods have been sold by him on account of a
person called the seller to another person called the buyer
• Lease Deed: It is defined as a legal document or an instrument required for
the execution of the transfer of property in the form of lease. It confirms
the rights, interests of the lessee over the leased property.
• Trade Discount: Trade discount refers to the reduction in list price known
as a discount, allowed by a supplier to the consumer while selling the
product generally in bulk quantities to the concerned consumer to increase
the sales of the business as more customers are attracted when the
discount is given on the list price of the product.
• Bills Payable: A bill payable is a document which shows the amount owed
for goods or services received on credit (meaning not paid at the time that
the goods or services were received). The provider of the goods or services
is referred to as the supplier or vendor. Hence, a bill payable is also known
as an unpaid vendor invoice.
• Bills Dishonoured: A bill is dishonoured either by non-acceptance or
by non-payment. That is, the person on whom a bill is drawn (the
drawee) refuses to accept it or if he accepts the bill and agrees to pay
but later fails to do so on the due date, then the bill of exchange is
said to be dishonored.
• Letter of Allotment: It is a letter from a company to a person who has
asked to buy shares in that company, telling them how many shares
they have been given and if they owe any more money.
• Share Certificate: Share certificates are documents issued by
companies that sell shares in the market. A shareholder receives a
share certificate as a receipt of his or her purchase and to reflect
ownership of a specified number of shares of the company.
• Deferred Revenue Expenditure: is an expenditure that is revenue in
nature and incurred during an accounting period, however, related
benefits are to be derived in multiple future accounting periods.
These expenses are unusually large in amount and, essentially, the
benefits are not consumed within the same accounting period.
• Debenture: In corporate finance, a debenture is a medium- to long-
term debt instrument used by large companies to borrow money, at
a fixed rate of interest. The legal term "debenture" originally referred
to a document that either creates a debt or acknowledges it, but in
some countries the term is now used interchangeably with bond,
loan stock or note.
• Resolution: A resolution is a formal way in which a company notes
down the decisions that are made in a meeting of the members of
the company. It is a written document that details any corporate
action taken by the board of directors of a company.
• Articles of Association: Articles of association form a document that
specifies the regulations for a company's operations and defines the
company's purpose. The document that outlines the methodology
for accomplishing necessary day-to-day tasks.
References
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%20verification.pdf
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df
Vouching and Verification. (n.d.-b). https://gfgc.kar.nic.in. Retrieved September 24,
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