VOUCHING OF INCOME AND EXENDITURE

FYBAF (A) 2009-2010

GROUP NO :7 NAME:
RASHMI SINGH PAWAN KANOJIA DHARA PATEL ANAMIKA GUPTA NEELAM SHUKLA SORAV MEHTA

ROLL NO:
916014 916016 916018 916020 916022 916024 -FINANCIAL AUDIT MRS DOLLY MAM

ACKNOWLEDGEMENT
It gives us immense pleasure to present this project on VOUCHING OF INCOME AND EXPENDITURE to you. The project presents the subject matter in a simple and convincing language. We would like to thank MRS DOLLY MAM for helping us out with this project and for making FINANCIAL AUDITING very much interesting for us. We would also like to thank our coordinator Mrs. NISHIKANT JHA for helping us out with Accounting & Finance. We enjoyed working on this project. Thank You DOLLY MAM for giving us such a wonderful topic. We hope you like our project.

INDEX
ACKNOWLEDGEMENT INTRODUCTION PRINCILES OF VOUCHING OBJECTIVE OF VOUCHING ROUTINE CHECKING OF VOUCHING CONCET OF VOUCHER EXAMINATION OF VOUCHER IMPORTANCE OF VOUCHING VOUCHING OF INCOME VOUCHING OF EXENDITURE

INTRODUCTION
Having recorded the system of internal control and assessed its strengths and weaknesses, the auditor is then in a position to plan the nature and extent of the audit tests he proposes to execute in relation to the organizations accounting transactions. The tailoring of the audit programme this way to meet individual demands of different accounting and control systems is fundamental to the concept of system audits. A distinction will be drawn between transaction test, to be applied where internal controls appear strong, and weakness tests, when a significant control deficiency may affect the auditors opinion on the accounts. It is important to make this distinction correctly as the nature of the subsequent audit may be dependent upon it. In this connection, the following planning audit test diagram may be of assistance.

MEANING AND DEFINATION

The term vouching in the context of auditing has been defined by various academicians and authors. Some of the definitions are given below: According to Dicksee Vouching consists of comparing entries in books of account with documentary evidence in supports thereof. Spicer and Pegler have defined vouching as, The examination by the auditor of all documentary evidence, which is available to support the authenticity of the transaction entered in the clients records. From these definitions, it is clear that vouching is the process of inspecting a document that supports a recorded transaction in order to verify the authority and authenticity of then such a transaction. Documentary evidence in support of a transaction is called voucher. In vouching, a transaction is selected from an account and then the auditor goes backward through the processing system to find the source documentation that supports the transaction. For example, to vouch a sales transaction, the auditor would look out for (i) Whether the transaction occurred in the accounting period under review. (ii) Whether the entries made in the sales book can be traced to carbon copied of sales invoices. (iii) Whether the calculations in sales invoices are arithmetically correct. (iv) Whether authoritative procedures are being followed.

General principles of vouching

In conducting vouching appropriately and effectively, the auditors should follow certain principles which are stated as below. While vouching a transaction, the auditor must verify the authenticity of the transaction, accuracy of amount recorded and proper classification of accounts. The voucher, which has already been checked by the auditor should be cancelled or tick marked with a special sign, so that it may not be used again for fictitious transactions. It should be seen that every voucher is authorized by an officer responsible for this purpose. If there is any alteration in the voucher, it must be supported by the concerned officers initials. While vouching transactions, the auditor should keep in mind that the distinction is made between capital and revenue items. It should be seen that the date of the voucher falls within the accounting period. It should also be ensured that the voucher is made out in the clients name. All the vouchers should be numbered serially and dated. The amount in the receipt must be shown in words and figure. If the two differs then it should be investigated. If any voucher is missing, the concerned official should be asked to give proper explanation. If no satisfactory explanation is received, it should be further investigated.

Objectives of vouching
Vouching is concerned with the examining documentary evidence to ascertain the authenticity of entries in the books of accounts. It is a technique used by the auditor to judge the truth of entries appearing in the books of accounts. Success of an audit depends on the efficiency with which vouching has been conducted. The following are the objectives for which the auditor adopts vouching techniques: To check that all transactions recorded in the books of accounts are supported by documentary evidence. To verify that no fraud or error has been committed while recording the transactions. To see that each and every transaction recorded has been adequately authorized by a responsible person. To ensure that distinction has been made between capital and revenue items while recording the transactions To have greater precision in reporting the financial information as true and fair. To ensure the reliability of the figures presented in the books of accounts. To confirm that no transaction has been recorded in the books of accounts which are not related to the entity under audit. To ensure the accuracy in totalling, carrying, forward and recording of an amount in the accounts.

Routine checking of vouching

The following points can be made about the relationship between routine checking and vouching: (i) The auditor verifies the arithmetical accuracy of the entries through routine checking. In vouching, entries are checked with the help of documentary evidence. Vouching also includes examination of documentary evidence in support of recorded transactions besides routine checking is a part of vouching. The work of routine checking is generally done by the junior audit clerks, whereas vouching is done by the senior audit clerks. Routine checking comprises of checking of accounts ledger posting etc. The object is to verify the accounts have been correctly balanced. Routine checking is included in vouching. Vouching is the checking of transactions.

(ii)

(iii)

(iv) (v) (vi) (vii)

Concept of vouching
There is no denying the fact that without voucher, vouching cannot be conducted. Vouchers are considered as an integral part of vouching. Voucher is a documentary evidence, both internal and external, which is used to support the entries made in the books of accounts of an enterprise. A transaction is supposed to be recorded in the books of accounts only when the documentary evidence is available to support the transaction. It may be a receipt, counterfoil of a receipt, resolution passed in a meeting, cash memo, pay-in-slip, purchase invoices, minutes of a meeting etc. All such documentary evidence are known as vouchers. Voucher can be of two types: Primary and Collateral vouchers. (a) Primary Vouchers: When written evidence is available in original, it is known as primary vouchers. For example, purchase invoices, counterfoil of cash receipt etc. (b) Collateral Vouchers: In certain cases, evidence in original is not available. Copies of such evidence are made available for the purpose of audit. These vouchers or documents are known as collateral vouchers. For example, Copies of resolution passed at a meeting, Xerox copy on demand draft etc. On the basis of source of document, vouchers can again be classified into 2 parts: (a) Internal vouchers: Vouchers originating within the organization are known as internal vouchers. For example, sales invoices, minutes book of board meetings, material requisition slip etc. (b) External vouchers: Vouchers originating from the outside sources are known as external vouchers. For example, mortgage deed, bank statement etc.

Examination of voucher
While examining the voucher the auditor should note the following points: (i) (ii) All vouchers should be consecutively numbered and filed properly. Each voucher should be dated and such date should fall within the financial year under audit. (iii) Voucher should be addressed to the client and should relate to business of the client. (iv) The amount shown on vouchers should be calculated accurately and amount in words and in figure match. (v) The signature of the official authorizing the transaction is there on the voucher. (vi) Vouchers are properly affixed with a revenue stamp as per the requirements of law. (vii) Voucher originating outside the business are genuine. (viii) Vouchers inspected should be cancelled by a stamp lest they should be produced again. (ix) Vouchers are entered properly in financial books e.g. proper allocation of expenditure is made between capital and revenue cash purchases are not recorded twice-once in cash book and then in purchase book. (x) Vouchers are valid e.g. shareholders resolution (a voucher) should adhere to the scope and limitation of the powers given to them by memorandum of association and articles of association ; price shown on sales invoice should on sales invoices should be as per approved price list / contract with customer. (xi) In case of missing vouchers, the auditor should ask for the reasons for the same and should rely on appropriate evidence in such cases e.g. in case of a missing purchases invoices, he may obtain a duplicate copy from the client. The auditor should not seek help of the clients staff while vouching

Missing voucher
Concepts While checking the entries in books of account with the relevant documentary evidence, it may happen that vouchers against certain recorded transactions may not be available in the vouchers files to the auditor. These are called missing voucher. Listing missing vouchers The auditor should make a note of all such transaction in audit note book which are recorded in the books but against which vouchers are missing. He should prepare a list of such missing vouchers and try to trace them. Audit procedure to be adopted to trace missing vouchers Appropriate audit procedure for the purpose of tracing missing voucher would depend upon the type of such vouchers. Some example are given below I. It is quite possible that important vouchers like share certificates, fixed deposit receipts or registered transfer deed for land and building may be missing from vouchers files. They may be either in the safe custody of some important official or with a bank or a financial institution as a security against a loan obtained by the client. In such cases, the auditor can check these vouchers either with the officers concerned bank or financial institution. II. If the business has entered in a contract for the purchase of land and building with a third party, it may not be possessing title deed for such land and building at the time of audit. If registration of properly is pending, the auditor can examine the contract between client and the seller and in cases where registration has been delivered to the client, the auditor can go to the office of the Registrar to verify the accuracy of the recorded transaction. III. In some cases by corresponding with the debtors and creditors, the auditor can obtain information about the receipts or payment. IV. In cases of regular payments or receipts, he may apply common sense to vouch transaction. For example, if rent receipts are available for the month of April and June and missing for May, it may be inferred that rent has been received for the month of May also.

Importance of vouching
Vouching is the essence of auditing. It is called so because of the role played by it in achieving the objects of auditing and its contribution towards the successful conduct and completion of audit work.

SERVES AS A BASIS TO EXPRESS AN OPINION ABOUT TRUTHFULNESS AND FAIRNESS OF FINANCIAL STASTMENT The financial statement balance sheet and profit and loss account summaries the effect of transactions recorded in books of account of a business, on its financial position and operation. The auditor satisfies himself with regard to accuracy, authority and authenticity of these recorded transactions by references to appropriate documentary evidence through the process of vouching. After being satisfied, he can say emphatically whether books of account of the business are correct and are maintained in a proper manner. If so, only then the balance sheet and profit and loss account drawn from the books can give a true and fair view of the business. Thus, without vouching, the auditor cannot achieve the primary object of audit. HELP IN DETECTION AND PREVENTION OF FRAUD AND ERROR- Vouching not only entails comparison of a recorded transaction with documentary evidence but also lays emphasis on ascertaining the genuineness, validity and proper recording of each transaction. This helps in detecting most of the errors and frauds, however, cleverly, committed. FORM THE BASIS FOR SUCCESSFUL CONDUCT AND COMPLETION OF AUDIT WORK- The success of audit

process depends on the care and caution with which the auditor carries on vouching. If the auditor goes about vouching in a haphazard and reckless manner and does not examine the authenticity of vouchers, he may be held liable for not detecting errors and frauds. In Armitage v. Brewer and Knott [1932], the auditors were found guilty of negligence. An employee of the firm having full charge of the books of account and of payment of wages had carried out extensive defalcations chiefly through falsification of wages sheet and petty cash vouchers. The court opined that the auditors did not exercise even a moderate amount of inquiry and care and their excuse that This or that was a small matter was untenable. The court awarded damages to the client. RELIANCE BY AUDITOR In case of organization having a sound internal control system, the auditor might reduce the extent of vouching, but reliance on such a system would not curtail the responsibility of the auditor in any manner. Thus, vouching is fundamental to all audit procedures and success of an audit depends upon the efficiency and themselves with which vouching is accomplished. De Paula has quite rightly stated, Vouching constitutes the foundation upon which the super structure of auditing is erected.

Vouching of income
Rent received:
Examine the cash book The auditor should examine the cash book for rent received with reference to the carbon copies / counterfoils of rent received. (ii) Examine rent receipt (a) He should examine copies of rent receipts issued to tenants with reference to rent bills raised by the client. (b) Ensure these bills are raised as per the terms and condition of lease deeds or tenancy agreements and obtain a list of properties lying vacant and a separate list of properties being occupied. (c)Examine the rent receipts for details such as whether the date and amount of rent payable (as per tenancy agreement) and that of actual payment (as indicated by rent receipt) are the same; whether there is a proper break up of rent receipts into rental income for the period under audit, rent received in advance and outstanding rent collected for previous periods. (iii) Examine the counterfoils of pay-in-slips The amount collected through rent receipts should be deposited into the bank account and the date and amount of such deposit should be checked with reference to counterfoils of pay-in-slips. (iv) Pay special attention towards rent outstanding The auditor should vouch rent outstanding with reference to tenancy agreement, rent bills, confirmatory letter from tenants and list of properties occupied. In case rents are doubtful, adequate provision for rent outstanding should have been made. (v) Examine other relevant vouchers in case of disputes In case of disputes relating to rent, pending in a court of law, the (i)

auditor should examine other relevant vouchers such as correspondence with the lawyers. (vi) Routine checking The auditor should check arithmetical accuracy of rent bills and rent receipts and ensure amounts collected under various heads.e.g. Taxes, water and electricity.

Dividend and interest income:

Examine the cash book The auditor should examine the cash book for dividends and interest income received with references to counterfoils of dividend / interest warrants or the forwarding notes ( received from the borrower along with the cheque / draft relating to interest ), brokers note in case of cum- dividend / interest purchase of securities and such other relevant vouchers. (ii) Examine the dividend / interest warrants or the forwarding notes (a)The auditor should examine these warrants with reference to schedule of investments or schedule of loans and deposits prepared by the client and calculate the amount received which pertains to the period under audit and amount outstanding. (b) He should trace a simple of dividend / interest received from cash book through dividend / interest warrants to investment certificates and their deposit into the bank. (iii) Pay special attention to interest outstanding The auditor should vouch interest outstanding with records of investments and loans and examine its proper disclosure in accounts. (iv) Examine recording of dividends and interest of correct amounts In certain cases, dividends and interest are received by the client after deduction of tax at source. The auditor should ensure that dividends and interests are (i)

recorded at gross amounts and tax deducted at source has been debited to Income-tax-Account.

Commission:
Examine the receipt of commission in the cash book The auditor should examine the receipts of commission in the cash book with counterfoils of the cash receipt. (ii) Examine counterfoils of the cash receipts The auditor should examine the counterfoils of receipt of commission with reference to the agreement between the client and the parties from whom it is receivable or copy of account sales (in case of goods received on consignment) or bank advice (in case of commission received from abroad) and relevant documentary evidence in other cases. This would help him in verifying details such as due date of commission, basis of calculation, rate, mode of payment, and similar relevant facts. (iii) Examine pay-in-slip The auditor should ensure that money has been deposited into the bank by reference to counterfoils of pay-n-slips. (iv) Routine checking The auditor should make all the necessary calculations himself and also examine posting to the appropriate ledger accounts. (i)

Bad debts:
(i) The auditor should examine such receipts in the cash book with carbon copies or counterfoils of the cash receipts issued to the debtors or trustees and should also check its postings into the Bad Debts Recovered Account. Sometimes if a debtor becomes bankrupt, the debts are written off in the books as bad. The official receiver,

(ii)

subsequently, may give some amount towards the debt written off and such payment is called bad debts dividend. The auditor should vouch such a receipt with dividend warrant received from the official receiver, correspondence with the official receiver and counterfoils of cash receipts issued to the official receiver. (iii) The auditor should examine the counterfoils of pay-in-slip to ensure that amount credited to Bad Debts Recovered Account is promptly deposited into the bank.

Sale of scrap:
(i) Examine the receipt in the cash book on account of sale of scrap with reference to counterfoils of the cash receipt and sales invoice. (ii) Examine sales invoice with reference to bills raised for sale of scarp ensure that bills are duly authorized by the person responsible for identifying scrap. (iii) Review the cost records and financial records to determine the total Price X quantity of scraps that has been generated during the period under audit and compare this with previous years. In case of substantial deviation from standard scrap rate or standard scrap quantity, the auditor should try to seek explanations from officers concerned. (iv) Examine whether revenue from sale of scrap has been recorded as sales revenue or has been reduced from the cost of the product.

Insurance claims:
The client might have received money from insurance company for claims in respect of fixed assets or current assets. The auditor may adopt the following procedures to vouch the receipt of insurance claims(i) Examine the cash book entries for claims received with reference to counterfoils of the cash receipts issued to the insurance company. (ii) Examine counterfoils of cash receipts with reference to copy of the insurance claims lodged with the insurance company, correspondence with the insurance company and the insurance agent. (iii) Copy of report / certificate containing full particulars of the amount of loss suffered should also be examined to ensure proper account treatment. The difference between actual loss claims received should be debited to the profit and loss account.

Vouching of expenditure
Freight and carriage expenses:
The auditor should examine the payments shown in the cash book for freight and carriage expenses with the reference to bills and statement of accounts submitted by transporters and clearing and forwarding agents and also with the receipts issued by them. (ii) The bills should be in the name of the client and rebate should be properly adjusted and should be arithmetically correct. (iii) The auditor should ensure that the expenses in respect of fixed assets are properly capitalized. (iv) Payments by cheques should be traced to bank statement.
(i)

Repairs and renewals:

(i) Check the payment for repairs and renewals shown in cash book with reference to statement showing estimates submitted by maintenance staff or contractor, bills for material purchased and acknowledgements obtained for labour charges paid. (ii) Arithmetical accuracy of documentary evidence should be ascertained. (iii) Repairs should be charged to profit and loss account as revenue expenditure.

Agents commission:
(i) The payment to agent for his commission is checked with reference to commission account, sales report sent by him and agreement between the client and the agent for details such as rate of commission and other terms and condition.

(ii)

The auditor should check the relevant calculations himself and trace such payments to bank statements.

Customs duties:
The audit procedures are listed below: Examine cash book Examine the payment of customs duties in the cash book with reference to bill of entry. (ii) Examine the bill of entry (a) Check the amount of customs duty was calculated correctly i.e. in accordance with the applicable rate for dutiable goods. (b) If the duty has been paid by clearing and forwarding agent, examine bill of entry with reference to agents bill. (c) If the duty has been paid by the client directly, examine bill of entry together with receipt evidencing payment of customs duty. (iii) Examine disputed cases carefully In case of dispute about the amount of duty payable, a provisional payment may be made. The auditor should determine the duty payable and ensure any additional duty to be paid or refund expected should have adjusted. (iv) Verify for duty drawback The auditor should verify the claim of duty drawback with reference to acknowledgement issued by the Directorate of Duty drawback. It may be noted that for claiming duty drawback an exporter submits an application in prescribed form to the Directorate of Duty drawback and an acknowledgement is issued if form is complete in all aspects. (i)

Excise Duties:
Excise duty becomes payable at the time of releasing of excisable goods from the factory / godown to the manufacturer. Normally, excise duty payable is deposited with the designated bank to the credit of the controller of Excise and one copy of the challan is forwarded to him for obtaining the permit and another copy is sent to the dispatch department evidencing payment of required duty. The auditor may adopt the following procedures to vouch the payment of excise duties: (i) Verify payment of excise duties by examining the duty paid as per challans with reference to the quantity of goods in respect of which issue permits have been received. (ii) Test check the accuracy of the amount of duty paid by multiplying the rate of excise duty with the value of goods issued as per the clients stock register. (iii) In respect of excisable goods manufactured but remaining to be released, ensure necessary provision for unpaid excise duty has been made. (iv) Ensure that in every case modvat credit has been adjusted and only net excise duty has been paid.

Reference www.google.com www.wikiedia.com Books referred:

I. Students guide of auditing II. Auditing principles and techniques - Sk basu iii. Fundamentals of auditing - Tata mc growhill ltd