Presentation on vouching and verification

Presentation on

Vouching and verification(financial Audit)

for B Com students By

Dr. Sanjay P Sawant Dessai Associate Professor

VVM Shree Damodar College of Commerce and Economics margao Goa

05/01/23 [email protected] Vouching and varificaton

VOUCHING AND VERIFICATIONContents

• Vouching • Objectives• Types of voucher.• General procedure for vouching• Audit of payments/expenses • Audit of receipts / Incomes• Audit of Purchases• Audit of Sales

05/01/23 [email protected] Vouching and varificaton 2

Verification and valuation Contents

• Verification• Objectives• Verification V/s Vouching • Valuation• Meaning• Objectives• Verification V/s. Valuation


Verification and valuationContents

• Procedure for Verification & Valuation of• Assets • Liabilities• Inventories• Types of inventories• Verification & valuation of inventories• Auditors duty with case laws.


Systems of accounting

• Cash • Mercantile/ accrual • Difference between expenses and payment• Difference between profit and loss account

and receipt and payment account


Vouching

“Examination of all documentary evidence in support of a transaction and includes identification of any document that should be available to the auditor to carry out that examination”


Objects of vouching

Authenticity of transaction.To check transaction are genuinely connected with

the business.To ascertain that transaction are supported by

documentary evidence. To check vouchers pertain to the financial year under

audit. Approval by competent authority.Proper identification of expenditure as capital or

revenue.To verify arithmetical accuracy


Common points in vouching Serial number of vouchers and they are filed

properly Date of voucher Addressed to the client and relate to business of

client Amount shown in figure should match with words Signature of official authorizing officer Revenue stamp if amount is rupees 5000 and

above Vouchers originating from outside the business are

genuine


Common points in vouching Vouchers inspected should be cancelled or

stamped Proper allocation between capital and revenue

expenditure Clarification regarding missing voucher Should not seek help of the clients staff Pre-receipt vouchers should not be accepted Over writing or cancellation on a voucher should

not be accepted. Alteration of any kind should be supported by the

signature of the authority


Types of vouchers

• Primary • Secondary • Primary vouchers – original evidence – cash

memos, rent receipts, agreements, salaries statement, purchase invoice etc

• Secondary – Also called as collateral vouchers • Copies of original evidence, carbon copies,

counterfoils of pay in slips etc


Vouching procedure • Check General consideration • Check Internal control • Check Cash book• Check Bank statements • Check Documentary evidence • Check Authority• Check Acknowledgements • Check type of expenditure( Capital / revenue )• Routine checking


Vouching procedure for salaries and wages

Examining the internal control procedure Before proceeding to verify payment made on account of

salaries and wages the auditor should examine the internal control procedure as regard the following Appointment, promotion and transfer of employees.Records of attendance.Arrangement for the preparation bill and there analysis.Sanctioning and disbursement of wages and salaries.Custody of the wages record.


Vouching procedure for salaries and wages

Examine the payment shown in the cash book.Check the bill details.

By reference to the record of attendance, schedule of rates and sanction of management.

Check computation of wages and salaries. With regard toAbsenceLeave IncrementsFines and penaltiesLoans and advancesDeduction on account of provident fund, insurance, tax etc

Check for Receipts of paymentsCheck for arithmetical accuracy of pay rollCompare signature sample of employeeCheck for dummy employees


Rent

• General consideration • Internal control • Cash book / Bank statement • Rent agreement • Acknowledgment from party• Routine checking


Verification of Assets and liabilities

• Meaning of verification• Definition of verification• Object • Auditors duty in verification• Points to be considered in verification


VERIFICATION OF ASSETS AND LIABILITIES

Verification of assetsDefinition Spicer and pegler “ The verification of assets

implies an inquiry in to the value, ownership and title, existence and possession, and the presence of any charge on the asset”


Verification of AssetsVerification is an important audit process of inspection and

collection of information and examination of documentary evidence to confirm that

1. Assets were in existence on the balance sheet date.2. Assets have been acquired for the purpose of the business

and under a proper authority.3. Right of ownership of the asset vested in or belonged to the

undertaking.4. Assets are free from any lien or charge not disclosed in the

balance sheet.5. Assets have been correctly valued having regard to their

physical condition. 6. And assets values are correctly disclosed in the balance

sheet.


Auditors duty

• Verification of asset is primarily the reasonability of management.

• Auditor’s duty is limited only to an appraisal of the evidence, their inspection and reporting on matters affecting there valuation, existence and title, observed in the course of such an examination.


Valuation of fixed assets

Following points should be considered while valuation of fixed assets

1. Cost less depreciation2. Cost include all expenditure necessary to

bring asset in to existence and put them in working condition

3. Fluctuation in market values are ignored


Verification of plant and machinery

While verifying the plant and machinery auditor should follow the following procedure.

1. Check plant and machinery registerAuditor has to verify the plant and machinery register to

see the following Name of the machinery Make of Machinery Date of purchase Cost of machinery Location of machinery



2. DepreciationVerify that adequate depreciation at appropriate rate is

charged on all types of plant and machinery3.Capitalistion of expensesSatisfy that only capital expenditure is shown under

asset and expenses on repairs and maintenance are not capitalized.

4.Valuation and disclosureSee that plant and machinery is properly valued and

disclosed in the balance sheet. And the movement of plant and machinery due to purchase and sale is properly reflected.



5.Physical verificationCarry out a physical inspection of the plant and

machinery on test basis to see that they really exist and are in good working condition.

6.Consistency in method of depreciation 7.Check for lien or charge not disclosed in the balance

sheet.8.Board resolutions verify board resolutions related to

sale and purchase of a plant and machinery.


Verification of preliminary expenses

• Introduction• Preliminary expenses are all expenses relating to the formation of an

enterprise such as • Registration fees• Cost of printing document like memorandum of association and• Article of association

The audit procedure for verification of preliminary expenses is given below• 1.Documantery evidence• Verify the amount of preliminary expenses shown in the balance sheet

with reference to documents such us agreement, bills, receipts etc.• 2.Compare the amount with that disclosed in statutory report


• 3. Disclosure requirement • Examine whether as per disclosure requirement

expenses on issue of share and debentures are being shown separately and are not included in preliminary expenses.

• 4. Check for reimbursement of preliminary expenses incurred by promoters

• 5. Check for amortization of expenses• Preliminary expenses are to be amortized over

period of ten years on a straight-line basis as per income tax act 1961


Verification of sundry creditors

• Obtain the schedule of creditors and examine it with reference to individual creditors account to verify– Discount earned– Rebates– Returns – Outstanding beyond normal credit period

• Inspect document underlying purchases to verify– Invoices – Goods received note


Sundry creditors• Vouch payments to creditors with reference to – Cash book/pass book– Vouchers– Cheque book

• Verify the cut-of procedure adopted by business at the year end To see unrecorded liability if any• Confirmation from Creditors Auditor may communicate directly with creditor so as to confirm the

amount on balance sheet date.• Check for bills payable accepted during the year• 7. Examine valuation and disclosure Ensure that creditors have been disclosed properly in financial

statements as per recognized accounting principal.


Audit of contingent liabilities

• Introduction• Contingent liabilities refers to obligation relating to

past consequences or other events or conditions, that may arise in consequences of one or more further events which are presently deemed possible but not probable.

• Examples of contingent liability• Guarantees of third party obligation• Discounted bills receivable• Pending or threatened litigation against the entity


• Audit procedure• The primary objective in case of contingent liability is to verify the

existence.• 1. Representation from management• Obtain a letter of representation from client containing a statement that

management is aware of no undisclosed contingent liability.• 2. Review minutes of board meeting• Review the minutes of meetings of board of directors and their

committees to discover contingency commitments if any.• 3.Review contracts, loan agreement for evidence of liabilities• 4. Review list of pending legal cases and documentation • This analysis is directed towards the discovery of possible lawsuits and tax

assessment associate with legal fees paid by client.


• 5.Review terms and conditions of grants and subsidies under various schemes

• To see contingent liability due to non-compliance with scheme

• 6.Check records relating to bills receivable discounted

• 7.Ensure that contingent liabilities do not include items such as

• product warranties, service contracts, etc.


VALUATION AND VERIFICATION OF INVENTORIES (STOCK)

What is inventory1. Goods purchased for resale2. Finished goods for sale3. Raw materials 4. Work in progress5. Spare parts and consumable stores6. Packing materials and returnable containers


Why Inventory Valuation

• To know true and fair financial position• Overvaluation or under valuation of inventory

will have direct impact on profit/loss


Methods of inventory valuation

• First in first out • Last in first out • Weighted average method • Base stock method • Latest purchase price


Valuation on Inventories

• As per Accounting Standard 2 inventories are to be valued at cost or market price whichever is less

• As per AS2 inventories are to be valued at first in first out method or weighted average method


Valuation and verification of inventory

• The responsibility for properly determining the quantity and value of inventory rests with the management of the entity.

• It is the responsibility of management to ensure that inventory included in financial statement is physically existent and represent all inventories owned by the entity.


Value of inventory

• Raw material = purchase price + carriage inward • Work in progress = prime cost + factory overheads• Finished goods = works cost + administrative overheads• Overheads= indirect material + indirect Labour + Indirect

expensed • Prime cost = direct material + direct labour + direct

expenses


Auditors Duty

Auditor is particularly concerned with • Existence - that all recorded inventories exist

as at the year end • Ownership- all inventories owned are recorded

and all recorded inventories are owned• Valuation- basis of valuation is appropriate

and properly applied and the condition of inventoried is recognized in their valuation


Auditors DutyFollowing procedure should be followed for

Verification of inventories• Internal control evaluation• Examination of records• Attendance at stocktaking• Obtaining confirmation from third parties• Examination of valuation and disclosure • Analytical review procedure


Internal control evaluation Check internal control with regard to 1. Purchases 2. Issue 3. Balance


Examination of Records

Books of accounts 1. Store/stock register2. Purchase book3. Sales book4. Purchase return and sales return book.

Documents 1. Purchase order2. Vendor’s invoices3. Goods received note4. Inspection report,5. Material Issue note6. Bin card etc.


Attendance at Stock taking

• The extent of attendance is determined by the factor such as effectiveness of internal control and records maintained by the enterprise and method of stock taking.

• Where auditor rely on the physical count by the management it may be appropriate for the auditor to attend the stock taking and verify the following


Attendance at stock taking 1. Inspect inventory count instruction given by the

management to the staff are actually followed.2. Review the procedure adopted for movement of

inventory at the time of physical count.3. Review the procedure followed for identifying

defective, damages, obsolete and slow moving items.

4. Examine the cut-off procedure for goods purchased but not received and goods sold but not dispatched.

5. Review the original verification sheet and compare it with stock book.


Confirmation from third parties

• Where stock is held with third parties such as consignee and agent the auditor should obtain confirmation from them.


Examination of Valuation and Disclosure

• Examine the valuation method used are in accordance with recognized Accounting Standard

• Inspect the value assigned to various items of inventory - cost price / market price (net realizable value)

• To determine the cost examine stock sheet, invoices, costing records and treatment of overhead expenses.

• Examine the evidence supporting the assessment of net realizable value.

• Examine whether appropriate allowances have been made for defectives, damaged and obsolete and slow moving items.

• Check whether the inventory has been disclosed properly in financial statement.


Analytical Review Procedure

• Reconcile quantities of opening stock, purchases, production, sales and closing stock.

• Compare closing stock quantities and amount with those of last year.

• Compare percentage of current year stock with that of purchases and sales, with corresponding figures of the previous year.

• Compare current years gross profit ratio with previous year.• Compare figures of purchases, sales and stock with the

budgeted figures.• Compare inventory turnover ratio with last year.


(legal background)• Auditor’s duty with regards to verification of inventory • Kingston cotton mills co. ltd. UK (1896)• In this case , the profits of the company had been

inflated fictitiously by deliberate manipulation of the quantities and values of stock-in-trade.

• The auditors had certified that balance sheet on the basis of the certificate of the managers as to the correctness of the stock-in-trade without checking the stock in details and this facts was shown on the balance sheet.


• Justice Lindsay, while delivering judgment observed that it is not the duty of the auditor to take stock and that he is not guilty of negligence if the certificate of a responsible official is accepted in the absence of suspicious circumstances.

• In the same case justice Lopes observed as follows “ an auditor is not bound to act as detective, or as had been said to approach his work with suspicion or with foregone conclusions that there is something wrong. He is watchdog, but not a blood hound. He is justified in believing tired servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest to rely upon their representations, provided he takes reasonable care”.


Legal Background

• Westminster Road Construction & Engineering co. Ltd. (1932)

• In this case in UK, the auditors were found to have been negligent in not discovering the overvaluation of work-in- progress and omission of liabilities, because they did not check records, which were available. They would have discovered the over-valuation, had they checked the records. In this case, negligence of the auditors was established and damages awarded.


• Three principles for the general guidance of the auditor• It is no part of auditor’s duty to take stock.• He can rely upon statements and reports made available to him in

regard of valuation of stock so long as there is no circumstance, which may arouse his suspicion, and he is satisfied with procedure followed by the management.

• Auditor would be failing in his duty if he does not take reasonable care in verifying the statement of stock, which is put up to him according to the information in his possession and the expert knowledge expected of him in regard to method of verification and stock


Presentation on vouching and verification

Economy & Finance

Transcript of Presentation on vouching and verification