Unit II Vouching

8/18/2019 Unit II Vouching

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Vouching and Verifcation

Dr.N.Sar


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Vouchin• Voucher is known as the evident for the support of a transaction in

the books of account. It may be bill, receipts, re uisition form,agreement, decision, bank paying slip etc.

• !he act of e"amining documentary evidence in order to ascertain theaccuracy of entries in the account books is called #Vouching#.Vouching is a technical term which refers to the inspection by theauditor of documentary evidence supporting and substantiating atransaction.

•

Simply stated , vouching means a careful e"amination of all originalevidence i.e invoices, statements, receipts, correspondence, minutesand contracts etc. with a view to ascertain the accuracy of the entriesin the books of accounts and also to $nd out, as far as possible, thatno entries have been omitted in the books of accounts.


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Objectives Of Vo

• %ain ob&ective of vouching is to $nd out the regularityor irregularity of transactions, frauds and errors.

• 'egularity means maintaining record and performingthe work compliance with the rules, regulation andlaw.

• Irregularity means doing the work crossing to the lineof rules, regulation and laws.

• !o have greater precision in reporting the $nancialinformation as true and fair


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Voucher can be of two ty• (rimary)

– *hen written evidence is available in original, it is known as primary vouchers.+or e"ample, purchase invoices, counterfoil of cash receipt etc.

• Secondary or ollateral vouchers) – In certain cases, evidence in original is not available. opies of such evidences

are made available for the purpose of audit. !hese vouchers or documents areknown as collateral vouchers.

– +or e"ample, opies of resolution passed at a meeting, -ero" copy of demanddrafts etc.

• n the basis of sources of documents, vouchers can again be of two types. – Internal vouchers: Vouchers originating within the organi0ation are kn

as internal vouchers. +or e"ample, sales invoices, minutes book of boardmeetings, material re uisition slip etc.

– External vouchers: Vouchers originating from the outside sources are knoas e"ternal vouchers. +or e"ample, mortgage deed, bank statement etc.


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%a&or ob&ectives of vouching• To Detect Errors And Frauds•

To Know The Truth O Account• To Find The Unrecorded Transactions• To Know That All The Transactions Are Authorized• To Know That Only The Business Transactions Are

ecorded


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!"#ortance O Vouching

• Vouching !s The Bac$%one O Auditing• Vouching !s The Essence O Auditing• Vouching !s !"#ortant To &ee 'hether E(idences

Are )orrect Or *ot


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Factors To Be )onsidered 'hile• Vouching helps to prove the truth and fairness of account by detecting errors and

frauds. – !he following factors are to be taken into consideration)

• 1n auditor should check the records whether they are supported by evidentialdocuments or not.

• 1ll the documents related to income and e"penditures are to be separated andseparate $les should be maintained. If not, auditor should ask to do so.

• 1n auditor should use special sign in tested vouchers so that they cannot be usedagain.

• *hile vouching, an auditor should check whether the general principles ofaccounting have been followed or not and clear cut demarcation of capital andrevenue is made or not.

• *hether the documents presented for testing are related to the current year or not.• 1ll the documents which are presented for auditing must be authori0ed by the

concerned authority. 1n auditor should check whether it is done or not.• 1n auditor should ask duplicate copies of missing vouchers, but if important

vouchers have been missed and auditor is not satis$ed with the reasons presented,s2he should write in re ort to this fact.


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+oints To Be )onsidered 'hile Vouching O)ash Transactio

• Vouching of cash transaction is the most important &ob of an auditor.Before setting the program of vouching, an auditor should in uirecarefully into whole system of internal control. – 1n auditor should pay attention in the following points)

• 'esponsible o3cer for cash received and authority to sign check should notbe given to the cashier and a copy of counterfoil should be kept for record ofo3ce. !he receipts should be numbered serially.

• 1ll the receipt of cash should be recorded in the cash book.• 1mount of cash received should be deposited into bank daily.• !he cashier should not have any control over ledgers.• Drawer of check should present it to responsible o3cer to sign.• 1ll unused receipt books and check books must be kept under lock.• System for recording cash sales and miscellaneous income should be

di4erent.•

1ll the payments e"cept petty cash e"penses must be made by check


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,eaning o error and raud• 5rror is a mistake a raised due to an involuntary act and most of the error are of

innocent nature. ertain error may be committed purposefully in order to concealsome fraud already committed. !he errors are committed due to the humanelement present in the work.

• Defnition o Error- – According to Din$ar +agare. / an error "ay %e de

unintentional mistake or mis6description in the books of accounts or recordswhether by way of

• %athematics or clerical mistakes in the records and data7• versight or misinterpretation of facts7 or• %isapplication of accounting policies8.

• ,eaning o Fraud- – +raud is the word used to mean an intentional error, '.9. %aut0 has included

fraud in the broad category of errors, as the error is an involuntarily act whereas fraud is a deliberate act committed against proprietors, government, people

etc.


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Ty#es o e• !he errors may be divided under four

categories vi0.• lerical 5rrors.

– !hese error may again be subdivided into,• 5rror of mission and• 5rror of ommission

– 5rror of (rinciple – ompensating errors –

5rrors and Duplication.


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Ty#es o

• 1 great variety of frauds may be found,but the following are the chief waysmay be committed.

–

%isappropriation of ash. – %isappropriation of goods, and – %anipulation of 1ccounts


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Vouching of ash transactions

Cash book is the most important of the books of a/c for any businereceipts and payments are recorded in cash book. The cash balance on acan be known from cash book. The entries for receipts and payments are checked with reference to various supporting documentary ev


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To ascertain that all the expenses and receipts are sunder the correct book To ascertain that all the expenses and receipts are sunder the correct headsTo ensure there is no unauthorized or fraudulent pay

are madeTo verify that the closing cash bank balance are corstruck.


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Vouching the 'eceipt side :Debit Side; of ash book

Vouchers

1. Opening alance cash book of pre. yr !. Cash "ales copies of cash memos#. Cash $eceived from debtors receipts% bank pass book &. 'roceeds of ills $eceivable /$ book% pass book (. )ncome for )nterest and *ividend receipts% Counterfoils

+. "ale of )nvestments sale deed% receipt,. Commission $eceived agreement% sale statement-. $ent received $ent agreement%receipt

. 'roceeds from sale of scraped machinery plant register 1 . 'roceeds from sale of 0ixed ssets receipt% tender


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11. "ubscription received register of members1!. )nsurance Claim insurance policy1#. $ecovery of claims claim register%cash book 1&. $eceipts from sale hire purchase hire2purchase agreement1(. $oyalty received contract of lease1+. )ncome of minimum rent lease agreement1,. )T refund return of income% app.1-. *ividend from $eceiver receipt% passbook 1 . "hare Capital sh. pp. 3 allotment book% board4s resolution! . *ebenture cash book% deb. pp.% board4s resolution!1. )ssue of $ight "hares cash book% o letter of offer

V hi f th t id dit Sid f h


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Vouching of the payment side : redit Side; of ash

i. 'ayments relate to the business onlyii. The payment should relate to the year for which the a/c are being auditediii. ll payments are properly approved and authenticated by responsible officer iv. 'ayments are correctly accounted for in the books of a/cv. 5o payment should be left unrecordedvi. mount paid should be correctvii. ll payments supported by proper voucher viii.'ayment should be made to proper personix. 'articulars should be tally with the books

x. The legality of payment should be verifiedxi. 'ayment of 6ages 7Time $ecords% 'iece2work $ecords% 'reparation of 6age "heetsxii. Capital 8xpenditure 7$elated to purchase of 0ixed ssets9xiii.:oan borrowed detailsxiv. "alaries paid detailsxv. )nsurance premium paid details

xvi. $emuneration paid to directors or partners details


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Vouching of Subsidiary Books

1. 'urchase book !. 'urchase return book #. "ales book&. "ales return book (. ills receivable book +. ills payable book ,. ;ournal proper


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Verifcation o Assets and Accounting&tat

• Veri$cation is made on the basis of vouching. So, veri$cation is a part ofvouching.

• Veri$cation means the proof of e"istence or con$rmation of assets and liabilitieson the date of balance sheet.

• 1ccording to Spicer and (egler, =veri$cation of assets implies an en uiry intothe value, ownership and title, e"istence and possession and the presence ofany charge on the assets8.

• !herefore> .. – !he accuracy and reliability of the annual accounts. – !he transactions are authori0ed or not. – !he assets and liabilities are recorded properly. – Valuation of assets is done in a proper way. – !he ownership, cost and possession of the asset. – (roper disclosures are made or not. –

Detection of fraud and error.


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VA0UAT!O* OF A&• Valuation of assets means e"amination of the accuracy an

propriety of the valuation of those assets, which are shown in

the balance sheet of any concern at the end of the $nancialyear.

• !herefore valuation is an operation which includes>>.. – obtaining all the necessary information regarding valuation – analy0ing all the $gures available – con$rming the fact that the valuation is being determined

on the basis of generally accepted conventions andaccounting principles

– ensuring that consistency of methods are followed for the

valuation from year to year

D!FFE E*)E BET'EE* VE !F!)AT!O*


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D!FFE E*)E BET EE* VE !F!)AT!O*A*D VA0U

• 12 ,eaning – Veri$cation is the act of checking title, possession and valuation of assets but

vouching is the act of checking the records with the help of evidential

documents.

• 32 *ature – Veri$cation is specially related to the assets and liabilities but vouching is

related to all the accounting documents.•

42 +erson – ?enerally, assistant sta4 or auditor performs the work of vouching but auditor

himself performs the work of veri$cation.

• 52 Ti"e – Vouching is made at the beginning of auditing but veri$cation is made at the

end of auditing or at the time of checking balance sheet.


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Di6erences Between Valuation And Verifcation O Assets

• Valuation and veri$cation of assets are complementary to each

other• @. Veri$cation is a $nal work but valuation is needed to the

veri$cation.• A. Veri$cation is the work of auditor but valuation is the work of

concerned authority or board.•

. Valuation checks the amount shown in accounts butveri$cation checks the items shown in the balance sheet.• C. Valuation is made throughout the year but veri$cation is made

at the end of the year.• . Valuation is based on evidence but veri$cation is based on

individual check.


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!"#ortance O Verifcation And Valuation O Assets And 0ia%ilities

• 1ssets and liabilities are very important aspects of business.Balance sheet is prepared on the basis of them and an auditor

should prove the true and fairness of information provided bybalance sheet. So it is very important for an auditor.• To &how The Actual Financial +osition• To Know The eal +osition O +roft And 0oss• To Know The eal +osition O +roft And 0oss• To Assure &hareholders• Easy For &ale• Easy To 7et 0oan• Easy To 7et )o"#ensation


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%ethods f Valuation f 1ss• Valuation of various assets can be made by using di4erent methods.• Cost Method - Valued based on the purchase price• Market Value Method - Valuation of assets can be made on the

basis of market price of such assets. If the similar type of asset notavailable in the market then>..

– e#lace"ent Value ,ethod – *et ealiza%le Value

• Base Stock Method - company should maintain certain level of stoand valuation of stock is made on the basis of valuation of base stock.

• Standard Cost Method - business organi0ations $" the standard con the basis of their past e"perience.

• Average Cost Method -S imple method for the valuation of suchassets which cannot be distinguished. +or e"ample (etrol, diesel etc>


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?5N5'1E ('IN I(E5S + ' V5'I+I 1!I N 1ND V1EF1!I N + 1SS5!S• Acquisition o individual asset • Acquisition o group o assets• Sale o assets• !epreciation• "h#sical veri$cation o $xed assets • Inspection o current assets and invest%ents• Charges on assets• Assets &ith third parties


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(' BE5%S IN V5'I+I 1!

• E8a"#le• If the auditor is re uired to verify the stock6in6trade at

the end of the accounting period, it will take weeksand months to complete this work. Not only that, theauditor will have to take help of e"perts in this line. Inaddition to that, there are certain assets, which haveno physical e"istence in appearance, namely goodwill,patent, copyright, trademarks etc. In these cases, theauditor has to conduct veri$cation on the basis ofavailable documents.


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(' BE5%S IN V1EF1• Character o the assets• 'se o assets • Esti%ated li e• Eventual proble%s• (ack o in or%ation


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!'1NS1

• Vouching of apital 5"penditure• apital e"penditure means the e"penditure

relating to purchase of $"ed assets . In vouch these types of transactions, theauthenticity of the transaction, that is, whetherit is properly authori0ed by the authority andwhether the amount of transaction is dulycapitalised or not should be checked.

d d ld h $ d


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0and and %uilding 9 Docu"ents to %e chec$ed

• !itle deed• %ortgage deed in case of mortgaged property•

Broker s note• ontract• 'eceipts• 1rchitect s certi$cate• +i"ed asset register• %inutes of the directors meeting


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Vouching o !n(est"ents 9 Docu"ents to %e chec

• Broker s purchase note• Eetter of allotment and calls• Share certi$cate or debenture certi$cate• Bank passbook• 'eceipts• Director s meeting minute book

Vouching o Borrowing ro" Ban$s 9 Docu"ents to %e


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Vouching o Borrowing ro Ban$s 9 Docu ents to %e

• erti$cate from bank for securities deposited• %inutes of the Board meeting• Bank statement• Eetter of loan sanction• Bank passbook

Vo ching o )ash Bo


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Vouching o )ash Bo• &alaries and wages #aid : !ocu%ents to

checked • Salary bills• *age sheets or pay roll• ounterfoil of che ues• 1ppointment letters• Service agreement• 5mployment registers

T ( lli l " ""i i 9D " % h $ d


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Tra(elling sales"an;s co""ission 9Docu"ents to %e chec$ed

• 1greement with the salesman• 'eceipts issued by salesman• Statement of sales• 1ppointment letters of the salesman• ommission statement

! # "i " # id 9 D " % h $ d


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!nsurance #re"iu" #aid 9 Docu"ents to %e chec$ed

• Insurance policy• Insurance premium receipts• over note issued by the insurance company• orrespondence with the insurance company• ther supporting papers and vouchers

V5'I+I 1!I N 1ND V1EF1!I N + 1SS5!S


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V5 I+I 1!I N 1ND V1EF1!I N + 1SS5!S• Veri$cation of asset is an important audit techni ue.

onventionally, the scope of this techni ue is limited toinspection of assets and collection of information about theassets.

• +or the purpose of applying veri$cation techni ues, we maydivide the assets into the following four categories)

– Intangible assets , vi0. goodwill, patent, trademark,

copyright, etc. – +i"ed assets , vi0. land and building, plant J machinery,

furniture and $"tures, motor vehicles etc. – urrent assets vi0. stock6in6trade, sundry debtors, prepaid

e"penses and accrued incomes, cash and bank balances

etc

VE !F!)AT!O* A*D VA0UAT!O* OF !*TA*7!B0E A&&ET&


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VE !F!)AT!O* A*D VA0UAT!O* OF !*TA*7!B0E A&&ET&• ?oodwill is considered as an intangible $"ed asset. !he value, which is

shown in the balance sheet, does not appear to be its present value, becausethe present value of goodwill depends upon a number of factors like $nancialposition of the business, earning capacity at present and its future trend etc.But in actual practice, it is not valued at cost.

• Valuation o goodwill• There are three "ethods o (aluation o goodwill o the fr"

– 1verage (ro$ts %ethod – ?oodwill K 1verage (ro$ts " No. of years purchased

– Super (ro$ts %ethod K Super (ro$ts K 1ctual (ro$ts L Normal (ro$ts – Normal (ro$ts K apital Invested - Normal rate of return2@MM – ?oodwill K Super (ro$ts " No. of years purchased

– apitali0ation %ethod – :i; apitali0ation of 1verage (ro$ts %ethod –

:ii; apitali0ation of Super (ro$ts %ethod

VE !F!)AT!O* A*D VA0UAT!O* OF


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)!*TA*7!B0E A&&

• Verifcation o goodwill• ?oodwill is the e"cess price paid for a business as a whole over the book

value or the computed value or the agreed value of all tangible assetspurchased. It is not possible to be veri$ed physically7 hence veri$cation ofgoodwill means proper checking of accounting entries passed for goodwill.

• Auditor;s duty regarding (erifcation – !he goodwill as recorded in the books of accounts should be properly

e"amined and the same is to be veri$ed with the balance sheet. –

If goodwill is created on account of purchasing a running business, theauditor should verify it with the contract made between the client andthe vendor.

– Sometimes, management intends to capitali0e the current e"penditureby raising goodwill, which is usually high. !he auditor should raiseob&ection to this practice.

VE !F!)AT!O* A*D VA0UAT!O* O


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)!*TA*7!B0E A&

• Auditor;s duty regarding (aluation – !he auditor should con$rm that goodwill appearing

in the balance sheet has not been shown in e"cessof its cost price.

– !he auditor should see that the goodwill is neverappreciated in the books of a company.


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• 1 patent is an o3cial document which secures to an investorthe e"clusive right to make, use and sell his invention.

• Valuation o #atent – !he patent is valued at cost less depreciation. ost is the

ac uisition cost, which may be purchase cost or inventioncost.

– !he cost of registration of patent should be included in thevaluation, while the renewal fees should be charged o4 torevenue.

– Since patent su4ers depreciation through e u"ion of time, itis preferable to adopt $"ed instalment method of chargingdepreciation based on its legal life.

•

: ost %arket Income 1pproach are the three methods to


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• Verifcation o #atent• 1ctual patent should be physically veri$ed by the auditor and it

should be seen that it has been duly registered.• Auditor;s duty regarding (erifcation

– !he auditor should check the patent register in order to verify thatit has been properly included therein.

– !he auditor should also ensure that the legal life of the patent has

not yet been e"pired. – !he latest renewal certi$cate of the patent should also be veri$ed

by the auditor. – !he patent may also be sub&ect to litigation about its title. 1

certi$cate from the solicitors of the company should be obtained

to ensure that it is free from encumbrances


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• Auditor;s duty regarding (aluation – !he patent should be e"amined to see that the

company concerned is registered as the owner of thepatent.

– It should be seen that the patent is valued at costless depreciation. If it is found that the commercial

life of the patent is shorter than its legal life, thedepreciation should be spread over its commerciallife only.


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• 1 copyright is the e"clusive legal right to produce or reproduce some kindof literary work. It is the legal protection provided to an author by whichthe publication of his work by others is restricted.

•

Valuation o co#yright- – ?enerally the value of the copyright is not $"ed, as a copyright loses its

value with the passage of time. In the balance sheet, it is shown at costless amounts written o4 from time to time.

• Auditor;s duty - –

!he auditor should see that the value of copyright is determined onproper basis including the period of copyrights. – It should be ensured that if any copyright does not command sale of

any books, the same should be written o4 in that year. – It should be con$rmed that the legal life of the copyright has not been

e"pired.

Verifcation o )o#yrigh


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Verifcation o )o#yrigh• In verifying copyright, the auditor should inspect the

agreement between the author and the publisher. If there aremany copyrights with the business of the client, the auditorshould ask for a schedule thereof from the client and verifythem from the schedules.


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Verifcation o trade"ar$s


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$• !rademarks can be veri$ed by e"amining the assignment deed

duly endorsed by the o3ce of the register of trademark. Iftrademarks are purchased, the assignment of interest or theassignment deed should be inspected.

• Auditor;s duty- – !he auditor should see that they are registered in the name

of the client and are the property of the client. –

Ge should also see that proper distinction between capitaland revenue e"penditure is maintained. 1ll research e"pensein this connection should also be capitali0ed.

Veri$cation 1nd Valuation of +i"ed 1ssets) Eand 1nd Buildings


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• 1lmost all the business or commercial undertakings have landand buildings of their own. +or the purposes of veri$cation andvaluation of land and buildings, they can be classi$ed into twotypes, which are freehold and lease hold property.

• Freehold #ro#erty-• Veri$cation• !he auditor should inspect the title deed and see that they

appear to be in order. Ge should obtain a certi$cate from thelegal advisor of the client con$rming the validity of the title tothe property.

• Ge should also verify that the conveyance deed has been dulyregistered as re uired by the Indian 'egistration 1ct and the

particulars to be endorsed thereon have been duly endorsed

Valuation o )reehold "ropert#


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) p• !he original cost and any improvement there6on should be checked with

original deed and receipt. It is also seen that all e"penses incurred onregistration, brokerage or other legal fees have been duly capitali0ed.

•

!he cost of buildings should be depreciated at appropriate value, dependingupon the uality of their structure and the use, which is being made of them.• !he auditor should check the e"penditure on repairs so as to e"clude such

e"penditure from capital cost.• 0EA&E


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• !he value of the leasehold property should be checked fromthe lease deed. 1ny addition or e"pansion thereon should bee"amined by reference to the contractor s bills and othersupporting papers.

• !he auditor should ensure that the provision for any claim thatmay arise under the dilapidation clause on the e"piry of thelease has been made.

• Ge should see that the cost as well as legal e"penses incurredto ac uire the lease is being written o4 at an appropriate rateover the une"pected term of the lease.


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• Veri$cation – !he auditor should e"amine the title deed of buildings to see

whether the client holds the title on the balance sheet date.If the building has been mortgaged, the title deed will be inthe possession of the mortgagee from whom a certi$cateshould be obtained.

– Ge should see the appropriate lease deed, if the building isleasehold, to ascertain the cost, amorti0ation etc.

– Ge should also ensure that all conditions in the lease deedhave been ful$lled by the client.

– !he auditor should ensure that the relevant particulars ofbuildings have been entered in the $"ed assets register

maintained by the client


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• Valuation – !he auditor should verify the original cost of the building by

reference to the deed of conveyance. If the building isconstructed by the client, he should verify the original costby reference to the contractor s bill.

– Ge should also verify that appropriate depreciation has beenprovided against the building. In case no depreciation isprovided on the building, a note to this e4ect should begiven in the pro$t and loss account.

– Ge should see that the buildings have been valued at costless depreciation. In case of a company, the re uirements ofSchedule VI have to be complied with.

–

If any revaluation has taken place the auditor should look


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+lant and ,achine


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• Valuation – !he cost price of any plant or machinery plus any cost of

installation will be vouched with supplier s invoices and othersupporting documents.

– !he auditor should see that proper depreciation has beenprovided during the year.

– Ge should check as to whether any of the items has beendisposed o4 or sold during the year.

– !he auditor should also verify that the plant and machineryhave been properly shown under $"ed assets in the balancesheet.

+urniture and +i


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• Veri$cation – !he auditor should ascertain whether a register is

maintained for furniture and $"tures detailing the nature ofthe item, its ac uisition cost, location, code number etc.

– Ge should also verify whether the furniture and $"tures bearon them the code numbers allotted.

– Ge should in uire whether physical veri$cation of the

furniture and $"tures has been carried out by themanagement and if so, he should e"amine the workingpapers.

– !he auditor should verify physically some of the importantitems of furniture and $"tures on test check basis.

+urniture and +i


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• !he auditor should satisfy that the furniture and $"tures havebeen properly depreciated and value written o4 for damaged

or unserviceable items,• Ge should see that the cost of furniture and $"ture has been

properly ascertained and recorded in the books of accounts.• Ge should en uire whether any of the items have been

disposed o4 or sold during the year. If so, he should check that

it was properly authori0ed and the sale proceeds credited tofurniture and $"ture account. 1ny capital pro$t made thereinshould be transferred to capital reserve.

• !he auditor should also verify that furniture and $"tures havebeen properly shown under $"ed assets in the balance sheet.

1ssets 1c uired Fnder Gire (urchase System


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• Veri$cation – !he e"istence of the assets ac uired can be con$rmed by physical

veri$cation of the assets by the auditor or by reviewing the workingpapers of physical veri$cation of $"ed assets done by the management.

– !he company is not the owner of the asset till the last instalment underhire purchase agreement has been paid. Gowever, the possession rightof the asset can be veri$ed by reference to the hire purchaseagreement.

– 1 default in payment of the hire purchase instalment entitles the hirevendor to take back the possession of the asset. So, the hire purchaseagreement has to be e"amined to ascertain the nature ofencumbrances.

– !he auditor should also see that the asset purchased is included in the$"ed asset register.

1ssets 1c uired Fnder Gire (urchase System


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• Valuation – +i"ed assets are generally valued at cost less depreciation.

So, the auditor will have to e"amine the hire purchaseagreement and the price list to ascertain the cash cost of theasset.

– Depreciation should be deducted and the auditor shouldensure that the rate normally charged by the company onsame or similar assets has been applied on a consistentbasis.

– !he auditor should con$rm the proper recording of assetsac uired under hire purchase agreement. !he interestelement in the instalments should be charged o4 to revenue

V5'I+I 1!I N 1ND V1EF1!I N + F''5N! 1SS5!S


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• Stock6in6trade – !he valuation of stock is fre uently the main factor in determining

the results shown by the accounts. 1part from the e4ect on thebalance sheet, incorrect stock would a4ect the pro$t of the year thathas closed as well as that of ne"t year.

• Auditor;s duty• !he valuation of the closing stock, therefore, is an important step

essential for the determination of the pro$ts of the year, also for truly

disclosing the $nancial position of the entity at the end of the year.• !he precise duties in regard to veri$cation of stock6in6trade are

nowhere de$ned. Fnder the circumstances, these have to be deducedfrom an interpretation of the general responsibilities of auditors inregard to the statements of accounts veri$ed by them, especially inregard to stock6in6trade.

&te#s or (erifcation o )losing &toc$ ' i h d d f h i


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• 'eview the procedure and arrangements for the maintenanceof stock records.

• Secure the original rough stock sheet, if available.• heck all additions and test fair proportions of e"tensions.• 1scertain the basis and method of valuation adopted and

con$rm that the same has been followed consistently.• Verify the cost of raw materials and stores by reference to

purchase invoices.• on$rm that stock has been valued at Olower of cost or

market price principle.• 1scertain that the goods not belonging to the client have not

been included in stock6in6trade.•

+ind o t hether there has been a complete ph sical stock6

Sundry


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• Verifcation• 5"istence of book debts can be veri$ed by e"amining the

books of account and satisfying that the entries therein aresupported by proper sales documents.

• Balance of book debts should be sent to the debtors for theircon$rmation, which will also establish the e"istence of thebook debts.

• !he e"amination of debtor s ledgers with related salesdocuments and correspondence with debtors will con$rm theownership of book debts.

Sundry


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• Valuation• Fsually the balances shown in the debtor s ledger supported

by sales documents represent the value of book debts.• !he auditor should call for the lists of book debts and debts

written o4 and arrive at the conclusion about ade uacy ofwrite o4 and provision for doubtful debts.

• !he con$rmation of balances by debtors will help establish the

valuation of book debts.

Bills 'ece


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• Veri$cation• !he auditor should e"amine the bills receivable book and

prepare a schedule of all those bills receivable, which havenot yet matured before the date of the preparation of thebalance sheet *

• *here the number of bills is large and are kept with thebankers for collection, the auditor should obtain a detailed

certi$cate from the bank to ascertain the clear position aboutthe bills.• 1ny contingent liability in respect of the bills that are

discounted or endorsed but remain outstanding at the time ofaudit should be maintained as a footnote of the balance

h t

Bills 'ecV l ti


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• Valuation• !he auditor should see that the bills are properly drawn,

stamped and duly accepted and are not overdue. In case of

renewal of any bills, the auditor should compare the new billwith the old bill.

• Sometimes, the bills might have matured and honoredsubse uent to the date of the balance sheet, but prior to thedate of the audit. !he auditor should check the cash receivedas shown in the cash book of the ne"t year.

• If the bills have been retired before the date of the balancesheet, the proceeds thereof should be checked by reference tothe cash book.

ash• Veri$cation


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Veri$cation – !he auditor should compare the balances as shown in the passbook with the

balances as shown in the cash book. – !he auditor should prepare a bank reconciliation statement or should check the

statement prepared by the client in order to ascertain the correct bank balance. – Ge should obtain a balance con$rmation certi$cate from the bank at the close of

the year.• Valuation

– In order to ascertain the current position with regard to che ues issued but notyet presented or che ues deposited but not collected, the auditor should con$rm

through cash book and passbook $gures. – *here amounts are deposited in foreign banks under e"change control

regulations, the fact is to be disclosed. – *here amounts are kept in di4erent reserve accounts in the banks in order to

avail deductions under Indian Income !a" 1ct, the fact should also be disclosed.

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• Verifcation – !he most common practice in verifying cash balance is to obtain a certi$cate from

the accountant about the actual cash balance in hand at the date of the balancesheet.

– !he auditor should verify the cash in hand by actually counting it on the close ofthe business on the date of the balance sheet.

– In certain cases, if the client is maintaining an unduly large balance of cash in handconsistently, the auditor should make a surprise check to ascertain.

• Valuation – If the cash6in6hand is not in agreement with the balance as shown in the books, it

should be the duty of the auditor to call for an e"planation. – ften postage and other stamps are taken with the cash in the balance sheet. !he

auditor should con$rm the balance of postage and stamps by physical countingonly.

– Ge should also check the system of making payments and safety arrangementsprovided for the protection of cash balance.

V5'I+I 1!I N 1ND V1EF1!I N + +I !I!I FS


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• (reliminary 5"penses – !he e"penses incurred for the formation and commencement of a

company is usually grouped under the heading =preliminary

e"penses8. !hese include stamp duties, registration fees, legalcosts, cost of printing etc.

• Duties of the 1uditor – It should be seen by the auditor that no e"penses other than those related

to the formation of a company are included under this head. – !he auditor can cross check the amount of preliminary e"penses with that

disclosed in the prospectus, statutory report and the balance sheet. – !he bills and statements supporting each item of preliminary e"penses

should be checked. – !he auditor should also ensure that proper deduction has been availed

against ta"able income under the Income !a" 1ct, @PQ@.

V5'I+I 1!I N 1ND V1EF1!I N + N!IN?5N! 1SS5!S


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• !he contingent assets are those which may arise on thehappening of an uncertain event. 1s a general practice,contingent assets are not recorded in the balance sheet

because that would imply taking credit for revenue which hasnot accrued. But it is logical as the contingent liabilities areshown in the balance sheet the contingent assets should alsobe shown.

• 1s regards valuation of contingent assets, it may be notedthat ordinarily no valuation would be re uired. Gowever, ifsuch assets were disclosed by way of a note, a propervaluation based on the related contract would be made.

Unit II Vouching

Documents

Transcript of Unit II Vouching