Professor Academy

Auditing
The term audit is derived from the Latin term ‘audire’, which means to hear. In
the early days, a person used to listen to the accounts read over by an accountant
to check them. He was known as an auditor. Auditing is as old as accounting
and there are signs of its existence in all ancient cultures such as Mesopotamia,
Greece, Egypt, Rome, the U.K., and India. Arthasashthra by Kautilya detailed
rules for accounting and auditing of public finances. The original objective of
auditing was to detect and prevent errors and fraud. Auditing evolved and grew
rapidly after the industrial revolution in the 18th century with the growth of the
joint-stock companies the ownership and management became separate.
The shareholders who were the owners needed a report from an independent
expert on the accounts of the company managed by the board of directors who
were the employees. The objective of the audit shifted and the audit was
expected to ascertain whether the accounts were true and fair rather than
detection of errors and frauds. In India the Companies Act, 1913 made an audit
of company accounts compulsory. With the increase in the size of the
Companies and the volume of transactions, the main objective of the audit
shifted to ascertaining whether the accounts were true and fair rather than true
and correct. Hence the emphasis was not on arithmetical accuracy but a fair
representation of the financial efforts.
The Companies Act, 1913 also prescribed for the first time the qualification of
auditors. After the independence in the year 1956, the Companies Act, 1956
was implemented and detailed provisions were made in the act regarding audit
and auditors. This act provides provisions regarding compulsory statutory audit
of companies, auditor appointments, auditor disqualifications, cost audit, the
appointment of cost auditors, government audit, special audit, etc. The
Companies Act, 1956 has been replaced with the Companies Act, 2013. Chapter
X of the Companies Act, 2013 (Sections 139-148) deals with the provisions
related to Audit & Auditors.

Recommended Link:
https://edurev.in/studytube/Nature--Scope-and-Significance-of-Auditing-
Auditin/7f165ff0-7f4e-4430-b541-a5091fb30ad0_t

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1. Scope of Auditing
The objective of an audit is to enable the auditor to express an opinion as to
whether the financial statements are prepared, in all material respects, following
an identified financial reporting framework.
It is management’s responsibility to prepare the financial statements. Whilst the
auditor’s opinion adds credibility to the financial statements, it is no guarantee
of future viability nor of management’s efficiency or effectiveness. A degree of
imprecision is inevitable due to inherent uncertainties and the use of judgment.
Only reasonable assurance is given.
The amount of audit work is determined by judgment, requirements of
professional bodies and legislation, agreed on terms of the engagement, and the
need to exercise professional skepticism. The ability to reduce audit risk is
limited by the necessity to sample, inherent limitations in any accounting and
control systems, possible fraudulent collusion, and certain evidence that is not
persuasive or conclusive.
Audit Opinion
 The audit opinion is given on whether the financial statements give a true
and fair view of the entity’s financial statements and whether they have
been properly prepared following the applicable reporting framework.
This opinion is reached after:
 Extensive risk assessment has been performed.
 Extensive testing of controls and substantive tests on transactions and
balances for validity, accuracy and completeness of recording.
 Extensive verification procedures have been performed to test for
existence, ownership, valuation, presentation and disclosure of items in
the financial statements.
 Extensive review of whether the financial statements comply with
applicable accounting standards and legal requirements.
 As such, the audit opinion gives a high level of assurance to the users of
financial statements. Whenever an audit is conducted, it must be
performed in accordance with ISAs or national auditing standards, and if
it is a statutory audit, it cannot be restricted in any way.

The auditor’s report on financial statements illustrates the high level of

assurance given by an audit:
Example, Auditor’s Report to the Shareholders of ABC Company

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We have audited the accompanying balance sheet of ABC Company as at 31
December 20X1, and the related statements of income and cash flows for the
year then ended. These financial statements are the responsibility of the
company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit
We conducted our audit following International Standards on Auditing (or to
relevant national standards). Those Standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements give a true and fair view of (or present
fairly, in all material respects) the financial position of the company as at 31
December 20X1, and of the results of its operations and its cash flows for the
year then ended following International Accounting Standards (or title of
national standards used) and comply with (title of relevant statute or law)
Auditor Address
Date
The scope of an audit is the determination of the range of the activities and the
period of records that are to be subjected to an audit examination.
Scope of an audit are;
 Legal Requirements.
 Entity Aspects.
 Reliable Information.
 Proper Communication.
 Evaluation.
 Test.
 Comparison.
 Judgments.

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Legal Requirements
The auditor can determine the scope of an audit of financial statements
following the requirements of legislation, regulations or relevant professional
bodies.
The state can frame rules for determining the scope of audit work. In the same
way, professional bodies can make rules to conduct the audit.

Entity Aspects
The audit should be organized to cover all aspects of the entity as far as they are
relevant to the financial statements being audited.
A business entity has many areas of working. A small entity may have few
functions while a large concern has many functions. The auditor has to go
through all the functions of the business.
The audit report should cover all functions so that the reader may know about
all the workings of a concern.

Reliable Information
The auditor should obtain reasonable assurance as to whether the information
contained in the underlying accounting records and other source data is reliable
and sufficient as the basis for the preparation of the financial statements.
The auditor can use various techniques to test the validity of data. All auditors
while doing the audit work usually apply the compliance test and substance test.
The auditor can show such information in the report.

Proper Communication
The auditor should decide whether the relevant information is properly
communicated in the financial statements.
Accounting is an information system so facts and figures must be so presented
that the reader can get information about the business entity. The auditor can
mention this fact in his report.
The principles of accounting can be applied to decide about the disclosure of
financial information in the statements.

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Evaluation
The auditor assesses the reliability and sufficiency of the information contained
in the underlying accounting records and other source data by making a study
and evaluation of accounting systems and internal controls to determine the
nature, extent, and timing of other auditing procedures.

Test
The auditing assesses the reliability and sufficiency of the information
contained in the underlying accounting records and other source data by
carrying out other tests, inquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in the
particular circumstances.
There are compliance tests and substantive tests to examine the data. The
vouching, verification and valuation technique is also used.

Comparison
The auditor determines whether the relevant information is properly
communicated by comparing the financial statements with the underlying
accounting records and other source data to see whether they properly
summarized the transactions and events recorded therein.
The auditor can compare the accounting records with financial statements to
check that the same has been processed for preparing the final accounts of a
business concern.

Judgments
The auditor determines whether the relevant information is properly
communicated by considering the judgment that management has made in
preparing the financial statements, accordingly.
The auditor assesses the selection and consistent application of accounting
policies, how the information has been classified and the adequacy of
disclosure.
Recommended Text:
https://www.taxmann.com/bookstore/bookshop/bookfiles/auditingandassurance
chapter1.pdf

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2. Kinds of Audit
Follow the below links:
It is recommended to study “Kinds of Audit” in Google due to its nature of
evolution over time.
https://www.indeed.com/career-advice/career-development/types-of-audits
https://www.investopedia.com/terms/a/audit.asp
https://www.patriotsoftware.com/blog/accounting/different-types-of-audit/
https://www.accountingtools.com/articles/types-of-audits.html
https://www.marketing91.com/types-of-audits/
3. Audit Programme
An audit programme is a set of instructions which are to be followed by the
auditor for the proper execution of an audit. After the audit plan has been
developed, a detailed audit programme is formulated and written. It would
contain the various steps and procedures that would be required for the audit
process. It would also carry the measures which are typically employed to
determine what, and how much evidence must be gathered and evaluated. The
responsibilities of the entire audit team would be laid down in the Audit
Programme in order to carry out different tasks. This article states the various
aspects of the Audit Programme.
Overview
An audit programme offers a basic plan for the audit team concerning the
entity’s business, its size, the procedure to conduct the audit, allocation of work
amongst the team members and the time estimates within which the audit must
be completed. It would contain information regarding the relevancy of pieces of
evidence, materiality level, risk tolerance, the measure of the sufficiency of the
evidence. Therefore, audit programmes are created to enhance the
accountability of the audit team and its members for the work performed by
them.
An auditor may choose to revise the audit programme if it seems necessary due
to prevailing circumstances. An audit programme would be influenced by the
size of the entity, type of business or services the entity operates in, the
effectiveness of internal controls, applicable laws, and other multiple relevant
factors. Thus, an audit programme is prepared by an auditor as per the scope of
the work.

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Standard Programme & Audit Working Papers
The minimum essential work that is to be performed is the Standard
Programme. However, a set audit standard programme applicable to all the
circumstances does not exist. The Audit Working Papers document the
activities that are performed by the audit programme. Audit Working Papers
support the work performed by an auditor and provides assurance that the audit
was conducted in accordance with all the appropriate and applicable standards
on auditing. It assists the auditor for the proper execution of the audit work.
Therefore, an audit programme includes various steps of auditing in an audit
programme such as the assessment of internal control, ascertaining accuracy
and the reliability of books of accounts, vouching and verification, inspection,
valuation of assets and liabilities, presentation of financial statements, scrutiny
of accounts and the submission of reports and related disclosures.
Inclusions in an Audit Programme
The following should be evaluated before the formulation of an audit
programme.
 The Appointment Letter and the appropriate resolution for the
appointment.
 The terms of the operation which includes the reports required and the
manner of determining the audit fee.
 The system of bookkeeping and the list of the books of account as
maintained by the entity.
 The particulars of the Directors, Promoters and their powers.
 Names of the individuals who maintain the books of accounts and other
authorised individuals.
 The Memorandum of Association, Articles of Association and Partnership
Deed as applicable.
 Details of the business of the client and its accounting systems by assessing
and reviewing the information on the following:
 Nature of business of the entity
 Internal Control System as well as the Manager controls
 The statement of profit and loss account, balance sheets, auditors’ and
directors’ reports of the prior year and the reports of the internal auditor.
 Analytical review procedures to:
 Identify the areas of accounts which are essential due to their size.
 Highlight the unusual figures or relationships in the accounts.
 Design audit test that focuses on critical and unusual items.

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  Obtain sufficient audit assurance to permit the reduction or maybe, the
elimination of thorough testing in certain areas.
 The assessment of audit risk by using professional judgement and the audit
procedures to make sure that it is decreased to an acceptable low level.
 The preliminary estimates of materiality for the audit as a whole.
 The class of accounting transactions that are relevant and to make a
decision on the type of testing and samples.
 Selection of representative samples.
 Test of compliance in order to evaluate the reliability of critical controls.
 Material weaknesses in the operation of the critical controls of
management.
 The performance of the analytical review procedures, substantive tests of
details to attain sufficient, reliable and relevant audit evidence for each
audit goal.
 Fundamental accounting assumptions
 Disclosure of the change in an accounting policy that would have a
material effect.
 The audit report from all the Branch Auditors and any reservation made by
a branch auditor which is appropriately dealt with in the finalisation of
accounts.
 The Working Papers that contain all the audit evidence and are cross-
referenced.
 Summary of the work done, issues, significant judgements and audit
conclusions.
 Review by a senior in charge of all the work done by assistants, audit
programme followed and the work performed as per the schedule.
 Updation of the audit working papers along with the permanent records as
well.
 Review of the unadjusted errors in order to determine if the individual and
aggregate effect is material.
 Compliance with the legal and regulatory requirements and with all
mandatory accounting standards as issued by the Institute.
 Post balance sheet events
 Formulation of the draft audit opinion.
 Comparison of the budgeted time to actual time and the reasons for
significant differences.
 The evaluation forms of the complete staff.
 Planning of the next year’s audit.

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Advantages of Audit Programme
The following are the advantages of an audit programme.
 An audit programme helps to ensure that all the critical areas are covered
during the audit appropriately.
 It helps to distribute work among the members of the audit team and
assistants as per their level of competence and experience.
 An audit programme gives instructions to the audit team and decreases
the scope for misunderstanding.
 It helps to fix the responsibility for the work done amongst the audit team
as the work done can be traced back to the individual in the auditing staff.
 It helps to assess the progress of work by ascertaining the part of the audit
work that has been completed against how much is left in order to
complete the audit successfully.
 An audit programme serves as evidence against a charge of negligence.
 An audit programme also serves as an audit record that may come into
use for future references once the audit is completed successfully.
 Disadvantages of Audit Programme
The following are the disadvantages of Audit Programmes.
Rigidity: An audit programme does not possess the advantage of being flexible
as the same programme cannot be used for different types of organisations.
Every business or entity has the separate and unique issues that they face.
Therefore, a single or same audit programme cannot be laid down for every type
of business.
Decreases the Initiative of Efficient Staff: An audit programme does nothing
to promote the initiative of capable individuals. Assistants and team members
would not be able to suggest any improvement in the set plan.
Mechanical Audit Work: An audit programme is considered mechanical that it
ignores various other aspects such as internal control.
Overlooking New Areas: As time passes, new problems or issues may arise
during the audit, and they may be overlooked in the Audit Programme.
Remedy for Disadvantages
The following are the remedies that can be used against the disadvantages of an
Audit Programme.

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The remedy for such situations would be to increase the flexibility of the audit
programme. It should be flexible enough to include changes and stay open for
improvements.
The audit team that conducts the audit should be encouraged to bring the
attention of the auditor to any defects or mistakes in the audit programme.
The audit staff should be encouraged to explore unusual transactions thoroughly
without the audit programme holding them back from doing so.

Recommended Site:
https://taxguru.in/chartered-accountant/audit-programme-checklists-completion-
audit.html

4. Internal Control in Audit:

Refer the following sites before reading the material:
https://taxguru.in/chartered-accountant/internal-controls-audit.html
https://www.investopedia.com/terms/i/internalcontrols.asp

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Internal Control system is one of the basic and essential factors for efficient and
effective management. It covers the whole management system of an
organization, both financial or non-financial. Internal control system is helpful
for the management and also the Auditor in achieving goals and targets
effectively. Therefore, internal control system covers a number of checks and
control to ensure efficient and economic working.
There are two types of controls — Financial Control and Administrative
Control. Reliability of financial records and safeguarding of assets is a part of
financial control. We will now understand in detail what Internal Control
System.

Internal Control
Internal Control comprises of the plan of the organization and all the co-
ordinate methods and measures adopted within a business to safeguard its
assets, check the accuracy and reliability of its accounting data to promote
operational efficiency and to encourage adherence to prescribed managerial
policies.

Purpose of Internal Control

From Auditor’s Point of View
It is very important from the Auditor’s point of view to study and evaluate the
system of internal control. To obtain an adequate understanding of the internal
control system, that must be tested. The Auditor has to determine whether audit
is possible, if yes, then he should determine the scope of audit.

From Client’s Point of View

 Internal control system provides reliable and accurate data that is
necessary for decision making and to run business activity efficiently.
 Adequate internal control system safeguard business assets, in absence of
it, assets of the company may be stolen, misused or accidentally
destroyed.
 Internal control system within organization is necessary to discourage and
stop non performing business activities and to protect business from
wastage is all aspects of the business.
 Internal control system ensures that rules and procedures are to be
followed by business personnel.

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Characteristics of Internal Control
Following are the main characteristics of Internal Control usually abbreviated as
CROSSASIA
 Competent and trustworthy personnel
 Records, Financial and other Organization plan
 Organizational plans
 Segregation of duties
 Supervision
 Authorization
 Sound practice
 Internal Audit
 Arithmetic and accounting controls
Limitations of Internal Control
 Management decision to choose cost effective control system may reduce
the effectiveness of internal control system.
 There are chances of misuse by a person of authority who is operating on
internal control system.
 Objectives of internal control systems may be defeated by manipulation
of management.
 Since internal control system is involved in routine transactions, irregular
transactions may be overlooked.
 Changes in conditions may affect the effectiveness of internal control
system.
Scope of Internal Control
Cash − Here, internal control is applied over payments and receipts of an
organization. This is to safeguard from misappropriation of cash.
Control over Sale and Purchase − With proper and efficient control system
for transactions regarding purchase and sale of material, handling of material
and accounting for the same is must.
Financial Control − It deals with the efficient system of accounting, recording
and supervision.
Employee’s Remuneration − Internal control system is applied to preparation
and maintenance of records of employees and the payment methods also. It is
also necessary to safeguard against misappropriation of cash.

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Capital Expenditure − Internal control system ensures the proper sanction of
capital expenditure and also the use of it for the purpose intended.
Inventory Control − It covers the proper handling of inventory, minimization
of slow-moving items or dead stock, proper valuation of stock, recording of it,
etc.
Control over Investments − internal control system is applied to the proper
recording of transactions be it purchases, additions, sale or redemption, income
on investments, profit or loss on investment.
Internal Control and Auditor
An Auditor should ensure that certain rules and procedures are followed by the
business unit he is working on, in spite of the fact that a sound system of
internal control is as sole responsibility of the management. The Auditor can
simply guide or help the management if he is asked to do so, because he has no
authority to prescribe such rules and procedures. The degree of reliance on the
system depends upon the effectiveness of internal control system; therefore, the
Auditor should review and evaluate the internal control system of an
organization to prepare his audit Program.
Review of Internal Control System
 Reviewing the system of accounting entries, whether recorded as per
accounting standard or not.
 To frame audit program according to present circumstances.
 Frauds, errors and mistakes are likely to be located or not.
 To review existence of internal audit program and to check the efficiency
of internal control system.
 To review the reliability of reports, records and certificates as presented
by the management.
 To check if there is any possibility of improvement in existing internal
control system.
Control Environment: The first component of internal control is control
environment. A control environment refers to a service organization’s
compliance culture and includes everything from organizational structure to
ethical values. Is management committed to an effective system of internal
control? Is there some type of team committed to internal auditing or
compliance? How does management implement policies and procedures that
guide the organization? How does management create an atmosphere that
addresses integrity, ethics, and operating effectiveness?

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Risk Assessment: Risk assessment is a critical component of a service
organization’s compliance, which is why the COSO framework incorporates it
into the components of internal control. Does the organization know where
assets live? Does the organization assess risks that are a threat to the
achievement of internal control objectives? Are controls fully understood? Are
there tests performed to assess of control?

Information and Communication: Quality information and effective

communication among a service organization can impact meeting internal
control objectives. When there’s a system change, how does management
communicate that to internal employees and/or external users? What is the
effectiveness of that communication?

Monitoring: How does management monitor the operating effectiveness of the

organization? How do you address efficiencies and take part in corrective
action?

Existing Control Activities: The final component of internal control is existing

control activities. This is the largest component, as it provides the details about
the controls that you’ve put into place to meet your internal control objectives.
Does the organization have documented policies and procedures? Is there a
business continuity plan? Is there a change management program?

5. Internal Check and Internal Audit

Recommended Site:
https://keydifferences.com/difference-between-internal-check-and-internal-audit.html

Internal Check is an integral function of the internal control system. It is an

arrangement of duties of the staff members in such a way that the work
performed by one person is automatically and independently checked by the
other.

Objectives of Internal Check

 To protect business from carelessness, inefficiency and fraud.
 To ensure and produce adequate and reliable accounting information.
 To keep moral pressure over staff.

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  To minimize the chances of errors and frauds and to detect them easily on
early stage if it is committed.
 To divide the work in such a way that no business transaction should be
left unrecorded.
 To fix the responsibility of every clerk according to the division of work.

Principles of Internal Check

Responsibility − Allocation of business work amongst the various staff
members should be done in such a way that their duties and responsibilities
should be judiciously and clearly divided.
Automatic check − Automatic checking of work of one employee by another
forms part of a good Internal Check system.
Rotation − Transfer or rotation of employees from one seat to another must be
followed under good system of internal control.
Supervision − Prescribed procedures and Internal Check should be strictly
supervised.
Safeguard − To safeguard files, securities, cheque books is also recommended
in Internal Check.
Formal Sanction − Without formal sanction, no deviation should be allowed
from the established procedures.
Reliance − Under good system, too much reliability on one employee should
not be there.
Review − From time to time, system of Internal Check should be reviewed to
introduce improvement.

Advantages of Internal Check

From the Owner’s Point of View
 Good system of Internal Check provides accurate, reliable and genuine
accounting record and data to the owner of the business on which he can
rely upon.
 Economy in operations and overall efficiency in system due to good
Internal Check may result in more profits.

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From the Auditors Point of View
 Due to efficient system of Internal Check, the statutory Auditor can avoid
deep and detailed checking of transactions. He may rely on test checks;
hence Internal Check provides convenience to Auditor.
 Since the Balance Sheet and the Profit and the Loss account is prepared
without wasting of time, hence quick preparation of final accounts is
possible.

For the Business

Moral Check − Great check to commission of errors and frauds is possible with
knowledge of subsequent checking of work of each employee by others.

Detection of Errors and Frauds − This helps in early detection of errors and
frauds because work of each clerk is checked by another automatically and no
one is allowed to do complete work from the beginning to the end.

Proper Division of Work − According to qualification, experience and area of

specialization of work, proper and rational distribution of work among the
members of staff is done.

Increases Efficiency − A good internal control system provides increased

efficiency of work coupled with overall economy.

Disadvantages of Internal Check

 It is costly for small business units.
 If Internal Check system is not properly organized, there are chances of
disorder in the working of business.
 There might be instances where the quality of the product and the work is
compromised with by the staff members due to greater importance to
faster results.
 An Auditor cannot be relied on if he does not conduct tests with
procedures of his own.

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6. Vouching
Meaning
Vouching is concerned with examining documentary evidence to ascertain the
authenticity of entries in books of entries in books of accounts. It is an
inspection by the auditor of evidence supporting and substantiating the
transaction made in the books. It is a technique used by the auditor to judge the
truth of entries appearing in the books of accounts. All accounting entries must
be supported by a document. It is not only examining the documentary evidence
but sometimes auditor has to go behind recorded evidence to eliminate any
possibility of fraud.
DEFINITION
“Vouching is the examination of the evidence offered in substantiation of
entries in the book including in such examination the proof, so far as possible,
that no entries have been omitted from the books” -Taylor and Perry

OBJECTIVES OF VOUCHING
• To ensure recording of all transactions.
• To verify that all transactions recorded in the books of accounts are supported
by documentary evidence.
• To verify the validity of the vouchers which support the entries and to
ascertain whether these are authentic, addressed to the business and properly
dated.
• To verify that no fraud or error has been committed while recording the
transactions in the books of accounts.
• To ensure that the vouchers have been processed carefully through various
stages of internal check system.
• To verify whether every transaction recorded has been adequately
authenticated by a responsible person.
• To know that while recording the transaction whether distinction has been
made between capital and revenue items.
• To ensure whether accuracy has been observed while totaling, carrying
forward and recording and amount in the account.

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• To verify that all the transactions connected with the business have been
recorded in the books of accounts.
• To check vouchers which support entries are legal, valid, authentic, addressed
to the business and properly dated.
• To have greater precision in reporting the financial information as true and
fair.
• To ensure reliability of figures entered 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.

POINTS TO BE NOTED WHILE VOUCHING

1. Auditor must verify the authenticity of transactions, accuracy of amount
recorded and proper classification of account.
2. All the vouchers are numbered serially and dated. To avoid wasting of time in
locating a voucher, they have to be arranged serially.
3. The voucher checked by the auditor should be stamped or tick marked with a
special sign, to avoid its use again.
4. The amount in the receipt must be shown in words and figures. If there is a
difference, it should be investigated.
5. The receipt should indicate the period for which the payment has been made.
It will show the payments made in advance.
6. If the voucher is in the personal name of the partners, manager, director or
any other person, it should be properly treated in the books of accounts.
7. The auditor should proceed cautiously and use special ticks for the vouchers
which are doubtful.
8. Every voucher should be certified by a responsible officer of the business.
9. All expenses pertaining to the business should be examined by the auditor.
10. A receipt obtained from a party for Rs.20/- or more should bear the revenue
stamp.
11. The auditor should see that proper account is debited or credited and proper
classification of accounts has been done.
12. Distinction is made between capital and revenue items while vouching.
13. Alterations in the vouchers must be supported by the concerned officer’s
initials.
14. Auditor should use specific ticks for vouching cash payments, receipts,
purchases, sales etc.

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VOUCHING OF TRADING TRANSACTIONS
I. VOUCHING OF PURCHASE BOOKS.

1. The main aim of vouching of purchases book is to see that all purchases
invoices are entered in purchases book and the goods are entered in the
purchases book are actually received by the business.
2. Payment is made for only those goods which are delivered by the supplier.
3. Vouching normally depends on the frequency of purchases, size of the
organization and the staff employed.
4. If the internal control system for purchases is inadequate, the auditor has
to exercise a greater care in vouching the purchase transactions.

Auditor’s Duties While Vouching Credit Purchases

1. a) There should be proper record for all the purchase orders. A duplicate
copy of order is kept in the office for record.
b) A copy of purchase order shall be sent to Accounts Department.
c) All goods received should be recorded on goods received note; a copy of
it should be sent to Accounts Department.
d) Payment of supplier is made only after verification of receipt of goods
and the price quoted in purchase order.
2) The auditor should see that only credit purchases of goods are recorded in
purchase book.
3) The purchases book can be verified from purchase invoices, copies of orders
placed, goods received note, goods inward book, copies of challans from
suppliers.
4) The quantity mentioned in the invoice must be the same as in shown in the
Purchase order.
5) The price charged by the supplier must be as per quotation/price list of
supplier.
6) The supplier bill must in the name of the business and for the period under
audit.
7) The goods purchased must not be for the personal use of Directors or
officers.
8) While vouching the purchase vouchers, each voucher should be stamped or
initiated after examination, so that it cannot be produced again.
9) The totaling and casting of purchases book should be verified. It should also
be seen that all Taxes, octroi, and freight are added to the purchases and trade
discounts allowed are deducted.
10) In certain cases, statement from the suppliers may be obtained to verify his
purchases records.

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11) The auditor should be more careful while vouching the purchases made in
the first and the last month of the accounting period, because sometimes the
purchases of the last year may be included in the purchases of first month of the
current year or purchases of the last month of the current year may be recorded
in the next.
12) Duplicate invoices must not be entered in the purchases book if original
invoices have already been recorded

II. VOUCHING OF PURCHASE RETURNS

Sometimes the purchased goods are returned back to the supplier for the various
reasons. The goods purchased may not correspond to the quality or the
specifications ordered. The auditor should see that there exists a proper system
to record such returns. In such cases, the purchaser sends back the invoice or
alternatively a credit note may be obtained from the supplier. The credit note
should include the amount which was originally included in the invoice. A
separate returns book is maintained to record the returns. If the supplier replaces
the goods returned, the information must be sent to both departments.

AUDITOR’S DUTY
o He should see that a Debit note has been sent to the supplier or Credit note has
been received from the supplier.
o The quantity returned must correspond with the store-keeper’s record, return
outward register and gatekeeper’s outward register.
o The amount shown in Credit note should be verified.
o The auditor should be careful about the recording of purchases return in the
current year. Sometimes the profits of current year may be manipulated by
recording current year’s purchases returns in the subsequent years.
o The purchases return of the first month and last month of the accounting year
should be vouched carefully, to detect any manipulation of amounts.

III VOUCHING OF CREDIT SALES

In big organizations sales are made on credit basis. The client himself prepares
the sales invoices and records credit sales in the sales book. The auditor can
depend on sale invoices, and internal control system for credit sales in
operation.

INTERNAL CONTROL OF CREDIT SALES

• Any order received or booked should be recorded in a separate register, giving
full details of the goods ordered.
The details are:
a) Name of the customer
b) Quantity ordered

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c) Selling Price
d) Reference number
e) Date of delivery
f) Mode of delivery
g) Particulars regarding sales tax, excise duty and insurance

• After receiving the order, a copy of the same is sent to dispatch section, where
the clerk will keep the goods separate for the purpose of dispatch.
• Another clerk will prepare the list of goods and verify the goods dispatched
with the customer’s order.
• Three copies of the challan should be prepared giving the full details of goods
dispatched. One copy will be kept by the dispatch Department and other two
copies will be sent along with the goods.
• One copy will be received back duly receipted, which serves as the proof of
dispatch of goods. The original copy of invoice is sent the customer, and
another copy to Accounts Department.
• If the orders are received through agent, a copy of sales invoice will be sent to
the agent for sales commission and execution of sales order.
• If agent collects the payment from customers, necessary information shall be
provided.
• For collection of amount of Sales Invoice either Sales or Accounts Department
may make cautious efforts to collect the amount after expiry of credit period.
• Up-to-date record shall be maintained by Departments.

AUDITOR’S DUTIES
• He should examine the internal control system to assess the efficiency of the
system by test checking. If not satisfied, thorough vouching will be necessary.
• The sales register should be examined with copies of sales invoices. The sale
of capital items shall not be recorded in the sales book.
• Test checks should be applied on the calculations made in sales invoices.
• The totaling and castings of sales book should be verified.
• The sales tax, duties collected through sales invoices must be recorded under
separate accounts.
• It should be verified that all sales invoices are prepared on the basis of
challans and entered in the respective accounts. No sales invoice should be left
unrecorded.
• Sales made in the current year must be recorded under that year only.
Similarly sales of the preceding or subsequent years shall not be recorded as
sales of the current year.
• All cancelled sales invoices must be kept together for verification by auditor,
and see that they are properly treated in the books of accounts.

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• Trade discounts allowed to the customers should be checked. No separate
entry for discount should be passed in the books. If the trade discounts are high,
the possible reasons should be located.

IV. VOUCHING OF SALES RETURNS

They are the returns made by the customers, on which a credit note is issued
only after obtaining sanction from the responsible officer. Before a Credit note
is issued, return inward register and stores records should be verified. If sales
returns occur frequently, it is preferable to use separate sales return book in
returns will be recorded. The auditor should be careful about the sales return in
the beginning of the year to detect the fictitious sales. The quality and quantity
of goods returned must be verified by the person preparing return note.
Sometimes the customer sends a Debit note on returning the goods; it should be
taken as external information for verification and duplication in recording of
sales returns.
The auditor should pay special attention while vouching sales returns:
• Date on which the goods are actually returned.
• Credit or Debit Note of sales returns.
• Gate-keeper’s receipt book.
• Stores Records.
• Corresponding entry for the return of goods in customer’s account.
• Goods returned should form the part of closing stock at cost price or market
price whichever is less.

V . VOUCHING OF GOODS ON SALE OR RETURN BASIS

A separate record should be maintained for goods sold on approval basis. It
should not be treated as sales unless the customer has sent his approval or after
the expiry of the time limit. On the receipt of approval from customer or expiry
of time limit, sales invoice will be prepared, a copy of which will be sent to the
customer. If the customer informs about the return of goods, necessary
arrangement should be made to get back the goods. The goods sent on sale or
return basis should be taken in the closing stock as stock with customer. The
auditor should get a statement from customer that goods are lying with him on
approval basis.

VI. VOUCHING OF GOODS SENT ON CONSIGNMENT BASIS

• The goods sent on consignment basis by the principal to his agent should not
be considered as sale.
• Only when such goods are sold by the consignee, entry for sale should be
made in the books.
• The goods sent on consignment still lying with the consignee should be taken
into closing stock.

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• A Separate book should be maintained to show the record of goods sent on
consignment basis.
• At the end of the year, an account sale is received from consignee, indicating
the goods sold by him and balancing of closing stock of goods sent on
consignment basis.
• The auditor should verify the goods sent on consignment basis from proforma
invoices, goods outward register correspondence with consignee and account
sales.

VOUCHING OF CASH TRANSACTIONS

INTRODUCTION:
Cash book is maintained to account for receipts and payments of cash. Auditor
should see that all receipts have been recorded in cash book and no fictitious
payment appears on the payment side of cash book. The auditor should study
the internal control in existence and verify its effectiveness and adequacy.

He should find out chances of frauds in the system and the circumstances for
concealment of incomes, introduction of fictitious payments, manipulation of
accounts etc. He should look into the accounting routines and financial authority
of different officials. Vouching must be arranged in serial and chronological
order. If any voucher is in the personal name of an official, it should be verified
that it related to the organization.

AUDIT OF CASH TRANSACTIONS:

1) INTERNAL CONTROL SYSTEM EVALUATION: It should have the
characteristics like:
a) It shall not leave any cash receipts unaccounted for and permit any cash
payment without goods and services being received.
b) The person authorizing the payment must have financial power. It should be
verified under what conditions it can be exercised.
c) All receipts shall be immediately recorded and acknowledged.
d) All cheques must be crossed “Account payee only” immediately on receipt.
e) Cash receipts issued and amount credited to debtors shall be reconciled daily.

2) CORRECTNESS OF ACCOUNTING RECORDS:

It involves checking of records to verify that entries have been made as per the
accounting system which is regularly followed. The checking of records may
disclose mistake or manipulations e.g.
a) Omission or commission of a transaction which may be accidental or incidental.
b) Errors of principle
c) Compensating errors.

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I. VOUCHING OF CASH RECEIPTS
The auditor should keep in mind the following points in regard to risk of errors,
frauds or manipulation while vouching the cash receipts;
▪ False particulars of cash deposited in bank may be entered in counterfoils of
pay-in-slips.
▪ Cash received may not be entered in cash book particularly bad debts
recovered, sale of assets, over payments to creditors.
▪ Duplicate receipts may show sum less than the original receipts.
▪ Cheques received from customer may be deposited in bank without being
entered in cash book and later on an equivalent amount may be withdrawn.
▪ Incorrect totaling of cash book and thereafter false bank statements may be
prepared.
▪ Overstatement of discount allowed and excess of cash received may be
misappropriated.
▪ Cash in hand may include personal cheques without any intention to deposit
these cheques into bank for collection.
▪ Cheques received may be credited to suspense account and then later on cash
may be withdrawn and misappropriated.

The vouching of cash receipts will depend to a large extent on the strength of
internal control system. Test checks can be applied to the audit of cash receipts
if internal control system is satisfactory and adequate. Auditor may check a few
receipts at random if everything is in order.

VOUCHING OF VARIOUS CASH RECEIPTS (DEBIT SIDE)

• OPENING BALANCE: Closing cash balance of the last year becomes
opening cash balance of the current year. It can be verified from the last year’s
audited balance sheet.
• CASH SALES: There are more misappropriation of cash sales. In vouching
cash sales, cash register should be fully checked with carbon copies of cash
memos. The auditor should verify the daily deposits of cash received in the
bank.
• Dates of cash memos and date on which the receipts are recorded in cash book
must be same
• If cash memos are cancelled, all copies including the original copy duly
cancelled, should be kept in the book.
• If the company has a discount policy, it must be approved by a responsible
officer.
• (Vouchers-Duplicate cash memo, Salesman’s abstracts, Cashier summaries).

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CASH RECEIVED FROM DEBTORS
When cash is received from customers, a cash memo is issued; a counterfoil is
retained by the receiving clerk.
Sometimes shortage is concealed, by delaying the recording of receipts of cash
from a debtor.
Sometimes payment received from a customer is misappropriated without
making entry in his account and later on when cash is received from another
customer, it is posted to the account of former customer. This is known as
“teeming and lading”.
• The auditor should verify amount received from debtors from the counterfoils
issued to customers.
• All receipts should be serially numbered.]
• Amount should be entered in the cash book on the day when received.
• Discount allowed to customers should be authorized by a responsible officer.
(Vouchers-Counterfoils, Correspondence etc).

Loans
All business concerns have to borrow, from banks or other financial institutions.
Auditor should enquire whether the client is empowered borrow.
A company is required to maintain a separate register for the public deposits
accepted and should follow legal provisions imposed by the Companies Act.
While vouching the received, the terms and conditions contained in the
agreement should be verified.
If the loan is secured it has to be disclosed in the Balance Sheet.

BILLS RECEIVABLE
• It may be verified because the various details regarding bills matured and
discounted are available in it.
• Auditor should check the amount received with bank statement.
• An enquiry may be made from party regarding due amounts and dishonor of
bills. It may lead to detection of a fraud, as the amount may be received and
misappropriated by the cashier.
• A verification of the bills discounted should be made. Such bills be entered
and appeared as contingent liability in the Balance Sheet; if the date of maturity
is after the date of Balance Sheet.
• (Vouchers-Bill receivable Book, Cash Book, Pass Book)

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RENT RECEIVABLE
The auditor has to examine the following points:
• Terms and conditions of agreement and lease deed.
• Rent received should be compared with the list of properties maintained. If the
rent is collected by agent, then it should be compared with the account
submitted by the agent.
• Check the counterfoils of receipts issued to the tenants.
• In case of heavy arrears of rent outstanding, auditor should confirm the arrears
from tenants with the consent of client.
• Auditor should obtain a certificate from the responsible officer regarding the
period for which the property remained vacant.
• (Vouchers-Lease Deed and Agreement, Counterfoils, Correspondence)

SALE OF INVESTMENTS
• The auditor should examine the bank advice to know the various details about
the investments sold through broker.
• Broker’s Sold Note or Commission Note should be examined to verify the sale
proceeds and commission charged by the broker.
• If the investments are sold at cum-dividend price, auditor should see that
proper apportionment has been made between capital and revenue receipt.
• If the investments are made against specified funds, they must be transferred
to Profit or Loss Account. (Vouchers-Bank Advice, Broker’s Sold Note)

INCOME FROM INTEREST AND DIVIDEND

• The auditor should check dividend warrant counterfoil land covering letter
received along with the cheques.
• If the dividend is collected through bank, amount should be verified with the
bank statement.
• If the dividend warrant has been received and is not yet collected, it should
show as yet to be collected.
• Interest received on the securities can be vouched from covering letters and
schedule of securities.
• Interest on fixed deposits can be verified from the bank pass book and interest
on loan granted can be checked from the agreement made and counterfoil of
receipt issued.
• It should be ensured that al interest received and accrued have been accounted
for in the books and properly shown in the balance sheet.
(Voucher-For dividend counterfoils, Dividend warrants, Pass Book.

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For Interest-Pass Book-Agreement, Counterfoils).

COMMISSION RECEIVED
The following points should be examined by the auditor:
• Study the agreement for receiving commission.
• Verify the commission received with counterfoils of receipts.
• Check the calculations of commission according to the terms of agreement.
• List of names of the parties should be verified from whom the commission is
receivable.
• In case of commission received on sale of goods on consignment basis,
amount of commission should be verified form the copy of account sale sent to
consignor.(Voucher-Agreement, Counterfoils)

PROCEEDS FROM THE SALE OF FIXED ASSETS

• It should be vouched with minute book of Board of Directors,
Correspondence, agents sale account and sale contract.
• It should be credited in proper account.
• Any profit arising on the sale of asset shall be credited to revenue account
which is not available for distribution of dividends.
• If any expense on the sale assets is paid, the amount should be reduced and
balance should be credited to asset account.
• Sale of fixed assets is to be sanctioned by the authorized person or committee.
(Voucher-Sale Deed, Broker’s Sold Note, Correspondence)

INSURANCE CLAIMS
• It can be vouched with copy of insurance claim lodged, correspondence with
the insurance company counterfoil of the receipt issued.
• It should be verified that insurance claim recovered has been recorded in the
proper account. (Vouchers-Accounts, Correspondence)

II VOUCHING OF CASH PAYMENTS (CREDIT SIDE)

• The internal control system for payments should be evaluated before vouching
credit side of cash book.
• While vouching various payments auditor should see that:
▪ Payment is made to right person.
▪ Payment is for the purpose of business
▪ Amount recorded in the cash book is the amount appearing in the voucher.
▪ Payment is duly sanctioned by the authorized officer.
▪ Proper account has been debited with the payment.

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 ▪ Provisions of Companies Act has been complied with while recording the
payment.
▪ Rough cash book should be compared with the cash book to locate the
fictitious payment.

i) CASH PURCHASES
• In emergency, cash purchases may be made.
• Purchases of stores and stationery are made usually on cash basis.
• An adequate internal control system will be helpful in controlling manipulation
of cash purchases.
• It should be seen that goods purchased are actually received by the store-
keeper.
• Cash memos can be compared with goods inward book to verify the goods
received.
• Only the net amount should be entered in the books (after trade discount).
(Vouchers-Cash Memos, Goods Inward Note).
ii) BIILS PAYABLE
• If honored on the date of maturity and are returned by the payee after
receiving the payment.
• These bills should be cancelled after being paid.
• Bills payable paid can be vouched with bills book.
• If the payment is made by bank, bank statement or pass book can be examined
to verify the payment of bill.
(Vouchers-Receipts, Bills Payable Returned, Pass Book, Bills Payable Book)

iii) WAGES
• There are many chances of fraud and misappropriation in wages payment.
• The auditor should study the system of internal control in operation.
• Fraud and misappropriation in wage payment can arise in the following ways:
a) Inclusion of dummy workers in the workers’ register.
b) Payment of wages for the time or the work for which worker was not present
at the work place.
c) Payment of wages at higher rate than allowed.
d) Including in the records the name of those workers who have left the
organization.
e) Less amount of deductions is taken for calculation of wages.

iv) SALARIES
• Auditor should see that salaries bill is prepared with the sanction of
responsible officer.
• He should also check attendance records, salary bill of earlier months and
appointment letters of new employees.

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• If there is an abnormal increase in salaries of a month over the salaries of
previous month, he should inquire into the reasons for such change.
In vouching the payment of salaries, following points are important:
a) Auditor should check salary register with the entries made in cash book.
b) He should examine carefully alterations in the amount of deductions on
account of fines, funds, loans, insurance etc.
(Voucher-Salary Registers, Counterfoils, Appointment Letters)

v) INSURANCE PREMIUM
The auditor should examine the following for the vouching of the insurance
premium:
a) Insurance policy or the cover note issued by the insurance company.
b) Insurance policies in case the policies are more than one.
c) Insurance premium receipts.

vi) TRAVELLING EXPENSES

• The staff of the company is paid travelling expenses according to the rules.
• The voucher and receipt of travelling expenses will serve as an evidence for
vouching these expenses.
• If the allowance is fixed as per rules, auditor can verify the amount from the
rules.
• If actual expenses are reimbursed, the calculation of travelling expenses
should be verified.
• The Bill of travelling expenses should be sanctioned by a responsible officer.
(Vouchers-Receipts, Bills)

vii) PETTY CASH BOOK

▪ Verification of actual cash balance with the balance appearing in Petty cash
book.
▪ Whether the internal control system is effective in detection of frauds and
misappropriations.
▪ Determining the validity and accuracy of transactions recorded in the Petty
Cash Book.
• All vouchers are serially numbered and sanctioned by a responsible officer.
• Petty cash received from the head cashier is recorded on the same day on
which it is actually received.
• Appropriate expense account is debited.
• All the payments must be verified from the supporting evidence

viii) LOANS
• He should see that the loan voucher should be supported by the receipt given
by the party.

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• Details regarding terms and conditions of loan can be verified from the loan
agreement.
• It should be seen that instalments of loan along with interest are received on
time.
• Mortgage deeds, other documents should also be examined.

ix) Freight, carriage, Customs duty

• Freight-- Heavy goods transported through ship/train/truck/aircraft for which
charges are collected called as freight charges.
• To check freight invoice
• Consignment note if any given by transporter, which gives you an evidence of
the amount paid and whether actual transport is happened or not.
• Whether transporter has PAN or not.
• If freight is subjected to TDS and no PAN is submitted, then TDS to be
charged @20%.
• If payment is through cash –cash book, vouchers to be verified.
• If payment is through bank- cheque register, bank statement to be verified.
• Also bills, validity, mileage, duplicate payments, and use of correct tariffs.
• Carriage --Verify carriage inward voucher with delivery challan.
• Verify mode of payment- cash or bank.
• Bills received immediately to be recorded properly.
• In some case companies adopt self-billing process to pay freight bills.
• Customers calculate their freight costs and instruct the freight forwarder to
invoice using credit notes.
• If still auditor is unable to calculate because of software usage and no
knowledge can ask for third party experts.
• Customs duty –Tax imposed on imports and exports of goods, rates are either
specific or based on value of goods.
• If customs duty is directly paid, auditor should check receipt bill entry.
• Checking of monthly accounts and bill entry.
• To see that all charges are treated as capital or revenue items.
• Orders
• Accounting ledgers
• Bills of lading
• Airway bills
• Permits
• Invoices
• Contracts
• Packing list
• Correspondence
• Evidence of payment made or received.

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Sources: Any document based upon which a financial transaction is recorded
in books of accounts is known as ‘source document’.
1. Cash memo 5. Debit note
2. Cheques 6. Pay- in –slip
3. Invoices and bills 7. Receipt
4. Credit note 8. Miscellaneous

Importance:
Vouching is the act of checking evidential documents to find out errors and
frauds and to know the authenticity, accuracy and reliability of books of
accounts. Thus, it is important for an auditor due to the following reasons:
1. Vouching Is the Backbone of Auditing
Main aim of auditing is to detect errors and frauds for proving the true and
fairness of results presented by income statement and balance sheet. Vouching
is only the way of detecting all sorts of errors and planned frauds. So, it is the
backbone of auditing.

2. Vouching Is the Essence of Auditing

Auditing not only checks the accuracy of books of accounts but also checks
whether the transactions are related to business or not. All the transactions are
performed after the prior approval of concerned authority or not, transactions
are real or not because an accountant may include fictitious transactions to
commit frauds. All these facts can be found with the help of vouching. So,
vouching is essential for auditing.

3. Vouching Is Important to See Whether Evidences Are Correct or Not

An auditor checks the books of accounts to detect errors and frauds. Frauds may
be committed presenting duplicate vouchers. All the small and big amounts of
frauds can be detected with the help of vouching. So, all the evidential
documents and records are to be checked carefully and in detail by an auditor
which is the scope of vouching.
Therefore, it can be said that vouching is the heart of auditing because without
the work of vouching, the work of auditing cannot be performed.

7. Verification of Assets and Liabilities

MEANING
Verification means proving the correctness. One of the main work's of auditor is
verification of assets and liabilities. Verification is the act of assuring the
correctness of value of assets and liabilities, title and their existence in the
organization

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DEFINITION
According to Spicer and Pegler “The verification of assets implies an inquiry
into the value, ownership and title, existence and possession, the presence of
any charge on the assets.
OBJECTIVES OF VERIFICATION OF ASSETS & LIABILITIES

1. Valuation of assets & liabilities :- The auditor has to ensure that the assets &
liabilities have been shown at their correct value .
2. Finding out the ownership & title of the assets :- Verification certifies the
ownership & the title of the assets shown in balance sheet. .
3. Detection of errors & frauds:- Verification helps in detecting the frauds &
errors in the account books of the undertaking .
4. Certification of the arithmetical accuracy in account books
5. Verification certifies the arithmetical accuracy of the accounts books. .
6. Whether balance sheet exhibits a true & fair financial position of the concern
7. Verification helps the auditor to certify the fact whether the balance sheet
exhibits a true & fair financial position

MEANING OF VALUATION

The process of determining the value of an asset or company. There are many
techniques for valuation, and it is often partially objective and partially
subjective. The valuation of assets is therefore an attempt to ensure the
equitable distribution of the original outlay over the period of the assets
usefulness.”

OBJECTS OF VALUATION

a) To know the actual financial position of the company .

b) To know about the goodwill of the concern .
c) To know the difference in the value of assets at the time of purchase & at the
date of Balance Sheet .
d) To know the original cost of the assets .
e) To know the mode of investment of the capital of the company

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Refer the following Sites:
https://gacbe.ac.in/pdf/ematerial/18BCO55S-U3.pdf
https://www.scc.ac.in/downloads/VERIFICATION-AND-VALUATION-OF-
ASSETS-AND-LIABILITIES.pdf
https://rajdhanicollege.ac.in/admin/ckeditor/ckfinder/userfiles/files/vouching%2
0and%20verification.pdf

8. Auditor – Appointment, Duties, and Liabilities

https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (Refer Section
139 to Section 148)

Textbook PDF Available

https://archive.mu.ac.in/myweb_test/study%20TYBCom%20Accountancy%20
Auditing-II.pdf (Full Book)
https://www.sscasc.in/wp-content/uploads/downloads/BCOM/Principles-
Practices-of-Auditing.pdf (Introduction)
http://www.gdcbemina.com/docs/Auditing.pdf
https://www.icsi.edu/media/webmodules/publications/FULL%20FAA%20PDF.
pdf (Refer from Page No. 321)
Recommended Textbook:
https://www.marghampublications.com/index.php/text-books/commere-and-
management/practical-auditing-natarajan

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