Presentation on vouching and verification

Presentation
on
Vouching and verification
(financial Audit)
for B Com students
By
Dr. Sanjay P Sawant Dessai
Associate Professor
VVM Shree Damodar College of Commerce and
Economics margao Goa
09/27/15 1
sanjaydessai@gmail.com
Vouching and varificaton

VOUCHING AND VERIFICATION
Contents
• Vouching
• Objectives
• Types of voucher.
• General procedure for vouching
• Audit of payments/expenses
• Audit of receipts / Incomes
• Audit of Purchases
• Audit of Sales
09/27/15
2

Verification and valuation
Contents
• Verification
• Objectives
• Verification V/s Vouching
• Valuation
• Meaning
• Objectives
• Verification V/s. Valuation
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Verification and valuation
Contents
• Procedure for Verification & Valuation of
• Assets
• Liabilities
• Inventories
• Types of inventories
• Verification & valuation of inventories
• Auditors duty with case laws.
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Systems of accounting
• Cash
• Mercantile/ accrual
• Difference between expenses and payment
• Difference between profit and loss account
and receipt and payment account
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Vouching
“Examination of all documentary evidence in
support of a transaction and includes
identification of any document that should be
available to the auditor to carry out that
examination”
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Objects of vouching
Authenticity of transaction.
To check transaction are genuinely connected with
the business.
To ascertain that transaction are supported by
documentary evidence.
To check vouchers pertain to the financial year under
audit.
Approval by competent authority.
Proper identification of expenditure as capital or
revenue.
To verify arithmetical accuracy
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Common points in vouching
 Serial number of vouchers and they are filed
properly
 Date of voucher
 Addressed to the client and relate to business of
client
 Amount shown in figure should match with words
 Signature of official authorizing officer
 Revenue stamp if amount is rupees 5000 and
above
 Vouchers originating from outside the business are
genuine
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Common points in vouching
 Vouchers inspected should be cancelled or
stamped
 Proper allocation between capital and
revenue expenditure
 Clarification regarding missing voucher
 Should not seek help of the clients staff
 Pre-receipt vouchers should not be accepted
 Over writing or cancellation on a voucher
should not be accepted.
 Alteration of any kind should be supported
by the signature of the authority09/27/15 9

Types of vouchers
• Primary
• Secondary
• Primary vouchers – original evidence – cash
memos, rent receipts, agreements, salaries
statement, purchase invoice etc
• Secondary – Also called as collateral vouchers
• Copies of original evidence, carbon copies,
counterfoils of pay in slips etc
09/27/15 10

Vouching procedure
• Check General consideration
• Check Internal control
• Check Cash book
• Check Bank statements
• Check Documentary evidence
• Check Authority
• Check Acknowledgements
• Check type of expenditure( Capital / revenue )
• Routine checking
09/27/15 11

Vouching procedure for salaries and wages
Examining the internal control procedure
Before proceeding to verify payment made on account of
salaries and wages the auditor should examine the internal
control procedure as regard the following
Appointment, promotion and transfer of employees.
Records of attendance.
Arrangement for the preparation bill and there analysis.
Sanctioning and disbursement of wages and salaries.
Custody of the wages record.
09/27/15 12

Vouching procedure for
salaries and wages
Examining the internal control procedure
Before proceeding to verify payment made on account of
salaries and wages the auditor should examine the internal
control procedure as regard the following
Appointment, promotion and transfer of employees.
Records of attendance.
Arrangement for the preparation bill and there analysis.
Sanctioning and disbursement of wages and salaries.
Custody of the wages record.
09/27/15 13

Vouching procedure for
salaries and wages
Examine the payment shown in the cash book.
Check the bill details.
By reference to the record of attendance, schedule of
rates and sanction of management.
Check computation of wages and salaries. With regard to
Absence
Leave
Increments
Fines and penalties
Loans and advances
Deduction on account of provident fund, insurance, tax etc
Check for Receipts of payments
Check for arithmetical accuracy of pay roll
Compare signature sample of employee
Check for dummy employees
09/27/15 14

Rent
• General consideration
• Internal control
• Cash book / Bank statement
• Rent agreement
• Acknowledgment from party
• Routine checking
09/27/15 15

Verification of Assets and liabilities
• Meaning of verification
• Definition of verification
• Object
• Auditors duty in verification
• Points to be considered in verification
09/27/15 16

VERIFICATION OF ASSETS AND LIABILITIES
Verification of assets
Definition
Spicer and pegler “ The verification of assets
implies an inquiry in to the value, ownership
and title, existence and possession, and the
presence of any charge on the asset”
09/27/15 17

Verification of Assets
Verification is an important audit process of inspection and
collection of information and examination of documentary
evidence to confirm that
1. Assets were in existence on the balance sheet date.
2. Assets have been acquired for the purpose of the business
and under a proper authority.
3. Right of ownership of the asset vested in or belonged to the
undertaking.
4. Assets are free from any lien or charge not disclosed in the
balance sheet.
5. Assets have been correctly valued having regard to their
physical condition.
6. And assets values are correctly disclosed in the balance
sheet.
09/27/15 18

Auditors duty
• Verification of asset is primarily the
reasonability of management.
• Auditor’s duty is limited only to an appraisal of
the evidence, their inspection and reporting
on matters affecting there valuation,
existence and title, observed in the course of
such an examination.
09/27/15 19

Valuation of fixed assets
Following points should be considered while
valuation of fixed assets
1. Cost less depreciation
2. Cost include all expenditure necessary to
bring asset in to existence and put them in
working condition
3. Fluctuation in market values are ignored
09/27/15 20

Verification of plant and machinery
While verifying the plant and machinery auditor should
follow the following procedure.
1. Check plant and machinery register
Auditor has to verify the plant and machinery register to
see the following
 Name of the machinery
 Make of Machinery
 Date of purchase
 Cost of machinery
 Location of machinery
09/27/15 21

2. Depreciation
Verify that adequate depreciation at appropriate rate is
charged on all types of plant and machinery
3.Capitalistion of expenses
Satisfy that only capital expenditure is shown under
asset and expenses on repairs and maintenance are
not capitalized.
4.Valuation and disclosure
See that plant and machinery is properly valued and
disclosed in the balance sheet. And the movement of
plant and machinery due to purchase and sale is
properly reflected.
09/27/15 22

5.Physical verification
Carry out a physical inspection of the plant and
machinery on test basis to see that they really exist
and are in good working condition.
6.Consistency in method of depreciation
7.Check for lien or charge not disclosed in the balance
sheet.
8.Board resolutions verify board resolutions related to
sale and purchase of a plant and machinery.
09/27/15 23

Verification of preliminary expenses
• Introduction
• Preliminary expenses are all expenses relating to the formation of an
enterprise such as
• Registration fees
• Cost of printing document like memorandum of association and
• Article of association
The audit procedure for verification of preliminary expenses is given below
• 1.Documantery evidence
• Verify the amount of preliminary expenses shown in the balance sheet
with reference to documents such us agreement, bills, receipts etc.
• 2.Compare the amount with that disclosed in statutory report
09/27/15 24

• 3. Disclosure requirement
• Examine whether as per disclosure requirement
expenses on issue of share and debentures are being
shown separately and are not included in preliminary
expenses.
• 4. Check for reimbursement of preliminary
expenses incurred by promoters
• 5. Check for amortization of expenses
• Preliminary expenses are to be amortized over
period of ten years on a straight-line basis as per
income tax act 1961
09/27/15 25

Verification of sundry creditors
• Obtain the schedule of creditors and examine it with
reference to individual creditors account to verify
– Discount earned
– Rebates
– Returns
– Outstanding beyond normal credit period
• Inspect document underlying purchases to verify
– Invoices
– Goods received note
09/27/15 26

Sundry creditors
• Vouch payments to creditors with reference to
– Cash book/pass book
– Vouchers
– Cheque book
• Verify the cut-of procedure adopted by business at the year end
To see unrecorded liability if any
• Confirmation from Creditors
Auditor may communicate directly with creditor so as to confirm the
amount on balance sheet date.
• Check for bills payable accepted during the year
• 7. Examine valuation and disclosure
Ensure that creditors have been disclosed properly in financial
statements as per recognized accounting principal.
09/27/15 27

Audit of contingent liabilities
• Introduction
• Contingent liabilities refers to obligation relating to
past consequences or other events or conditions,
that may arise in consequences of one or more
further events which are presently deemed possible
but not probable.
• Examples of contingent liability
• Guarantees of third party obligation
• Discounted bills receivable
• Pending or threatened litigation against the entity
09/27/15 28

• Audit procedure
• The primary objective in case of contingent liability is to verify the
existence.
• 1. Representation from management
• Obtain a letter of representation from client containing a statement that
management is aware of no undisclosed contingent liability.
• 2. Review minutes of board meeting
• Review the minutes of meetings of board of directors and their
committees to discover contingency commitments if any.
• 3.Review contracts, loan agreement for evidence of liabilities
• 4. Review list of pending legal cases and documentation
• This analysis is directed towards the discovery of possible lawsuits and tax
assessment associate with legal fees paid by client.
09/27/15 29

• 5.Review terms and conditions of grants and
subsidies under various schemes
• To see contingent liability due to non-compliance
with scheme
• 6.Check records relating to bills receivable
discounted
• 7.Ensure that contingent liabilities do not include
items such as
• product warranties, service contracts, etc.
09/27/15 30

VALUATION AND VERIFICATION OF
INVENTORIES (STOCK)
What is inventory
1. Goods purchased for resale
2. Finished goods for sale
3. Raw materials
4. Work in progress
5. Spare parts and consumable stores
6. Packing materials and returnable containers
09/27/15 31

Why Inventory Valuation
• To know true and fair financial position
• Overvaluation or under valuation of inventory
will have direct impact on profit/loss
09/27/15 32

Methods of inventory valuation
• First in first out
• Last in first out
• Weighted average method
• Base stock method
• Latest purchase price
09/27/15 33

Valuation on Inventories
• As per Accounting Standard 2 inventories are
to be valued at cost or market price whichever
is less
• As per AS2 inventories are to be valued at first
in first out method or weighted average
method
09/27/15 34

Valuation and verification of inventory
• The responsibility for properly determining the quantity
and value of inventory rests with the management of the
entity.
• It is the responsibility of management to ensure that
inventory included in financial statement is physically
existent and represent all inventories owned by the
entity.
09/27/15 35

Value of inventory
• Raw material = purchase price + carriage inward
• Work in progress = prime cost + factory overheads
• Finished goods = works cost + administrative overheads
• Overheads= indirect material + indirect Labour + Indirect
expensed
• Prime cost = direct material + direct labour + direct
expenses
09/27/15 36

Auditors Duty
Auditor is particularly concerned with
• Existence - that all recorded inventories exist
as at the year end
• Ownership- all inventories owned are recorded
and all recorded inventories are owned
• Valuation- basis of valuation is appropriate
and properly applied and the condition of
inventoried is recognized in their valuation
09/27/15 37

Auditors Duty
Following procedure should be followed for
Verification of inventories
• Internal control evaluation
• Examination of records
• Attendance at stocktaking
• Obtaining confirmation from third parties
• Examination of valuation and disclosure
• Analytical review procedure
09/27/15 38

Internal control evaluation
Check internal control with regard to
1. Purchases
2. Issue
3. Balance
09/27/15 39

Examination of Records
Books of accounts
1. Store/stock register
2. Purchase book
3. Sales book
4. Purchase return and sales return book.
Documents
1. Purchase order
2. Vendor’s invoices
3. Goods received note
4. Inspection report,
5. Material Issue note
6. Bin card etc.
09/27/15 40

Attendance at Stock taking
• The extent of attendance is determined by the factor
such as effectiveness of internal control and records
maintained by the enterprise and method of stock
taking.
• Where auditor rely on the physical count by the
management it may be appropriate for the auditor to
attend the stock taking and verify the following
09/27/15 41

Attendance at stock taking
1. Inspect inventory count instruction given by the
management to the staff are actually followed.
2. Review the procedure adopted for movement of
inventory at the time of physical count.
3. Review the procedure followed for identifying
defective, damages, obsolete and slow moving
items.
4. Examine the cut-off procedure for goods purchased
but not received and goods sold but not dispatched.
5. Review the original verification sheet and compare it
with stock book.
09/27/15 42

Confirmation from third parties
• Where stock is held with third parties
such as consignee and agent the auditor
should obtain confirmation from them.
09/27/15 43

Examination of Valuation and
Disclosure
• Examine the valuation method used are in accordance with
recognized Accounting Standard
• Inspect the value assigned to various items of inventory - cost price /
market price (net realizable value)
• To determine the cost examine stock sheet, invoices, costing records
and treatment of overhead expenses.
• Examine the evidence supporting the assessment of net realizable
value.
• Examine whether appropriate allowances have been made for
defectives, damaged and obsolete and slow moving items.
• Check whether the inventory has been disclosed properly in financial
statement.
09/27/15 44

Analytical Review Procedure
• Reconcile quantities of opening stock, purchases, production,
sales and closing stock.
• Compare closing stock quantities and amount with those of
last year.
• Compare percentage of current year stock with that of
purchases and sales, with corresponding figures of the
previous year.
• Compare current years gross profit ratio with previous year.
• Compare figures of purchases, sales and stock with the
budgeted figures.
• Compare inventory turnover ratio with last year.
09/27/15 45

(legal background)
• Auditor’s duty with regards to verification of inventory
• Kingston cotton mills co. ltd. UK (1896)
• In this case , the profits of the company had been
inflated fictitiously by deliberate manipulation of the
quantities and values of stock-in-trade.
• The auditors had certified that balance sheet on the
basis of the certificate of the managers as to the
correctness of the stock-in-trade without checking the
stock in details and this facts was shown on the balance
sheet.
09/27/15 46

• Justice Lindsay, while delivering judgment observed that it is
not the duty of the auditor to take stock and that he is not guilty
of negligence if the certificate of a responsible official is
accepted in the absence of suspicious circumstances.
• In the same case justice Lopes observed as follows “ an auditor
is not bound to act as detective, or as had been said to
approach his work with suspicion or with foregone conclusions
that there is something wrong. He is watchdog, but not a blood
hound. He is justified in believing tired servants of the company
in whom confidence is placed by the company. He is entitled to
assume that they are honest to rely upon their representations,
provided he takes reasonable care”.
09/27/15 47

Legal Background
• Westminster Road Construction & Engineering co.
Ltd. (1932)
• In this case in UK, the auditors were found to have
been negligent in not discovering the overvaluation
of work-in- progress and omission of liabilities,
because they did not check records, which were
available. They would have discovered the over-
valuation, had they checked the records. In this case,
negligence of the auditors was established and
damages awarded.
09/27/15 48

• Three principles for the general guidance of the auditor
• It is no part of auditor’s duty to take stock.
• He can rely upon statements and reports made available to him in
regard of valuation of stock so long as there is no circumstance,
which may arouse his suspicion, and he is satisfied with procedure
followed by the management.
• Auditor would be failing in his duty if he does not take reasonable
care in verifying the statement of stock, which is put up to him
according to the information in his possession and the expert
knowledge expected of him in regard to method of verification and
stock
09/27/15 49

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