The document discusses the concept and process of test checking in auditing. It defines test checking as selecting and examining a representative sample from a large number of similar transactions rather than examining every transaction. Some key points discussed include: - Test checking is suitable when there are large volumes of routine transactions or when the auditor needs to complete work quickly. - It allows the auditor to focus on more important areas while still obtaining a reasonable assurance about the accounts. However, it does not allow risks to be measured scientifically and errors or frauds could remain undetected. - The auditor must select samples carefully and ensure different types of entries, accounts, and personnel work is included in the test checks.

1. Dr. Minal Bhandari
Pratibha College of Commerce and
Computer Studies, Chinchwad

2.  Routine checking means the checking of
entries as they appear in the books of account
to see whether the routine mechanism of book-
keeping has been properly used and to
establish the arithmetical accuracy of
accounting records.
 Under routine checking we need to verify each
and every book of accounts, while test
checking is the examination of selected
number of items it is not that elaborative as
that of routine checking.

3.  Routine checking is the regular monitoring of
business accounts, books and ledgers to
determine how the business is functioning and
to detect any errors that may have occurred,
either accidentally or fraudulently.

4.  In a big organization, auditor may not go for the
checking of each and every transaction and may
check a few transactions at random. This type of
check is called 'test check'.
 This type of audit suits a situation where the size
of business is very large and the number of
business transactions are also large.
 As per Prof. Meigs, “Test checking means to
select and examine a representative sample from
a large number of similar items.”

5. 1. When there are large volumes of identical or
routine transactions.
2. When transactions are large.
3. When the auditor has to certify the accounts
quickly after the close of the accounting period.
4. When the auditor has past experience about the
nature of transactions of the clients organization.
5. When a satisfactory system of internal control and
check system exist.

6. Random
Complete
examination
representative
Sample size
Complete
coverage
Study the
processing
Materiality
level
Extent of test
checking
basis

7. 1. Reduces Volume of Work: The work of an auditor is reduced
considerable as he checks only few transactions, extra time
available can be utilized for concentrating on areas of
considerable importance.
2. Reduces Time and Cost: Test checking is one of the technique
which reduces time, cost and energy of auditor and the client.
3. Quick Completion of Audit Work: Test check enables the auditor
to complete the work quickly as the auditor checks only a few or
limited transactions.
4. Effective Means of Checking: Test checking can be effective if the
auditor selects the transaction to be checked carefully.
5. Scientific Assessment of Risk: The risk of material misstatement
in the financial statement is assessed by the auditor in a scientific
manner by drawing samples and studying them in detail.
6. Serves as a Guide: It serves as a guide for the auditor to draw a
conclusion regarding the state of affairs of business.

8. 1. No Scientific Approach: It is a traditional auditing technique
where no scientific approach is used in selecting the samples,
hence the results drawn on it tends to be incorrect.
2. Risk cannot be measured: It is not possible to measure the
amount of risk.
3. Complicated transactions are not checked: The audit assistants
select only simple transactions for checking and complicated
transactions are left omitted.
4. Possibility of errors and frauds remain undetected: When test
check is adopted by the auditor there are possibility of errors
and frauds left undetected.
5. Unsuitable when there is no system of internal check: The
auditor cannot adopt test check when there is no proper system
of Internal check and control in operation.
6. Unsuitable for small business concerns.

9. Auditor’s Duty regarding
Test Checking……….
1. Every type of entry should be selected
2. The entries of every month should be
tested
3. The work of every accounting person
should be included to test
4. The accounts such as stock, wage sheet,
cash, bank reconciliation should be
checked in detail

10.  A voucher is a written document that provides
evidence of any business transaction.
 It is a small printed piece of paper that entitles the
holder to a discount, or that may be exchanged for
goods or services. It is used as evidence for the
recording of transactions in journal or subsidiary
books.
 “A voucher is any documentary evidence in
support of transaction in the books of accounts.”
 Examples are bill receipts, cash memos, pay-in-
slips counterfoil, checks, an invoice, a debit or
credit note, cheque book counterfoil etc.

11.  Primary Voucher − Original copy of written
supporting document is called primary
voucher. Like purchase Bill, cash memo, pay-
in-slip, etc.
 Collateral Voucher − Copies of supporting
documents which are not available in original
are collateral voucher like duplicate or carbon
copy of sale invoice.

12.  Good quality of paper.
 Company name on the top.
 Date of the transaction to be recorded and not date
of recording the transaction.
 Vouchers should be numbered serially.
 Name of the opposite party should be mentioned.
 Exact amounts are to be mentioned with proper
description.
 Name and signature of the person preparing the
document.
 Name and signature of the authorized person.

13.  Vouching is a procedure followed in the process
of the audit to authorize the credibility of the
entries entered in the books of accounts.
 R. R. Bose : “By vouching it is meant the
verification of the authority and authenticity of
transactions as recorded in the books of accounts.”
 A careful examination of all original evidence i.e
invoices, statements, receipts, correspondence,
minutes and contracts etc. with a view to ascertain
the accuracy of the entries in the books of accounts
and also to find out, as far as possible, that no
entries have been omitted in the books of accounts.

14. 1. To find out the regularity or irregularity of
transactions, frauds and errors.
2. To verify the entries with documentary
evidences
3. To ensure the genuineness of the recorded
transactions
4. To verify the authenticity of the transactions
and vouchers
5. To ensure that all the transactions are
related to the trade

15. 1. Arranged Vouchers
2. Checking Of Date
3. Compare The Words And Figures
4. Checking of the authority
5. Checking of cutting or changes
6. Transaction Must Relate To Business
7. Personal vouchers on personal name
8. Revenue stamp
9. Should not accept cancelled vouchers
10. Agreement, printed vouchers should be accepted
* Auditor should make a note of missing voucher in
the process of vouching

16. Vouching is said to be the back bone
of auditing.
It is the essence of auditing.
It is essential & fundamental, primary
work to carry on further scrutiny.
It is an important part of audit
process.

17.  A receipt or counterfoil of a receipt
 An agreement or contract copy or
correspondence
 A resolution passed by BOD or shareholders
 Bank paying-in-slip
 An invoice
 Buying or selling note
 Salary sheet or book, Gatekeeper book etc.

18. 1, IF THE VOUCHER IS IN THE PERSONAL NAME OF THE CLIENT
OR AN OFFICER AS IT MAY BE PERSONAL PURCHASES NOT
RELATED TO THE BUSINESS.
2, IF THE PAYMENT DOES NOT CONCERN THE BUSINESS.
3, IF THE AMOUNT MENTIONED IN THE VOUCHER DIFFERS IN
WORDS & FIGURES.
4, IF THE AMOUNT IN THE VOUCHER AND THAT ENTERED IN
CASH BOOK DIFFER.
5, IF THE VOUCHER HAS NOT BEEN PASSED BY A RESPONSIBLE
OFFICER.
6, IF CANCELLED VOUCHER AGAIN RECORDED.
7, IF THE DATE OF VOUCHER DOES NOT CORRESPOND WITH
THE DATE OF THE PAYMENT.

19. 1,TO AVOID WASTAGE OF TIME , ALLVOUCHERS SHOULD BE
GOT SERIALLY NUMBERED AND FILED IN ORDER OF ENTRIES
MADE IN THE BOOKS.
2, INSPECTED VOUCHERS SHOULD BE MARKED WITH A
STAMP
SO THAT THEY MAY MISUSED.
3, IF ANY OF THE VOUCHERS IS IN THE PERSONAL NAME OF
THE OFFICERS OR THE DIRECTORS, THE AUDITOR SHOULD
CHECK OTHER RELEVANT PAPERS OR BOOKS TO CONFIRM
THAT THE TRANSACTION RELATES TO BUSINESS AND NOT A
PERSONAL ONE.
4, AS FAR AS POSSIBLE, THE WORK RELATING TO A
PARTICULAR PERIOD OR A SET OF BOOKS SHOULD BE
COPLETED AT A STRETCH.

20. 5, EVERY VOUCHER SHOULD HAVE BEEN SIGNED BY THE
RESPONSIBLE OFFICER TO ESTABLISH ITS CORRECTNESS.
6, IF ANY VOUCHER IS NOT AVAILABLE THE AUDITOR
SHOULD CALL FOR EXPLANATION AND GET THE
DUPLICATECOPIES.
7, THE AUDITOR SHOULD SEE THAT THE VOUCHERS ARE
PROPERLY ENTERED IN THE PROPER FINANCIAL BOOKS.

21.  Check list for vouching of Cash & Bank Transactions
1. Internal check System : Steps should involve in the verification of Internal
Control System,
 Review the Segregation of Duties
 Examine the financial power vested in the different persons and conditions under
which they exercise them.
 Segregation Duties: Segregation of duties is a key internal control in any
organization. The purpose of this segregation of duties is to minimize the
opportunity for an employee to misappropriate funds and avoid detection.
 Cash handling duties can be divided into four stages:
o Custody. Recording
o Authorization Reconciling
 Depositing
2. Documentary Evidence of Transactions: Examine all the vouchers with the
appropriate documentary evidence. Documentary Evidence is of two types,
 Internal Evidence : Created and used and retained within the organization
 External Evidence: Originate outside the client’s organization. Examples: Bank
Statement, Supplier Invoice, Insurance policies, etc.
 Points should be considered while verifying the evidence:
 Date, Name and Address, Amount, Period, Entry in the books of accounts

22. 3. Examine the Method of Depositing Cash
Receipts Daily: Examine the method adopted for
depositing daily cash receipts in bank. The pay in
slip should invariably be used for this purpose.
 Verification of Cash in Hand: Verify the cash
in hand by actually counting it and see whether
it agrees with cash book balance.
 Revenue Stamps: The stamps are required
according to the valuation of the amount and
cash For the stamps, The stamps Act, 1899 is
applicable while fixing the revenue stamps.
Ensure that cash payments exceeding
Rs.5000/- should be supported by a revenue
stamp.

23. 4. Petty Cash Transactions:
 Understanding petty cash fund system in existence
to control petty cash. Verify the Pre-numbered
petty cash vouchers should be used for
withdrawing cash from the fund and same should
be supported by appropriate bills. Ensure that
limit should be placed on the size of
reimbursements.
 Opening Balance Verification: Match the opening
balance of the Cash & Bank Balances as reflected in
the Cash Book with the closing balance as per the
audited financials of the previous year. In case of
any discrepancy in the amounts, the same is to be
noted and clarification is required from the
Management.
 Balance Confirmations from Banks: Cross check
bank balances as per books with confirmations
received from banks.

24. Meaning :Verification is the process which
confirms the truth or accuracy and to substantiate
The procedures normally carried out at the year
end, to confirm the ownership, valuation and
existence of items at the balance sheet date.
Definitions :
Spicer and Pegler : “The verification of assets
implies an enquiry into the value, ownership and
title, existence and possession and the presence of
any charge on the assets.”
Tendon : “Verification or measurement of
property is to prove the authenticity of property.”

25. Valuation (GAAP)
Ownership and Title
Existence and Possession
The presence of any charge
on the assets

26. 1. To ensure that assets shown in BS are actually exists.
2. To check whether they are shown at fair value in BS.
3. To ensure that there is no charge on assets.
4. To ensure that assets belongs to the business only and used
for the business only.
Objectives of Verification of Liabilities
1. To verify that all the debts are shown
2. To ensure that the debts which are recorded are genuine
3. To ensure about its fair valuation
4. To detect a lie about liability

27. VOUCHING
Meaning:
A process of comparing the
entries with its documentary
evidences.
Subject Matter:
Recorded entries are verified
with ledger accounts.
By Whom:
Chief auditor and audit clerks.
Evidence:
Bonafide vouchers are essential
evidence for vouching.
VERIFICATION
A process of checking the
existence, ownership and title to
the assets.
Verification of BS items is done
with the help of vouching process
and actual checking.
Chief auditor and his associates.
Title deeds, receipts and payments
documents etc.

28. 1. Existence : Plant register with original cost, rate and amount of
depreciation. The expenses like custom duty, freight, erecting
charges at debit side of Machinery Account.
2. Ownership : Cash receipt, authorization to purchase through
resolution of the board, contract between supplier and the client
can be checked.
3. Possession and Lien: Physical inspection, register of charges
with approval of a responsible officer and confirmation from the
mortgages.
4. Valuation and disclosure: Cost less depreciation. Method of
depreciation consistency, in case of sale profit or loss etc. should
be verified.

29. 1. Furniture and Fixture
2. Inventories
3. Cash in hand
Classwork

30.  Verification of assets includes their proper
valuation.
 Setting of the exact value of an asset on the basis
of its utility is known as valuation.
 Over or under valuation would exhibit false
status of the financial affairs of the company.
 According to the definition of Batliboi,
“Assessment or valuation is a meticulous
examination and verification of assets in
accordance with the general accounting
principles of the business.”

31. 1. Original cost of the assets.
2. Expected working life of the assets.
3. Wear and tear rate
4. The chances of the assets becoming
obsolete.

32.  Fixed Assets
 Current Assets
 Wasting Assets: Fixed nature but gradually
lose its value in the process of working e.g.
mines, quarries etc.
 Intangible Assets : Goodwill, Copy right,
Patent, Trademark
 Fictitious Assets: Pre. expenses, discount on
the issue of shares etc The total exp incurred
on such assets is treated as an asset and
should shown until they are written off.

33. Verification proves the existence, ownership and title
of assets.
Valuation certifies the correct value of asset. Vouching is
done after original entry in the books of accounts.
Verification and valuation are done at the end of the
financial year.
Following points should be considered while valuing the
Assets:
1. Original cost of the assets
2. Expected working life
3. Wear and tear
4. Break value
5. The chances of the assets becoming obsolete

34. 1. Cost Price
2. Market Value
3. Replacement Value
4. Book Value
(A value at which an asset appears in the books of accounts.
It is usually the cost less depreciation written off)
5. Historical Value
(It is equivalent to the cost less reasonable amount of
depreciation off)
6. Residual Value (A value which will be realized in the
market and received from the sale of an asset is known as its
realizable or residual value)
7. Scrap Value (A value which is obtained from the asset if it
is sold as scrap)

35. VALUATION
1. Meaning:
The process certifies the correct
value of the assets and
liabilities at the date of B/S.
2. Evidence:
In valuation an auditor has to
depend upon the certificates of
the owners.
3. By whom:
Done by the management but
accuracy of valuation is done
by the auditor.
VERIFICATION
The process which proves the
existence, ownership and title to
the assets.
It is done on the basis of evidence
such as title deeds, receipts and
payments etc.
It is done by the auditor himself.

37.  Audit report is the statement included in the
financial statements.
 It contains the opinion of the auditor in
financial statements.
 The auditor reports to the shareholders who
have appointed him.
 Auditor has to provide his opinion on the truth
and fairness of financial statements.
 Thus, the auditor protects the interest of
shareholders through audit report.

38.  Lancaster : “A report is a statement of collected and
considered facts, so drawn up as to give clear and concise
information to persons who are not already in possession of
the full facts of subject matter of the report.”
 Cambridge Business English Dictionary: Audit report is
defined as a formal document that states an auditor’s
judgment of a company’s accounts.
 Under Sec. 143(3), auditor of a company must report to its
members.
(a) The accounts examined by him;
(b) Balance Sheet, Profit and Loss Account, and Cash Flow
statement, which are laid in general meeting of a company
during his tenure of office; and
(c) The document declared to be attached to the Balance
Sheet and Profit and Loss Account.

39. 1. Title of the report
2. Name of addressee
3. Introductory paragraph
4. Scope
5. Opinion
6. Signature
7. Place of signature
8. Date of the report

41. It is given by the auditor if the auditor is satisfied
that the accounts, Balance Sheet, Profit and Loss
Account and Cash Flow statement do represent a
true and fair view and they are prepared in
conformity with the accounting principles and
statutory requirements.

42. i. The books of accounts, Profit and Loss Account
and the Balance Sheet do not represent the true and
fair view of the state of affairs and results of the
operations, due to lack of conformity with the
accounting principles and statutory requirements
ii. The auditor is not able to verify the value and
existence of certain assets
iii. The information requested by the auditor is not
furnished
iv. Proper books of account are not maintained as
required by law
v. Part of audit examination done by other auditors.

43.  When there is sufficient basis for the auditor to form
an opinion that the whole accounts and financial
statements, do not present a true and fair view of the
financial condition and results of operation, the
adverse or negative opinion will be given. In case:
 When the auditor is not satisfied with the truth and
fairness of financial statements,
 Non conformity with the Generally Accepted
Accounting Principles, Mistakes, discrepancies and
material misstatement in the financial statements,
 Omission of a material disclosure.

44.  The auditor may disclaim or refuse opinion on the
accounts, Profit and Loss Account and the Balance
Sheet, when he does not have sufficient information
to base his opinion. In the scope and opinion
paragraph, the auditor should give disclaimer
information. This may happen on the following
grounds:
 The auditor has not been able to obtain sufficient
information to form his opinion,
 The audit examination is not adequate to form an
opinion,
 There are some material un-determined item in
audit examination.

45. The term certificate refers to a written
confirmation of the accuracy of the facts stated
therein and does not involve any estimate or
opinion.
Examples, 1. Import and Export Certificate
2. Deposit Return Certificate
3. Bonus Computation Certificate
4. Newspaper Circulation Certificate

46.  Scope and limitation of the examination of the
books of accounts
 Time which is covered
 Assumptions
 The information and explanation which is
received

48.  The Auditing Practices Committee of the ICAI, 1982
which is renamed as “Auditing and Assurance
Standards Board” (AASB)
 Objectives:
1. To review the existing auditing practices in India.
2. To develop AASs.
3. To issue guidance notes.
4. To identify the areas in which auditing standards
need to be developed.
5. To formulate General Clarifications, wherever
necessary on issue arising from Standards.

49.  Issued by the ICAI which is effective for all audits on
or after April 1, 1985
 It lays down the basic principles which govern the
auditor’s responsibilities when an audit is carried out
 These principles are:
 Integrity, objectivity and independence
 Confidence, skills and competence
 Planning
 Documentation
 Audit evidence
 Accounting system and internal control
 Audit reporting

50.  Overall objectives and scope of the audit of
financial statements by an independent auditor
 Issued by the ICAI which is effective for all
audits on or after April 1, 1985
 It deals with the following aspects of an audit:
1. Objective of audit (True and fair opinion)
2. Responsibility for financial statements
3. Scope of audit

51.  Form and Content : Working papers
 Permanent audit file and current audit file
 Ownership and custody of working file

52.  Fraud and error and their characteristics
 Responsibility of management
 Responsibility of the auditor
 Indication of possible misstatements
 Evaluation and disposition of misstatements
 Effects on auditor’s report
 Documentation
 Management representations
 Communication

53.  The concept of sufficient appropriate audit
evidence and factors affecting
 Various types of internal and external evidence
 The methods of obtaining evidence viz.,
inspection, observation, inquiry and
confirmation, computation and analytical
review