Vouching and verfication

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CAMEER1114@GMAIL.COM VOUCHING AND VERIFICATON
Presentation
on
Vouching and verification
(financial Audit)

Vouching
Objectives
Types of voucher.
General procedure for vouching
Audit of payments/expenses
Audit of receipts / Incomes
Audit of Purchases
Audit of Sales
VOUCHING AND VERIFICATION
CONTENTS
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Verification
Objectives
Verification V/s Vouching
Valuation
Meaning
Objectives
Verification V/s. Valuation
VERIFICATION AND VALUATION
CONTENTS
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•Procedure for Verification & Valuation of
• Assets
•Liabilities
•Inventories
•Types of inventories
•Verification & valuation of inventories
•Auditors duty with case laws.
VERIFICATION AND VALUATION
CONTENTS
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Cash
Mercantile/ accrual
Difference between expenses and payment
Difference between profit and loss account and receipt and payment
account
SYSTEMS OF ACCOUNTING
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“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”
VOUCHING
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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
OBJECTS OF
VOUCHING
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 Serial number of vouchers and they are filed properly
 Date of voucher
 Addressed to the client and relate to business of
client
 Amount shown in figure should match with words
 Signature of official authorizing officer
 Revenue stamp if amount is rupees 5000 and above
 Vouchers originating from outside the business are
genuine
COMMON POINTS IN VOUCHING
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 Vouchers inspected should be cancelled or stamped
 Proper allocation between capital and revenue expenditure
 Clarification regarding missing voucher
 Should not seek help of the clients staff
 Pre-receipt vouchers should not be accepted
 Over writing or cancellation on a voucher should not be accepted.
 Alteration of any kind should be supported by the signature of the
authority
COMMON POINTS IN VOUCHING
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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
TYPES OF VOUCHERS
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•Check General consideration
•Check Internal control
•Check Cash book
•Check Bank statements
•Check Documentary evidence
•Check Authority
•Check Acknowledgements
•Check type of expenditure( Capital / revenue )
•Routine checking
VOUCHING PROCEDURE
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Examining the internal control procedure
Before proceeding to verify payment made on account of
salaries and wages the auditor should examine the internal
control procedure as regard the following
Appointment, promotion and transfer of employees.
Records of attendance.
Arrangement for the preparation bill and there analysis.
Sanctioning and disbursement of wages and salaries.
Custody of the wages record.
VOUCHING PROCEDURE FOR SALARIES
AND WAGES
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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
VOUCHING PROCEDURE FOR
SALARIES AND WAGES
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General consideration
Internal control
Cash book / Bank statement
Rent agreement
Acknowledgment from party
Routine checking
RENT
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Meaning of verification
Definition of verification
Object
Auditors duty in verification
Points to be considered in verification
VERIFICATION OF ASSETS AND LIABILITIES
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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”
VERIFICATION OF ASSETS AND LIABILITIES
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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.
VERIFICATION OF ASSETS
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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.
AUDITORS DUTY
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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
VALUATION OF FIXED ASSETS
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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
VERIFICATION OF PLANT AND MACHINERY
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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.
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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.
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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
VERIFICATION OF PRELIMINARY EXPENSES
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•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
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•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
VERIFICATION OF SUNDRY CREDITORS
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• 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.
SUNDRY CREDITORS
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Introduction
Contingent liabilities refers to obligation relating to past
consequences or other events or conditions, that may
arise in consequences of one or more further events
which are presently deemed possible but not probable.
Examples of contingent liability
Guarantees of third party obligation
Discounted bills receivable
Pending or threatened litigation against the entity
AUDIT OF CONTINGENT
LIABILITIES
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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.
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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.
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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
VALUATION AND VERIFICATION OF INVENTORIES (STOCK)
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To know true and fair financial position
Overvaluation or under valuation of inventory will have direct impact on
profit/loss
WHY INVENTORY VALUATION
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First in first out
Last in first out
Weighted average method
Latest purchase price
METHODS OF INVENTORY
VALUATION
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As per Accounting Standard 2 inventories are to be valued at cost or market
price whichever is less
As per AS2 inventories are to be valued at first in first out method or weighted
average method
VALUATION ON INVENTORIES
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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.
VALUATION AND VERIFICATION OF
INVENTORY
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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
VALUE OF INVENTORY
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Auditor is particularly concerned with
Existence - that all recorded inventories exist as at the year end
Ownership- all inventories owned are recorded and all
recorded inventories are owned
Valuation- basis of valuation is appropriate and properly
applied and the condition of inventoried is recognized in their
valuation
AUDITORS DUTY
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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
AUDITORS DUTY
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Check internal control with regard to
1. Purchases
2. Issue
3. Balance
INTERNAL CONTROL
EVALUATION
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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.
EXAMINATION OF RECORDS
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The extent of attendance is determined by the factor
such as effectiveness of internal control and records
maintained by the enterprise and method of stock
taking.
Where auditor rely on the physical count by the
management it may be appropriate for the auditor
to attend the stock taking and verify the following
ATTENDANCE AT STOCK TAKING
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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.
ATTENDANCE AT STOCK TAKING
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Where stock is held with third parties such as consignee
and agent the auditor should obtain confirmation from
them.
CONFIRMATION FROM
THIRD PARTIES
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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.
EXAMINATION OF VALUATION AND DISCLOSURE
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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.
ANALYTICAL REVIEW PROCEDURE
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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.
(LEGAL BACKGROUND)
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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”.
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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.
LEGAL
BACKGROUND
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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
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Vouching and verfication

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