MODULE 2

Audit Procedures: Vouching - Definition - Features - Examining

vouchers -Vouching of cash book - Vouching of trading
transactions - Verification and valuation of assets and liabilities:
Meaning - Definition and objects - Vouching v/s verification -
Verification and Valuation of different assets and liabilities.
Audit procedures refers to the way in which the audit work should be
conducted. It is the procedure followed by an auditor for the actual conduct of
his audit work. There are certain aspects of audit procedure which are common
in all audit works. They are:
1. Routine checking: The checking of castings and postings of the common
books of the organization is called routine checking. In other words it is
the checking of subsidiary books and ledger accounts by an auditor. It
involves the following operations:

 Checking of the castings, sub castings, carry forward and other

calculations in the books of original entry.
 Checking of the postings into the ledgers.
 Checking of the casting and balances in the ledgers.
 Checking of the transfer of the balances from the ledgers to the
trial balance.
Generally, routine checking is conducted for the following books:
 Cash book * Petty cash book
 Purchase book * Sales book
 Purchase return book * Sales return book
 Bills receivable book * Bills payable book
 Journal proper * Wages and salaries book
 Sales ledger * Purchase ledger
 Private ledger * Stock sheet

Advantages:
 It facilitates thorough checking of the books in original entry.
 Under routine checking, postings are completely checked.
 It helps in verifying arithmetical accuracy of the entries in the
books of accounts.
 Clerical errors and simple frauds are located by routine checking.
 Checking of posting and casting is helpful in preparation of trial
balance.
 It is easy and simple job which can be done by any audit clerk.

Disadvantages:
 It can reveal only arithmetical errors and ordinary frauds.
 It is a mechanical checking. So it causes monotony.
 It is not important in the audit of a concern where self balancing
system is in operation.

2. Test Checking or Sample checking or selective verification: Test

checking means checking by an auditor, a few transactions selected at
random and there so as to form his final judgement on the whole set of
transactions. It means to select and examine representative sample from a
large number of similar items. Test checking involves sampling.

Conditions or essential or precautions of test checking:

 The success of test checking largely depend upon the system of
internal check in operations the business.
 The sample selected for test checking should be at random.
 It should be applied only to homogenious transactions. The sample
of test checking should be selected without bias.
Test checking should not be applied to cash book items.
No indication should be given to client as regard the method of test
checking. One sample for test checking should be selected by the
auditor himself. There are certain transactions which are not
suitable for test checking. They are:
 Opening and closing entries * Cash book entries
 Transactions of seasonal industry. * Non recurring transactions.
 Bank reconciliation statement * Items which are significant
 Transactions which are required by law is to be checked carefully. .

Advantages:
 It helps the auditor to complete the audit work in a short time.
 It helps in reducing the cost of audit.
 It enables the auditor to undertake the audit of many concerns
simultaneously.
 It keeps the client staff alert and conscious
 If selection is done intelligently, test checking ensures the accuracy
of books of account.
 It ensures the periodic examination of the system of internal check.
Disadvantages:
 Test checking may fail to detect errors and frauds, if selection is
not done intelligently.
 Test checking increases the responsibility of the auditor.
 Where there is test checking, the staff of the client may become
careless.
 Through test checking, an auditor may not get a true position of the
financial state of affairs of an undertaking.

3. Surprise Checks:
Surprise checks constitute a system under which an auditor makes a
surprise checking of some of the important items. Surprise check , wholly
cover;
 Verification of cash * verification of investment
 Verification of records relating to stocks and stores.
 Verification of books of original entry.

4. Audit in Depth:
It means the examination of the selected items in depth or in detail
from the origin of the transactions to fair conclusions. In other words, it
means step by step verification of selected items or transactions from the
beginning to the end.

5. Adoption of distinctive ticks, tick marks or check marks:

In the case of audit work, an auditor uses variety of marks or
symbols to indicate the work that has been done. These marks or symbols
are known as ticks or check marks or check signs. Ticks are much
significant to an auditor. They are useful to the auditor in the following
respects.
 Ticks help the auditor to know the checking that has been done by
the earlier.
 By means of ticks made earlier, an auditor can easily find out the
alterations in the books account made subsequent to the audit.

Points to be noted or precautions to be taken while using ticks:

 Different types of ticks should be used for different audit works.
 Ticks should be small
 It should be clear
 It is advisable to use only pens or ball pens.
 It is advisable to use ticks of different colours for different
purposes.
 Ticks should not get mixed up with the figures shown in the books
of account.
 Ticks used by the client staff are not used by the audit staff.
 Special ticks must be used for items which require special
attention.

Vouching

Vouching is the act of checking or examining the entries made in

the books of account with the supporting the documentary
evidences or vouchers.
It is the backbone of auditing.
In the words of L.R. DICKSEE “Vouching is an act of comparing
entries in the books of account with the documentary evidence in
support thereof.”
Features of Vouching
1. Vouching is the backbone of Auditing
2. Vouching is the essence of Auditing
3. Vouching is important to see whether evidences are correct or not.
Objectives of vouching
1. To ensure transactions pertain to the business only.
2. To detection and prevention of errors and frauds.
3. It pertains to the year under audit.
4. The transactions are properly authorized and are genuine.
5. No transaction has been omitted in the books.
6. To ensure that all entries made in the books are supported by necessary
documentary evidence.
Importance of Vouching:
1. Vouching ensures the arithmetical accuracy of the books of account.
2. To ensure that there are no transactions, which are not connected with the
business has been recorded in the books of accounts.
3. It is the most important tool in the hands of an auditor to ascertain the
accuracy of the transactions recorded in the books of accounts.
Vouchers
Vouchers are the documentary evidence in support of transactions recorded in
the books of accounts. The following are the some of the examples of vouchers:
 Receipt obtained from a payee * Counter foil of a receipt
 Purchase invoice * Sales invoice
 Cash memo * Bank pay-in-slip
 Minutes of a meeting * Bought notes * Sold notes etc

Types of vouchers
1. Primary vouchers:
Primary vouchers are original vouchers. They are written or printed, or typed
evidence in original.
Example: Cash memos, Invoices. Pay in slip
2. Secondary vouchers:
When original voucher is not available copy of the original evidences are
produced in support or subsidiary evidence. Such vouchers are called secondary
or collateral vouchers.
Example: Bank reconciliation statement, copy of sales memo.
Essentials of valid voucher
1. The authority of the voucher.
2. The authenticity of the voucher.
3. The genuineness of the voucher.
4. The accuracy of the voucher.
5. The correctness of the voucher.
6. Proper classification of accounts in to capital and revenue.
While examine the vouchers following points must be paid special attention:
1. All the vouchers are consecutively numbered and arrange serially.
2. He should examine the date of the vouchers.
3. He should see that information in the voucher is fully self-explanatory.
4. He should see that voucher is related to business in the name of the firm.
5. He should see that each voucher is original in face.
6. He should accept voucher in printed form.
7. He should not accept voucher in over writing or erasure.
8. He should complete vouching work in a one siting.
9. He should not take help of client staff for vouching.
10. He should see that every voucher is passed in the order by responsible
officer.
Vouching of cash book or Cash transactions
Cash book is an important financial record in a business. Mainly errors and
frauds are committed in association with cash receipts and payments. Vouching
of cash book means checking of cash receipts and cash payments with
supporting documents. The main objectives of vouching of cash transactions
are:
 To ensure that all receipt of cash are duly accounted for.
 To ensure that no improper payments are made.
 To see that all receipts and payments of cash are actually and
properly recorded.
 To see that all payments have been made to proper persons and the
payments are true payments.
 To see that cash book or cash transaction covers the vouching of
receipt side and vouching of payment side.
Vouching of receipt side/ Debit side of the cash book
Cashbook is the most important book of account in a business organization. The
auditor should conduct a detailed checking to ensure that all receipts and
payments are duly and properly recorded. An efficient internal check system in
operation is very helpful to the auditor. It is more important on the part of the
auditor to physically verify the closing day Cash in hand of the business period.
The auditor should visit the business at the close of the financial period or on
the following morning and actually count the cash in hand and compare it with
the balance as shown in the cashbook. Vouching of cash receipt transactions is
more difficult than that of cash payment transactions, since there is greater
chance of manipulation in regard to cash receipt.
The auditor should bear in mind the following points, while vouching the
cash receipt transactions.
1) The auditor should carefully examine the system of internal check in
operation with regard to cash receipt transactions.
2) An auditor can resort to test checking only if he has satisfied himself that
there is an efficient system of internal check.
3) He should ascertain whether a diary of cash receipt or rough cash book has
been in use. If a rough cash book has been in use, he should examine the entries
in the rough cash book and compare them with the entries in the cash book.
4) He should examine the methods of depositing daily receipts into the bank.
5) He should check the bank pass book with the entries in the cash book.
6) He should vouch for cash receipts by reference to documentary evidence.
7) He should enquire into the system of allowing documents, the rate of
discount allowed etc.
8) He should enquire into the bad debts written off. He should satisfy himself
that the bad debts written off are authorized by a responsible person. He should
ensure whether there is a proper control over use of the receipt book. In this
context, he should keep in mind the following points:
a) All receipts are on printed forms.
b) See that the receipt book should be consecutively numbered.
c) The receipts have to be signed by a responsible officer.
d) The unused receipt book should be kept in safe custody.
e) All spoilt receipts should remain attached to the counter foils.

Types of Cash receipts Supporting vouchers to be verified by

the Auditor
Opening Cash balance Previous years audited balance sheet
Cash sales Cash memos with summary of daily
salesman’s abstract.
Receipts from debtors Counterfoils with rough cash book and
cash book, Debtor’s confirmation letter.
Receipts from B/R Debtors’ explanation for outstanding
debt, Cashbook, passbook, bills
receivables book
Sales of fixed assets Auctioneers note, sales deed
Loans received Legal provisions, loan agreement, value
of security offered.
Interest on bank deposit Bank passbook with bank advice
Insurance claim money Correspondence insurance claim
(company and client)
Receipts from Hire Purchase agreement, counterfoils of
purchase receipt.
Subscription received Register of subscription with counterfoil
of receipts.
Commission received Agreement between client and party,
cash book, counterfoils.

1) Opening balance: - The opening balance of the cash book should be

vouched by comparing it with the closing balance of cash book as shown in the
audited copy of the balance sheet of the previous year,

2) Cash sales: - The vouching procedure in regard to cash sales should be on

the following lines:
1. He should examine the system of internal check in operation in regard to cash
sales.
2. After ascertaining the efficiency of the internal check system as regards cash
sales, auditor should vouch the cash sales as follows:
a) Cash memos written by the salesman should be checked with the summery
sales prepared at the end of the day.
b) He should examine the rough cash book, if any.
c) He should check the rough cash book with the main cash book.
d) The summaries of daily sales should be checked with the entries in the stock
register.
e) He should verify the daily deposit of cash received into the bank; pay-in slip
also should be vouched.
3) Receipts from debtors: - While vouching the receipts from debtors, an
auditor should bear in mind the following points:
1. He should enquire into the system of internal check in operation in regard to
the receipt from debtors.
2. After satisfying himself about the efficiency of internal check in operation in
regard to the receipt from the debtors, the auditor should conduct the vouching
of receipts on the debtors on the following lines:
a) He should check the total cash received from the debtors by verifying the
rough cash book with the counterfoils of the receipts issued to customers.
b) He should check the cash book with the rough cash book.
c) He should check the details of cash and cheques paid into the bank.
d) He should enquire into whether bad debts are written off by a competent
authority.
e) He should verify the balances due as per the schedule of debtors with letters
of confirmation received.
f) He should be alert to the possibility of teeming and lading.
4) Receipts from bills receivable: - Bills receivable include bills of exchange,
promissory notes, and I.O.Us received from debtors. The receipts from bills
receivable can be in two ways:
* Receipts from bills discounted
The vouching of receipts from bills discounted should be as follows:
a) The amount of cash received from bills discounted should be checked by
comparing the bills discounted book with the cash book, pass book, B/R book.
b) See that proper records have been made in the books for discount on bills
discounted.
c) He should determine the contingent liability in respect of bills discounted but
not matured on the date of the balance sheet.
* Receipts from bills matured
a) The auditor should check the cash received from bills matured by comparing
the bills receivable book with the cash book and the pass book.
b) Special attention should be given to bills which have matured but remain
unpaid.

5) Receipts from sale of investment

Vouching of receipts from the sale of investment should be on the following
lines:
a) Investments are usually sold through brokers, as such, broker’s sold notes or
contract notes should be examined to vouch for the amount from the sale of
investments. If the sale of investment has been effected through the bank, then,
the bank advice should be examined to vouch for the amount received from the
sale of investments.
b) The sale proceeds of the investments should also be checked with the related
investment account with the stock market quotations.
c) If the investment has been sold cum-dividend, the auditor should see that the
sale proceeds are properly apportioned between capital and revenue receipt.
d) If the investment has been sold ex dividend, the auditor should see that the
dividend is received and recorded.
e) He should see that the profit or loss on the sale of investment is properly
adjusted.
f) If the investments are pertaining to some earmarked funds, the auditor should
see that the profit or loss on the sale is transferred to the earmarked fund a/c.
6) Receipt from the sale of fixed assets
Vouching of receipts from the sale of fixed assets should be on the following
lines:
a) The auditor should see that the sale of fixed assets is properly sanctioned.
b) If the sale of fixed assets is through a broker, the proceeds of the fixed assets
sold should be vouched with the help of sold notes. In the case of sale of fixed
assets through an auctioneer, the sale proceeds should be vouched with the help
of the auctioneer’s note. He can verify the cash receipt in the cash book with the
counter foil or carbon copy of the receipt issued to the party. He may also vouch
for the sale proceeds of fixed assets with the correspondence with the parties
and the sale contracts and the fixed asset a/c.
c) He should see that proper fixed asset a/c has been credited with the sale
proceeds.
d) If there is any profit, the auditor should see that it is credited to the capital
reserve.
e) In the case of certain prepaid expenses in respect of fixed assets, the auditor
should check whether suitable adjustments are made in the expense’s accounts.
7) Loan received
Vouching of loan received should be on the following lines:
a) He should ascertain whether the client is empowered to borrow money.
b) In the case of a joint stock company, he should verify whether the legal
provisions have been complied with.
c) He should verify the loan agreement to ascertain the terms and conditions on
which the loan has been received.
d) If the loan is secured, he should ascertain what security has been offered and
the value of security offered.
e) He should ensure that the loan amount received is recorded in the books of
account.
f) If the interest on loan is unpaid, the auditor should see that it is properly
adjusted.
8) Dividend on investment
a) The auditor should verify the dividend received is recorded in the cash book
with the counterfoils of the dividend warrants.
b) To see that dividends have been received on the dates.
c) If the dividend is sold ex-dividend, see that dividends are subsequently
received are entered in the cash book and credited to the dividend account.
9) Subscription received: Register of subscription with counterfoils of receipts.
10) Insurance claim received: Correspondence-Insurance claim between
company and client.
11) Commission received: Agreement between client and parties.
12) Rent received: Lease deed agreement rent receipt, carbon copy issued to
tenant or counterfoils.

Vouching of payment side/credit side of cash book

If there is an effective system of internal check in operation as regards to cash
payment, the chance of frauds and errors in regard to cash payments is
minimized. While vouching of cash payment transactions, the auditor should
not only see that the payment is actually made but also satisfy himself that:
(1) The payment shown in the cashbook has been actually for the business only.
(2) It has been paid to the right person.
(3) The payment relates to the period under audit.
(4) The payment has been sanctioned by competent authority.
(5) The payment is supported by a voucher genuine and properly numbered

Type of Payment in the cash book Supporting vouchers

Opening credit balance of bank account Previous years audited balance sheet
(Bank overdraft)
Cash purchases Cash memo, invoice, good in work
book
Payment to creditors Receipts issued by creditors; goods
inward
register, invoice minutes book
Payment of wages Wage sheet, wage record, time and
piece work card or record
Payment of salary Salary register, attendance book,
appointment
letter, agreement minutes
Directors fee Articles of association, minutes of
general meeting, receipts issued by
directors.
Travelers commission Sales order register, bills and receipts,
agreement
Bills payable book, bank pass book
Bills payable

Loans Advanced Loan agreement, Receipt given by the

borrower, title deeds etc.
Interest on loan Interest registers and bank pass book
Insurance claim money Correspondence insurance claim
Purchase of investment Brokers note, cheque book, passbook,
letter of allotment
Purchase of plant and Invoice and receipts
machinery
Rate and tax Bills receipts issued by municipal
authority
Auditors fee Receipts issued by the auditor
Petty Cash book Voucher, postage register, stationary
register and petty cash requisition.

1. Opening credit balance: The opening credit balance in the bank

column can be verified from the previous years audited balance sheet.
2. Cash Purchase: The vouching of the cash purchases should be on the
following lines:
 The auditor should examine entries in the cash book with the help
of cash memos or invoices issued by the supplier and also goods
inward book.
 Special attention should be paid to trade discount, which should
be deducted from purchase.
 See that the cash paid for the goods have actually received
 He should see that the purchases are duly authorised.
 He should see that the amount paid is debited to the appropriate
account.
 To ascertain whether payment made for cash purchases relates to
the business.
3. Payment to Creditors: Vouching of payment to creditors should be on
the following lines:
 Payment to creditors may be vouched with the receipts issued by
the creditors.
 He should check the amount due to the creditors with the
accounts of the creditors.
 Examine the goods inward book and see that goods have actually
been received.
 The auditor should verify the periodical statement of accounts.
 In the case of purchase made before the close of the year, see
that goods not actually received are kept out of the closing stock
of the year.
4. Payment of bills payable: Payment of bills payable on their maturity
should be vouched on the following lines:
 The payment of bills payable, as recorded in the cash book, should
be vouched with the bills payable book and also with the bills
payable returned by the payees.
 If the bills payable are through the bank, the auditor should
examine the bank pass book for the payment.
 He should see that bills payable paid and returned by the payees
are cancelled.
5. Vouching of loans advanced: Loans advanced should be vouched by the
auditor on the following lines:
 He should see that loans advanced are properly authorised.
 He should examine the loan agreement.
 He should vouch the loan advanced as recorded in the cash book
with the loan agreement also with the receipt given by the
borrower.
 If the loan is advanced against any security, the auditor should
examine the security and its title deeds.
 Examine the mortgage deed, if the loan is advanced against
mortgage.
 See that the provisions of the Companies Act as regards the
granting of loans to directors and officers of the company are
complied with.
6. Purchase of Investment: Vouching of purchase of investment should be
on the following lines:
 The auditor should see that the purchase of investment is
properly authorised.
 If the investments are purchased through a broker, he should
vouch the investments purchased with the broker’s note.
 If the investments are purchased through the bank, he should
examine the bank pass book to check the payment.
 He should make a physical verification of the investment
purchased.
 See that investments purchased are registered in the name of the
client.
 In the case of company, the auditor should see that investments
have been purchased in accordance with the provisions of the
Companies Act.
7. Payment of Capital expenditure: Vouching of payment of capital
expenditure should be on the following lines:
 The auditor should see that the payment of capital expenditure is
properly authorised.
 He should examine the document pertaining to the purchase and
ownership of the fixed assets.
 He should examine the invoices and the receipts obtained from
the suppliers to ensure that payments have been made.
 He should see that all expenses incurred for the acquisition are
capitalised.
 He should physically examine the fixed assets purchased.
 He should see that repairs and maintenance expenses incurred
are charged to revenue account.
 See that property purchased is registered in the name of the
client.
8. Vouching of payment made for the acquisition of patents:
 If the patents has been purchased, the auditor should vouch the
payment made for the patent with the help of the contract for
sale and the receipts for the payment obtained from the seller.
 He should see that expenses incurred on the purchase of the
patent are capitalized.
 Where the patent is acquired through research, the auditor
should see that all expenses incurred on the experiments and the
research connected with patents are capitalized.
9. Vouching of Wages:
 He should enquire into the system of internal check in force in
regard to the maintenance of wage records, preparation of wage
sheet and payment of wages.
 If the internal check is effective, the auditor can conduct the
vouching of wages on the following lines:
 He should check a few items of wage sheets here and there to
ensure that the calculations are correct.
 He should check totals of wage sheet with the cash book.
 He should see that the amount of cheque drawn for wages
tallies with the totals of wage sheet.
 He should see that deduction from wages have properly
adjusted and recorded in the books.
 He should see that wages recorded in the cash book have
actually been paid.
 He should examine the system of employment of casual labour
and check the payment made to casual labour.
 He should see that proper record is maintained for unpaid
wages.
 Wages for the current months should be compared with the
wages of the previous month. If there is a material difference,
the auditor should enquire into the reason for the difference.
10. Vouching of Salaries:
 An auditor should enquire into the system of internal check in
operation in the concern in regard to the payment of salaries.
 If the internal check system in regard to the payment of salaries is
sound, an auditor can conduct the vouching of salaries on the
following lines:
 He should see that the salary bill is prepared with the sanction
of a responsible officer.
 He should see that the salary register is duly signed by each
employee and counter signed by a responsible official.
 He should check the salary register with the entries in the cash
book.
 He should see that the deduction for provident fund, life
insurance premium, income tax etc have been correctly made
and properly recorded in the books.
 For vouching salaries of the secretary, manager and other
important officials, the auditor should examine the board’s
minutes book.
 He should check attendance register
 He should see that the total of the salary book for a particular
month agrees with the cheque drawn for salaries.

Vouching of petty cash book

Vouching of petty cash books should be on the following lines.
1) He should examine the system of internal check in force in the business in
regard to the petty cash transactions.
2) If he finds that the system of internal check is sound, he should adopt the
following lines:
* He should find out the system of petty cash books.
* He should ascertain the name of the petty cashier to the amount of the imprest.
* He should check some petty cash payments at random with the vouchers to
ensure the correctness of the petty cash payments.
* He should see that all petty cash payments over a certain amount are
supported by proper vouchers.
* He should see that petty cash payments not supported by proper vouchers are
supported by slips by the officer who has spent the amounts.
* See that the petty cash book is periodically checked and initiated by some
responsible officer.
* See that the petty cash balance as shown in the petty cash book agrees with
petty cash balance as shown by the petty cash account.
* He should check the casting of the total payment column and the individual
expenses column.
* He should physically count the petty cash balances on the balance sheet date.
If he fails to do so, he will be held liable for damages.
* He should see that I.O.Us are not included in the petty cash balances.

Vouching of Trading Transactions (Non-cash items or credit transactions)

1. Vouching of purchase ledger: It is meant for recording transactions
relating to credit purchases of goods. The auditor has to check and
verify the following in case of purchase ledger:
 Record of all purchase orders.
 Verification of quantity, price and payment terms of purchase invoice.
 Verification about goods is actually received.
 Verification about proper recording of purchase bill.
 Auditor should verify statement of accounts of suppliers
2. Vouching of purchase return book or return outward: When goods
purchases are returned to suppliers. It is called purchase returns. The
auditor needs to verify following points in case of vouching of purchase
return books:
 He should compare credit notes with purchase return book.
 He should examine goods outward book.
 He should check entries in the purchase returns journal.
 He should check heavy returns at the start or end of the year.
 He should check the totals and postings to purchase returns and suppliers
accounts.
3. Vouching of credit sales or sales book or debtor’s ledger
The auditor should vouch credit sales in the following manner:
 He should apply test check.
 He should check some invoices with orders and outward entries.
 He should confirm sales of capital items not included in the sales.
 He should confirm trade discount allowed is not included in sales ac.
 He should send accounts statements to customers.
 He should confirm goods on consignment is not included in sales.
 He should check cancelled invoice against duplicate invoice copy.
4. Vouching of sales returns
The auditor should vouch sales return in the following manner:
 He should vouch sales returns entries with stock register.
 He should verify the copy of the credit note issued to customer.
 He should check posting from sales returns book to customer ledger.
 He should verify customer returns at the start and end of the year.
5. Vouching of Goods sent on consignment
• 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.
• 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.
6. Vouching of Journal proper
It is meant for recording all those transactions which cannot be recorded in the
other subsidiary books namely purchase book, sales book, purchase return book,
sales return book, cash book, B/R book, B/P book. The following entries are
recorded in the journal proper:
1) Adjusting entries.
2) Transfer entries.
3) Closing entries.
4) Rectification entries.
5) Entries for purchase and sale of assets on credit.
6) Opening entries.
7) Entries for consignment.
8) Entries for application for shares, allotment on shares and calls on shares.
An auditor should vouch the journal proper on the following lines:
1) He should see that every entry in the journal proper is supported by a voucher
or evidence.
2) He should see that every entry in the journal proper is explained by narration.
3) When the evidence is not available for some entries in the journal proper, the
auditor should check those entries from the evidence of parties.
VOUCHING OF IMPERSONAL LEDGER
Impersonal ledgers are other than personal ledgers. It is also termed as general
ledgers or nominal ledgers. Impersonal ledgers are classified in to two: nominal
accounts and real accounts. Nominal accounts are related to trading, and profit
and loss accounts. Real accounts affect balance sheets. Procedure for doing
vouching of impersonal ledger is as follows:
1. The auditor should check the posting of cash transactions appearing in the
impersonal ledger.
3.Не should carefully check the totals of the subsidiary books and their
postings.
4. He should see that the transfers between the accounts are effected only
through journal entries
5. He should see that the current amounts are posted properly and no entry is
posted twice.
6. He should see that the expenses and incomes are properly adjusted according
to the generally accepted norms.
7. He should carefully check the adjusting entries.
Outstanding assets
Outstanding assets are assets remaining outstanding at the date of the balance
sheet. The expenditure already incurred during the period, but a portion of this
pertains to the next business period. It includes (a) prepaid expenses, (insurance
paid, rent paid in advance, tax, etc.) And (b) accrued incomes (interest due but
not received, dividend due not received) and (c) deferred revenue expenditure
Outstanding liabilities
Outstanding liabilities should also be included in the profit and loss account in
order to ascertain correct profit or loss during the current period. Outstanding
liabilities include: (1) Unpaid expenses pertaining to this year (2) Income
relating to the next year and received in advance.
Unearned incomes
Unearned incomes refer to incomes actually received in advance during the
current year, but do not pertain to this year, hence it will be a liability for the
current period. It will be earned in the next year
Deferred revenue expenditure
Where expenditure is huge and of known-recurring nature, but which is incurred
during the year under audit and spread over a number of years. Such
expenditure is called deferred revenue expenditure.
Capital expenditures
Capital Expenditure means, all expenditure incurred in purchasing or installing
new machinery or increasing the life an asset or acquiring a valuable right. This
type of expenditure is incurred in acquiring assets for the purpose of earning
income or increasing the earning capacity of the business. All these
expenditures are referred to as capital expenditure.

Revenue expenditures
All expenditure incurred in carrying on the business, its conduct and
administration. This expenditure is also incurred in maintaining the earning
capacity. This expenditure is called revenue expenditure.
Contingent liabilities
In any business, there may be certain unknown liabilities, which may or may
not arise after the preparation of final accounts. These liabilities are called
contingent liabilities.
Contingent assets
Some expenses paid in the previous year are likely to receive or refund in the
current year. This is called contingent assets.
Verification of assets and liabilities
Verification
Verification means the act of assuring the correctness of value of assets and
liabilities in the organization. It refers to the examination of proof of title and
their existence or confirmation of assets and liabilities on the date of Balance
Sheet. It usually indicates verification of assets of any organization, which can
be done by examination of values, ownership, existence, possession of any
assets and also ensures that the assets are free from any charge. In simple words,
verification means, ‘proving the truth or confirmation’.
Definition: Spicer and Pegler define Verification as, “An inquiry into the
value, ownership and title, existence and possession and the presence of any
charge on the asset”.
J. R. Batliboi defines it as, “The auditor must satisfy himself that assets really
existed at the date of the Balance Sheet and were free from any charge and that
Valuation
Valuation means finding out correct value of the assets on a particular date. It is
an act of determining the value of assets and critical examination of these values
on the basis of normally accepted accounting standard.
Definition : R. Batliboi, “A company’s Balance Sheet is not drawn for the
purpose of showing what the capital would be worth if the assets were realized
and liabilities paid -off, but to show how the capital stands invested”.
Joseph Lancaster, “The valuation of assets is therefore an attempt to equitable
distribution of the original outlay on the period of the assets usefulness”.
Objects of verification of assets and liabilities
(1) To ensure that the assets and liabilities shown in the balance sheet actually
exist
(2) To satisfy the auditor that assets and liabilities are properly valued.
(3) To assure that assets are actually the properties of the business and liabilities
are actually held.
(4) To verify that they are free from any mortgage
(5) To see that assets and liabilities are properly classified such as fixed assets,
current assets, intangible assets, etc...
(6) To detect fraud and check the arithmetical accuracy of the posting.
Difference between vouching and verification
vouching verification
It examines all the business It examines assets and liabilities
transactions recorded in the original appearing in the balance sheet.
entry.
It is based on documentary evidence. It is based on both physical and
documentary evidence.
Work done by junior staff. Work done by auditor himself.
It is not including valuation of assets It includes valuation of assets.
It is continuous and throughout the It is one at the end of the year.
year.
It takes place first. It takes place after vouching.

Verification of various types/kinds of assets

1. Cash in hand
The auditor should actually count the cash in hand by attending the business
premise on the last day of the financial year. Actual verification of cash in hand
has been considered to be the most important part of an auditor’s duty. While
verifying cash in hand consider the following points:
 Auditor use cash weighing machine to count cash.
 He should count cash, stamps, IOU in hand.
 He should check remittance from branches.
 He should check purpose of holding large cash balances.
 Documentary evidences should be verified in case of cash in transit.

2. Cash at bank
 Auditor should verify pass book with cash book.
 He should compare pass book with BRS.
 He should obtain certificate regarding bank balances.
 He should see outstanding cheque are genuine.

3. Loans advanced
 He should examine loans granted through loan agreements.
 He should see that loan amounts are confirmed by the borrower
 He should examine the mortgage deal.
 He should determine adequacy of security offered.
 He should see there is no change in loan agreement terms.
 He should determine adequacy of security offered.
 He should see there is no change in loan agreement terms.

4. Bills receivable
 He should get a list of total bills receivable.
 He should see that bills are properly drawn, accepted.
 He should see that bills are subsequently matured.
 He should enquire from the bank regarding bills sent for collection.
5. Debtors
 He should obtain duly certified list of debtors.
 He should scrutinize accuracy of debtors list.
 He should verify actual existence of debtors.
 Sales ledger balance should be checked with debtor’s ledger.
 He should see debtors shown on balance sheet are recovered.
 He should see adequate provision made for bad debt.

6. Stock in trade (Inventory)

Verification of stock in trade does not mean merely the checking of stock
statements. It is much more than this. It includes the following,
 Verification of physical existence of stock in trade.
 Verification of ownership of stock in trade.
 Verification of guaranties in the statement of stock.
 Examine the organization’s transactions that result in stock in trade.
 Ensuring that receipts and issues are properly recorded.
 Ensure that the provision is made for obsolete stock.
 Examination of the system of internal control.
 Verification of arithmetical accuracy of statement of stock.
While verifying stock in trade, an auditor should keep in mind the following
points,
 Auditor should examine internal check system in operation.
 He should check stock sheet with stock register.
 He should examine management control of issue of stock.
 He should check totals, balances and extensions of stock sheets.
 He should check physical existence of stock in hand.
Valuation of stock in trade
Following points are to be noted while valuing stock in trade:
1) An auditor should inquire into the basis of valuation.
2) See that the basis of valuation has been consistently adopted from year to
year.
3) Check the values of a few items in the stock sheet with the corresponding
invoice prices and current selling prices.
4) See that the totals of the stock sheet are correct.
5) Compare the percentage of gross profit of the current year with that of the
previous year.
6) See that calculations, additions and castings are correct
7) See that the stock sheet is signed by a responsible officer.

Methods of valuation of stock in trade

 Actual cost price method
 Simple average cost method
 Weighted average cost method
 FIFO
 LIFO
 Base stock method
 Standard cost method
 Market price method
 Net realized value method

Valuation of different items of stock in trade

1) Raw materials are valued at cost price plus proportionate freight and import
duty.
2) Work in progress: cost price of raw materials plus proportionate amount of
manufacturing expenses plus a percentage to cover the establishment charges
relating to manufacture.
3) Finished goods: principle of “cost price or market price whichever is lower”
is applied.
4) Spare parts: cost price
5) Stores articles: cost price
6) Stock of special trade: cost price plus interest at remarkable rate plus
expenses of maintaining stock.

7. Free hold property

Freehold property refers to the land and building which is absolutely the
property of the business. While undertaking the verification and valuation of
freehold property an auditor should observe the following points:
 He should verify legal existence of title deeds relating to land.
 He must verify both ownership and possession of the client.
 He should compare ledger account with balance sheet.
 He should verify deed, purchase agreement, lease agreement etc.
 He should examine brokers notes, auctioneers accounts etc.

8. Leasehold property
Leasehold property refers to land and buildings acquired by a business for a
fixed period on lease. While undertaking the verification and valuation of
leasehold property an auditor should observe the following points.
1) Examine the lease deed. He should examine the lease deed to ascertain the
cost of leasehold property, the duration of the lease, terms and condition of the
lease.
2) If the lease is for more than one year the auditor should see that the lease
deed is registered.
3) He should see that the amount paid for lease property is capitalized.
4) He should see that the lease rent is paid regularly and the lease is existing.
For this purpose, he should examine the last receipt of the payment of rent.
5) He should see that the agreement with the subtenant is if it is sublet to others.

9. Plant and machinery

 He should obtain schedule of plant and machinery certified by responsible
officer.
 He should verify adequacy of depreciation.
 He should see same method of depreciation follow year after year.

10. Motor vehicle

 He should verify vehicle are registered in the name of client.
 He should get schedule of all motor vehicles owned by the company.
 He should see that adequate depreciation is provided for vehicles.
 He should see that vehicles are shown in balance sheet separately at cost less
depreciation.

11.Furniture, Fixtures and Fittings

They are items of movable equipment that are used to furnish an office.
Examples are chairs, desks, shelves, book cases, filing and other similar items.
 When assets have been acquired during the current accounting period, the
auditor should examine the purchase invoice of the dealers.
 He should verify furniture stock register and ask the management to
prepare an inventory to reconcile it with the stock register.

12. Copyright
 He should verify copy right agreement.
 He should obtain schedule of copyright.
 He should see that copyright are shown in balance sheet separately at cost
less depreciation.
13. Goodwill
 He should verify purchases agreement to ascertain value of goodwill.
 He should see written off in accordance with resolution of board.
14. Loose tools
 He should obtain loose tools register.
 He should verify receipts of issue of loos tools.
 He should see that loos tools are shown in balance sheet separately at cost
less depreciation.

15. Live stock

 He should obtain schedule of livestock.
 He should compare livestock register with schedule.
 He should verify livestock are revalued annually.

Verification of various types of liabilities

1. Sundry creditors
 He should obtain schedule of creditors from management.
 He should compare creditor amount with balance of creditor ledger.
 He should verify purchase and purchase return book.
 He should verify goods inward book.
2. Bills payable
 He should verify bills payable from bills payable book.
 He should examine the bills payable retired under rebate.
3. Bank overdraft
 He should verify overdraft agreement with bank.
 He should check the pass book and cash book.
 He should verify whether overdraft is secured or unsecured.
4. Loans and advances borrowed
 He should verify loan agreement.
 He should see that loans and advances shown in balance sheet.
 He should verify whether loan is secured or unsecured.
5. Debentures
 He should verify memorandum and articles of the company.
 He should verify debenture trust deed.
 He should obtain a certificate from debenture holders to verify amount of
debenture issued.
7. Outstanding expenses
 Verify the outstanding expenses with the help of statement of outstanding
expenses certified by a responsible officer.
 Compare the outstanding expenses of current year with those of previous year
to see whether there is any material difference.
 See that outstanding expenses have been subsequently paid.
 Verify the item of expenses such as salaries, wages, rent etc which remain
outstanding.
 See that outstanding expenses are clearly shown in the balance sheet.
8. Income received in advance

Verify the item of incomes which are normally received in advance with
the help of list of incomes received in advance certified by a responsible
official.
See that these are fully disclosed in the balance sheet.

Valuation of assets and liabilities

It means estimation of various assets and liabilities. It is the duty of the auditor
to confirm assets and liabilities appear in the balance sheet in fair value.
Valuation of different assets
1. Fixed assets
They are acquired for permanent use of business. The utility of this asset is for
long period. E.g.: Plant, machinery, land, building, motor vehicle, furniture etc.
 Fixed asset valued at cost less than reasonable depreciation.
 Provision for depreciation on fixed asset is necessary.

2. Current assets
They are acquired for resale or converting them into cash. They are purchased
for a short period. E.g.: Stock, debtors, bills receivables, cash in hand, cash in
bank
 Cash and bank balance no valuation required
 Debtors are valued at book value.
 Provisions for bad and doubtful debts proceed for book debt.
 Raw material valued in FIFO and LIFO method.
 Closing stock valued at cost or market price, whichever is lower.
3. Intangible assets
Intangible assets are those assets which cannot be seen or touched. They are not
visible in physical form. E.g.: Goodwill, copyright, patent, trademark.
 These assets are shown at cost price.
 These assets treated as fixed assets for the purpose of valuation.
4. Wasting assets
Wasting assets are fixed in nature which are depleted gradually in process of
earning income. Eh: Mines, quarries, oil wells, etc.
 Wasting assets are shown in original cost in balance sheet
 Provision is made for depreciation and depletion.
5. Fictitious assets
Fictitious assets are huge revenue expenditure that has been capitalized with the
object of spreading amount to number of years.
E.g.: Special advertisement cost, preliminary expenses, debenture discount.
 These have no exchange value
 Every year, a portion of these expenditure are written off in P&L ac.
Valuation of different liabilities
1. Current liabilities
These are the liabilities of the business, which are short term liabilities. They
are settled with a period of one year.
E.g.: Creditors, Bills payable, outstanding expenses.
2. Fixed Liabilities
These are the liabilities of the business, which are long term liabilities. They are
to be settled in long term basis. E.g.; long term loans, long term deposits
accepted.
4. Contingent liabilities
These are liabilities which are not actual liabilities, but which may
become an actual liability on happening or non-happening of a future
event.
Characteristics of contingent liability
 Uncertain
 Conditional
 It involves additional expenditure
 Actual liability on happening of an event
 It may be a past or possible future act
Difference between verification and valuation
verification valuation
Verification includes valuation. Valuation is a part of verification.
Auditor verify existence of assets. Ensure value of assets shown in the
balance sheet are correct.
It is done by the auditor. It is done by management team.
It is made at the end of the year. It is made throughout the year.
It is the final work. It is the initial work.
The auditor is guarantee in the case of In this case there is no such
verification. guarantee.

Window dressing
It means manipulation done by the management of the company in the financial
statements in order to present more favorable picture of the company.
Window dressing done through following ways:
 Increase the inventory value.
 Postponement of purchase of fixed assets.
 Selling a fixed asset or cash.
 Paying of current liabilities.
 Considering short term liabilities as long term.
Audit Notebook/ Audit Memorandum
An Audit Note Book is a register maintained by the audit staff to record
important points observed, errors, doubtful queries, explanations and
clarifications to be received from the clients. It also contains definite
information regarding the day-to-day work performed by the audit clerks. For
every firm that he audits, the auditor maintains a separate notebook in which
audit clerk notes down many important points, difficulties and new points which
he has to discuss with the auditor. In short, an audit note book is usually a
bound note book in which a large variety of matters observed during the course
of the audit are recorded. The note book should be maintained clearly,
completely and systematically.

Audit Working Papers

Audit working papers are the documents which record during the course of
audit evidence obtained during financial statements auditing, internal
management auditing, information systems auditing, and investigations. Audit
working papers are used to support the audit work done in order to provide the
assurance that the audit was performed in accordance with the relevant auditing
standards.

Contents of audit working papers

The auditor will have to perceive the following working papers for each client.

1) The trial balance

2) Schedule of debtors and creditors

3) Depreciation statement

4) Correspondence between the auditor and "debtors and creditors" regarding

their data on account

5) Schedule of investment

6) Conformation by the bank regarding the bank balances of the client

7) Bank reconciliation statement

8) Details of cash balance checked

9) Certificate regarding stock in trade and its valuation

10) Certificate from the management that all outstanding assets and liabilities
have included in the accounts-debts classified as good, doubtful, and bad.

11) Adjusting entries

12) Contingent liabilities certified by management.

Types

We can divide the working papers into two parts

1. Permanent audit file

2. Current audit file

A permanent audit file contains information which is of continuous interest and

is relevant in future audits. Information like articles of association, loan
agreements, leases, documents related to internal control of the entity, record of
accounting policies followed by the entity on a continuous basis, significant
observations of previous audits etc.

A current audit file contains information regarding audit conducted for the
current period. It includes information like financial statements and audit report
of the entity, trial balance and worksheets, records regarding internal control
risk of an entity, external confirmations received, queries of the auditor and
reply received from the management etc.

Audit Programme

An audit programme is a detailed, written statement designed by the auditor

indicating the work to be performed by the audit assistants, specifying the time
limit for completion of work, instructions and guidance to the audit staff. In
short, it is a tool for planning, directing and controlling the audit work. An audit
programme is a detailed plan of the auditing work to be performed. It specifies
the procedures to be followed in the conduct of audit more efficiently. The
auditor outlines the whole procedure of audit from beginning till the finalization
of audit report. Audit programme is generally contained in the audit notebook
and it is prepared by the senior staff in consultation with the auditor.

Definition: Professor Meigs defines Audit programme as a detailed plan of the

audit work to be performed, specifying the procedures to be followed in
verification of each item in the financial statements and giving the estimated
time required.

Advantages of an Audit Programme:

1. Helps in Estimation and Division of Work 2. Helps in Fixation of

Responsibility:

3. Helps in Future Planning 4. Serves as a Guide. 5. Valuable Evidence 6.

Uniformity

7. Continuity 8. Coordination

Dis Advantages:

1. Mechanical 2. No Quality in Work 3. Loss of Initiative 4. Rigidity 5. Shelter

for Inefficient Staff

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