4 – VOUCHING

Introduction - According to SAP – 5, “Audit Evidence”, issued by ICAI, the auditor should
obtain sufficient appropriate evidentiary matter to afford a reasonable basis for an opinion
regarding financial statements examined by him. In fact, auditing as a whole consists of mainly
two functions, both of which are closely connected with evidence. The first is evidence,
gathering through inspection, observation, inquiries, confirmations, etc. the second is evaluation
of the evidence so gathered from the point of view of its validity, adequacy and relevance.

I. Concept of Vouching

Meaning of Vouching – Vouching may be defined as “such an examination of the ledge entries
as will satisfy an auditor not only that entry is supported by documentary evidence but that it has
been properly made upon the books of account”. Vouching does not mean merely the inspection
of receipts with the cash book, together with documentary and other evidence of sufficient
validity to satisfy an auditor that such transactions are in order, have been properly authorized,
and are correctly recorded in the books of account.

Objects of Vouching
1) All transactions connected with the business have been properly recorded in the books of
accounts;
2) The entries in the books of accounts pertain to transactions which are genuinely
connected with the business;
3) The vouchers in support of the entries are legally valid, in the sense that they are
authentic, properly dated, addressed to the business of the client, and are not fraudulent in
any respect;
4) The vouchers have been carefully processed through each stage of an effective system of
internal check;
5) The vouchers have been properly authorized.

Meaning of Voucher – A voucher may be defined as any document which evidences a

transaction or an entry in a book of account. It may be in the form of a money receipt, invoice,
cash memo, bank pay-in-slip, agreement or contract, a resolution passed at a meeting of the
Board of directors or shareholders, the minutes of a meeting, correspondence with parties, and so
on.

Kinds of vouchers – A voucher may be (i) primary or (ii) collateral. A primary voucher is an
original evidence of a transaction or entry. Thus, written responses to confirmation requests as to
debtors’ or creditors’ accounts, purchase invoices or cash memos for goods purchased, or
statements prepared by the bank, are examples of primary vouchers. Collateral vouchers may be

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in the form of copies of sales invoices, receipts issued to debtors or resolutions passed at the
meetings of the Board or shareholders.

Examination of vouchers - Whether a voucher is primary or collateral, it must constitute an

adequate, reliable and competent proof in support of the transaction or entry in a book of
accounts to which it relates. Each voucher should examined with great care and caution and
while doing so, the following points must be given particular attention –
1) Each voucher should be consequently numbered and carefully preserved;
2) It should be addressed to the client or organisation at its normal business address;
3) It should be properly dated and correspond to the period of the transaction;
4) It should be authorized by an official properly empowered in this behalf;
5) The amount shown in the voucher should be correctly calculated and totaled;
6) If the amount of a voucher exceed Rs.5,000, it should be properly stamped;
7) It should be genuine and complete as regards all legal and procedural formalities;
8) It should be cancelled with a special rubber stamp or with a special tick;
9) Suitable adjustments should be made for prepayment expenses or accruals;
10) Over-writing or erasion on a voucher should not be accepted.

Cut-off Tests or Arrangement – The auditor must provide an effective check against such
practice by establishing timely cut-off points. A cut-off point indicates the precise point at which
the year under review has ended. To this end, he should ask the departments concerned to furnish
him with the serial number of the documents (invoices, Goods Received Notes) which constitute
the cut-off points as to the creditors, and goods received and sold.

Having determined the point at which all transactions for the year under review have ceased, the
auditor should examine all receipts and payments of cash, and sale and purchase invoices for a
few days previous to the end of the period under review – (a) which invoices and transactions
entered prior to the end of the accounting year belong to the subsequent year; and (b) which
invoices and transactions entered subsequent to the end of the accounting year do actually belong
to the accounting year under audit.

According to the “Statement on Auditing Practices” (SAP) issued by the ICAI, the auditor
should carefully examine the procedure employed to ensure separation of transactions as at the
end of one year from those at the commencement of the next year. He should satisfy himself by
examination and test-check that these procedures adequately ensure that –
- Goods purchased for which property has passed to the client have in fact been included in
the inventories and that the liability has been provided for;
- Goods purchased and provided for have been included in the inventories;
- Goods sold have been excluded from the inventories and credit has been taken for the
sales.

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Importance of Vouching
1) Vouching is the essence of auditing. It constitutes the foundation upon which the super-
structure of auditing is erected.
2) The success of an audit engagement largely depends on the care and attention with which
vouching is accomplished.
3) Ascertaining the genuineness, validity and proper recording of each transaction will
require the auditor to look beyond and behind what is immediately visible to him.
4) It is not necessary for the auditor in all cases to vouch each and every transaction, based
on the soundness of the internal control.

Situations where vouching of a selected number of transactions may not be appropriate

(a) If the enterprise under audit has a poor system of internal control;
(b) If in a small enterprises, the internal control system in areas such as division of duties is
not complete;
(c) If the enterprise under audit is of a specialized nature where the number of transactions,
though limited in number, are of a specialized type in the case of which application of
sampling would be inappropriate, [example – major capital expenditure, purchase of
investments, rent and dividend received, etc].
(d) Whether a business is large or small, and whether its internal check system is strong or
weak, there is no escape for the auditor so far as his duty of reasonable care in respect of
vouching is concerned.
(e) In Armitage v. Brewer and Knott, the auditors were charged with being careless in
vouching so that fraud committed by the client’s clerk went undetected.

II. Vouching of Cash Transactions

Introduction - Before the auditor begins to vouch cash transactions, he must examine the system
of internal control with regard to cash receipts and payments. There are two main objects of cash
control. The first is to ensure that all receipts of the business from all sources are accounted for;
and therefore, every precaution should be taken by means of internal check to make it as difficult
as possible for the receipts to be misappropriated. The second is to ensure that every payment has
been properly authorized and is a bonafide business expense, that the action is properly recorded
in the books of account and that the payee has actually received the amount.

Internal check as regards cash transactions – An efficient system of internal check with
regard to cash transactions (receipts and payments) should possess the following characteristics –
Cash receipts
 All incoming mail should be opened by persons other than the cashier or the clerk
maintaining the Debtors’ Ledger. All receipts should be promptly recorded and

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 acknowledged by way of pre-numbered money receipts, and their copies or counterfoils
should be properly maintained;
 All cheques should be crossed “Account payee only” immediately on receipt;
 There should be a daily reconciliation between the total cash credited to debtors and the
total of official receipts issued;
 Cash receipts should be deposited in the bank on the same day, and Bank Reconciliation
Statements should be prepared at regular intervals by the cashier as also be someone not
involved with cash receipts or records;

Cash payments
 Petty cash funds should be maintained as per the imprest system and Petty Cash Register
should be under the supervision of a responsible official. All payments through Petty
Cash Register should be properly authorized and there should be a maximum amount
fixed for individual payments. In any case, the nature of these payments should be such
they cannot ordinarily be made by cheques.
 All payments, other than petty cash, should be made by cheques. Cheques should be
prepared only against authorized vouchers and the persons authorized to sign the cheques
should not be involved with maintenance of cash payment records or with preparation of
bank reconciliation statements. Cheques should be crossed “Account Payee Only” and
should be properly dispatched to the parties concerned.
 Vouchers, against which cheques have been issued, should be cancelled so as to prevent
their production in support of further cheques.
 The cashier should not have any responsibility or control as regards Sales Ledger,
Creditors’ Ledger, Nominal Ledger, invoices, etc.

Vouching procedure of Cash receipts – The vouching procedure in regard to some of the
important items appearing on the debit side of the Cash Book is given as under -
1. Opening balance - It should be compared with the closing balance of the Cash Book as
shown in the audited copy of the Balance Sheet of the previous year.
2. Cash sales
a. Cash sales invoices/memos should be checked with the summary of daily sales.
Sales invoices/memos should be pre-numbered and each number should be
accounted for;
b. Summary of daily sales should be checked with the cash book and bank paying-
in-slips, noting that all cash is deposited in bank daily;
c. Summaries of daily sales should be independently checked for calculations and
totals;
d. The total in the rough cash book, if any, should be checked with the main cash
book;

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 e. In case of automatic cash registers, the daily totals entered in the cash book
should be checked with the till rolls;
f. The summaries of daily sales should be checked with the entries in the stock
register.
3. Receipts from debtors –They should be subject to an effective system of internal check.
Important parts of such system should be as follows – (a) persons maintaining the
debtors’ ledger should be allowed to collect money from customers; and (b) the
customers should be asked to remit cash/cheques through the post, and not hand the same
directly to the cashier.
The daily total of cash received should be checked from the rough cash book to the
counterfoils of daily receipts issued and posted to the customers. It should also be
checked from the bank paying-in-slips and the main cash book. The auditor should be
alert to the possibility of ‘teeming and lading’ or ‘lapping of payments’, which is a
method of commission of fraud.

Teeming and Lading – It is an ingenious method of concealing a cash shortage. It involves

misappropriation of receipts from one or more customers and covering the shortage with receipts
from other customers. Later, this shortage will continue to be there, it will never be in the same
account. At times, the receipt from one customer may be split over the accounts of many
customers, thus concealing several misappropriations at any time and rendering the detection of
irregularity still more difficult.
Ordinarily, teeming and lading or lapping may not amount to a fraud. Nevertheless, the auditor
must carefully look for instances thereof, because it may involve substantial amounts and if the
cashier is not in a position to clear the debts, it may result in loss to the enterprise.
Teeming and lading will be easy to detect if the auditor proceeds as follows –
- He should ascertain whether the name, amount and dates as shown on the receipts or
remittance advices are in complete agreement with relevant cash receipt records;
- He should compare individual receipts as records in the rough cash book with the receipts
issued and posted to individual customers;
- He should see that the details of receipts as recorded in the rough cash book, main cash
book and the receipts issued to individual customers, agree with the amounts shown in
the counterfoils of the paying-in-slips;
- He should ascertain whether cash receipts are deposited in the bank intact, and on a
timely basis;
- He should carefully examine the debtors’ ledger, especially those accounts which show
part payments, in order to satisfy himself that the debtors concerned have indeed made
part payments;
- From time to time, he should get the balances in the debtors’ ledger confirmed by
individual debtors;

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 - He should be alert to the recording of improper and fictitious discounts and allowances to
the customer’s accounts because this could be an easy means to withholding cash receipts
and concealing defalcation.

4. Interest receipts
5. Dividend received
6. Royalty income
7. Rental income
8. Loan raised
9. Bills receivable
10. Commission earned
11. Sale of investments
12. Subscription contribution received
13. Insurance claims received
14. Sale of fixed assets
15. Miscellaneous receipts

Vouching procedure of Cash payments –The object of vouching of the payment side of the
cash book is to see that each payment shown there has been – (a) wholly and exclusively for the
business of the client; (b) authorized by the person competent to do so; (c) properly recorded in
the books of account; and (d) received by the right persons or parties.

1. Wages
2. Payment of goods
3. Capital expenditure
4. Investments made
5. Loans paid
6. Salaries
7. Commission paid
8. Travelling expenses
9. Insurance premium paid
10. Bills payable
11. Freight and carriage
12. Discount bills dishonoured
13. Petty cash
14. Payment of taxes
15. Repairs and renewals
16. Advertising expenditure
17. Dividends paid
18. Directors fees

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 III. Vouching of Trading Transactions

Introduction – Vouching of transactions relating to purchase of goods should be preceded by a

thorough evaluation of the existing system of internal check and control relating to them. This
should involve a careful enquiry into the policies and procedures relating to authorization as to
ordering of goods, receipts and inspection of goods, return of defective goods to suppliers,
processing of invoices for payment, actual payment, and record of transactions from beginning to
end.

Vouching procedure
1. Purchases
2. Forward purchases
3. Purchase returns
4. Sales
5. Goods on ‘sale or return’
6. Goods on consignment
7. Hire-purchase sales
8. Forward sales
9. Sale of by-products
10. Sale of scrap
11. Packages (Empties)
12. Sales returns
13. Bills receivable book
14. Bills payable book
15. Purchase ledger
16. Sales ledger
17. Journal Proper

IV. Vouching of Impersonal Ledger

Introduction – Impersonal ledger (also called General or Nominal Ledger) contains the
balances of all incomes and expenses accounts which are ultimately taken to the Profit and
Loss Account, and in case of real or capital accounts, to the Balance Sheet. Posting to the
Impersonal Ledger will already have been individually vouched at the place of their origin
(ie., books of original entry). However, in certain cases, information contained in these
accounts may require further verification, because irregularities are the easiest to be
committed in the case of Impersonal Ledger.

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 Types of Impersonal Ledger
1. Outstandings
a. Outstanding Liabilities
i. Unpaid Expenditures
ii. Unearned Incomes
b. Outstanding Assets
i. Prepaid Expenses
ii. Accrued Income

Examples of Impersonal Ledger accounts

Unpaid Expenditures
1. Purchases
2. Rent
3. Taxes
4. Salaries and wages
5. Freight
6. Commission
7. Employee stock options
8. Other operating expenses
9. Contingent liabilities
10. Undisclosed liabilities
Unearned Income
1. Subscriptions
2. Advance in respect of sale of goods/services
3. Interest
4. Rent
Outstanding Assets (Prepaid Expenses)
1. Prepaid insurance
2. Prepaid rent
3. License fees
4. Prepaid subscriptions
5. Prepaid advances
Income accrued though not received
1. Interest
2. Dividend
3. Contingent assets