VOUCHING & INVESTIGATION

III B.COM(CA) - VI SEMESTER :: AUDITING // 55 \\

UNIT -4

VOUCHING & INVESTIGATION

1. What is meant by Vouching? What are its objectives and importance? (Or) ‘Vouching is the

essence of auditing’ – explain?

Ans.: Introduction: Vouching means testing the truth of items appearing in the books of original

entry. It is considered to be the essence of auditing and therefore the auditor should be very careful

while vouching. Vouching means to substantiate an entry in the books of accounts not only with

documentary evidence but also to see that the transaction has been properly authorised, recorded and

entered in the books of accounts.

Vouching - Definition: “Vouching consists of comparing entries in the books of accounts with

documentary evidence in support there of”. — DICKSEE

It means the checking of the correctness and authenticity of the transactions.

Vouching -Objectives:

1) All transactions relating to the business have been properly recorded in the books of accounts.

2) To verify that all transactions recorded in the books of accounts are supported by a documentary

evidence.

3) Every tranasactions recorded has been adequeteiy authenticated by a responsible person.

4) The vouchers have been carefully processed through each stage of an effective system of internal

check.

5) The vouchers have been properly authorised.

6) Whether accuracy has been observed while totaling carrying forward and recording an amount in

the accounts.

IMPORTANCE OF VOUCHING:Vouching is the most important work of an auditor. It helps the

auditor to verify the validity, accuracy, authority and authenticity of the transaction recorded in the

books of accounts.

It helps the auditor to detect even clerical frauds. It is the foundation of auditing, actually it is

the very essence of auditing.

The success of auditing depends to a great extent upon intelligent and efficient vouching. The

auditor therefore, should vouch the entries with great care and intelligence, he should use all his

intelligence, common-sense, observation and tact in doing vouching.


2. Explain the principles of Vouching?

Ans.:Vouching -Definition: “Vouching consists of comparing entries in the books of accounts with


Vouching - Principles : The following are the principles of vouching:

1. Arranged voucher : A voucher is helpful to support any transaction, which may be cash memo fill,

voucher, ticket or others.

2. Checking of Date: The voucher date can also be checked; it must be related to the current year. The

date of the last or future year must not be adopted.

3. Checking of Authority: the vouchers are considered correct only when the proper authority signs

on them. For the approval of dealing the owner or the management must put the signatures for the

approval of dealing. If the vouchers are without the signatures of the proper authority, they are not

considered as true.

4. Cutting or change: There should be no changes in the vouchers. Any person making the fraud can

change the time, date, amount and name of concern. So, these changes cannot be acceptable till the

approval authority have signed.

5. Compare the Words and Figures: The auditor should satisfy himself the amount written on the

vouchers, its figures and words are same or not.

6. Transaction must relate to business:For the correctness of the vouchers it is necessary that it

relates with the business concern, the vouchers must be in the name of the business and also the manager.

If it does not, the vouchers are not acceptable and doubtful.

7. Case of personal vouchers: The auditor should bot accept the voucher in personal name. There is

a chance that an officer of the company has purchased any item in his personal capacity.

8. Checking of Account head: Auditor must be satisfied about the head of account in which cash is

deposited and drawn. He should examine the documentary evidence in this regard.

9. Revenue stamp : For the stamps , the stamp act 1899 is applicable while fixing the revenue stamps.

The stamps are required according to the valuation of the amount or cash memo.

10. Case of cancelled voucher : The auditor shod not accept the canceled vouchers because it has

already served the purpose of payment. There will be a danger of double payment, if it is accepted.

11. Important Notes: To arrive the right decision, the auditor can also take help form the working

papers of the previous year and others paper or not related to business and available with the management.

12. Minutes Book : When the meeting of shareholders is held. Al the resolutions and decisions of

the directors and shareholders are recorded in the minutes book. The minutes books should be examined

by the auditor. He has to check that these decisions have been implemented in the books of accounts

or not.


13. By Laws: In case of company the article of association and memorandum are basically the rules

and regulations. But on the other hand in the societies and clubs the bylaws are used to determine the

powers of management. The auditor goes through these rules and regulations to find the true and fair

view.

14. Agreements: The auditor must examine all the related papers of the business such as the agreement,

correspondence and others. The basic information can be received to the auditor by such papers.

15. Deed of Mortgage: Sometimes, you are the sale or purchase of any assets, the management can

enter into the agreement is prepare in this case. If the agreement is prepare in this case. If the agreement is

made for a loan against the immovable property then the mortgage deed is signed. It is compulsory for

the auditor to study the content of the deed.

3.What is meant by voucher? What are different types of vouchers?

Ans.:Vouching -Definition: “Vouching consists of comparing entries in the books of accounts with


“A voucher is documentary evidence in support of a transaction”

—— Arthur W. Holmes

Vouchers – kinds: Vouchers can be classified into two kinds :

1. Primary Vouchers : written evidence in original concerning an entry is known as Primary Voucher.

E.g.: cash memo for cash purchase is a primary voucher.

2. Subsidiary / Collateral Vouchers : In certain cases, evidence in original regarding a transaction is

not available. To prove, the ruth and correctness of the transaction, either a copy of the original evidence

or some other document which can pro e the correctness of that transaction is made available to the

auditor for audit purpose. Such evidence is known as Subsidiary / collateral Voucher. E.g.: When the

receipt for payment of a purchase on credit is lost, carbon copies of the sales invoice can be produced as

subsidiary evidence.

3. Other types of Vouchers :

i. Regular Voucher: Regular vouchers are used for regular voucher entry. Regular vouchers are also

used when there is a need to replenish the petty cash fund.

ii. Template Voucher: Template Vouchers are created by using a standard template to provide an

efficient means of entering data for vouchers.

iii. Adjustment Vouchers : Adjustment vouchers can be used to adjust existing vouchers, to associate

two vouchers to each other, as well as to enter credit and debit memos that reference purchase orders.

This can enter adjustment information manually or can copy the voucher that wants to adjust right into

the adjustment voucher.


iv. Journal Voucher: Journal vouchers are used to correct the distribution information on a voucher

after the voucher has been posted, payment posted and paid. This type of voucher will always net to

zero.

v. Reversal Voucher: The Reversal Voucher will be used to restore the encumbrance on a PO and

reversing the PO’s matched quantity or amount for an unpaid Voucher. Specifically, if the voucher was

entered in error and needs to be unposted, unmatched and closed, the state will use the Reversal Voucher.

vi. Single Payment Voucher : Single payment vouchers are used to enter a voucher for one-time

vendor without adding rows to the vendor table.

4. How do you vouch the payment side of the cash book?

Ans.:Vouching of Payments side of the cash book : The following are the general things observed /

checked by the auditor while vouching the payments:

1. He should see that the transaction is authorized.

2. He should observe that the payment made is for personal purpose or for the business.

3. He should check that the transaction/payment belongs to the particular financial year.

The following are the special inquiry made by the auditor while vouching the payments:

1.Cash Purchases: (Cash memo, goods inwards memo etc.)

a. Payment of cash purchases should be vouched with cash memos of te suppliers.

b. Special attention should paid to trade discounts. He should see that only the net amount is recorded

in the books of accounts.

c. He should see that purchases of fixed assets, investments etc., should not be included under the head

purchases.

2. Payment to Creditors : (Statements of accounts, receipts, etc.)

a. Money paid to the creditors is vouched with the receipts issued by the creditors.

b. He should inquire whether periodical statements are submitted by the creditors and are compared with

creditor’s account.

c. He should see that the payments must be made through crossed cheques.

3. Payment of Bills Payable: (Bills payable Register, Payer’s acknowledgement)

a. The payment of Bills Payable as recorded in the cash book, should be vouched with the Bills Payable

book and Bills Payable returned by the payers.

b. If the Bills Payable is paid through the bank, the auditor should examine the pass book for the

payment.

c. He should check the Bills Payable paid after the date of Bills Payable but before the date of audit

with the entries made in the cash book.


4. Purchase of Buildings: (Invoiced, agreements, letter of contract, receipts, etc.)

a. If the property is purchased through a broker, the auditor should examine the broker’s note.

b. If the property purchased is a freehold property, the auditor should examine the conveyance deed.

c. If the property purchased is a lease hold Property, the auditor should examine the lease deed.

d. If the building construction through a contractor, the auditor should examine the actual contract the

architect’s certificate and the receipt obtained from the contractor for the payment made.

e. He should ensure that all expenses incurred for acquiring and registering the property are capitalized.

5. Purchase of Patents and Copyrights: (Invoice, agreement, letter of contract, receipt etc.)

a. If a patent has been purchased, the patent and the receipt acknowledging the purchase consideration

should be seen.

b. Any expenses incurred in acquiring it should be capitalized.

c. In case of the patent has been secured by making experiments and research, the expenses incurred on

experiments and research should be capitalized.

d. If the patent has been acquired through an agent, the auditor should see that his commission is

capitalized.

e. It should be remembered that the renewal fee is not capitalized but treated as revenue expenditure.

6. Petty Cash book:

a. The auditor should physically count the cash with the petty cashier with the petty cash book balance.

If he fails to do so, he will be held liable for damages. This upheld in the case of London oil storage

Co. Ltd. Vs. Seears Hasluck &Co.

b. He should see that the petty cash book is maintained on the imprest system.

C. He should see that all petty cash payment over 2/- are supported by proper vouchers.

d. He should also refer to nominalledger to find out whether the balances as shown in the petty cash

agree with the ledger account.

7. Payment of Wages :

a. He should check a few items of wages sheets here and there to ensre that the calculations are correct.

b. He should see that the amount of cheque drawn for wages tallies with the totals of the wages sheets.

c. He should check the totals of the wages with he cash book.

d. He should see that deductions from wages for fines, advances etc., have been properly adjusted and

recorded in the books.

E. He should also examine the system of employment of casual labour and check the payments made to

the casual labour.


5. How would you vouch the Receipts side of theCash Book?

Ans.: Vouching of receipts side of the cash book : The following are the general things observed /

checked by the auditor while vouching the receipts:

1. He should see that the transaction is approved by the Board of Directors.

2. He should observe that the receipt relate to the business of the enterprise.

3. He should check that the transaction/receipt belongs to the particular financial year.

The following are the special inquiry made by the auditor while vouching the receipts:

1. Cash Sales: (Carbon copies of cash memos, Salesmen’s diary, Cashier summaries, Counterfoils of

receipts book etc.)

a. Check the arithmetical accuracy (multiplications, Subtractions, totals)of cash memos, counterfoils

of receipts book, salesmen’s diary and cashier’s summaries.

b. Summary of daily sales should be checked with the cash book and bank paying -in-slips and note that

tall cash is deposited into the bank daily.

c. Examine the classification of cash sales to ensure that correct account heads have been credited.

2. Collection from Debtors: (Sales invoice, Receipts issued to customers, Statement of customers

accounts , Existing and past discount chart., etc.)

a. The auditor should first of a check the existing internal control system in respect of cash collection,

particularly collection form customers.

b. He should also ensure that the amount received from customers has been enter in the cash book on

the day it is received.

c. He should be observed that the discount allowed to customers is authorized by a responsible officer.

3. Bills receivable: (cash book, pass book, Bills receivable book)

a. The auditor should check the cash received from bills matured by comparing the Bills receivable

book with cash book and the pas book.

b. Special attention should be given to bills, which have matured but remain unpaid.

c. He should verify that the amount of discount deducted is separately debited to discount account.

d. Bills receivable discount relating to the period after the date of Bills receivable should be shown as

an asset under the head “Rebate on bills discounted not yet due”.

4. Sale of Investments: (Broker’s note, bank advice, correspondence, etc.)

a. If investments are sod through brokers, brokers sold note should be examined.

b. If the sale of investment has been affected through the bank, the bank advice should be examined.


c. If the investment has been sold cum-dividend, the auditor should see that the sale proceeds are

properly apportioned between capital receipt and revenue receipt.

d. If the investments have been sold ex-dividend, the auditor should see that the dividend is received

and recorded subsequently.

5. Sale of building: (Sale deed account, correspondence)

a. If building is sold through a broker or auctioneer, such sale proceeds should be vouched with the

help of brokers sold note or auctioneer’s note.

b. He may also vouch the sale proceeds of building with the sale contracts, the fixed assets account and

correspondence with the parties.

c. If there is any capital profit only the sale of building, the auditor should see that it is credited to the

capital reserve account, and not to the general profit and loss account.

d. He can verify the entry for the receipt in the cashbook with the counterfoils or carbon copy of the

receipt issued to the party.

6. How to vouch the journal proper, explain ?

Ans.: JOURNAL: The use of journal has become very popular. All those transactions which cannot be

recorded through any other book of prime entry are recorded through the journal. The use of journal in

any business house depends upon the size of the business and the number of entries to be recorded.

E.g.: Where returns inward and return outwards in a business are very few, there will be no necessitate

for maintaining return inward and return outwards books. Instead such entries can be recorded in the

journal proper.

The following transactions are generally recorded through the journal proper:

1. Opening entries.

2. Entries for the issue and allotment of shares and debentures.

3. Closing entries.

4. Entries for the forfeiture of shares and the reissue of forfeited shares.

5. Various adjusting entries i.e.; provisions, doubtful debts, outstanding, depreciation, interest on capital,

prepaid expenses, taxation, etc…

6. Entries for the acquisition of different liabilities taken over from the vendors.

7. Entries for the acquisition of various assets taken over from the vendors.

8. Entries relating to consignment accounts or joint venture business and dishonor of bills or renewal

of bills etc….


9. Entries for making calls.

They may affect final accounts if not properly checked. There are lot of chances for committing

frauds through entries in the journal. Therefore, the auditor should carefully vouch the entries passing

through this book. He should see the narration being given under each entry. A proper narration will help

the auditor in understanding the exact nature of the entry and reduces of fraudulent entries.

The actual and supporting evidence that will be required by the auditor to vouch transaction

recorded in journal will depend upon the nature of transaction.

E.g.: The issue and allotment of shares in the case of a limited company can be vouched with the help

of the prospectus, directors, minutes, application and allotment letters.

While vouching the opening entries previous year audit balance sheet must be examined.

In case of recording the acquisition of assets under a contract, the auditor must be vouch the

contract entered into with the vendors. He should not pass any entry recorded in the journal unless he is

fully satisfied with regard to its correctness, validity of its supporting evidence and its proper authorization.

7. Define investigation? What are the features of Investigation?

Ans.: Investigation - Introduction: Investigation is an examination of the books of accounts of a

business done by an investigator with a predetermined purpose.

Investigation - Definition: “It involves enquiry into facts behind the books and accounts into the

technical, financial and economical position of the business organisation.” —-—-TAYLOR AND

PERRY

Investigation -Features: 1. It involves critical examination of specific records.

2. It is conducted with certain specific purpose.

3. It is extended to policy matters also.

4. It is carried out with certain suspicious things depending upon the case.

5. The scope of investigation may be extended or limited as the case may be.

6. Future course of action may be suggested by the investigator.

7. It is a personal examination of individuals like director, auditors and other officers.

8. Investigation is voluntary and contractual in nature except in case of companies. 9. The investigator

reports to his client who appointed him.

10. Factual information has to be given analytically and descriptively in the report.


8.Explain the salient principles of Investigation?

Ans.:Principles of Investigation: The following are the Principles of Investigation:

1. Determination of nature and Scope : The instructions of the client regarding the nature, scope

and objective should be obtained in certain and unambiguous terms. If the instructions are vague, they

may create confusion and problems during investigation. The instructions should cover the area of the

investigation, the purpose of investigation and the period to be investigated.

2. Formulation of Investigation programme: a. An investigation programme cannot be fixed and

rigid. Actual investigation procedure at each sage have to be programmed, depending upon the various

developments in the course of the investigation.

b. The finding of the previous steps will decide the further course of investigation. While formulating

the investigation programme, the broad scope and limits are to be determined.

c. The list documents and records to be verified are to be determined at this stage keeping in view the

objective and purpose of the investigation.

3. Conduct of investigation:

A thorough investigation examination of various records and documents and examination of various

persons of the concern, relating to the investigation area are to be conducted.

At every stage, the investigator may decide the further course of investigation based on the

circumstances and various findings.

The investigator shall maintain, an exhaustive record of work done, evidences examined, important

discussions held etc., as evidence for the investigation conducted. The record maintained by the

investigator along with the supporting documents may form the basis for formulation of conclusion and

preparation of the investigation report.

4. Investigation Report: The investigator may correlate all his findings, analyse all the supporting

documents and statements, thoroughly examine the investigation records and draw conclusions. While

doing so, he must have an open mind, free from pre-conceived notions.

9. Explain the aims and objectives / purposes of Investigation?

Ans.:Investigation - Definition: “It involves enquiry into facts behind the books and accounts into

the technical, financial and economical position of the business organisation.” - TAYLOR AND

FERRY

Investigation – Objectives / Purposes: The need of investigation may arise in many cases, but there

are some of the circumstances where the investigation is most frequently called for.

1. For purchasing any business:Investigation can be conducted by a person on behalf of his client,

when the client is intended to purchase an existing business.


2. for admission of a new partner: Investigation in to the affairs of a partnership firm can be made by

any person on behalf of the incoming partner of an existing partnership business.

3. For seeking avenues of investment: In order to measure the financial solvency position of any

business investigation can be done. The financial solvency is measure through investigation on behalf

of a person who seeks avenues of investment.

4. For granting loan or financial assistance: Investigation can also be undertaken on behalf of a

bank or other financial institutions proposing to extend or grant loans to its client or alter the terms

and conditions of the same.

5. For suspected fraud: If the owner or the management suspects fraud, they can appoint investigator

to detect the fraud activated by the employees.

6. For abnormal fluctuation of Profit: Investigation can be conducted on behalf of the owner of the

management of a business in order to ascertain the reasons of abnormal fluctuations in profit in the

organization.

7. For settlement of tax liability: Investigation can be undertaken for the settlement of tax liability

or in some cases for the detection of undisclosed income of the assesssee.

8. For Settlement of insurance claim: In the case of fire or other hazards, the organizations have to

submit claim to the insurance company to recover the loss. The insurance company can appoint an

investigator to determine the exact amount of loss for settlement of claim.

9. For Valuation of goodwill and shares:The shares and goodwill of the business are required to be

valued in different occasions. In order to calculate the fair value of shares and goodwill, investigation

can be undertaken.

10. For judging sickness of a business unit : government may consider to takeover of a sick industrial

unit and for this purpose. It may give appointment to an investigator to investigate into the affairs of

the sick unit.

11. for the provisions of the companies Act.: Section 235-251 of the Companies Act provide

regulations for the investigation of any company under different specific situations.

12. For judging negligence of the auditor: In some cases, the auditor is held liable for negligence

in is duty. But before accusing auditors for negligence, it has to be properly investigate.

13. for complaint by the shareholders: Investigation can also be undertaken by the management on

the basis of complaints made by the shareholders.

14. For the affairs of a trust: Investigations are sometimes required to be conducted on behalf of

the beneficiaries of any trust into the affairs of a trust for suspected fraud.

15. For the liquidation of the business: Investigation of suspected fraud or misfeasance against the

directors on behalf of the liquidator of a company could also be undertaken.


10. What are the differences between auditing and investigation?

Ans.: The following are the differences between Auditing and Investigation:

BASIS AUDITING INVESTIGATION

1. DEFINITION A systematic examination of books It involves enquiry into facts behind

and records of business/organization the books and accounts into the

in order to verify and report upon the technical, financial and economical

facts regarding the financial operations position of the business organisation.

and the results there of.

2. PURPOSE It is conducted to ascertain whether the It is conducted with some special

balance sheet exhibits the true and fair purpose. Eg: To know the earning of

view of the concern. the business, to know the actual

financial position of companies.

3. CARRIES OUT Audit is conducted on behalf of the Investigation is carried out on behalf

proprietor. of proprietor or the third parties.

4. NATURE It is extensive in nature. It is intensive in nature.

5. SCOPE It implies the examination of accounts It involves not only the critical

of a business. examination but also an exhaustive

and close enquiry into other matters

relevant to the purpose of

investigation.

6.QUALIFICA-TION Auditing should be conducted only by Investigating may be conducted by

a practicing C.A. any person that need not be C.A.

7. CONDUC-TED BY The person who conducts the audit is The person who conducts

called as auditor. investigation is called as an

investigator.

8. COMPULSION Audit is compulsory in case of joint Investigation is not legally

stock companies. compulsory.

9. TIME PERIOD It is a kind of test checking. It is thorough examination of the

accounts of business for certain year.

10.-ADJUST-MENTS No adjustments are done in the case of Certain adjustments have to be made

OFACCOUNTS audit since annual accounts are already to ascertain the net or actual earning

prepared. capacity of the business.


11. EVIDENCE In case of auditing the auditor is

concerned only with prima facie evidence.

12. INVESTIGA-TION Books and accounts are checked for the

OFAUDITEDACCOUNTS first time in case of audit.

The investigator is concerned with

sustained evidence and sometimes

conclusive evidence are also seen.

In most cases of investigation the

books presented are already checked

and audited.

VOUCHING & INVESTIGATION

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