Vouching and verfication

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[email protected] VOUCHING AND VERIFICATON

Presentation on

Vouching and verification

(financial Audit)

Vouching ObjectivesTypes of voucher.General procedure for vouchingAudit of payments/expenses Audit of receipts / Incomes Audit of PurchasesAudit of Sales

VOUCHING AND VERIFICATIONCONTENTS

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VerificationObjectivesVerification V/s Vouching ValuationMeaningObjectivesVerification V/s. Valuation

VERIFICATION AND VALUATION CONTENTS

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•Procedure for Verification & Valuation of• Assets •Liabilities•Inventories•Types of inventories•Verification & valuation of inventories•Auditors duty with case laws.

VERIFICATION AND VALUATIONCONTENTS

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Cash Mercantile/ accrual

Difference between expenses and paymentDifference between profit and loss account and receipt

and payment account

SYSTEMS OF ACCOUNTING

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“Examination of all documentary evidence in support of a transaction and includes identification of any document that should be available to the auditor to carry out that examination”

VOUCHING

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Authenticity of transaction.To check transaction are genuinely

connected with the business.To ascertain that transaction are

supported by documentary evidence. To check vouchers pertain to the

financial year under audit. Approval by competent authority.Proper identification of expenditure

as capital or revenue.To verify arithmetical accuracy

OBJECTS OF VOUCHING

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Serial number of vouchers and they are filed properly

Date of voucher Addressed to the client and relate to

business of client Amount shown in figure should match with

words Signature of official authorizing officer Revenue stamp if amount is rupees 5000

and above Vouchers originating from outside the

business are genuine

COMMON POINTS IN VOUCHING

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Vouchers inspected should be cancelled or stamped Proper allocation between capital and revenue

expenditure Clarification regarding missing voucher Should not seek help of the clients staff Pre-receipt vouchers should not be accepted Over writing or cancellation on a voucher should

not be accepted. Alteration of any kind should be supported by the

signature of the authority

COMMON POINTS IN VOUCHING

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Primary Secondary

Primary vouchers – original evidence – cash memos, rent receipts, agreements, salaries statement, purchase invoice etcSecondary – Also called as collateral vouchers Copies of original evidence, carbon copies, counterfoils of pay in slips etc

TYPES OF VOUCHERS

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•Check General consideration •Check Internal control

•Check Cash book•Check Bank statements

•Check Documentary evidence •Check Authority

•Check Acknowledgements •Check type of expenditure( Capital / revenue )

•Routine checking

VOUCHING PROCEDURE

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Examining the internal control procedure Before proceeding to verify payment made on

account of salaries and wages the auditor should examine the internal control procedure as regard the following Appointment, promotion and transfer of employees.Records of attendance.Arrangement for the preparation bill and there analysis.Sanctioning and disbursement of wages and salaries.Custody of the wages record.

VOUCHING PROCEDURE FOR SALARIES AND WAGES

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Examine the payment shown in the cash book.Check the bill details.

By reference to the record of attendance, schedule of rates and sanction of management.

Check computation of wages and salaries. With regard toAbsenceLeave

IncrementsFines and penaltiesLoans and advances

Deduction on account of provident fund, insurance, tax etcCheck for Receipts of payments

Check for arithmetical accuracy of pay rollCompare signature sample of employee

Check for dummy employees

VOUCHING PROCEDURE FOR SALARIES AND WAGES

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General consideration Internal control

Cash book / Bank statement Rent agreement

Acknowledgment from partyRoutine checking

RENT

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Meaning of verificationDefinition of verification

Object Auditors duty in verification

Points to be considered in verification

VERIFICATION OF ASSETS AND LIABILITIES

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Verification of assetsDefinition Spicer and pegler “ The verification of assets implies an inquiry in to the value, ownership and title, existence and possession, and the presence of any charge on the asset”

VERIFICATION OF ASSETS AND LIABILITIES

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Verification is an important audit process of inspection and collection of information and examination of documentary evidence to confirm that

1. Assets were in existence on the balance sheet date.2. Assets have been acquired for the purpose of the

business and under a proper authority.3. Right of ownership of the asset vested in or

belonged to the undertaking.4. Assets are free from any lien or charge not disclosed

in the balance sheet.5. Assets have been correctly valued having regard to

their physical condition. 6. And assets values are correctly disclosed in the

balance sheet.

VERIFICATION OF ASSETS

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Verification of asset is primarily the reasonability of management.Auditor’s duty is limited only to an appraisal of the evidence, their inspection and reporting on matters affecting there valuation, existence and title, observed in the course of such an examination.

AUDITORS DUTY

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Following points should be considered while valuation of fixed assets

1. Cost less depreciation2. Cost include all expenditure necessary to bring

asset in to existence and put them in working condition

3. Fluctuation in market values are ignored

VALUATION OF FIXED ASSETS

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While verifying the plant and machinery auditor should follow the following

procedure.1. Check plant and machinery registerAuditor has to verify the plant and

machinery register to see the following Name of the machinery Make of Machinery Date of purchase Cost of machinery Location of machinery

VERIFICATION OF PLANT AND MACHINERY

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2. DepreciationVerify that adequate depreciation at appropriate rate is charged on all types of plant and machinery3.Capitalistion of expensesSatisfy that only capital expenditure is shown under asset and expenses on repairs and maintenance are not capitalized.4.Valuation and disclosureSee that plant and machinery is properly valued and disclosed in the balance sheet. And the movement of plant and machinery due to purchase and sale is properly reflected.


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5. Physical verification Carry out a physical inspection of the plant and machinery on test basis to see that they really exist and are in good working condition.6. Consistency in method of depreciation 7. Check for lien or charge not disclosed in the balance sheet.8. Board resolutions verify board resolutions related to sale and purchase of a plant and machinery.


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IntroductionPreliminary expenses are all expenses relating to the formation of an enterprise such as Registration feesCost of printing document like memorandum of association andArticle of association

The audit procedure for verification of preliminary expenses is given below1.Documantery evidenceVerify the amount of preliminary expenses shown in the balance sheet with reference to documents such us agreement, bills, receipts etc.2.Compare the amount with that disclosed in statutory report

VERIFICATION OF PRELIMINARY EXPENSES

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• 3. Disclosure requirement •Examine whether as per disclosure requirement

expenses on issue of share and debentures are being shown separately and are not included in

preliminary expenses.•4. Check for reimbursement of preliminary

expenses incurred by promoters•5. Check for amortization of expenses

•Preliminary expenses are to be amortized over period of ten years on a straight-line basis as per

income tax act 196124


•Obtain the schedule of creditors and examine it with reference to individual creditors account to verify–Discount earned–Rebates–Returns –Outstanding beyond normal credit period

•Inspect document underlying purchases to verify–Invoices –Goods received note

VERIFICATION OF SUNDRY CREDITORS

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• Vouch payments to creditors with reference to – Cash book/pass book– Vouchers– Cheque book

• Verify the cut-of procedure adopted by business at the year end To see unrecorded liability if any• Confirmation from Creditors Auditor may communicate directly with creditor so as to confirm the

amount on balance sheet date.• Check for bills payable accepted during the year• 7. Examine valuation and disclosure Ensure that creditors have been disclosed properly in financial

statements as per recognized accounting principal.

SUNDRY CREDITORS

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IntroductionContingent liabilities refers to obligation relating

to past consequences or other events or conditions, that may arise in consequences of one

or more further events which are presently deemed possible but not probable.Examples of contingent liabilityGuarantees of third party obligation

Discounted bills receivablePending or threatened litigation against the entity

AUDIT OF CONTINGENT LIABILITIES

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Audit procedureThe primary objective in case of contingent liability is to verify the

existence.1. Representation from management

Obtain a letter of representation from client containing a statement that management is aware of no undisclosed contingent

liability.2. Review minutes of board meeting

Review the minutes of meetings of board of directors and their committees to discover contingency commitments if any.3.Review contracts, loan agreement for evidence of

liabilities4. Review list of pending legal cases and documentation

This analysis is directed towards the discovery of possible lawsuits and tax assessment associate with legal fees paid by client.

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5.Review terms and conditions of grants and subsidies under various schemes

To see contingent liability due to non-compliance with scheme

6.Check records relating to bills receivable discounted

7.Ensure that contingent liabilities do not include items such as

product warranties, service contracts, etc.

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What is inventory1. Goods purchased for resale2. Finished goods for sale3. Raw materials 4. Work in progress5. Spare parts and consumable stores6. Packing materials and returnable containers

VALUATION AND VERIFICATION OF INVENTORIES (STOCK)


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To know true and fair financial positionOvervaluation or under valuation of inventory will have direct

impact on profit/loss

WHY INVENTORY VALUATION

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First in first out Last in first out

Weighted average method Latest purchase price

METHODS OF INVENTORY VALUATION

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As per Accounting Standard 2 inventories are to be valued at cost or market price whichever is lessAs per AS2 inventories are to be valued at first in first out method or weighted average method

VALUATION ON INVENTORIES

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The responsibility for properly determining the quantity and value of inventory rests with the management of the entity.It is the responsibility of management to ensure that inventory included in financial statement is physically existent and represent all inventories owned by the entity.

VALUATION AND VERIFICATION OF INVENTORY

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Raw material = purchase price + carriage inward Work in progress = prime cost + factory overheadsFinished goods = works cost + administrative overheadsOverheads= indirect material + indirect Labour + Indirect expensed Prime cost = direct material + direct labour + direct expenses

VALUE OF INVENTORY

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Auditor is particularly concerned with Existence - that all recorded inventories exist as at the year end Ownership- all inventories owned are recorded and all recorded inventories are ownedValuation- basis of valuation is appropriate and properly applied and the condition of inventoried is recognized in their valuation

AUDITORS DUTY

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Following procedure should be followed for Verification of inventoriesInternal control evaluation

Examination of recordsAttendance at stocktaking

Obtaining confirmation from third partiesExamination of valuation and disclosure

Analytical review procedure

AUDITORS DUTY

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Check internal control with regard to 1. Purchases

2. Issue 3. Balance

INTERNAL CONTROL EVALUATION

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Books of accounts 1. Store/stock register2. Purchase book3. Sales book4. Purchase return and sales return book. Documents 1. Purchase order2. Vendor’s invoices3. Goods received note4. Inspection report,5. Material Issue note6. Bin card etc.

EXAMINATION OF RECORDS

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The extent of attendance is determined by the factor such as effectiveness of internal control and records maintained by the enterprise and method of stock taking.

Where auditor rely on the physical count by the management it may be appropriate for the auditor to attend the stock taking and verify the following

ATTENDANCE AT STOCK TAKING

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1. Inspect inventory count instruction given by the management to the staff are actually followed.

2. Review the procedure adopted for movement of inventory at the time of physical count.

3. Review the procedure followed for identifying defective, damages, obsolete and slow moving items.

4. Examine the cut-off procedure for goods purchased but not received and goods sold but not dispatched.

5. Review the original verification sheet and compare it with stock book.

ATTENDANCE AT STOCK TAKING

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Where stock is held with third parties such as consignee and agent the auditor should obtain confirmation from them.

CONFIRMATION FROM

THIRD PARTIES

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Examine the valuation method used are in accordance with recognized Accounting

StandardInspect the value assigned to various items of

inventory - cost price / market price (net realizable value)

To determine the cost examine stock sheet, invoices, costing records and treatment of overhead expenses.Examine the evidence supporting the assessment of

net realizable value.Examine whether appropriate allowances have been made for defectives, damaged and obsolete and slow

moving items.Check whether the inventory has been disclosed

properly in financial statement.

EXAMINATION OF VALUATION AND DISCLOSURE

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Reconcile quantities of opening stock, purchases, production, sales and closing stock.Compare closing stock quantities and amount with those of last year.Compare percentage of current year stock with that of purchases and sales, with corresponding figures of the previous year.Compare current years gross profit ratio with previous year.Compare figures of purchases, sales and stock with the budgeted figures.Compare inventory turnover ratio with last year.

ANALYTICAL REVIEW PROCEDURE

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Auditor’s duty with regards to verification of inventory Kingston cotton mills co. ltd. UK (1896)In this case , the profits of the company had been inflated fictitiously by deliberate manipulation of the quantities and values of stock-in-trade.The auditors had certified that balance sheet on the basis of the certificate of the managers as to the correctness of the stock-in-trade without checking the stock in details and this facts was shown on the balance sheet.

(LEGAL BACKGROUND)

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Justice Lindsay, while delivering judgment observed that it is not the duty of the auditor to take stock and that he is not guilty of negligence if the certificate of a responsible official is accepted in the absence of suspicious circumstances.In the same case justice Lopes observed as follows “ an auditor is not bound to act as detective, or as had been said to approach his work with suspicion or with foregone conclusions that there is something wrong. He is watchdog, but not a blood hound. He is justified in believing tired servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest to rely upon their representations, provided he takes reasonable care”.46


Westminster Road Construction & Engineering co. Ltd. (1932)

In this case in UK, the auditors were found to have been negligent in not discovering the overvaluation of work-in- progress and omission of liabilities, because they did not check records, which were available. They would have discovered the over-valuation, had they checked the records. In this case, negligence of the auditors was established and damages awarded.

LEGAL BACKGROUND

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Three principles for the general guidance of the auditorIt is no part of auditor’s duty to take stock.He can rely upon statements and reports made available to him in regard of valuation of stock so long as there is no circumstance, which may arouse his suspicion, and he is satisfied with procedure followed by the management.Auditor would be failing in his duty if he does not take reasonable care in verifying the statement of stock, which is put up to him according to the information in his possession and the expert knowledge expected of him in regard to method of verification and stock

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Vouching and verfication

Economy & Finance

Transcript of Vouching and verfication