Vouching: Its need and importance
Vouching is concerned with the checking of records with the help of supporting documents. These supporting documents or vouchers constitute bills, invoices, purchase or sale receipts, goods inward/outward register, minute book, and similar evidence that form the foundation of recording transactions in a business.
For example, every accounting entry for the purchase of goods is evidenced by a supporting receipt against which the auditor checks the authenticity of such purchase. Thus, when an auditor checks the accuracy of business transactions with their corresponding documentary evidence, it is called vouching. It is popularly known as the acid test of an audit because it tests the truth of a transaction recorded in the client’s books. When entries exactly match with their supporting vouchers, it ensures that the entries are correctly recorded in the books and do not represent any false figures.
The objective of vouching is to ensure the genuineness of the transactions to make sure that no fake transactions are recorded in the books of accounts.
With vouching, an auditor ensures that:
- Entries & transactions are supported by proper documentary evidence,
- Such entries are properly maintained, and
- They are correctly recorded in the books of accounts (both arithmetically and logically)
Importance of vouching
The importance of ‘vouching’ lies in the fact that without the process of vouching, an audit cannot be performed. Vouching holds great importance in audit because of the following reasons:
Backbone of audit
The thoroughness with which vouching is done determines the success of auditing. As we know, the primary goal of auditing is to uncover errors and frauds in order to prove the accuracy and fairness of results reported by the income statement and balance sheet. Vouching is one of the best means to discover these errors and planned frauds and is thus, called the backbone of auditing.
Auditing not only checks the correctness of books of accounts, but also whether or not the transactions are relevant to business, whether all transactions are executed with or without the prior sanction of the concerned authority, and whether transactions are real or fictitious since an accountant may include fake transactions to commit fraud. All of these things can be discovered with the use of vouching. Hence, vouching is crucial for auditing.
Accuracy and authenticity of transactions
In vouching, each and every transaction is verified on the basis of a supporting document. This helps to get to the truth of an account.
Locate fake invoices
Since vouching goes back to the source of every transaction, it checks whether evidence is correct or not. Many times, frauds are committed by presenting fake and duplicate invoices. By checking all the documentary evidence, vouching helps an auditor to detect these frauds and confirms the authenticity of transactions.
Find missing transactions
Vouching also aids in locating any missing or unrecorded transactions in the books against which a voucher is found available. Similarly, there might be some transactions recorded in the books against which a voucher missing. The auditor must go to the root of such transactions and ask for reasons behind missing vouchers.
Highlight personal transactions
Transactions are sometimes undertaken for personal reasons, although their payments are made in the name of the company. Such transactions should not be documented in a business’s books. If such transactions are documented, we can track them down through vouching. They must be segregated in order to determine the true profit or loss of the business.
Vouching also checks if all transactions are made with the approval of the authorized personnel. Any unauthorized transactions may be fake or deceiving.
Correct recording in books
Not only this, but vouching also confirms that the amount of the voucher has been posted to the appropriate account with the correct amount. Correct posting of a transaction to the right account will ensure that the nature of the transaction would be correctly disclosed on its inclusion in final accounts.
Things to keep in mind when examining vouchers
The above points bring forth the importance of vouching, but it must be understood that vouching should be performed with utmost care. While inspecting a voucher, an auditor should keep the following things in mind:
1. All vouchers should be serially numbered and arranged in sequential order. If the client has not done so, the auditor must do so on his own or get it done by the client’s staff.
2. Vouchers that have been checked by the auditor should be invalidated with a rubber stamp to prevent them from being presented again. Cancellation is also possible with the use of a special tick mark.
3. The auditor should be cautious of vouchers that are not in the name of the company but rather in the personal name of a partner, manager, secretary, director, or any other official. It might be possible that the expenses are for that individual rather than the company. For example, a partner could have purchased a car for himself and represented it as an official vehicle. The auditor should make certain that the goods purchased are relevant to the business and are properly recorded in the stock register.
4. The auditor should ensure that every voucher has been acknowledged or authenticated as in order by a responsible official. If the voucher is printed or rubber-stamped by suppliers, for example, it should be treated as valid.
5. The auditor should exercise extreme care when it comes to missing vouchers and receipts. He should inquire about their absence and get duplicate copies from the client.
6. The auditor should, as far as possible, refrain from seeking the assistance of the client’s staff in the scrutiny and verification of vouchers.
7. While reviewing the vouchers, the auditor should confirm that they are properly entered into the relevant financial records and that capital and revenue items are reported accurately.
8. As far as it is possible, the auditor should examine each and every voucher. Test checking may be employed in audit only when the internal control/internal check mechanism in the company is satisfactory and dependable.
Besides the above general considerations, an auditor should also take care of the following things in each and every voucher:
9. The date, amount, and name of the person in whose favour the voucher is issued should all be thoroughly checked. It should be assured that no vouchers are entered into the books that are unrelated to the client’s business.
10. It is important to double-check that the voucher corresponds to the period under audit.
11. On all vouchers, the amount should be stated in both words and figures.
12. All receipts in excess of Rs. 5,000 should have a revenue stamp affixed to them.
13. All vouchers need to be signed by an authorized person on behalf of the payee.
14. Any alterations made in the vouchers should have the initials of the concerned officer.
15. The auditor should ensure that correct accounts are debited or credited and that proper account classification has been done.
An auditor has to take utmost care in the vouching of transactions. To take an example, it is quite difficult to vouch for cash receipts from debtors. The sole evidence for money received from them is the counterfoil of receipts provided to them. However, this evidence is not very dependable. Fraud can be done by entering a lower amount in the counterfoil, or by issuing receipts to debtors from an unused receipt book, or by entering a lower amount on the debit side of the cash book, or by writing down the amount received as bad debt after receipt, and so on.
An auditor should first inspect the internal check system in place before vouching receipts from debtors. He should make certain that unused receipt books are in the control and supervision of a responsible officer. In addition, duties of taking sales orders and receiving payments must be properly segregated among staff. He must reconcile the dates and amounts on the counterfoil with the amounts in the cash book. The auditor must also see that amounts received through cheques are entered in the cash book. If it is not a practice to issue receipts in printed form for cheques received, the auditor should crosscheck daily lists of cheques received with entries in the cash book. He must also compare the rough cash book to the original cash book. The auditor can also review the bank passbook with entries in the cash book.
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