BBA 6th Semester |Auditing (MGT362)

UNIT THREE: VOUCHING AND VERIFICATION

1.1 Voucher

Any documentary evidence supporting the entries in the records is termed as a voucher. Any
document, which supports the entries in the books of accounts and establishes the
arithmetical accuracy, is called a voucher.

1.2 Meaning of Vouching

Vouching means the examination of documentary evidence in support of entries to establish

the arithmetic accuracy. When the auditor checks the entries with some document it is called
vouching. Vouching is the acid test of audit. It tests the truth of the transaction recorded in
the books of accounts. It is an act of examining documentary evidence to ascertain the
accuracy and authenticity of the entries in the books of accounts.
The special considerations to be borne in mind by the auditor, in the course of vouching are;
1. Date of the voucher
2. The name of the party
3. Tick and audit rubber stamp
4. Authorization by the authorized person
5. Transaction relates to business
6. Revenue and capital
7. Amounts in words and figure
8. Account head
9. No assistance of member of client's staff to be taken for checking receipts
10. Missing vouchers
11. Proper filing
12. Signature of payee
13. Nature of payment
1.3 Verification of Assets

Verification is a process by which an auditor satisfies himself about the accuracy of the assets
and liabilities appearing in the balance sheet by inspection of the documentary evidence
available. Verification means proving the truth, or confirmation of the assets and liabilities
appearing in the balance sheet. Spicer and Pegler have defined verification as “it implies an

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inquiry into the value, ownership and title, existence and possession and the presence of any
charge on the assets”.

Thus, verification of assets includes verifying: -

1. The existence of the assets;
2. Legal ownership and possession of the assets;
3. Ascertaining that the asset is free from any charge, and;
4. Correct valuation
1.4 Points to be considered on verification

While conducting, verification following points should be considered by the auditor: -

1. Existence: The auditor should confirm that all the assets of the company physically
exist on the date of balance sheet.
2. Possession: The auditor should verify that the assets are in the possession of the
company on the date of balance sheet.
3. Ownership: The auditor should confirm that the asset is legally owned by the
company.
4. Charge or lien: The auditor should verify whether the asset is subject to any charge
or lien.
5. Record: The auditor should confirm that all the assets and liabilities are recorded in
the books of account and there is no omission of asset or liability.
6. Event after balance sheet date: The auditor should find out whether any event after
the date of balance sheet has affected any items of assets and liabilities.
1.5 Differences between vouching and verification

Vouching Verification
Meaning The act of examining the vouchers is Verification can be explained as
known as vouching. A voucher is establishing the truth or securing
any documentary evidence in some kind of confirmation with
support of a transaction entered in respect to the assets and liabilities
the books of account. appearing in the Balance Sheet of a
concern.

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Nature Vouching involves establishing the Verification goes beyond

& arithmetical accuracy and the vouching. It seeks to establish that
purpose authenticity of the transactions of a assets as stated in the Balance
concern. Vouching proves that an Sheet of a concern exist in fact and
asset ought to exist. that the liabilities are properly
disclosed. Verification proves that
an asset does exist.
Time It is done during the whole year. It is done at the end of the year.
Utility Certifies correctness of records. Certifies correctness of assets and
liabilities.
Personnel It is done by the junior staff of the It is done by the auditor himself
auditor under the supervision of a assisted by senior.
senior person.

1.6 Important points to be considered while vouching transactions

1. Serial: All the vouchers must be serially arranged and numbered according to date and
entries in the books of accounts. The entries in the books of accounts should also bear the
serial number of vouchers that will easy to correlate the voucher with the particular entry.

2. Date, Amount and Name: There is a chance that the voucher of the same date of the last
month or year may be produced again so, auditor should check the date of voucher
carefully. The voucher should contain the amount both in figure as well as in words. The
auditor should see that the amount tally with the amount entered in the books of accounts.
Each voucher should be in the name of the business concern and not in the name of any
individual i.e. official or partner or director. The vouchers of personal name should be
rejected or should check other relevant documents to confirm that the voucher is related
to the business. He should also confirm the name of the party issuing the voucher.

3. Particulars: The nature of item such as capital item recorded as revenue or vice versa, it
affects greatly final statements of the concern. So, the auditor should read particulars
column on the voucher carefully and ascertain the nature of item. Check the postings
made accordingly. Besides from the particulars the auditor can ascertain head of account,
title of the account, debit or credit effect of the transaction etc.

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4. Validity of Voucher: As far as possible the vouchers should be in printed form and
wherever necessary it should bear revenue stamp also. At least the voucher should bear
stamp of the receiving party. For petty expenses, there may not be such vouchers so,
auditor should take more regarding these vouchers because chances of fraud cannot be
denied.

5. Period: The period of the item is much important. Receipts and payments may relate to the
previous year, current year or next year. Entries are passed considering the period to
which it relates. Prepaid or pre-received items as well as received in advance and paid in
advance items should be properly accounted for considering any provisions or reserves
made. The auditor should pay careful attention towards this.

6. Other Precautions:
a. As far as possible vouching of a particular period should be made at a stretch.
b. Checked vouchers and related documents should be marked with stamp, signature
or both so that they cannot be reproduced.
c. List of rejected vouchers should be made and they should be kept away from the
particular voucher file or in a separate file.
d. List of missing vouchers is also to be prepared and the relevant documents must be
checked more carefully.
e. In the case of duplicate vouchers, auditor should be more alert and get information
till he satisfies regarding why there is duplicate voucher. All the relevant
documents must be checked more carefully.
f. Auditor should satisfy himself that entries are passed correctly in the books of
accounts. Checked entries should be marked with particular sign or tick mark.
Explanation should be collected regarding un- ticked items and these items be
compared with missing vouchers for confirmation.
g. The auditor should not be taken help from the employee of the concern in respect
of vouching.
h. All his experiences and observations should clearly be noted down which will
become part of his report.

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2 Vouching of income

2.1 Sales Book/ Credit sales

It is a practice of all business concerns to sale the goods not only for cash but also on credit.
Selling the goods on credit is a need of any business; even most of the sales are on credit
basis. The main evidence of credit sale is the sales invoices which are prepared by the client
himself. So, an auditor should very careful while vouching the credit sales. Before starting
vouching he should understand the process of credit sales and who is empowered to make
credit sales.

While vouching the sales book an auditor should proceed on the following ways.

1 He should first verify date, name of customer, quantity and quality / type of goods,
amount of incidental expenses such as duties, taxes, freight, octroi etc. and the total
amount from the sales invoice etc. and compare these with the entries in the sales
register.
2 He should check calculations, totals and castings of the sales register and daily or
weekly or monthly summary.
3 See that the incidental expenses are recorded to respective account. If these are paid
on behalf of customers and they will be recovered, they are recorded to customers
account.
4 Confirm that only credit sales are recorded in sales register. Sale of assets,
investments or other items is not recorded.
5 See that for every sale during the period under audit, invoice is prepared and all
invoices are recorded in the sales register. There is no omission or duplication.
6 See that goods sold but not dispatched are not included in closing stock.
7 Verify that there is no fictitious sales are recorded and as well no sales are left
unrecorded.
8 Examine that there is no manipulation of accounts through showing higher or less
sales and showing higher or less closing stock.
9 Check carefully sales at the beginning and at the end of the year because, there is a
chance of manipulation of accounts e.g. to increase profit, fictitious sales may be
recorded at the end of a year and they are reversed at the beginning of the next year
showing as sales returns.

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10 See that the invoices cancelled are not thrown out or destroyed but they are kept
marking as ‘Cancelled’.
11 Verify that rate of trade discount is as per the policy of the business. He should
enquire in detail if high or low rate of discount is allowed to particular customers.
12 Sales to sister concerns and the companies where the directors are interested should
be checked very carefully.
13 Verify all the vouchers related to the credit sales such as orders received,
correspondence, sales invoice, goods outward & package register, transport receipts
for expenses etc. with the sales book.
14 Wherever necessary he should call for confirmation of debtors directly to him.
15 See that goods sent on consignment and on sale or return basis are not included in
credit sales.
16 If there are any alterations or erasures, see that they are initialed and authenticated by
the responsible officer.
The auditor should verify also the goods returned by customers for one or other reasons. He
should examine the credit note sent to customer by checking name, particular of goods
returned, amount and calculations, signature etc. He should also compare credit notes issued
and debit notes received with the entries passed in sales return book. He should verify
correspondence in this regard and check entries in the gate keeper’s book, goods inward
register and stock book.
2.2 Cash sales
1. The cash sales register should be fully checked with the carbon copies of the cash
sales bill. Particular attention should be given to first and last month of accounting
year.
2. A summary of daily cash should be checked.
3. The auditor should be more careful where cash memos are issued even where cash is
not received.
4. A certain representative item should be subjected to vouching in depth to get an idea
about reliability of internal control.
5. Salesman’s summary, gatekeeper’s summary and cashier summary should also be
compared.
6. Dates of cash sales bills and the date on which the receipts are recorded in the cash
book must be the same. If the dates differ, the same should be inquired into.

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7. Where cash sales bills are cancelled, all the copies, including original copy dully
cancelled, should be kept in record.
8. Where it is a policy of the company to allow a discount, it should be seen that
uniform policy is followed.
9. If the sales are made by the salesman, their statements should be verified and
reconciliation should be made with the record of cash received.
10. Verify the entries in the cash book and the corresponding effect in sales A/c in the
ledger.

2.3 Rental receipts

1 Check the nature of the agreement of know the condition on which an asset is given
on the rent
2 From the original documents, check the rates, periods, mode of payment i.e. cash or
cheque.
3 Check the outstanding rent for last year and find out which of the receipts are for last
year and how much rest still outstanding.
4 Check the entries in the cash with pay in slips and the receipts issued.
5 Check the outstanding rent at the end of the year and see that provision has been made
for the same. Next year’s record may be verified to find the receipt of the same.
2.4 Interest and dividend received
1 First check the income stated in the current year’s profit and loss account.
2 Ascertain the amount received on account of last year and find the outstanding
balance receivable.
3 From cash book vouch the entries for income received.
4 Check the Tax Deducted at Source (T.D.S.) calculation and verify the effect given in
the ledger.
5 Compare the income received in total with that of the last year and enquire about any
significant variation.
6 Get a list of investments and check whether the income on all the securities and
investments has been received. If any securities are pledged with bank, get a
certificate from bank.
7 Ascertain the income for the year, still to be received and check whether provision has
been made for the same.
8 In case of interest received check the calculations.

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9 For interest from bank, verify the entry in the bank statement. For fixed deposits,
check whether any F.D has matured or any F.D. newly kept.

2.5 Sales return

1. Check the total of Sales Return Journal and find the amount recorded in profit and
loss account.
2. Check every item of sale return with the credit notes sent to customer.
3. Check the entry in gate-keeper record for return inward movement of goods and
check the internal control. Verify the entry in stock register.
4. Compare the extent of earlier year sales and return with that of the current year.
5. The sales return in the beginning of the year and of the end of the year should be
carefully scrutinized.
6. Enquiry should be made if there is a wide gap between the original transaction
and the return of goods
7. If the goods are return for unacceptable quality, enquiry about the steps taken after the
return of the goods and verify the documentation.
3 Vouching of expenses
3.1 Salaries and Wages
Payments on account of salaries and wages need to be vouched carefully, since amounts
which were either not due or in excess of those due may have been paid by the client. The
evidence in support of such payments generally is internal. It can, therefore, be relied upon
only if it has been produced in the normal course of business and there exists an efficient
system of internal control which could be expected to prevent it from being fabricated.
Therefore, before proceeding to verify payment made on account of salaries and wages, the
auditor should examine the internal control procedure as regards the following:
i. Appointment, promotion, transfer and discharge of employees.
ii. Recording attendance of workers engaged on the time basis, as well as particulars of
jobs performed by piece workers.
iii. Arrangement for the preparation of wages and salaries bills and their analysis.
iv. Sanctioning the disbursement of wages and salaries.
v. Arrangement for disbursement of wages and salaries for workers and employees not
present on the pay day.
vi. Custody of the wages records.

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vii. Mechanical recording of attendance of workmen by time recording clocks installed at

the factory gate, as well as in each department and the reconciliation of the total labor
force with the total of workmen in different departments; also the recording of
attendance of the staff departmental' in separate registers.
viii. Preparation of wages and salary bills by members of the staff, who are not connected
with maintaining a record of engagement of workers, recording of their attendance or
fixation of their wages.
ix. Rotation of duties of different clerks employed for preparation of wages and salaries
bills so that calculations, additions and extensions are not carried out by the same clerk
every month.
x. Verification of salaries and wages bills in case of newly appointed persons by
reference to orders for appointment, promotions or transfer made during each month
and of those payable to old employees by reference to old records and on reference to
the record of attendance.
xi. Checking and authorizing the overtime and piece work payment by officers who not
associated with the Wages Department.
xii. Withdrawal by a single cheque from the bank of the exact amount of wages and
salaries payable as are entered in the wages and salaries bill, depositing in the bank the
undisbursed amounts.
xiii. Disbursement of wages in the presence of an official who is in a position to identify the
worker and ensure that wages are not being paid to persons other than the workmen.
3.2 Purchases Book/ credit purchase
Before starting the work of vouching an auditor should study the process of credit purchases
i.e. how the requisitions are collected, how the supplier is fixed and orders are placed, who
signs the order, what are the stages of recording the goods received etc.
While vouching purchase book –
1 An auditor should verify the goods requisition slips, purchase orders, purchase
invoices or bills, goods inward notes and goods inward book and verify the figures &
particulars with the purchase book.
2 He has to see that only credit purchases are recorded in the purchase book.
3 While verifying purchase invoices he should check that –
- they are in the name of the client,

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- the date of invoice and date of entry in the purchase book is same and it is related to
the period under audit,
- the goods are not capital goods (assets),
- the goods are purchased for the business purpose and are dealt with the business of
the client,
- the quantities and their qualities mentioned in the invoices are as per the order
placed,
- the prices mentioned in the invoices are as per the orders or as per the amendments
made thereafter having authentic evidences,
- duties, freight, carriage, sales tax etc. are charged as per the orders placed,
- the officer who has checked the invoices has put his full signature marking as
‘Checked’.
4. The procedure of purchases is followed and the responsible officer has authorized the
purchase.
5. The amount entered in the purchase book is after adjusting incidental expenses and the
trade discount.
6. Purchase order, invoice, goods received note and goods inward register show the same
figures and particular and it tallies with the entries in the purchase book.
7. If columnar purchase book has been maintained, he should also check the entries
passed in this book are correct.
8. The auditor should examine carefully that there is no manipulation of account through
showing more or less purchase and more or less stock.
9. When the duplicate invoice is produced, he should take careful enquiry about the
original invoice and see that it is not produced elsewhere.
10. When officials of the company purchase in the name of the client company for
availing the benefits of higher trade discount, see that such purchases are debited to
their personal accounts and not to the purchases accounts. Such practice should be
discouraged.
11. Purchases of first and last month of a year should be vouched carefully because there
is a chance to manipulate accounts by transferring purchase of last year to the current
year or vice versa and purchase of current year to next year or vice versa.
12. After checking an invoice, an auditor should tick mark or put initial.
13. He should check the totals and casting of purchase book and related registers.

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If the goods received are defective or it is received late or if it is of different quality or type or
for any other reasons goods may be returned back to supplier. The auditor should verify that
the debit note is prepared accordingly and sent along with the goods returned as well as
proper entries are passed in the goods outward register and purchase return book.
3.3 Cash Purchases
While vouching, cash purchases the auditor should verify cash memos, goods inward register,
counterfoils of cheques issued, bank pass book, receipts from suppliers etc. He should
compare the figures and particular, from the above vouchers with the cash book entries.
Entries in the cash memo or inward invoice should tally with the entries in the goods inward
book. He should see that all purchases are recorded to the purchases account and not to any
other account.

3.4 Petty cash expenses

1 Identify the persons who handle Petty cash.
2 Verify the ceiling limit of disbursement through petty cash.
3 Note the limit of Imprest system.
4 See whether petty cash payments are regularly checked by a responsible official.
5 Examine reconciliation Statements prepared regularly for petty cash, based on
vouchers.
6 Verify the cashbook for the transfer of cash under Imprest system to petty cash
7 Scrutinize the Petty cash vouchers along with Invoices, Bills, Receipts signed by the
recipients.
8 Trace the postage expenses along with entries in Mail Outward Register. Compare
with previous periods and obtain satisfactory explanations for abnormal movements.
9 Check the castings of columns, totals and main totals.
10 Trace the postings from the petty cash book into the Nominal Ledger Head of
Account.
11 Verify the petty cash physically available on a certain date, by way of surprise check.
3.5 Travelling Expenses
The voucher for travelling expenses should normally contain the under mentioned
information
1 Name and designation of the person claiming the amount.
2 Particular of the journey.
3 Amount of railway or air fare.

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4 4. Amount of boarding or lodging expenses or daily allowance along with the dates
and times of arrival and departure from each station.
5 5. Other expenses claimed, e.g., porter charge, tips, conveyance, etc.

If the journey was undertaken by air, the counterfoil of the air ticket should be attached to the
voucher; this should be inspected. For travel by rail or road, the amount of the fare claimed
should be checked from some independent source. Particulars of boarding and lodging
expenses and in the case of halting allowance the rates thereof should be verified. The
evidence in regard to sundry expenses claimed is generally not attached to T.A. bills. So long
as the amount appears to be reasonable it is usually not questioned. All vouchers for
travelling expenses should be authorized by some responsible official. In the case of foreign
travel or any extraordinary travel, the expenses, before being paid, should be sanctioned by
the Board.
3.6 Directors’ Fees, Allowances and Remuneration
For vouching the item the auditor should first examine the amount of fees, allowances and
remuneration as mentioned in the article of association or as decided by the resolution passed
in the meeting of board of directors or shareholders or as sanctioned by the government or as
prescribed by the Companies Act. Then he should vouch the payment with the minute book
of board of directors, directors’ attendance register and receipts. He should confirm that the
ceiling limit under the act is not crossed.

3.7 Rent, Rates and Taxes

For vouching rent the auditor should examine agreement and the receipts. He should verify
outstanding balance of last year paid in the current year and amount paid in advance and see
that these are properly accounted for. For rates and taxes he should verify the bills and
receipts and the period to which it relates. Outstanding amount paid and advance payment
made should also be checked.

3.8 Advertisement
Now a day huge amount is being spent on advertisement. First the auditor should examine
the resolutions passed for advertisement containing the decisions regarding media, form,
frequency, agency, ceiling limit of expenditure etc. He should vouch the bills and receipts of
the advertising agency or of the press or of the office of the company working in particular

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media. If there is contract with a particular advertising agency he should go through the
agreement.

3.9 Income Tax

The auditor should verify challans of payment of tax, certificate of tax deducted at source
given by the authorities, returns filed by the client, assessment order, counterfoils of cheques
issued, bank pass book etc. If tax is deducted at source from the salaries of employees or
payment to contractors etc. he should see that it is paid within the time limit.

3.10 Interest Paid

The auditor should verify first the amount of loan outstanding, rate of interest, period etc.
from the loan agreement and bank pass book of loan account. Receipts for interest given by
the bank or the financial institution should be compared with the entries in the cash book.

In the case of interest on debentures the auditor should verify the rate of interest and the
period. He should make actual calculations and verify it with the debenture interest ledger,
bank pass book and counterfoils of cheques.

In both the cases, he should see that last year’s outstanding interest paid during the year and
current years outstanding are rightly recorded in the books.

3.11 Audit Fees

An auditor should verify the resolution for appointment and remuneration of the auditor or
order of the Central Government if he is appointed by the government. He should check the
receipt of the auditor, counterfoil of cheque issued, bank pass book and compare the figure
with the entry in the cash book.

3.12 Repairs
The auditor should check first whether repairs are done departmentally or a contract is given
for particular repairs or there is permanent contract for repairs on annual basis. He has to see
that the repairs are authorized by the authority and all the formal procedure is completed. He
should check the bills of stores and materials purchased, labour charges, engineer’s
remuneration etc. Compare the figures of receipts and bills and counterfoils of cheques issued
with the entries in the cash book. He has to see that any capital expenditure is not shown as
revenue expenditure and vice versa.

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3.13 Bank Charges

It means amount charged by bank for rendering services such as issuing demand drafts,
collecting bills and cheques, discounting bill, collecting other income or making payments of
any expenses etc. It should vouch with the help of bank pass book, bank statement and bank
advice.

3.14 Insurance Premium

The auditor should examine the policy or cover note and the receipt for the first or renewal
premium. He should also check the period to which it relates. If part of the premium is related
to the next year see that it is debited to prepaid insurance account.

3.15 Freight, Carriage and Custom

The auditor should examine the bill and receipt of shipping company, the bill of shipping
agent, railway receipt, and receipt for custom duty paid, bill of entry, counterfoils of cheques
etc. He should also enquire for goods received note and goods cleared note. Evidences for
other expenses such as port trust charges, weight men expenses etc. are also be verified. See
that rebate and refund (if any) are properly adjusted and accounted for. If expenses are related
to fixed assets see that these are debited to respective asset account.

3.18 Commission
Commission paid to agents, travelling salesmen, dealer and consignee can be verified with
the help of receipts, agreements, account sales, counterfoils of cheques, bank pass book,
statements of sales& orders received and other correspondence.

The auditor should check the rate of commission and actual calculations should be done to
verify the figures of commission. If incentive commission is given, see whether it is as per
the agreement.

4 Vouching and verification of assets

4.1 Book debts/ debtors
The term ‘book debts’ refers particularly amounts recoverable from customers, but in
practice it is applied to a wide range of claims which a business may carry as an asset in its
books. Therefore, the auditor should Verify of debtors employing the following
procedures:
i. Examination of records;

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ii. Direct confirmation procedure (also known as ‘circulation procedure’)

iii. Analytical review procedures.
The nature, timing and extent of audit procedures to be performed is, however, a matter of
professional judgment of the auditor. The general procedure is as under:

4.1.1 Examination of Records

1. The auditor should carry out an examination of the relevant records himself about the
validity, accuracy and recoverability of the debtor balances. The extent of such
examination would depend on the auditor's evaluation of the efficacy of internal
controls.
2. The auditor should check the agreement of balances as shown in the schedules of
debtors with those in the ledger accounts. He should also check the agreement of the
total of debtor balances with related control account. Any differences in this regard
should be examined.
3. Verification of subsequent realizations is a widely-used procedure, even in cases
where direct confirmation procedure is followed. In the case of significant debtors, the
auditor should also examine the correspondence or other documentary evidence to
satisfy himself about their validity and accuracy.
4. In the case of claims made against insurance companies, shipping companies,
railways, etc., the auditor should examine the correspondence or other available
evidence to ascertain whether the claims have been acknowledged as debts and there
is a reasonable possibility of their being realized. If it appears that they are not
collectible, they should be shown as doubtful. Similar considerations apply in respect
of claims for export incentives, claims for price escalation in case of construction
contracts, claims for interest on delayed payments, etc.

5. While examining the schedules of debtors with reference to the debtors' ledger
accounts, the auditor should pay special attention to the following aspects:
a) Where the schedules show the age of the debts, the auditor should examine
whether the age of the debts has been properly determined.
b) Examine the amounts outstanding are made up of items which are not
overdue are correct to the credit terms of the entity.
c) Whether transfers from one account to another are properly evidenced.
d) Examine the provisions for allowances, discounts and doubtful debts

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4.1.2 Direct Confirmation Procedure

1. The verification of balances by direct communication with debtors is theoretically the
best method of ascertaining whether the balances are genuine, accurately stated and
undisputed, particularly where the internal control system is weak.
2. The auditor employs direct confirmation procedure with the consent of the entity
under audit.
3. The confirmation date, the method of requesting confirmations, and the particular
debtors from whom confirmation of balances is to be obtained are to be determined by
the auditor.
4. The debtors may be requested to confirm the balances either (a) as at the date of the
balance sheet, or (b) as at any other selected date which is reasonably close to the date
of the balance sheet. The date should be settled by the auditor in consultation with the
entity.
5. In appropriate cases, the debtor may have sent a copy of his complete ledger account
for a specific period as shown in the entity's books.
6. The method of selection of the debtors to be circularized should not be revealed to
the entity until the trial balance of the debtors' ledger is handed over to the auditor. A
list of debtors selected for confirmation should be given to the entity for preparing
requests for confirmation which should be properly addressed and duly stamped, The
auditor may request the client to furnish duly authorized confirmation letters and the
auditor may fill in the names, addresses and the amounts relating to debtors selected
by him and mail the letters directly.
7. Any discrepancies revealed by the confirmations received or by the additional tests
carried out by the auditor may have a bearing on other accounts not included in the
original sample. The entity should be asked to investigate and reconcile the
discrepancies.

4.1.3 Analytical Review Procedures

In addition to the audit procedures discussed above, the following analytical review
procedures may often be helpful as a means of obtaining audit evidence regarding the various
assertions relating to debtors, loans and advances:
1 Comparison of closing balances of debtors, loans and advances with the
corresponding figures or the previous year;

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2 Comparison of the relationship between current year debtor balances and the current
year sales with the corresponding budgeted figures, if available;
3 Comparison of actual closing balances of debtors, loans and advances with the
corresponding budgeted figures, if available;
4 Comparison of current year's aging schedule with the corresponding figures for the
previous year;
5 Comparison of significant ratios relating to debtors, loans and advances with similar
ratios for other firms in the same industry, if available;
4.2 Cash in hand
1 Special care is necessary with regard to verification of cash balances. There can be no
certainty that the cash produced for inspection was in fact held by the custodian.
2 For this reason, the cash should be checked not only on the last day of the year, but
also checked again sometime after the close of the year without giving notice of the
auditor’s visit either to the client or to his staff.
3 If there is more than one figure for cash balance e.g. when there is a cashier, a petty
cashier, a branch cashier and in addition, there are imprest balance with employees,
all of them should be checked simultaneously, as far as practicable, so that the
shortage in one balance is not made good by transfer of amount from the other.
4 It is desirable for the cashier to be present while cash is being counted and he should
be made to sign the statement prepared, containing details and the cash balance
counted. If he is absent at the time the cash is being verified, he may subsequently
refute the amount of actual cash on hand which may put the auditor in an
embarrassing position.
5 If the auditor is unable to check balance on the date of the Balance Sheet, he should
arrange with his client for all the balance to be banked and where this cannot
conveniently be done on the eve of the close of the financial year, it should be
deposited the following morning. The practice should also be adopted in the case of
balance at the factory, depot or branch where cash cannot be checked at close of the
year.
6 If it is not possible, the auditor should verify the receipts and payments of cash up to
the date he counts the cash. This should be done soon after the cash balances have
been counted. The cash book of the day on which the balance is verified should be
signed by the auditor to indicate the stage at which the cash balance was checked.

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7 If any cheques, or drafts are included in cash balance the total there of should be
disclosed.
8 If the auditor finds any slip, chit or amount given in respect of temporary advances
paid to the employees, included as part of the cash balance, he should have them
initialed by a responsible official and debited to appropriate accounts.
4.3 Petty Cash
1 Petty cash in hand should be verified with Petty Cash Book
2 Also check up the balance of Petty cash account in General Ledger.
3 Vouch the transaction of last month property to ascertain that fictitious payments are
not entered into
4 Some of the points given for verification of cash in hand will be applicable for Petty
Cash also.
4.4 Bank Balance
1 To verify cash at bank, the auditor should examine the bank pass book and compare it
with the balance as shown by the bank column of the cash book.
2 Check bank reconciliation statement with bank statement / pass book of subsequent
period.
3 The auditor should get a certificate regarding the balance at the bank directly from the
bank.
4 Ensure that the balance as shown by the cash book is brought into the balance sheet as
Cash and Bank’ and not `Balance as shown by the pass book’.
5 The auditor should also see that the `cheque outstanding’ and `cheques not yet
collected’ are genuine. If some of these cheques are more than six months old, he
should make inquires, and have them reversed in the books of accounts.
6 Fixed deposits with the bank can be verified by examining the deposit receipt.
7 If there are more than one bank account such as `Dividend Account’. “Interest
Account’ etc., all such accounts should be checked and the balances should be
verified upon the same date.
4.5 Closing Stock or Inventory
1 At first he should examine the method of stock taking and method of valuation of
stock and see that whether these methods are consistently used or not.

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2 Call for list of items in stock and see that they pertain to the business of the client.
Confirm that consumable stores, spare parts, loose tools, dead stock items etc. are not
included in stock.
3 Check that quality and quantity as per stock sheet tallies with that of as per book
records. Also check all the calculations.
4 If the goods are in warehouse check the warehouse certificate in this respect carefully.
5 Check that goods sold but not dispatched are not included in stock and goods
purchased but not received are not excluded from the stock.
6 See that goods with consignee, branches and goods sent on sale or return basis are
properly valued and included in the closing stock.
7 Check that the goods damaged and destroyed are approved by the responsible official
and valued properly.
8 Compare the value and quantity of closing stock with the same figures of the last few
years. As the same, compare the amount and rate of gross profit with the same figures
of the last few years. Enquiry should be made if the difference is considerable.
9 Obtain a certificate of closing stock duly signed by the general manager / chief
executive / managing director.
4.6 Bills Receivable
1 The auditor should examine the Bills Receivable Book with the Bills Receivable not
matured but in hand on the date of the Balance Sheet.
2 When any bills are in the process of collection the details of the same have to be
verified with bank certificates.
3 If the Bills Receivables in hand are many, auditor should make a list of bills for his
convenience.
4 If there are any bills that have been discounted, and still not matured, he has to
examine the details of the same very carefully and should confirm with the bank
because they are to be shown as contingent liabilities by way of a note in the Balance
Sheet.
5 While examining the Bills, the auditor has to pay special attention to see that they are
properly drawn, stamped and duly accepted.
6 He has to check whether any bills are overdue. If so auditor should ask for the details
of the action initiated, etc. If there are any bills which are doubtful of recovery, he

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should see whether any adequate provision has been made for the anticipated loss on
account of bad debts.
7 He should see that in case of dishonored bills, the same is not shown as Bills
Receivable. the auditor has also to check up whether noting formalities have been
properly complied with or not.
8 In case the auditor has visited his client after the Balance Sheet date, many of the bills
due on the Balance sheet date might have matured or honored. Hence the auditor has
to vouch such bills with Cash Book or Pass Book and reconcile the balance.
9 If the bill has been renewed after the Balance Sheet date, then also the value of the
original bill due on Balance sheet date should be shown as Bills Receivable and
interest on renewed bills properly accounted.
10 If the bills endorsed have been dishonored, the original drawee is to be debited and
endorsee is to be credited.
4.7 Loans and advances
4.7.1 Loans against the security of Land and building
1 The auditor has to examine the mortgage deed, see if the copy has been properly
executed and registered in favor of the client.
2 The auditor has to examine the title deeds deposited with the mortgage deed.
3 The auditor, if required, has to examine the value's certificate in order to ascertain the
value and sufficiency of the security.
4 The auditor has to confirm that the property is properly insured and insurance
premiums have been paid in time.
5 The auditor has to examine the title of the Borrower to the property, etc.
6 If the mortgage is a second mortgage, the auditor has to confirm that the same is
brought to the knowledge of the first mortgagee. In this case he has to take the
acknowledgement of title deeds from the first mortgagee.

4.7.2 Loans against the security of goods.

1 The auditor has to examine the nature of the goods and confirm that the goods are
really belonging to the borrower. He should see whether the loan is granted against
railway receipt, lorry receipt, warrant, godown keeper’s receipt etc.
2 In case goods are stored in the godown, he has to see that the rent of the godown is
paid in full and the goods are fully insured.

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3 The auditor should examine the value of the goods by comparing them with the
present market value. Regarding quality and quantity, he may rely on the inspector’s
reports.
4 If the goods are of perishable nature, the auditor has to examine the turnover of the
stock of the client.

4.7.3 Loans against the security of stocks and shares

1 He should call for a statement of stocks and shares given as security and confirm that
all of them are fully paid up.
2 He should see whether an instrument of transfer is properly stamped and is properly
executed.
3 He should see that their value is properly disclosed as per the prevailing market rates.
4 He has to ensure that there is a sufficient margin on the loans advanced.
5 He has to see whether the charge is properly registered or not.
4.8 Patent and Trademarks
1 The ownership of patent rights is verified by inspection of certificate issued for grant
of patent, by the prescribed authority.
2 If it has been purchased, the agreement surrendering it in favor of the client should be
examined.
3 If there are a number of patents held by the client, obtain a schedule giving the full
details thereof or verify with reference to the register maintained by the client.
4 It must be verified that patent rights are alive and legally enforceable and renewal fees
have been paid on due dates and charged to Revenue Account. The last renewal
receipt should be examined to ascertain that the patent has not lapsed.
5 See that the patents are properly registered in the name of the client only.
6 See that the cost of patent is being written off over its useful period of life.
7 In case the patent is acquired, cost paid for the same and all relevant expenses are to
be capitalized.
8 If the patent is created by the client by the research experiments and laboratory work,
only the actual expenses incurred for it in the process are to be capitalized.
4.9 Copyrights
Copyrights are the property of either an author or a publisher in respect of producing or
reproducing books or articles. Its value depends upon merit of the book or article. The asset is
shown in the balance sheet at cost less amounts written off.

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1 The auditor should examine the written agreement of assignment along with the
royalty paid to the authors etc., for such copyrights.
2 He has to see that such assignments are properly registered.
3 If the client is the owner of many copyrights, the auditor should ask the client to
prepare a schedule of copyrights and get the detailed information to confirm that the
same is shown in the Balance Sheet.
4 Regarding the value of copyrights, it should be remembered that this asset has no
value in the long run. Hence, value is determined on revaluation basis and period of
copyrights.
5 If any copy rights does not command the sale of any books, then the same should be
written off in such year. The auditor has to verify the same in detail.
4.10 Goodwill
1 Whenever the company has purchased or acquired a running business and has paid for
it an amount, in excess of the book value of its net assets, the excess is called
`Goodwill’. It can be verified from the vendor’s agreement and the auditor should see
whether there is a specific sum which is paid or whether it is the excess of price paid
over the tangible assets and see that it is properly recorded.
2 When the company has written up the values of all its assets on a revaluation and has
raised a Goodwill Account in the books, the Goodwill appears in the Balance Sheet.
In this case, the auditor should see the basis of valuation and get satisfied about the
same. If he is not satisfied, the fact should be reported to the shareholders.
3 He should see that such excess is credited to a Capital Reserve or Revaluation
Reserve and no dividend is being declared from it.
4 If Goodwill has been created by any other means, the auditor should see that all
relevant facts are properly disclosed and are supported by documentary evidence.
4.11 Investments
Investment may be a share certificate, government bond certificate, government loan
certificate, debenture certificate, etc. For verification of such securities, the following
procedure is adopted.
1 Obtain a schedule of investments in hand at the beginning of the audit period. Obtain
the details of description of investments together with distinctive number of face
value, date of purchase, book value, market value, rate of interest, date of payment of

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interest or, date around which dividend is declared, etc., with also the details of
interest or dividend received along with tax deducted at source.
2 Add to the above list, purchase made during the year and delete the investments sold
during the year with all the above details.
3 Balance this schedule and compare the balance with general ledger and Balance sheet.
4 Check the market value of investments with reference to stock exchange quotations or
other suitable method, on Balance Sheet date and see that the values are disclosed in
the Balance sheet.
5 Inspect the certificates or securities physically on the Balance Sheet date.
6 Compare the income received with amount due and adjust the accrued income.
7 Confirm the uncalled liability on partly paid shares held as investment shown as
contingent liability by way of a note to the Balance Sheet.
8 See that adequate provision is made for any shortfall in the book value of investment
shown in the Balance Sheet.
9 For investment in the capital of partnership, the partnership deed and copy of accounts
of partnership firms, is to be verified. Also adjust the share of profit and loss for the
partnership period.
10 Investments which stand in the name of persons other than that of the company are to
be confirmed with appropriate sanction.
11 For investment lodged with others as security or lying with banks or share brokers,
obtain a certificate from the parties concerned.
12 In case of application money paid for shares which are still to be allotted, that fact is
to be specially disclosed in the Balance Sheet.
4.12 Leasehold Property
Normally the lease or right to use the property is granted for certain number of years. At the
expiry of the period of lease, the rights go back to the original lessor. Various steps involved
in the verification of leasehold rights are stated below.
1 Inspect the lease agreement to ascertain the amount of premium paid, period of lease,
other terms and conditions, like maintenance, insurance, etc.
2 See that the lease is properly registered with the Registrar because a lease for a period
exceeding one year is not valid unless it has been granted by a registered document.
3 Ascertain those conditions, the failure of which might result in the forfeiture or
cancellation of lease, and see whether they have been properly complied with.

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4 See whether sub-lease is valid as per lease agreement, in case if it is granted, by

referring to sub-lease agreement.
5 See that the premium paid and acquisition expenses of lease are being amortized
(written off) over the period of lease adopting a suitable basis.
6 In case, any provision is to be made under the collapse clause for payment on the
expiry of the term of lease, see that the same is properly and continuously provided.
7 In case of leasehold land, if any building is constructed by the lessee, see the position
and ascertain the correct method of presentation of such expenditure for disclosure in
the Balance Sheet.
4.13 Plant and Machinery
1 The auditor should ask for such a register maintained by the client and see that all
items of plant and machinery are recorded properly giving full details.
2 All fixed assets are required to be physically verified by the management. Therefore,
the auditor should enquire whether such physical verification was undertaken or not.
If yes, he should ask for necessary papers pertaining to the same. If there is any
discrepancy, reasons for the same should be asked.
3 Any new purchase made during the year are to be verified with reference to purchase
invoice and other papers regarding installation of the same.
4 Total value of plant and machinery as shown by Fixed Asset Register should tally
with ledger account maintained in the financial books.
5 Where any item of plant and machinery is sold, scrapped or transferred the auditor
should check relevant entries for the same and verify that they are removed from the
Fixed Assets Register.
6 The auditor should verify that adequate depreciation is provided on all items of plant
and machinery and method of depreciation is consistently followed from year to year.
7 Auditor should see that the entire plant and machinery stands in the name of the client
and are free from any charge. If plant and machinery is mortgaged, then he has to
verify that the documents are properly executed and mention of mortgage is made in
the Balance Sheet.
4.14 Furniture and Fixtures
1 The auditor should see that a proper record showing quantitative details of furniture
and fixtures owned by the client is maintained.

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2 The auditor has to see that all expenses incidental to the purchase of furniture and
fixtures is capitalized along with the purchase price paid for it.
3 The auditor has to enquire whether the furniture and fixtures have been properly
insured or not.
4 The auditor has to see that adequate provision for depreciation on furniture and
fixtures is made.
5 The auditor if possible can go for physical verification of furniture on test check basis
or he can rely on the management certificate to that effect.
6 He should further see that any damaged or unusable furniture, if existing, is fully
written off in the books.
4.15 Land and Buildings
1 The auditor has to examine the title deeds of the property owned by the client and
confirm that the same is freehold.
2 If the property has been purchased during the year, the auditor has to examine the
correspondence with the broker, or solicitor in details.
3 When a building has been constructed on the freehold property, the same is to be
verified from builder’s bill or architect’s certificate.
4 Where the title deeds are deposited with the mortgagee on a mortgage, then a
certificate from him to that effect is to be obtained for verification.
5 If the title deeds are deposited with the bankers or solicitors for safe custody, the
auditor should get a certificate from them to confirm the fact.
6 If required, the auditor should ask the solicitor of the client to confirm the validity of
the title deeds relating to the property.
7 The auditor has to see that the conveyance of the property is in the name of the client
and the same is properly registered.
8 The auditor has to ensure that the property is properly insured.
9 The auditor should see that separate account for land and building is maintained.
Because on land, usually no depreciation is provided.
4.16 Motor Cars
1 In respect of motor vehicles check appropriate depreciation method and percent has
been charged or not.
2 Where number of motor cars is large, it would be advisable if the client maintains a
motor vehicle register. Where no such register is maintained, the balance of Motor

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Car account in the General Leger should indicate the registration number and cost of
each vehicle.
3 The auditor should examine the registration book to see whether the description
agrees with the details given by the client. The auditor should see that the person in
whose favor registration is made holds it on behalf of the client and gives a
confirmation that he holds it and there is no charge on it.
4 Many times, vehicles are purchased by the client for the purpose of employees who
pay a certain sum of money every month from the salaries. When all the money has
been paid, the client transfers the car in the employee’s name. The auditor should
check the relevant records for recovery made and the transfer price.
5 Sometimes cars are owned by employers and given to employees and cost of
maintenance is borne by the client and the auditor in these cases should confirm that
whenever the client owns a car, he should provide depreciation on it.
6 Similarly, when the car is sold as scrap to the employees the auditor should compare
the written down book value with the scrap price realized and see that the balance is
charged to revenue account.

4.17 Stores and Spare Parts

1 The asset known as stores and spare parts consists of materials which are means for
consumption in the business and not for resale. Lubricants, dyes, fuel, etc., are
examples of stores, while spare parts of machinery are preserved to maintain it in
proper order.
2 The asset as such should be clearly shown in the Balance Sheet.
3 The auditor should obtain an inventory of stores and spare parts duly certified by a
responsible officer. He should count the stock himself and thus verify the existence by
personal inspection, if possible.
4 It is to be remembered that the stores consumed are debited to the Manufacturing
Account and spare parts used are debited to the Machinery Account.
5 The asset is to be shown at cost price in the Balance Sheet. It is not a depreciable asset
by use and provision for depreciation is not necessary.
6 However, the loss on account of breakage or waste on being worn out should be duly
written off.

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4.18 Preliminary Expenses

1 These are the expenses incurred for creating or incorporating company i.e. legal
expenses for drafting Memorandum of Association, Articles of Association, Stamp
fees, etc.
2 Auditor should check the prospectus or the statement in lieu of prospectus for amount
of preliminary expenses.
3 Contract with promoters, vendors, underwriters should be checked.
4 Board of Directors authorization for payment of expenses should be checked.
Receipts should be obtained for payments.
5 Actual expenditure for preliminary expenses should not exceed amount mentioned in
prospectus or statement in lieu of prospectus. Such excess should be approved by
shareholders in general meeting.
6 Preliminary expenses should be written off in a reasonable number of years (usually 3
to 5 years).
7 Preliminary expenses to the extent not written off should be shown under
Miscellaneous Expenditure, on the Asset side of the Balance Sheet.
8 Preliminary expenses written off during the year should be shown separately in the
Profit & Loss Account.
5. Vouching and verification of liabilities
5.1 Share Capital
Though capital is not a liability of the company the auditor is required to verify it so that he
can report on the genuineness of the balance sheet.

1. If it is the first year of existence of the company

a. He should examine the Memorandum of Association and Articles of Association

b. He should check the Cash Book, Pass Book, Director’s Minute Book to find out
the number of shares, the various classes of shares, the amount received thereon
and the amount due from the shareholders.
c. If some shares have been allotted to the vendors, he should examine the agreement
between the vendors and the company.
d. In case shares are issued at a premium he should ensure that the premium on issue
should be credited to a separate account.
e. Allotment and call money should be verified.

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f. He should check the forfeiture and reissue of shares, if any

g. He should ensure that all the relevant provisions of the Companies Act are
complied with.
(2) If it is not the first year of the company
a. The share capital would be the same as in the previous year unless there are some
alterations or addition by way of fresh issue or otherwise. He should ensure that the
relevant legal provisions are fulfilled.
b. Similarly for reduction of share capital, he should see the provisions of the Act as
specified in Sec. 100.
c. In case bonus shares are issued, the auditor should check whether the permission
from concerned authorities is taken, whether proper resolution is passed and
whether the capitalization entries are correctly passed.
d. In case rights shares are issued the auditor should check the bank book, bank
statements. He should ensure that the required resolutions are passed and that the
permission of the concerned authorities is taken, with particular reference to Sec.
81.
5.2 Reserves and Surplus
Reserves may be general or specific in nature. Sinking fund, Capital Redemption
Reserve, Reserve for Contingencies are specific reserves.
Auditor’s duty in verification of reserves is as follows:
a. He should check the Profit and Loss Appropriation account for transfer to
reserves, to see the provisions of transfer of profit to reserve are complied
with.
b. He should check the board resolution for transferring the profit to the
respective reserves.
c. He should ensure that the movement in the reserve accounts i.e. additions
to/deductions from previous year’s balance are properly disclosed as per the
requirements of the law.
d. Ensure that reserves are properly utilized as required by law.
e. See that the reserves are properly disclosed in the balance sheet as per the
law.
5.3 Loan Borrowed
For verification of loans, the auditor should consider the following points:

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1 The auditor should examine the Memorandum and Articles of the Company to find
out the powers of the Company to borrow money.
2 The auditor should examine the agreement and correspondence regarding the loan.
3 The auditor should vouch the receipts of loan, with the receipts issued in respect of
the loan and the corresponding entries in the cash book.
4 The auditor should examine the certificate of registration issued by the Registrar of
Companies, if the loan has been secured by mortgaging any property.
5 The auditor should vouch the payment of interest with the counterfoils of the receipts
issued to the vendors and the corresponding entries in the Cash Book.
6 He should also check the repayment of loan with the counterfoils of the cheque books,
the bank pass book and the cash book.
5.4 Creditors
1 The auditor should ask for a schedule of creditors and check the same with the
purchase ledger as that is already examined by him.
2 He should ensure that all purchase made during the year especially at the end of the
year are included in the accounts of the creditors.
3 In case of suspicion about any creditors, the auditor with the consent of the client can
ask the statement of account to be sent and verify the same by scrutinizing ledger
accounts.
4 He should see the given discount, goods returned etc, and confirm that the same are
genuine.
5 The auditor should ask for the reason for not paying any overdue creditors.
5.5 Provision for Taxation
1 In case of a limited company it is compulsory that the taxation provision is to be
made. But it cannot be ascertained accurately because the final liability on this
account can be known only when the assessment is completed. Therefore, a fair
estimate for providing this liability is necessary.
2 However, when finally, the assessment is over, the auditor should see that the excess
or short provision is properly adjusted in the books.
3 Where any appeal is pending and the liability challenged, the same is a contingent
liability. Hence the same is to be properly ascertained and disclosed in the Balance
sheet.

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5.6 Employees’ deposits

Normally, in commercial and industrial ventures, the employees who deal with cash or stores
are required to deposit cash security as a safeguard against some possible misappropriation or
pilferage. Sometimes, the employees instead of paying cash endorse trustee securities in favor
of the employers.

1 Such a security in cash or in securities should be deposited separately in the bank.

2 It should be shown distinctly on the liabilities side of the Balance Sheet.
3 He should verify the amount of deposits by reference to the certified schedule
received from the client.
5.7 Bills Payable
The auditor should verify the Bills Payable in the following ways:

1 The Bills Payable Book should be checked with the Bills Payable Account.
2 The Bills Payable already paid should be checked from the Cash Book and the
returned Bills Payables should be examined.
3 To verify the Bills Payables which have not yet matured at the year end, the auditor
should examine the Bills Payable book and should check the Cash Book of the
succeeding years to see whether any payment has been made in respect of such bills.
In case of any doubt, the auditor may ask the drawers for the confirmation of the bill.
4 The auditor should see if any charge has been created on the assets of the concern by
accepting the bill and he should see that the facts are disclosed in the Balance Sheet.
5.8 Proposed Dividend
1. The auditor should ensure that the dividend proposed complies with the provisions of
the Companies Act, the decisions of the Court, especially in the matters of provision
for depreciation, distribution of capital profits, transfer to reserves etc.
2. The auditor should verify the board resolution and the entry in the Profit and Loss
Appropriation account.
3. The auditor should ensure that as per the requirements of the Companies Act, 1956
gross dividend has been provided for.
4. To ensure completeness, the auditor should cross-check the names in the dividend list
with those in the register of shareholders.

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5.9 Outstanding Expenses

The auditor should obtain a certificate from a responsible officer to the effect that all the
outstanding expenses have been included in the current year’s accounts. The amount paid on
various accounts should be verified from the entries in the Cash Book. It should be ensured
that the outstanding expenses included that part which is unpaid at the date of the Balance
Sheet. The following points should be noted.
1 He should carefully note that all expenses, e.g. rent, rates, interest, wages, salary,
audit fee, legal expenses, etc., have been accounted for in the books.
2 He should check entries in the books passed on the basis of invoices to ensure that
they are not related to the year under audit.
3 He should compare all the paid and unpaid expenses of the current year with those of
the previous year to see that there is not much difference.
4 It should be ensured that all outstanding wages and salaries have subsequently been
paid.
5.10 Debentures
1 The auditor should examine the provisions regarding the power of the company to
issue debentures as contained in Memorandum and Articles of Association.
2 If the debenture is issued as mortgage debenture, he has to verify the registration
certificate issued by the Registrar.
3 He should carefully examine the terms of debentures issue as contained in Trust Deed
and ensure that the same have been properly complied with.
4 The auditor should vouch the cash received on this account with the cash book.
5 The auditor should verify whether the interest on debentures is paid or provided,
properly at regular intervals interval or not.
6 In case the debentures have been redeemed during the year the same is to be
confirmed with the Minutes of Board of directors. Counterfoils of the cheque books.
Bank Pass book and Cash book, returned debenture certificate etc.
7 If the debentures have been issued as a collateral security, then he should see that the
fact is properly disclosed in the Balance Sheet.

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