What is an Audit?

Audit is an independent examination of financial statements of an entity that enables an auditor

to express an opinion whether the financial statements are prepared (in all material respects) in
accordance with an identified and acceptable financial reporting framework (e.g. international or
local accounting standards and national legislations).
Spicer and Peglar defined audit as:
“Audit is such an examination of the books, accounts and vouchers of a business, as shall enable
the auditor to satisfy himself whether or not the balance sheet is properly drawn up, so as to
exhibit a true and correct view of the state of the affairs of the business according to the best of
his information and explanations given to him and as shown by the books; and if not, in what
respects it is untrue or incorrect.”
L.R.Dicksee. “Auditing is concerned with the verification of accounting data determining the
accuracy and. reliability of accounting statements and reports.” –
R.K. Mautz. “Auditing is the systematic examination of financial statements, records and
related.

This view of audit is presented by ISA 200 Objective and General Principles Governing an Audit
of Financial Statements.
The phrases used; “to express the auditor’s opinion” means that the financial statements give a
true and fair view or have been presented fairly in all material respects. True and fair
presentation means that the financial statement are prepared and presented in accordance with
the requirements of the applicable International Financial Reporting Standards (IFRS) and local
pronouncements/legislations.
What we can understand as the essential features of an audit from the above definition and
explanation are as under:
• An auditor involves in examination of financial statements, the auditor is not responsible for the
preparation of the financial statements.
• The end result of an audit is an opinion to assist the user of the financial statements. Auditing
therefore, relies heavily on professional judgment, not merely on the facts.
• The auditor’s opinion makes reference to “true and fair” or “fair presentations” but “true and
fair” is again a matter of judgment. It is not precisely defined for the auditor.
• In order to make the user of the auditor’s report able to feel confident in relying on such report,
the auditor should be independent of the entity. Independent essentially means that the auditor
has no significant personal interest in the entity. This allows an objective, professional view to be
taken.
You will note that this is a wide concept of an audit which can be applied to any entity, not just to
limited companies. However, in this course, we are concerned primarily with audits of limited
companies (often known as statutory or external audits). Any other audit applications will be
clearly indicated for you in the text.
Why is there a need for an audit?
The problem that has always existed at the time when the manager reports to the owners is that:
whether the owners will believe the report or not? This is because the reports may:
a. Contain errors
b. Not disclose fraud
c. Be inadvertently misleading
d. Be deliberately misleading
e. Fail to disclose relevant information
f. Fail to conform to regulations
The solution to this problem of credibility in reports and accounts lies in appointing an
independent person called an auditor to examine the financial statements and report on his
findings.

What is the distinction between auditing and accounting?

Relationship between auditing and accounting
Auditing and accounting are closely connected but both are separate activities. The directors of a
company are responsible for establishing books of accounts that will accurately record financial
information and that are used for preparing the annual financial statements. It is similarly the
responsibility of the directors to adopt consistent and appropriate accounting policies in order to
prepare and present the financial statements. The financial statements have to comply with
national legislative requirements and International Financial Reporting Standards (IFRSs).
Accounting is the process of recording, classifying, summarizing and reporting financial
information in a logical/systematic manner for the purpose of decision making. To provide
relevant & reliable information, accountants must have a thorough understanding of the
principles and rules that provide the basis for preparing the financial statements. In auditing the
financial statements, the concern is with determining whether the presented financial statements
properly (true and fair) reflect the financial information that occurred during the accounting
period. Since auditors are primarily concerned with the end result of this work i.e. do the
financial statements show a true and fair view? In order to arrive at their conclusion, the auditors
must have a deep knowledge and understanding of accounting (including applicable accounting
standards) and in practice, the directors will consult with the auditors as to appropriate
accounting policies to follow.
What are the advantages and disadvantages of auditing?
Advantages of an audit
We have seen that the need for an external audit in the case of companies arises primarily from
the existence of split-up of ownership from control. There are however, certain advantages in
having financial statements audited even where no statutory requirement exists for such an audit
in the case of a sole-tradership, partnership, or non-profit organizations for example.
These advantages can be summarized as follows:
a) Disputes between management may be more easily settled. For instance, a partnership which
has complicated profit-sharing arrangements may require an independent examination of those
accounts to ensure, as far as possible, an accurate assessment and distribution of the profits.
b) Major changes in ownership may be facilitated if past accounts contain an independent audit
report, for instance, where two sole traders merge their business to form a new partnership.
c) Application to lenders/financial institutions for finance may be strengthened by the submission
of audited accounts. However, do remember that a bank, for instance, is likely to be far more
concerned about the future of the business and available security, than by the past historical
accounts, audited or otherwise.
d) The audit is likely to involve an in-depth examination of the business and so may enable the
auditor to give more constrictive advice to management on improving the efficiency of the
business.
Disadvantages of an audit
Like most thing in life, audits are not entirely without their disadvantages. There are two main
points to make here:
b) The audit fee! Clearly the services of an auditor must be paid for. It is for this reason that few
partnerships and even fewer sole traders are likely to have their accounts audited.
c) The audit involves the client’s staff and management in giving time to providing information
to the auditor. Professional auditors should therefore plan their audit carefully to minimize the
disruption which their work will cause.
What are the different stages of audit?
Auditing is essentially a practical task. The auditor always needs to reflect the nature of the
circumstances of the entity under audit. It is unlikely that any two audit assignments will ever
identical. It is however possible to identify a number of standard stages in a typical external
audit. These are as follows:
- Audit appointment
- Engagement letter
- Initial planning
ƒ Knowledge of the business
ƒ Risk Assessment
ƒ Internal control review (procedures)
ƒ Control procedures (authorities/approvals/segregation of duties)
- Preparation of the audit plan
- Accounting system review
- Analytical review techniques (Compliance Procedures-Application of control test procedures)
like purchasing are according to the controls established.
- Considering the ways in which audit evidence can be sought
- Substantive testing (transaction level procedures)
- Reasonable assurance
- Review of the financial statements (compliance with the standards/material misstatement etc.)
- Preparation and signing of report

Scope of Audit
The scope of audit is increasing with the increase in the complexities of the business. It is said
that the long-term objectives of audit should be to serve as a guide to the Management’s future
decisions. The scope of audit encompasses verification of accounts with an intention of giving
opinion on its reliability. Hence it covers cost audit, management audit, social audit, etc.

It should be remembered that an auditor just expresses his opinion on the authenticity of the
accounts. He has no power to take action against anybody. That is why it is said that “an auditor
is a watchdog but not a bloodhound.”

Objectives of Auditing
Auditors are basically concerned with verifying whether the accounts exhibit a true and fair view
of the business. The objectives of auditing depend upon the purpose of his appointment.

Primary objective
As per Companies Act, the primary duty (objective) of the auditor is to report to the owners
whether the Balance Sheet gives a true and fair view of the company’s state of affairs and the
profit and loss account gives a correct figure of profit and loss for the financial year. The auditor
is also concerned with verifying how far the accounting system is successful in correctly
recording transactions and to ascertain whether the accounts are prepared in accordance with the
recognised accounting policies and practices and as per statutory requirements and in his
opinion, the financial statements comply with the accounting standards.

Secondary Objectives
The following objectives are incidental to the satisfaction of the main objective of auditing. The
incidental objectives of auditing are:

Detection and prevention of errors and

Detection and prevention of frauds.
Detection of material frauds and errors as an incidental objective of independent financial
auditing flows from the main objective of determining whether or not the financial statements
give a true and fair view. As the statement on auditing practices issued by the Institute of
Chartered Accountants, an auditor should bear in mind the possibility of the existence of frauds
or errors in the accounts under audit since they may cause the financial position to be misstated.

Errors refer to unintentional mistake in the financial information arising on account of ignorance
of accounting principles i.e. errors of principle, or error arising out of negligence of accounting
staff i.e. clerical errors.

I. Errors are mistakes committed unintentionally because of ignorance or carelessness.

Types of Errors

Errors of Omission

These are errors which arise on account of the transaction being recorded in the books of account
either wholly/partially. If a transaction has been totally omitted it will not affect the trial balance
and hence it is more difficult to detect. On the other hand, if a transaction is partially recorded,
the trial balance will not agree and hence it can be easily detected.
Errors of Commission
When incorrect entries are made in the books of account either wholly or partially, such errors
are known as errors of commission. e.g. wrong entries, wrong calculations, postings, carry
forwards, etc. Such errors can be located while verifying.
Compensating Errors
When two/more mistakes are committed which nullify each other. Such errors are known as
compensating errors. e.g. if in an account the amount of a transactions is wrongly debited by Rs.
100 less and if in same account another transaction is wrongly credited by Rs. 100 less, such a
mistake is known as compensating error.
Error of Principle
These are the errors committed by not properly following the accounting principles. These arise
mainly due to the lack of knowledge of accounting e.g. Revenue expenditure being treated as
Capital Expenditure or vice versa.
Clerical Errors
A clerical error is one which arises on account of ignorance, carelessness, negligence etc. and
may include one or more of the above except.

Location of Errors
It is not the duty of the auditor to identify the errors but in the process of verifying accounts, he
may discover the errors in the accounts. The auditor should may follow one or more of the
following procedures in this regard to locate errors and to rectify same:

Check the trial balance,

Compare supplementary totals of debtors and creditors with balances of main ledger extracted to
the trial balance, Compare the names of accounts appearing in the Ledger with the names of
accounts in the Trial Balance, Verify the totals and balances of all accounts and see that they
have been properly shown in the Trial Balance, Check the posting of entries from various books
into ledger. Check differences involving round figures such as 10, 100, 1000 etc. and whether
difference is divisible by 9 which could mean interchange of figures or totaling mistakes etc.
Timely careful scrutiny is the only remedy for detection of errors.

II. Detection and Prevention of Fraud:

A fraud is an error committed intentionally to deceive/to mislead/to conceal the truth or material
facts. Frauds may be of three types.

Types of Frauds

Misappropriation of Cash

This is one of the major frauds in any organisation and normally occurs in the cash department.
This kind of fraud takes place either by showing more payments or recording less receipts.

The cashier may show more expenses than what are actually incurred and may misuse the extra
cash. e.g. showing wages to dummy workers.

Cash can also be misappropriated by showing less receipts. Cash received from 1st customer is
misused, when the 2nd customer pays, it is transferred to the first customer. When the 3rd
customer pays, it is transferred to the 2nd customer. Thus, the fraud goes on forever. Such fraud
is called “Teeming and Lading”. To prevent such frauds, the auditor must check in detail all
books and documents, vouchers, invoices, etc.

Misappropriation of Goods
Here records may be made for the goods not purchased for/ not issued to the production
department and the goods may be used for personal purpose. Such a fraud can be detected by
checking stock records and physical verification of goods.
Manipulation of Accounts
This is finalizing accounts with the intention of misleading others. This is also known as
“Window Dressing”. It is very difficult to locate, because it is usually committed with or without
the connivance of higher-level management. The objective of “Window Dressing” may be to
evade tax, to borrow money from bank, to increase the share price, etc.

Limitations of Auditing

The inherent limitations are:

First of all, the auditors work involves exercise of judgment, for example, in deciding the extent
of audit procedures and in assessing the reasonableness of the judgment and estimates made by
the Management in preparing financial statements. Further much of the evidence available to the
auditor can enable him to draw only reasonable conclusions therefrom. The audit evidence
obtained by an auditor is generally persuasive in nature rather than conclusive in nature. Because
of these factors, the auditor can only express an opinion. Therefore, absolute certainty in auditing
is rarely attainable. There is also a likelihood that some material misstatements in the financial
information resulting from fraud or error, if either exists, may not be detected.
The entire audit process is generally dependent upon the existence of an effective system of
Internal Control. Further, it is clearly evident that there will always be some risk of an internal
control System failing to operate as designed. No doubt, the Internal Control system also suffers
from certain inherent limitations. Any system of Internal control may be ineffective against fraud
involving collusion among employees or fraud committed by management. Certain levels of
management may be in a position to override controls, for example, by directing subordinates to
record transactions incorrectly or to conceal them, or by suppressing information relating to
transactions.

Such inherent limitations of internal control system also contribute to inherent limitations of an
Audit.

Sr. No. Limitations of Auditing Details

1 Non-detection of errors and Auditor may not be able to detect certain frauds which
frauds are committed with mala fide intentions.

2 Dependence on explanations Auditor may not be able to find out misrepresentations

by others if any given by others if they are given with a view to
conceal fraud detection.

3 Dependence on opinions of Auditor has to rely on the views or opinions given by

others different experts viz. Lawyers, solicitors, engineers,
architects, etc. He can’t be an expert in all the fields.

4 Conflict with others Auditor may have difference of opinion with the
accountants, management, engineers, etc. In such a
 case, his personal judgment plays an important role. It
differs from person to person.

5 Effect of inflations Financial Statements may not disclose the true picture
even after the audit due to inflationary trends. (as
statements are prepared on historical cost basis)

6 Corrupt practices to The management may use corrupt practices to

influence the auditors influence the auditors and get a favourable report about
the state of affairs of the organisation.

7 No assurance Auditor can’t give any assurance about future

profitability and prospects of the company.

8 Inherent limitations of the Financial statements do not reflect the current values
financial statements of the assets and liabilities. Many items are based on
personal judgment of the owners. Certain non-
monetary facts may also distort the true position.

9 Detailed checking not Auditor can’t check each and every transaction.
possible

Different types of audits

An audit examines your financial records and transactions to verify they are accurate. Typically, audits
look at your financial statements and accounting books to compare information. You or your employees
may conduct audits. Or, you might have a third party audit your information (e.g., IRS audits- internal
revenue services). Many business owners have routine audits, such as once per year. If you are not
organized or don’t keep thorough records, your audits might take more time to complete.
Types of auditing can vary from business to business. For example, a construction business might conduct
an audit to analyze how much they spent on a specific project (e.g., costs for contractors or supplies).
Overall, audits help ensure your business is operating smoothly. So, what are the various types of audits?
1. Internal audit
Internal audits take place within your business. As the business owner, you initiate the audit while
someone else in your business conducts it. Businesses that have shareholders or board members may use
internal audits as a way to update them on their business’s finances. And, internal audits are a good way to
check in on financial goals. Although there are many reasons you may conduct an internal audit, some
common reasons include to:
Propose improvements
Monitor effectiveness
Make sure your business is compliant with laws and regulations
Review and verify financial information
Evaluate risk management policies and procedures
Examine operation processes
2. External audit
An external audit is conducted by a third party, such as an accountant, the IRS, or a tax agency. The
external auditor has no connection to your business (e.g., not an employee). And, external auditors must
follow generally accepted auditing standards (GAAS). Like internal audits, the main objective of an
external audit is to determine the accuracy of accounting records. Investors and lenders typically require
external audits to ensure the business’s financial information and data is accurate and fair.
Audit reports
When your business is audited, external auditors usually give you an audit report. Audit reports include
details of the audit process and what was found. And, the report includes whether your financial records
are accurate, missing information, or inaccurate.
3. IRS tax audit
IRS tax audits are used to assess the accuracy of your company’s filed tax returns. Tax auditors look for
discrepancies in your business’s tax liabilities to make sure your company did not overpay or underpay
taxes. And, tax auditors review possible errors on your small business tax return. Auditors usually conduct
IRS audits randomly. IRS audits can be conducted via mail or through in-person interviews.
4. Financial audit
A financial audit is one of the most common types of audits. Most types of financial audits are external.
During a financial audit, the auditor analyzes the fairness and accuracy of a business’s financial
statements. Auditors review transactions, procedures, and balances to conduct a financial audit. After the
audit, the third party usually releases an audit opinion about your business to lenders, creditors, and
investors.
5. Operational audit
Operational audits are similar to internal audits. An operational audit analyzes your company’s goals,
planning processes, procedures, and operation results. Generally, operational audits are conducted
internally. However, an operational audit can be external. The goal of an operational audit is to fully
evaluate your business’s operations and determine ways to improve them.
6. Compliance audit
A compliance audit examines your business’s policies and procedures to see if they comply with internal
or external standards. Compliance audits can help determine whether or not your business is compliant
with paying workers’ compensation or shareholder distributions. And, they can help determine if your
business is compliant with IRS regulations.
7. Information system audit
Information systems audit mostly impact software and IT companies. Business owners use information
system audits to detect issues relating to software development, data processing, and computer systems.
This type of audit ensures the system provides accurate information to users and makes sure unauthorized
parties do not have access to private data. Also, IT and non-software businesses should regularly conduct
mini cybersecurity audits to ensure their systems are secure from fraud and hackers.
8. Payroll audit
A payroll audit examines your business’s payroll processes to ensure they are accurate. When conducting
payroll audits, look at different payroll factors, such as pay rates, wages, tax withholdings, and employee
information. Payroll audits are typically internal. Conducting internal payroll audits helps prevent
possible external audits in the future. Businesses should conduct internal payroll audits annually to check
for errors in their payroll processes and remain compliant.
9. Pay audit
Pay audits allow you to identify pay discrepancies among your employees. A pay audit can help you spot
unequal pay at your company. During a pay audit, analyze things like disparities due to race, religion, age,
and gender. Pay audits can also help you ensure workers are paid fairly based on your business’s industry
and location.
10. Forensic audit
Forensic audits are highly technical audits that are often conducted as part of a criminal or civil
investigation. Forensic auditors apply both accounting knowledge and investigative procedures. They
may use the results of these audits as evidence in legal proceedings or to resolve disagreements between
corporations or company shareholders.
11. Single audit
Single audits are highly complex report cards. Companies typically perform them under the generally
accepted auditing standards (GAAS) and the generally accepted government auditing standards
(GAGAS). A single audit becomes important to conduct if a company has spent more than a certain
amount of money. These audits evaluate not only a part of the company but the entire company's
compliance and control. They typically apply to non-federal government agencies and non-profit
organisations.
12. Employee benefit plan
An employee benefit plan audit examines the financial statements of the company's benefit plan for the
employees. This type of audit can identify areas for improvement in plan efficiencies, operations, controls
and how well the plan complies with specific regulations. Generally, independent public accountants
perform audits of employee benefit plans.
13. Integrated audit
Integrated audits primarily assess how an organisation monitors and controls its financial accounting and
reporting and are required for certain companies. Auditors adhere to strict guidelines developed by the
Public Company Accounting Oversight Board (PCAOB). They work to identify and evaluate how a
company oversees its transactions, operations and financial processes.
14. Statutory audit
Statutory audits verify whether the company complies with government regulations for banks, investment
firms, public companies and insurance companies. These are like external audits but to verify the
accuracy of specific financial reports, including bank statements, investment earnings and the number of
clients. To increase public trust, many companies make these reports transparent by releasing their
findings.
15. Value for money audit
Non-profit organisations often implement value for money audits to assess resource management and
operations. For example, an auditor may discover a home-building charity that is overpaying for supplies.
The auditor can make recommendations for the company to research alternate suppliers, helping them
redistribute funds to other divisions of the charity. These audits specifically study:
Economy: Auditors review how companies acquire and distribute resources.
Effectiveness: Value for money audits evaluate how effective organisations are at using their resources to
meet their overall financial and operational goals.
Efficiency: Auditors analyse the efficiency of a company's processes and systems.
16. Agreed-upon procedures
During agreed-upon procedures (AUP) audits, the parties requesting the audit and the party or parties
conducting the audit agree to certain terms. Often, AUP audits are used to evaluate a specific process or
procedure, and the company only shares the results between the parties named in the agreement. For
example, an organisation's executive may decide to audit how the product development division uses its
resources. Companies may also use AUP audits to learn more about a company they want to merge with
or acquire. In AUP audit reports, auditors share objective information rather than recommendations or
opinions.
17. Special audit
Special audits are typically internal audits that focus on a narrow function or process within a company.
Owners, shareholders or upper-level management may authorise special audits. A special audit is the
result of a specific allegation of fraud or misconduct. These audits may investigate areas such as:
Safety compliance
Construction
Hiring procedures
Fraud
Royalties
Taxes
Audit Procedure: What Is It?
An audit procedure (or audit) is a formal inspection conducted by independent parties like accountants,
auditors, management consultants, etc., where they perform various tests as part of their assessment
process! The idea behind this type of testing relies partly on prevention- it’s believed these types of
procedures help organizations identify risks before they happen through observing how processes are
currently carried out within the organization. A scheduled audit procedure in this context is usually
performed by an external party like a consultant for example but can also be carried out internally as part
of the company’s ongoing audit process. In either case, it should not only involve examining how
systems work currently to spot any potential risks before they happen but identifying what controls need
to be put in place so that no errors occur going forward!
What is the Purpose of Audits?
The audit process is not always an easy one and it can be difficult to find time for, but the result of this
type of testing will provide organizations with a ‘snapshot’ view of what is going on within the
organization. Audits are carried out during different stages in a company’s life cycle so that they might
identify potential risks as well as opportunities associated with any given stage or phase! In this blog
post, we’ll cover what various types of audit methods are available and which ones you should know
about if your company does regular internal or external audits!

1. Inquiry:
The most basic type of audit, which is asking questions. When an audit engagement begins, the
company and staff being audited agree to provide auditors with the right to obtain information that is
relevant to the preparation of the financial statements or the purpose of the audit. Auditors are granted
entry to individuals within the business who they feel will provide them with evidence. This audit
method mainly involves a series of interviews with staff who can be asked about their job responsibilities
and what they do on a day-to-day basis to see if procedures are being followed correctly or not.
2. Observation:
Requires you to observe a process or activity. If internal auditors walk around with their eyes open,
they’ll be able to note any irregularities that may point towards some form of fraud. The observer has no
direct contact with the subject matter and must rely on his/her observations for evidence, so this type of
audit cannot typically produce conclusive results which means it should not usually be used alone but
instead combined with other types, like examination for example.
3. Examination:
Looks at whether work was performed following company policies and regulations set out by an
organization’s audit policy. It is a very broad audit method and can include any number of audit
techniques depending on the situation, such as interviewing staff or visiting different departments to see if
their procedures are being followed correctly or not.
4. Computer-Assisted Audit Technique:
 Computer-assisted audit technique (or CAAT) combines manual review with computer-generated
analyses for improved efficiency in an audit procedure. The process begins by generating test data
which then goes through various types of testing before it’s compared to what was expected when running
the tests manually. A great tool for auditing agencies that helps increase accuracy while also reducing
human error at the same time!
5. Audit Analytical Procedure:
Looks at financial reports that have been produced using auditing standards, like GAAPs, for example.
When combined with analytical audit procedures, this audit method can be used to look for fraud by
reviewing the company’s financial statements and comparing them with what is expected when audit
standards are applied.
6. Inspection of Assets:
Examines whether work was performed following policies (in this case ones related to physical
property) or not but it relies on a thorough inspection of various types of assets which includes looking at
things like buildings/grounds, IT equipment, vehicles, etc. Inspecting these items allows auditors to spot
anything that doesn’t match up – such as missing data files on an employee computer- resulting in the
suspicious activity being found much earlier than if you were using inquiry audit alone!
7. Recalculation:
Recalculating numbers is one audit technique that is used to audit financial statements. This audit
method can be used for both internal and external audits – the purpose of which is to confirm numbers
being reported on an audit statement are in line with what was done or not, particularly when large
amounts of money have been either gained or lost by a company.
8. Confirmations:
Used to confirm that the financial statements have been prepared following audit standards, which
includes examining whether they’re correct and accurate. The confirmation audit can be either formal or
informal; it’s usually a series of questions asked by the auditor to ensure he/she has all the information
needed for this type of audit.
9. Audit Procedures for Inventory:
Inspecting records and documents audit relies on a comprehensive inspection of the company’s
documentation, such as audit trails for example. This type of audit allows you to look at things like
computer logs to spot any inconsistencies with what was reported or not which would signal fraud – it can
be used alone but is usually combined with other types such as examination when examining whether
work was performed correctly or not.
How Can Audit Types Be Combined?
The types of testing methods used during audit procedures can be combined to offer a more detailed
audit which is often the case during an audit. Some of these methods might be used in combination with
other types like examination for example:
Substantive Audit Procedures:
Audit procedures that examine a company’s economic and financial statements and supporting
documentation to see its state or position. They are used to detect inaccuracies that could occur in
financial statements. Substantive audit testing can be completed using analytical procedures, inspection,
confirmation, and recalculation.

Audit Procedures for Cash:

Audit procedures that audit the cash balances of a company. This audit is conducted by comparing the
cash balances with what’s expected to be available. It can also rely on an audit of bank statements or
demand drafts, as well as examining whether work was performed correctly and following procedures (i.e
do employees know how to handle money?). These can be completed using audit or inquiry methods,
which are used to examine information recorded in journals and ledgers.

Test of controls:
Audit procedures that audit and examine the controls of a company’s internal control system. A test of
control audit is used to ensure controls are in place and working effectively – if they’re not, then this
could represent fraud or errors which would need to be reported on an audit statement. These can rely on
audit techniques like computer-assisted audit technique (CAT) for example, as well as examination,
inquiry, observation, inspection, and re-performance which you’d use when examining whether work was
performed correctly or not.

Test of control examples:

– audit the work of a person – audit whether a computer is functioning correctly or not – audit
whether people are following procedures in line with the company’s internal control system Once the
testing methods yield results, the audit evidence is then recorded in audit reports and audit findings.

VOUCHING
Meaning of VOUCHING: The act of examining documentary evidence in order to ascertain the accuracy
and authenticity of entries in the books of account is called "Vouching". In other words, vouching means
a careful examination of all original evidences that is invoices, statements, receipts, correspondence,
minutes, contracts etc. with a view to ascertain the accuracy of the entries in the books of accounts and
also to find out, as far as possible that no entries have been omitted in the books of accounts.

DEFINITION OF VOUCHING: According to Dicksee."Vouching consists of comparing entries in

books of account with documentary evidence in support thereof”.
OBJECTIVES OF VOUCHING
 Each and every transaction is verified and ratified on the basis of documentary evidences, so that the
accuracy of the transaction can be known.
 Vouching is done to find out the errors and frauds committed in the books of accounts.
 To have accuracy in presenting the financial reports as true and fair
 Through vouching we can know that the transactions in the books of accounts are authorised by the
competent authority.
 To find out accuracy of entries appearing in the BOA
 To ensure that the distinction has been made between the capital and revenue items while recording the
transactions.
IMPORTANCE/ADVANTAGES/MERITS OF VOUCHING
 Vouching with diligent care and intelligence ensures the success of an audit work
 Vouching is a vital technique of an auditor to check the regularities and irregularities of the
transactions.
 It is only through vouching the true and fair view of the books of accounts, financial statements and
reports can be certified by auditor
 It helps to know whether documentary evidences are authorized by the responsible authority.
 Vouching helps to know that the transactions which are recorded are related to
ROUTINE CHECKING AND VOUCHING
Routine checking covers the checking of every carry forward, posting to ledger account and balancing of
account.
Vouching includes routine checking which is a mechanical checking, whereas vouching is made on the
basis of documentary evidence.
A voucher may be a sales bill, purchase bill, payment receipt, pay-in slip, etc. All such types of
documentary evidence are known as vouchers.
DIFFERENCE BETWEEN ROUTINE CHECKING AND VOUCHING
Routine checking vouching
 Comprise of checking arithmetical accuracy and clerical errors
 Checking of transactions and its validity and authenticity
 Its objective is to verify that the accounts have been correctly balanced
 The object is to vouch on documentary evidence
 Routine checking is included in vouching
 Vouching is a broader term as it includes routine checking
 Simple and mechanical  Intelligent and systematic process
 Scope is limited  Wider scope
 Reveals minor frauds  Reveals all kinds of errors and fraudulent activities
VOUCHERS
MEANING: A voucher is a written paper or document in support of an entry in the books of account.
Voucher is known as the evident for the support of a transaction in the books of account. It may be bill,
receipts, requisition form, agreement, decision, bank paying slip etc.

How to prepare an accounting voucher

An accountant has to prepare accounting vouchers for a company. The accountant uses the source
document to prepare the vouchers. The source documents are the papers related to a business transaction.
Such documents comprise cash memos, bills, bank deposit slips, receipts, chequebook counterfoils,
challans, and other information which proves the existence of a transaction in an organisation. Almost all
the vouchers in accounting will have the same details. A voucher usually includes the following details.

Serial number of voucher

Type and Date of Voucher
Debit and Credit Column
Amount in both figures and words
Total Column
Particulars column (where the brief description of the transaction is recorded)
Space for signature of accountant
Signature of manager or authorised person
Signature of receivers (for bank payment voucher or cash payment voucher)

PRINCIPLES OR TECHNIQUES OF VOUCHING:

At the time of vouching auditor should keep in view the following important principles in his mind…
1. Arranged Vouchers: First of all, auditor should check all the vouchers provided by the client are
properly arranged. These are in the same order as the entries are made in the books.
2. Checking of Date: The auditor should compare the date of the voucher with the date recorded in the
cash book.
3. Compare the Words and Figures: The auditor should satisfy himself amount written numbered
consecutively. All the vouchers should be properly filed. On the vouchers, its figures and words are same
or not.
4. Checking of Authority: The auditor should examine that all the vouchers are passed by the authorized
officer. If the voucher is passed by unauthorized person, it will not be correct.
5. Cutting or Change: If there is any cutting or change on the receipts and vouchers figures it should be
signed by the authorized officer. The auditor should satisfy himself by inquiring about it.
6. Transaction must relate to business: The auditor should carefully examine that the entries must relate to
the business.
7. Case of Personal Vouchers: The auditor should not accept the voucher in personal name. There is a
chance that an officer of the company has purchased any item in his personal capacity.
8. Checking of Account Head: Auditor must be satisfied about the head of account on which cash is
deposited and drawn. He should examine the documentary evidence in this regard.
9. Revenue Stamp: The auditor should also check that voucher bears a required revenue stamp or not?
10. Case of Cancelled Voucher: The auditor should not accept the cancelled voucher because it has
already served the purpose of payment. There will be a danger of double payment if it is accepted.
11. Important Notes: The auditor should take some important notes about those items which need further
evidence or explanation.
12. Payment: The auditor should check that whether payment is described partially or for complete
transaction of sale.
13. Agreements: These provide the basic information to the auditor. He should check the agreements,
correspondence and other relevant papers.
14. Printer Vouchers: Printer vouchers are considered true and these are legally acceptable. If these are not
printed then these are useless.
15. List of Missing Vouchers: Auditor should prepare the list of missing vouchers. This list will be helpful
in detecting the fraud and errors.
TYPES OF VOUCHERS
 Primary Voucher: Written evidence in original is said to be the primary voucher, for
example, invoice for a purchase.
 Collateral Voucher: When the original voucher is not available, copies thereof are
produced in support or subsidiary evidence in order to remove doubt from the mind of
auditor. Such a voucher is usually known as a collateral voucher.

Types of vouchers
A voucher is a supporting document for entries passed in accounting books. A voucher is prepared when
an invoice is received from the supplier and payment is done. It serves as proof of the occurrence of a
transaction and retains effective control over the payables process.
Importance of creating vouchers
Creating vouchers ensures that every payment is authorised and the item purchased is received. It
provides an effective internal control mechanism. They are also very helpful during audits. They serve as
evidence of transactions reported in the financial statements.
(1) Receipt voucher- It is also called a credit voucher. A receipt voucher is used to keep a record of cash
or bank receipt. They are of two types:

1. Cash receipt voucher- It contains information about cash received in hand.

2. Bank receipt voucher- It contains information about cheque received, demand draft or any other mode.

Some of the instances when a receipt voucher is prepared are:

Cash sales
Customer advances received
Receipt of interest, rent, etc.
Refund of tax
(2) Payment voucher- It is also called a debit voucher. A payment voucher is used to keep a record of
payments made in cash or through the bank. They are of two types:

1. Cash payment voucher- It contains information about cash payments.

2. Bank payment voucher- It contains information about payments made by the bank.
Some of the instances when a payment voucher is prepared are:

Payment of expenses such as rent, security, operating expenses, printing and stationery, etc.
Payment for purchase of raw material
(3) Journal voucher- A journal voucher is also called a non-cash voucher or transfer voucher. They serve
as proof of non-cash transactions.
2. Depreciating fixed assets of the company:
(4) Supporting vouchers- It serves as documentary evidence of transactions that happened in the past.
Example- One can attach the bill of an expense along with the primary voucher to support the same. Fuel
bills are attached with conveyance vouchers.
Every company prepares such accounting vouchers as they are extremely important for a business to track
down its income and expenses and ensure compliance with statutory requirements.
SAMPLE VOUCHERS
https://docs.prismerp.net/en/financial-accounting/type-vouchers/