CHAPTER Hi

VOUCHING OF CASH TRANSACTIONS

‘The main objects of the audit of the cash book may be sum-
marised thus:-—
1. To ensure that all receipts are accounted for ;
2. To ensure that no fraudulent payments have been made ;
3. To know that all receipts and payments have been properly
recorded ; and
4, To verify the cash in hand and at bank.
Vouching : Its Meaning
A voucher is a documentary evidence in support of a trans-
action in the books of accounts. Vouching is considered to be the
essence of auditing and therefore the auditor should be very careful
while vouching. Vouching means to substantiate an entry in the
books of accounts not only with any documentary evidence such as
an agreements, receipts, counterfoils of a receipt book or paying-in-
book, contracts, but also to sce that the transaction has been properly
authorised, recorded and entered in the books of accounts ; ¢.g., veri-
fication of the entries in the invoice book with the invoices, checking
of the cash receipts with the counterfoils of the receipt book, the
checking of the cash payments with the receipts of the payees and so.
on. Vouching means testing the truth ofitems appearing in the
books of original entry. The success of an auditor in vouching depends
upon his intelligence, critical bent of mind, common sense, obser-
vation and tact with which he handles his work. He should go behind.
the books of accounts and go to the source of a transaction. Ifhe
simply compares the entry, say on the credit side of the cash book
vith the voucher, it is possible that he might be deceived; eg., the
surchase might not have been for the business or the receipt might
ave been for the previous year. Ifitisa receipt side entry and if
he compares the entry with the counterfoil of the receipt book, it is
possible that Iess amount might have been entered on the counter-
foil than the money which has actually been received. Glever
frauds can be discovered only by proper vouching. Therefore,
it is very important that the auditor should vouch the items with
great care and intelligence. It is through vouching that an auditor
can satisfy himself as to the authenticity and completeness of trans~
‘tons in the books of accounts. In case he is negligent, he will be
'* guilty as was decided in the case of Armitage vs. Brewer & Knott.
 VOUCHING OF CASIT TRANSACTIONS 29

Vouching also means checking of additions, ledger postings,

extracting of balances in the ledger, ete. The extent to which the
auditor should check will depend upon the size of the business, the
accounts of which he is auditing. If it is a big business, efficient
internal check will be in operation and hence the auditor will be
justified in relying upon a few test checks, while in a small business,
internal check may not be in operation and hence the auditor will
‘have to check every entry. To be on the safe side, the auditor will
do well to check in detail because the curtailment of work will not
qn any way reduce his responsibility.
Voucher.
As explained above, a voucher is a documentary evidence in
support of a transaction in the books of accounts. It may be a receipt,
a counterfoil of a receipt book, an agreement, resolution passed by
the Board of Directors or sharcholders and as recorded in the minute
book, an invoice etc.
While examining the vouchers, following points must be borne
in mind :—~—
1. All the vouchers are consecutively numbered and filed in
order of occurrence. If the client has not done so, the auditor
has a right to ask him to doso. Ifthey are not properly
arranged, much valuable time will be lost in finding out a
particular voucher to check it.
2. He should pay attention to the dates, which must corres-
pond with the cash book, name of the party to whom the
voucher is issued, the name of the party issuing the voucher
and the amount, etc.
3. The vouchers inspected should be cancelled by a stamp lest
they may be produced again, Subsidiary documents such
as statements, invoices, etc, relating to such a voucher
should also be cancelled. In case stamp is not available,
the audit clerk should affix his initials or put a tick right
across the face of the voucher. Such a mark or stamp
should be put in the centre of the voucher to avoid its
removal by a dishonest clerk.
4. Special attention should be paid to those vouchers which
are in the personal name of one of the partners, directors,
manager or secretary, etc., aS such a voucher may not
relate to the business. In such a case, original invoice,
inward book, etc. should be examined to see whether the
goods were purchased for the business or for the individual
30 A HANDBOOK OF PRACTICAL AUDITING

to whom the voucher is addressed. He should ask the client

to issue instructions to the customers not to address the
vouchers to any individual of the firm or the company. If
on enquiry it is found that the goods were meant for one
of the officers, personal account of such an officer should
be debited.
He should see that every voucher is passed as in order by
a responsible officer. The signature of the officer should.
be noted. If the receipt isa printed one or it bears a
rubber stamp of the name of the firm, the voucher should
be taken as a genuine one,
He should also note if the voucher is properly stamped, if
the amount of the voucher is above twenty rupecs.
He should also find out the nature of payment as to whether
it relates to the business.
To which account the payment is posted revenue or
capital.
This is important as wrong posting will affect
the profit
and loss account and ultimately the balance
sheet.
Attention should be paid to the amount both
in words and
figures. If they differ, the matter shoul
d be investigated.
Amount mentioned in figures only, should be particularly
taken care of as a cypher or ficure
may be easily added to
a figure by a dishonest employee
w hich will make a lot of
difference.
10. Note should be made of any item which requ
ires further
elucidation or information or
evidence which is available
from Partnership Deed, Cont
racts, Articles of Association,
Minute Book, Leases etc.
11. If duplicate voucher for a missi

‘ the
mention this fact in his explanation
report. . cti
Transa> he should
such vouchers should
be carefull i
vouchers may not be See te
available fo t certain
such as salaries, types of payments
Wages, petty expens
es etc. Such payments
can be verified by reference to sal : .
petty cash book respectively. aries book, wages book,
 VOUCHING OF CASH TRANSACTIONS 3K.

12ome Above all, the audit clerk should not take the help of any-
members of the staff of the client while vouching except for-
an explanation.
- 13, Receipted invoices should not be accepted as a voucher as
there is a danger of the payment being made twice—once-
as a credit purchase and again as a cash transaction.
14. Sometimes business houses issue their own printed receipts
to be signed by the payee, which receipts are considered as.
vouchers. The practice must be discouraged as the dis-
honest employees of the client themselves may fill up such.
receipts and forge the signatures of the supposed payecs,
In case this has been done, the auditor should get more
documentary evidence such as statement or invoices ete.,
which should be attached with such a receipt, before he
passes such a voucher.
, 15. While examining the vouchers for insurance, rent, rates,
and taxes etc., the audit clerk should note the period
for which the payment has been made, Ifthe payment is
made for some months in advance, proper adjustments.
should be made.
Internal Check as regards Cash.
Before the auditor starts the vouching of the cash book, he
should enquire as to the system of internal check in operation. There-
are Jot of chances of misappropriation of cash if there is no well-.
organised system of internal check. He should enquire as to the
duties of the cashier, and whether he has access to the Iedger and
other books of original entry. If so, there are chances of fraud. In
case of big concerns, the question will not arise as the cashier will
have no time but to write his cash book. This danger is usually in
small concerns, The following system of internal check as regards
cash receipts is suggested ;
1. When cash is received, it should be acknowledged by-
means of a printed receipt which should have a counterfoil
or by a carbon copy receipt. Cashier should not sign
receipts and counterfoils. The receipts should be consecu-.
tively numbered. The unused receipt books should be kept
under lock and key. Spoiled receipts should be cancelled
and must not be detached from the counterfoils. No
blank counterfoils should be accepted.
2. As soon as cash is received, it should be entered in a rough
cash book or diary.
“4
32 A HANDBOOK OF PRACTICAL AUDITING

wy Remittances should be opened by the cashier in the

presence of a responsible officer. All cheques received
should be crossed ‘Not Negotiable—A/c Payee only.’
Automatic tills or cash registers are very useful for check-
ing receipts, Some cash registers or tills are so made that
a receipt is issued only when money is deposited in the
till, which device is very useful.
All the reccipts of the day should be deposited in the bank
at the end of the day or the next morning.
Bank reconciliation statement should be prepared frequent-
ly by the cashier aud also by some one else.
The cashier should not have any control over the ledgers.
Petty cash should be organised under the Imprest System.
Before a cheque is issued, it should be presented along with
the account of the payee to a responsible officer for his
signature. Cheques should be crossed ‘A/c Payee only,’
before they are despatched. Unused cheque books should
be kept under lock and key by a responsible official lest
they may be used by forging the signature of the officer.
Castings of the cash book should be independently
checked.
Internal control should be exercised over the preparation
of wage shects to prevent fraud and manipulation.
All payments as far as possible, except for petty cash,
should be made by cheques.
Iftravellers are permitted to collect money on behalf of
the company, the issue of receipts by them and deposits
of such moneys into the bank should be carefully control-
led. As a matter of fact, the system of collection by the
travellers should be discouraged as far as possible. Fide-
lity insurance Policies should be taken out as an additional
protection to the business if travellers are allowed to
money. The travellers should be collect
given receipt books
having tire cobies— one to be given to
the customer,
F te sent to the head office and
retained by them. i &
the third to be
44. The1¢ meth
m od of: recordin 8 the cash sales
with in detail below. ‘This has been dealt
should be so organised that
chances of misappropriation
are reduced to minimum
 VOUCHING OF CASH TRANSACTIONS 33

15. Cashier should not sanction the payments of special nature.

Directors should do so.
Procedure in regard to vouching the debit side of the Cash
Book,
After satisfying himself that there is a good internal check system
regarding the receipts and payments of cash, the audit clerk should
now proceed to vouch the debit side of the cash book. It is rather
very difficult to vouch receipts as some receipts may be omitted al-
together and therefore only an indirect evidence is available. He
should check a few items at random and if he finds that they are in
order, he may assume that the others will be correct but he must
not omit to compare the rough cash book or the diary with the cash.
‘book. If he fails to do so and later on a fraud is detected, he might
be held responsible.
Sometimes it is argued that the auditor is not responsible if he
‘does not check rough cash book or diary because such books are not
‘included in the ‘books of accounts,” The argument may appear to
‘be sound to some extent, but if such books are a part of the system
of account books maintained by the company, the auditor will be
failing in his duty if he does not examine these books. The duty of
an auditor is not only to examine the books of accounts but also to go
beyond them which means that he should examine the memoranda
books, and other evidence available in support of the correctness of
the books of accounts. Some of the important items which usually
appear on the debit side of the cash book and the duty of an auditor
in that connection are given below :—
1, Opening Balance.
This should be compared with the balance shown in the
duly audited balance sheet of the previous year. This is
done to see that the actual balance was brought down.
2. Cash Sales.
There are greater chances of fraud under this head. The
salesman may sell goods and may not enter in the cash
book and thus misappropriate the money. The following
system should be organised to avoid fraud. The salesman
should neither deliver the goods to the customer nor
receive cash for the goods sold. He should prepare three
carbon copies of the cash memo when goods are sold to a
customer, to whom two copies of the cash memo are
handed over. The goods are in the msantime sent to the
34 A HANDBOOK OF PRACTICAL AUDITING

cashier. The customer goes to the cashier and hands over

the cash memos. The cashier who receives the price of
the goods, hands over the goods and a copy of the cash
memo duly stamped as ‘cash paid,’ while the other
copy of the cash memo is retained by him. Sometimes four
copies of the cash memo are prepared. The fourth copy
is retained by the gate-keeper who hands over the goods to
the customer. At the end of the day, the salesman, the
cashier, and the gate-keeper prepare the summaries and
send them to the General Manager. The summary sent
by the salesman shows the quantity and value of the goods
sold ; one sent by the cashier will show the cash collections
against the cash memos and one sent by the gate-keeper
will show the goods delivered. All the three summaries
must tally. Ifthere is any discrepancy, it will mean some
fraud, The auditor should check here and there a few
items from the salesman’s summaries, cashier’s summaries
and the gate-keeper’s extracts. If the auditor does not
do so, he will be held liable ifany fraud is discovered
*Jater on, as was decided in the case of Pendleburrys Lid.
us. Ellis Green & Co., 1936.
Where automatic tills are in use, the entries in the cash sales
book and in the cash book should be verified from the till records.
In some business houses, cash memos are issued against goods
sold on credit. The reason advanced is that this system ensures
prompt payment. In such a case, there may be so many cash
memos against which there may be no cash. Therefore it would be
rather impossible to vouch cash. The auditor should disown his
responsibility in such a case. Such a system should, however, be
discouraged. x

3. Credit Sales, i.c., Cash received from Debtorsto whom

goods had been sold on credit in the past. | ~
Y
The auditor should vouch cash received from debtors to
whom goods had been sold on credit in the .past. The
only evidence available on account of this item is the
counterfoils of the receipts issued to the debtors. But this
evidence ,is not very reliable as Jess amount might
have been inserted in the counterfoil than what had
actually been received from the customer to whom a
receipt for the full amount might have been issued and
less amount recorded on the debit side of the cash book.
ee?
 YVOUCHING OF CASH TRANSACTIONS 35

Again if cash has been received from a debtor, a receipt might

have been issued from the unused receipt books unless they had
been keept under lock and key,
Particular attention should be paid to discount allowed to
customers. ‘The method of granting discounts should be enquired
into as there .are chances of manipulation, ¢g., a customer sends
Rs. 95 and is allowed Rs. 5 as discount. The cashier may make an
entry in the cash column Rs, 90, and in the discount column 10 and
the receipt issued to the debtor will be for Rs. 100 and the counter-
foil willshow as if Rs. 90 had been received and a discount of
Rs, 10 had been allowed. As a matter of fact, the company has been
defrauded by Rs. 5. The auditor will do well to devote his atten-
tion to such items as there are chances of fraud. He should check
in detail such items and enquire into the method of granting dis-
counts. He should ask for the general rate of discounts, Any unusual
bigger‘ disééunt should be noted and an explanation should be
demanded fromi a responsible official. He should enquire as to who
sanctions the discounts. .
The same remarks apply to bad debts written off. The dis-
honest clerk may either write off the whole of the debit balance or a
part of it as bad debt after he has received the whole or a part of
the amount. In such cases, the auditor had better enquire as to
who is responsible to write off debts as bad. Inno case the cashier
should be allowed to do so.
Wherever possible, after taking permission from his clients, a
statement of accounts should be sent to the debtors to confirm the
balances shown in the statements sosent. If this is done, debtors
should be instructed to send letters of confirmation direct to the
auditor. Ifany fraud has been committed, it would be brought to
light by adopting this method.
4. Income from Interest, Dividends etc.
Interest received on account of fixed deposits in the bank
should be vouched with the bank pass book. Sometimes fictitious
Pass Books are produced. Ciare-must be taken to sce that it isa
genuine one.
Dividends received can be vouched with the counterfoils of
the dividend warrants or the letters covering the cheque. Interest
received on securities can be voched from the securities themselves
or from the Investment Ledger as to the date of the receipt of
interest, the amount, the rat¢ etc. a
36 A HANDBOOK OF PRACTICAL AUDITING

If the interest has been received on account of the loan grant-

ed, agreement with the borrower should be inspected to ascertain
the rate of interest and the date for the payment of interest ete.
If dividend warrants or securities etc., are deposited with the
bank for the purpose of collection of interest and dividends, bank
pass book must be referred to. Ifthe investment have been sold
‘ex-dividend’, or bought ‘cum-dividend’, the auditor should examine
broker’s Sold and Bought Note respectively and should see that
dividend is received subsequently.
5+ Rents received.
The auditor should examine the Lease Deeds and agreements
to ascertain the amount of rent payable, the due date, and provision
regarding the repairs etc. Rent received may also be compared
with the ‘rent rolls’ ifthey are maintained as in the case of owners
of large estates. If receipts are issued to the tenants for the rent
paid, the counterfoils of the receipt would bea good evidence. If
rents are collected by agents, their accounts must be examined.
Particular attention should be paid towards ‘rent outstanding.’
Ttis possible, rent might have been received but misappropriated
while it may be shown as outstanding. In such a case, if
the outstanding is a heavy one, with the permission of the clients,
the auditor should write to the tenants requesting them to confirm
the amount of the arrear of rent outstanding against their names.
Similar consideration must be paid towards properties shown as
“unlet.”
& Bills Receivable.
Bill Receivable Book should be compared with the Cash Book
and the Pass Book to see that the amount has been received on the
due date. Enquiries should be made regarding the bills which have
matured but the amount has not been received for them. Such
bills might have been dishonoured or retired.
7. Commission,
Commission account should be checked with the account of
the parties from whom commission is to be received. Agreement
with the parties regarding the rate of commission should be inspect-
ed. Counterfoils of the receipts should be checked with the amount
in the cash book.
8. Sale of Investments.
The amount received on account of the sale of investments
 VOUCHING OF CASH TRANSACTIONS 37

should be vouched with the broker’s sold note, If it has been sold
‘cum-dividend’ he should see that dividend is subsequently received
and that the sale proceeds is properly apportioned between capital
and revenue.
9. Bad Debt Dividends,
The amount received from debtors who have become bankrupt,
should be vouched with the dividend warrants received from the
Official Receiver or Assignee indicating the total debt and the rate
per rupee payable as dividend or any correspondence which might
have passed between the debtor or the official receiver and the
client.
xo, Subscriptions.
Subscriptions received by a club or school etc. should be check-
ed with the Register of Subscribers and the counterfoils of the
receipts.
31. Insurance Claim Money.
Insurance money received against a claim from an insurance
company, should be checked with correspondence passing between
the client and the Insurance Company, the account rendered by the
Insurance broker or company.
12. Share Capital.
For this item reference may be made to the chapter on Audit
of Limited Companies’, where this item has been dealt with in
greater detail.
13. Sale of Fixed Assets
This item may be vouched with correspondence, auctioneer’s
account, sale contract or any other evidence available.
14, Income from Hire-Parchase Agreement,
Where money is received on account of the instalment relating
to goods sold on hire-purchase system, the auditor should examine
the agreement and he should see that the instalment which is receiv-
ed includes interest and that it is properly allocated to interest
account as whole of it does not include the actual sale,
15. Miscellancous receipts,
Correspondence, contracts, or any other document will help
the auditor to vouch such transactions.
Credit side or the Payment side of the Cash Book,
When the auditor has finshed the vauching of the debit side of
the cash book and having satisfied himself that there isa good inter-
38 A HANDBOOK OF PRACTICAL AUDITING

nal check system, the auditor should now proceed to vouch the cash
payments which means that he should satisfy himself that the pay-
ments have been actually made ~
{a} to the right persons or parties ;
(6) for the business itself ;
(c) have been properly recorded in the books of accounts ;
and
have been sanctioned by yap
a person holdingg some authority.
The detection of misappropriation of money depends largely
on an intelligent and careful vouching of this side of the cash book.
Some of the important items which usually appear on the credit
side of the cash book and the duty of an auditor thereto are given
below :—
I. Credit Purchases, ie., cash paid to creditors from whom
goods had been purchased on credit in the past.
Money paid to creditors on open accounts can be vouched
with the receipts issued by the creditors acknowledging the receipt
of money. Money due to them can be compared with the accounts
of the creditors and the actual invoices received from the suppliers
of the goods, ‘The auditor should enquire whether periodical state-
ments are submitted by the creditors and are compared with the
creditors’ accounts. He may have to refer to minutes, contracts,
and other evidences before he passes an entry.
In regard to Cash Purchases, cash memos and Goods Inward
Book should be compared with the entries in the cash book. Special
attention should be paid to discounts, i.e. trade discounts should be
deducted from the purchases and only net figure should be carried to
the books of accounts.
Ifany voucher is missing, he should insist upon getting a dupli-
cate copy of it. He should vouch such an item with any possible
documentary evidence.
Tl. Wages.
Another important entry, which is usually a big one, is that o!
wages. There arc many chances of misappropriation of cash under
this head. Before he proceeds with his work, he should make a
thorough investigation regarding the internal check system prevalent
He should satisfy himself that the arrangement for the preparatior
of wages shects and the system of payment is adequate not to leave any
loap-hole for fraud. Ifhe finds that there is any loop-hole, he mus
 VOUCHING OF CASH TRANSACTIONS 39

disown his liability, The chances of fraud or errors are :

(c) ‘The inclusion of fictitious names or ‘dummy men’ in the
wages book.
(6) Possibility of clerical errars.
(ec) Error or fraud in time and piece-work records.
All the above may mean withdrawal of more money than is
actually needed for payment to the workers.
The following system of preparing the wages sheets is, however,
suggested to avoid fraud : the system will be of great help to the
auditor. Of course, the best system applicable will vary in each
particular case.
(a) Time Records.
If the wages are to be paid according to the time spent by the
worker, correct record of the time spent by him in the factory should
be recorded, For this purpose, Time Recording Clocks should be
installed at the gate and as soon as a worker enters or leaves the
factory, the time should be recorded. In case there is no Time Re-
cording Clock, the gate-keeper should record the time of each worker.
So that the workers may not waste their time, the time of their arrival
and departure should also be recorded imeach department by means
of another Time Recording Clock or by the foreman of the depart-
ment. These two records, viz. one maintained by the gate-keeper
and the other by the foreman of the department should be
compared.
(6) Piece-work Record.
Where the wages are to be paid according to piece wage system
each worker should be given a card which should record the amount
of work done by the worker. This should be signed by the worker,
foreman of the department and the store-keeper to whom the goods
are delivered when they are ready. Ifany fine is to be imposed on
account of faulty goods, it must be recorded.
{c) Preparation of Wages Sheets.
Information regarding the time record and piece work record
available now should be entered in the wages sheet or wages book
(separate wages sheets should be prepared for time werkers) which.
should have the following columns :
(2) Worker’s, number, name, occupation and rate of wages per
day or month or per unit of goods,
(ti) Time: ordinary and overtime.
40 A HANDBOOK OF PRACTICAL AUDITING

(tz) Gross amount payable.

(iz) Deduction on account of fines, contributions towards pro-
vident fund, sickness insurance etc.
(vp) Any advance of wages.
(ci) Net wages payable.
Whole of the above information should be collected by different
clerks from the gate-keeper’s record, foreman’s record etc. and if
there is any discrepancy, it should be enquired into. All the clerks
who have to do something in the preparation of the wages sheets,
should initial the sheets so that the responsibility may rest upon
them individually if any error is discovered later on. The whole of
the wages sheets should be counter-signed by the Works Manager, a
partner and a director.
(d) Payment of Wages.
The Wages Sheets should now be handed over to the
cashier who should have nothing to do with its preparation.
The cashier should then withdraw the exact amount which is
shown under the column ‘Net wages payable,’ plus the amount
payablefor ‘sickness insurance’ etc. The foreman of each depart-
ment should be present at the time of payment to prevent imper-
sonation for any absentee worker. Wages of the absentees should
be paid to a worker only when he has brought a letter of authority,
but with due precaution. In no case should they be paid to the
foreman or a fellow worker. The wages of the absentees should
be paid on the following few days after satisfactory explanation
from the persons entitled thereto, The Works Manager or some
responsible officer should be present at the time of payment. All
the officers, namely the Cashier, the Foreman and the Works
Manager should sign the Wages Shect as a certificate of correct
payment having been made. It is not possible to get the signatures
of each payee. Ifthe above system is followed the evidence of the
Foreman, the Cashier, and the Works Manager will be sufficient
proof of the payment having been made.
A list of the “Unpaid Wages” should be prepared and signed by
the Cashier, Foreman of the Department concerned and the Works
Manager.
Auditor's Duty as regards Wages.
1. He should see whether the Internal Check System as
detailed above is satisfactory and that there is no loop-~
 VOUCHING OF GASH TRANSACTIONS 4t

hole for any fraud. Ifhe finds any loop-hole he should

probe into it and disown his responsibility.
2. He should check a few items of the wages sheet here and
there to see that the calculations are correct. If he does
not do so, he would be held responsible if later on it
isfound that the Wages Sheet was incorrectly prepared
and overpayment was made.
3. He should check the total amount of wages payable with
the amount of cheques drawn to see that more money
has not been withdrawn than was needed,
4. We should check the names of some of the workers as
mentioned in the Wages Sheet with the job cards and the
Gate-Keepers and the Foreman’s register to see that no
“dummy” workers are included.
5. He should also see that the wages sheet is properly initial~
Jed or signed by all the persons responsible for the pre-
paration of the wages sheet.
6. He may paya surprise visiton the day of payment of
wages to sec that they are paid according to the method
suggested above, though it isnot his duty in the ordinary
course,
In short the duty of an auditor in verifying the item of wages is
to see that the wages as recorded in the Cash Book have actually
been paid and that they were actually due and that they were
properly authorised.
WI. Capital Expenditure.
Capital expenditure means moncy spent on acquiring fixed
assets. The duty of an auditor in this connection is to sce that the
payment is in order, that it is duly authorised and the money spent
is properly capitalised. Such expenditure requires special’ atten-
tion. The question as to which documentary evidence is required
will depend upon the circumstances of each particular case. We
shall take up some of the fixed assets and deal with the duties of the
auditor in vouching such expenditure in each case,
{a) Freehold and Leasehold Property and Buildings.
The agreement for the sale of property, or the Lease Deed,
Conveyance and Title Deeds, showing the money paid, should be
examined. Ifthe property has been purchased through a broker,
his statement or account should be cxamined. Tf it has been pur-
chased at an auction, auctioncer’s note or account will be a good.
A2 A HANDBOOK OF PRACTICAL AUDITING

evidence. In case a building has been constructed, Architect's

certificate, Builder’s contract and his receipt should be examined.
Expenses imcurred in acquiring the fixed asset, ¢.g., auc-
tioneer’s commission, brokerage, architect's fees or solicitor’s
charges, which can be vouched by their respective accounts, may be
capitalised.
In some cases, the staff of the client and his ‘materials are used
in construction of the building. In such a case, allocation of
materials and wages is necessary.
(6) Plant and Machinery.
Same considerations apply as in the case of Land and Building.
“Invoice of the supplier of the machinery should be examined to see
the price paid for it. In case some expenses have been incurred in
-erecting and fixing up the plant, he should see that such expenses
are capitalised,
{c) Patents.
In case a patent has been purchased, the auditor should examine
the patent and the receipt acknowledging the purchase consider-
ation. Any expense incurred in acquiring it should be capitalised.
Wthe patent has been acquired through an agent, the auditor
should see that his commission is capitalised. It should be remem~
bered that the renewal fees is not capitalised but treated as revenue
expenditure.
(d) Investments.
Payments for the purchase of shares, securities etc. should be
vouched with the Broker’s Bought Note. If possible, actually examine
the Investments. If they have been purchased cum-dividend, the
auditor should see that the interest acerued is received subsequently
and that it is properly allocated between capital and revenue.
Tn case of new issues, letter of allotment and the Banker’s
receipt for the instalment should be examined.
In case of Inscribed stocks, a certificate from the Bank in
~whose books the stock is inscribed, should be examined.
() Payments under Hire-purchase aud Instalment Agree-
ments,
The auditor should examine the agreement regarding the
rchase or Instalment. For every instalment paid, he should
 VOUCHING OF CASH TRANSACTIONS 43

rexamine the vouchers. Those instalments which have been paid include
interest also and thercfore he should see that it is not capitalised
but is transferred to revenue account.
AV. Loans.
He should examine the receipt given by the borrower. He
should make enquiry whether his client is authorised to advance
loans. Ifthe loan has been advanced against certain securities, he
‘should examine those securities. If the loan has been advanced
-against mortgage, he should examine the Mortgage Deed and the
Title Deeds etc.
In case of Ioan to the Directors and Officers of the company,
he must see that the provisions of the Companies Act are complied
with, j.e., approval of the Central Government has been obtained.
“V. Salaries.
Salaries book should be examined. He should see that the
total for the salaries book for a particular month agrees with the
‘cheque drawn for salarics or the item in the cash book under the
cash column.
There may be some variation in the salary of an employee
during the course of a year, possibly because of the increment
-which falls due ina particular month or some special increment or
allowance might have been given. The auditor should see whether
‘the increment was actually due or it isa fictitious entry. To as-
certain this he should examine the agreement or a copy of the
letter of appointment or the minutes book of the Directors ete.
“VI, Agents’ and Travellers’ Commission.
The agreement with the travellers and the agents should be
examined to ascertain the terms of the appointment regarding the
rate of commission. Calculation should be made and the receipt
_given by the traveller and agent should be cxramined and compared
with the cash baok.
The auditor should test the payment of commission by
-examining the orders received through the travellers.
“VIE. Travelling Allowance.
‘ He should see the rules and regulations regarding the payment
~of travelling allowance. Galculations should be made.
Where fixed travelling expenses are allowed, no calculation
zis necessary. He should see that the travelling bills have been duly
-checked by a responsible official.
44 A HANDBOOK OF PRACTICAL AUDITING

VIEL. Insurance Premiums.

In case of a new policy, the receipt from the Insurance
Company and the Policy itself should be examined. In case of
renewal, the renewal receipt for the premium should be examined.
TX. Bills Payable.
Returned bill duly cancelled should be examined. It would.
be a sufficient evidence of the amount having been paid. Reference
may be made to the Pass Book and Bills Payable Book.
X. Bills Receivable Discounted and Dishonoured.
Bills Receivable which had been discounted with the bank and
which have been dishonoured can be vouched with the entry in the
Pass Book. The auditor should see that the account of the acceptor
or the previous endorser is debited with the amount of the bill
together with the noting charges and other expenses, if any.
Tf the bill had not been discounted, but had been sent to the
bank for collection, the bank would credit the client’s account and
when presented for payment and is dishonoured, the bank will debit
the account of the client. These entries can be vouched with the
Pass Book, Bills Payable Book and the Gash Book. The dishonoured
bill should be examined.
XI. Freight and Carriage and Custom Duties.
The statements of account regarding the payment of freight
and carriage, submitted by the shippers, Clearing or Forwarding
Agents, together with the receipts issued by them, should be
examined to see that the payment has been duly made and accounted
for. He should see that allowances in respect of rebates have been
brought into account.
SH. Bank Charges.
Bank charges such as commission, interest on overdraft, and
loan etc. should be examined with the Bank Pass Book.
AY. Partner’s Drawings.
Partnership Deed should be examined as to what is the-
™maxmum amount and the time for which a partner can draw
moncy and whether heis to be charged any interest on drawings.
He should vouch this entry with the Partner's Drawing Book or
Account and see that the signature of the partner is there against
such entry.
AV. Postage.
The postage book should be compared with the Cash Book.
4
 VOUCHING OF CASH TRANSACTIONS 45

or the Petty Gash Book and the balance of stamps in hand should
be counted.
XV. Petty Cash.
There are greater chances of misappropriation of cash as
there are no vouchers for a number of petty payments, He should,
therefore, make an enquiry into the Internal Check System of Petty
‘Cash Payments. The petty cash book should be maintained on
the Imprest System. To ensure a fairly frequent inspection of the pet-
ty cash book by the cashier, the fixed round sum or ‘float’ should be as
low as possible. The amount of petty cash which should remain in the
chands of the petty cashier should be as low as possible accor-
ding to the requirement of the business. The auditor should check
the receipt of money by the petty cashier with the cash book and also
compare the dates. In certain cases, a certainsum is advanced to
the petty cashier who is not subjected to any check by the cashier,
The P. & L. Afe. is debited at the end of the month or the year with
the total amount spent by the petty cashier. It is very seldom that the
auditor or cashier checks the petty cash book. The procedure is
very defective and the auditor should disown his responsibility.
He should recommend the adoption of the columnar petty cash
book which should be maintained on the Imprest System as explain-
‘ed above, Postage may be compared with the postage book. He
should insist upon having vouchers for every expenditure, say above
Rs.2 or so. These vouchers should be properly arranged and
‘consecutively numbered, In certain cases, it may not be possible
to have vouchers, say for bus fare, charity, entertainment (cigarettes
and tea etc.) in which case the docket system should be introduced.
According to this system a slip showing the amount of expenditure
should be signed by the officer who has spent that amount. The
amount in the docket should be both in words as well as in figures
to prevent any alteration in the figures after the docket has been
signed. Ifa docket cannot be prepared, a list of all such expenses
for which a docket or voucher could not be had, may be prepared in
the evening and signed by a responsible person. The purpose for
which money was spent should also be shown. The auditor should
check a few items at random. He should also cast the individual
columns to sce whether the additions are correct.
Postage can also be dealt with like the petty cash. A definite
amount of stamps should be handed over to the despatcher, who
will keep the records of the letters etc. sent out. Whenever he
46 A HANDBOOK OF PRACTICAL AUDITING

wants more stamps, he will have to get his postage book checked..
Thus there will be little chance of embezzlement.
The auditor should count the petty cash balance on the balance:
sheet date. If he cannot be present on that day, he should instruct
the client to deposit the balance in the bank. If that has also not
been done, he should check the expenditure from the date of the
balance sheet to the date of checking and should count the petty
cash balance in hand on that date. The counting of petty cash
balance in hand is very important. If he does not do so and if there
is any discrepancy in the balance as per the petty cash book, and
actual cash in hand, he will be held responsible to pay
damages as was held in the case of London Oil Storage Company Ltd.
us. Sear Hasluck & Co. in which case it was held that in not vouch-
ing the existence of petty cash in hand, the auditor had committed a
breach of duty. The balance as shown by the books amounted to
£796, while actual cash in hand amounted to £30 only.
While counting the petty cash balance the auditor should see-
that it does not include any I. O. Us. If there are such acknow-
ledgments, he should get confirmation, especially in the case of
1.0.Us. by high officials of the concern because there have been cases
where a dishonest petty cash clerk having embezzled the money,
covered it up by forged I.O.Us. thinking that the auditor would not
care to get these 1.0.Us. verified from the high officials. Petty
cashier should not be allowed to lend money out of petty cash to any
employee of the company. a

Directors’ Fee.

He should examine the Articles of Association to find out the

fee payable to the directors. He should also examine the minute
book or the attendance register of the Board of Directors or the reso-
lution passed at a general meeting sanctioning sueh a payment to
ascertain the number of meetings attended by them to calculate the
fee payable to the directors. He should examine the vouchers
too.
Where the fees are to be calculated as a percentage on profits,
he should examine the agreement and find out the basis of the
calculation of the profits.
Tt must be remembered that according to S. 211 (2) of the
Companies Act, it is incumbent that the remuneration
the paid to
directors cither by way of fees or commission
etc. must be shown
senornvely in the Profit and Loss Account.
If this has not been1
 VOUCHING OF CASH TRANSACTIONS 47

doue, the auditor must make a mention of this fact in his report.
The total amount paid to all the directors must be shown and not
the amount paid to individual directors. According to S. 201 (1) of
the Companies Act, tax-free payments are prohibited. A Company is
prohibited to pay more than Rs, 50,000 in any one year to the
Directors, Managing Agents, Secretaries etc,
Ifa director has foregone his fee, the auditor should refer to
the minute book of the directors. This is necessary to avoid any mis-
appropriation.
‘XVI. Miscellanoous expenses, such as rent, rates, taxes,
advertising, lighting etc.
He should examine the vouchers as usual and sec that the
expenditure is properly apportioned between the periods where
necessary.
Bank Account.
During the year, cash or cheques are sent to the bank and
money is withdrawn from it frequently. Therefore such receipts and
payments are to be verified.
These transactions in the Cash Book should be compared with
the Pass Book. Payments into the bank should be vouched with
the counterfoils of the paying-in-book. Sometimes customers
making payment to the client, pay direct to the client’s banking
account. Sucha transaction will be vouched from bank’s advice
notes of amounts having been credited to the client’s account. Pay-
ments out of the bank can be vouched with the counterfoils of the
cheques issued. In case the client has ordered the bank to transfer a
certain amount to a creditor or to a society or association as subscrip-
tion, counterfoils of the cheques will not be available. In such a
case the receipt from the payee.and a copy of the advice to the
banker for such a transfer will be sufficient proof of payment. For
some items such as Bank Charges, Interest, Incidental Expenses etc.
there will be no proof except the Bank Pass Book or a letter from
the bank to this effect. Particular attention should be paid to dates.
It sometimes happens that the cashier records the transactions
on the payment side as if the money has been sent to the bank
but actually it is not sent and the cashier utilises the money for some
time and deposits the money later on. Though no misappropria-
‘tion of money in such a case has taken place yet this course is un-
desirable. In some cases, there might be difference between the
dates in the cash book and the pass book which might be due to the
48 A HANDBOOK OF PRACTICAL AUDITING

fact that cheques sent to the bank might not have been collected
and hence the account might not have been credited.
It may be very difficult to check all the items where cheques
drawn are numerous. In such a case, the audicor will do well to ap-
ply ‘test checks’, i.e, a few transactions may be checked at random.
With regard to the balance at the bank, the bank reconcilia-
tion statement should be prepared to verify the balance. A question
often arises as to whether the balance, as shown by the cash book,
-or the balance as shown by the pass book, should be carried to the
halance sheet. Supporters of the first view hold that as the auditor
has to give a certificate that ‘the Balance Sheet exhibits a true and
fair view of the state of the company’s affairs, as shown by the books uf
the Company, naturally balance as per cash book should be shown.
While on the other hand, some people hold that whatever the actual
‘balance is and which is shown by the bank books should be
shown, as that is the actual balance in the hands of the company’s
bankers. Both the views have truth in them.
In any case it would be better if a certificate from the bank
about the balance should be obtained directly, but this step may be
taken with the permission of the client. There have been cases
when fictitious pass books have been produced.
if the client has a banking account in a foreign country, the
balance should be converted at the rate of exchange prevailing on
the date of the Balance Sheet. A certificate confirming the balance
should be obtained from the bank abroad.
Some banks supply the modern form of loose-leaf Pass Book.
The auditor should handle such pass book carefully as there isa
danger of the client misplacing the sheets or fraudulently substituting
-onc, To avoid such a danger, the auditor should get directly from
the bank a confirmation of the balance. Such a pass book has the
advantage of being up-to-date and the auditor will not have to wait
until it is written up.
QUESTIONS
1, What do you understand by the term “vouching” ? What
is the object of vouching ?
; 2. What is a “Voucher” ? Detail the points to which attention
ould be paid when examining the vouchers relating to payments
?
3. What vouchers would you consider inadequate in the audit
accounts ? Give examples and explain.
 VOUCHING OF CASH TRANSACTIONS 49

4, Give examples of vouchers you would refuse to accept,

although properly stamped and signed. Explain clearly the reasons
of your refusal. (Bombay B, Com. 1935)
5. In the course of audit of (a) proprietorship concerns, (b)
partnership firms, and (c) limited companies, you find that there are
occasional purchases of controlled materials without vouchers. Your
clients do not want qualified reports. State the steps you should take
in order to give unqualified report, if possible.
6. How will you vouch the following :— \
(a) Cash Sales, (b) Dividend from investments, (c) Rent from
house property, (d) Sale of Investments, and (¢) Book
Debts realised.
7, What steps would you take in vouching the debits side of
the Cash Book ? (C. U. B. Com. 1933)
8. What should he a good internal check system as regards
receipts and payments of cash ?
9. What would you consider proper vouchers for the follow-
ing :—
(a) Directors’ Fees ; (6) Traveller’s Remuneration ; (c) Wages ;
and (d) Insurance Premiums. (NV. D. Com. 1950)
10. You are auditing the accounts of a firm and you discover
that it is the practice of the travellers of this firm to collect Debtors’
Accounts, deduct their commission and remit the balance to the
head office. What precautions would you take to ensure that all
collections were accounted for ?
(lL. In the case ofa manufacturing company, what enquiries
should the auditor make as to rents received in connection with the
properties owned by it ?
12, ‘In vouching payments, the auditor does not merely scek
proof that money has been paid away.’ Discuss. (Abd. B. Com. 1940)
13. What do you understand by “Routine Checking”, and
“Vouching” and what are their objects ? (Allbd. Suppl. B. Com. 1948)
14. What are the points you would have to consider before you
accept as correct payments made by a company under the following
heads :—
(a) Underwriting Commission ; (6) Preliminary Expenses ; (c)
Commission on placing shares ; and (¢) Brokerage.
(C. U. B. Com. 1932)
15. A manufacturer has suffered considerable losses from the
50 A HANDBOOK OF PRACTICAL AUDITING

inclusion of “dummy” workmen in “Wages Sheets”, How may such

entries be avoided or detected ? (C. U, B. Com. 1932)
16. State how you would verify the correctness of wages paid
in a cotton mill, and what internal check in the preparation of wages
statement should always be adopted ? (C. U. B. Com. 1939)
17. Are the endorsed cheques sufficient vouchers for the payment
of accounts? If not, give reasons, What are the circumstances when
you may accept endorsed cheques as vouchers for payments ?
18. How do you audit a Petty Gash Book and Petty Cash
Account? To what extent should you examine the petty cash trans-
actions ?
19. What do you consider to be the duty of the auditor in
regard to the vouching of (a) Capital Expenditure ; and (b) Deferred
Revenue Expenditure carried forward as an asset in the balance
sheet ? (N. D, Com. 1949)
20. How would you vouch the following :-- Wages ; Traevllers’
Remuneration ; Gustom Duties ; Directors’ Fees ; and Hire Purchase
Instalments.
2. How would you vouch the following payments :—(a)
Purchase of Investments ; (6) Loans advanced to customers ; (c) Bills
Payable met at maturity; (d¢) Directors’ Fees; and (e) Partners”
Drawings.
22. In the audit of accounts of a company having a consider-
able volume of transactions with its bankers, it is sometimes consi+
dered unnecessary to check all the entries in the Cash Book with
Bank Pass Book, and therefore, you are asked to describe a form of
“test check” which would, in your opinion, result in saving of time
without loss of efficiency. (C. A. 1, May, 1950)
23. In the course of an audit of a company, you discover that
{a} endorsed cheques have been filed as receipts ; (6) no vouchers
ire available for some of the payments; and (c) the 1. O. U. of a
director has been included in cash in hand.
State briefly what steps you would take to satisfy yourself that
these matters are in order.
24, In auditing the Cash Book, what use make of :
: . ’ . you would
we ean &k Pass Book ? When, ifat all, would you refer to the Pay-in-
(Allbd. B. Gom. 1931)