UNIT IV-

VOUCHING,
VERIFICATION AND
VALUATION 1
 TOPICS TO BE COVERED

I. Vouching: Meaning, Objectives - Difference with Routine Checking – Factors to be

considered during Vouching of Different items.
II. Verification and Valuation: Concept, Objectives, Importance, Difference with Vouching,
Difference between Verification and Valuation, Verification and Valuation of Different items.
III. List of items to be covered under verification:
1) Verification and valuation of Property Plant Equipment (Land and building, plant and machinery, furniture
and fixture, Motor vehicles.)
2) Verification and valuation of current assets (Sundry debtors, prepaid expenses, accrual income, stock in
trade, cash, and bank balances)
3) Verification and valuation of Intangible assets (goodwill, patent, trademarks, copyright)
4) Verification and valuation of Fictitious assets (preliminary expenses, discount on issue of shares or
debentures)
5) Verification and valuation of contingent assets
6) Verification and valuation of long-term liabilities (Debentures, long term loans)
7) Verification and valuation of current liabilities (sundry creditors, bills payable, bank overdraft)
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8) Verification and valuation of contingent liabilities
Vouching- Meaning
• Vouching is a procedure followed in the process of the audit to authorize the
credibility of the entries entered in the books of accounts. In simple and easier
words, it is a precise investigation of the presented documents of the firm by
an auditor to check the correctness and accuracy of such documents. It is the
foremost step of the auditing process based on which auditor performs his work and
prepares an audit report.

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Objectives
• To ensure that all the transactions took place during the financial year for the
business purpose only (not for personal use), and are appropriately recorded in the
books of accounts with true and fair evidences.
• To check the accuracy of the totaling and carrying forward amount recorded in the
financial statements.
• To ensure that the person responsible for the business has verified his records or
not.
• To make the financial records free from malpractices.
• To make sure that financial records are prepared in a lawful manner.

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Voucher
• Documentary evidence in support of any business transaction is called as a Voucher. It may be a receipt,
invoice, bill, cash memo, bank pay-in-slip, counterfoil of a cheque, correspondences, agreements,
resolutions passed in the meeting etc.

• INTERNAL AND EXTERNAL EVIDENCE

• INTERNAL VOUCHER: CREATED AND USED WITHIN CLIENT’S ORGANISATION.

• EXTERNAL VOUCHER: ORIGINATES FROM OUTSIDE THE CLIENT’S ORGANISATION

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Types of Voucher
There are two types of Voucher. They are -
1. Primary Voucher: Primary voucher refers to the written evidence in original. Examples of primary
voucher are purchase invoice, cash memo, bills, confirmation of balances, bank statements, contracts, etc.

2. Collateral Voucher: When the original voucher is not available, copies thereof are produced in
support or as subsidiary to remove suspicion and to satisfy the auditor, such a voucher is known as Collateral
Voucher. Examples of collateral voucher are copies of sales invoice, receipts, copy of resolution passed in a
meeting etc.
3. Missing Vouchers
While vouching vouchers or supporting documentary evidences are not available for
the entries made in the books of accounts, such non-availability of vouchers is called as
missing vouchers. It may be deliberate (purposeful or indicative of a big fraud) or
accidental (innocent misplacement).

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Vouching vs Routine checking
• Vouching traces the sources of information beyond the books of accounts whereas
routine checking is limited to recorded entries.
• The auditor verifies the arithmetical accuracy of the entries through routine
checking. In vouching entries are checked with the help of related documentary
evidence.
• The work of routine checking is generally done by junior audit clerks, whereas
vouching is done by senior audit clerks.
• Vouching also includes examination of documentary evidence in support of
recorded transactions besides routine checking. Thus routine checking is a part of
vouching.

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 Factors to be considered during
Vouching
1. An auditor should check the records whether they are supported by evidential documents or not.
2. All the documents related to income and expenditures are to be separated and separate files should be
maintained. If not, auditor should ask to do so.
3. An auditor should use special sign in tested vouchers so that they cannot be used again.
4. While vouching, an auditor should check whether the general principles of accounting have been followed or
not and clear-cut demarcation of capital and revenue is made or not.
5. Whether the documents presented for testing are related to the current year or not.
6. All the documents which are presented for auditing must be authorized by the concerned authority. An
auditor should check whether it is done or not.
7. An auditor should ask duplicate copies of missing vouchers, but if important vouchers have been missed and
auditor is not satisfied with the reasons presented, s/he should write in report to this fact.
8. If an auditor finds the correction in the evidential document, then such figures should be verified with
documents and to be noted down in audit notebook for consideration while preparing report.
9. All the documents are to be reviewed before closing the work of audit which helps to check again those facts
where special sign is given.
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Vouching of Cash Transactions
Recorded in Debit Side (Cash Receipts)
1. Opening Balance: Closing balance for the last financial year will be the opening balance or cash-in-hand for
the current financial year.
2. Cash Received from Debtors: Points to be considered for vouching the cash received transactions-
• Actual date and time of cash received should be entered.
• The responsible authority should accredit any discount allowed to the customers.
3. Loan Repayment: The following points should be considered:
• Interest received on loan should be credited to interest received account.
• Substantiation of bank statement, i.e., verification of bank statement is necessary as the client can also deposit
the amount directly in the bank.
4. Rent Received: Following transactions should be vouched properly:
• Records of the different rental properties should be maintained separately to record the rental income earned
from various properties.
• Tax deducted at source should be properly accounted for if deducted by the party.
5. Commission Received: It can be vouched as follows-
• Agreement verification of the commission being received.
• Computation of commission receivable.

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Recorded in Credit Side (Cash Payments)
1. Opening Balance: Credit opening balance represents bank overdraft because cash-in-hand of a
company can never be negative.
2. Payment to Creditors: Examination of creditors payment can be done in following ways-
• Creditors account statement should be inspected.
• Any issue of receipt by creditors should be inspected.
• Any advance payment should be evidently quoted.
3. Payment of Salaries: It can be examined in the following ways-
• Salary register of the employees should be managed month wise.
• Amendments in the amount of TDS, advance payment, insurance, funds should be noted.
4. Purchase of Plant and Machinery: It can be vouched as follows-
• Excise duty treatment, according to excise rules.
• Go thoroughly to the purchase invoice or receipt of the machinery.
• All the charges incurred along with purchase such as freight inward, commission charges should be
properly verified.
5. Income Tax: Following points should be considered for income verification-
• All the tax challans, whether it is of advance tax or self -assessment tax should be checked.
• Check for any demand notices from the income tax department.
• Check for any assessment orders by the income tax department.
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Verification- Concept
Verification means the inspection of assets appearing in financial statements,
whether the assets are according to legislation or not. Verification of assets and
liabilities are done to confirm the following −
• Existence
• Ownership
• Proper valuation
• Possession
• Freedom from encumbrances
• Proper recording

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Objectives of Verification
• Confirmation about the existence of assets through physical verification.
• Legal and official documents relating to assets are checked to confirm the
ownership of assets.
• It is confirmed that assets are free from any charge of lien.
• Proof regarding proper valuation of assets.
• To confirm that assets are properly accounted for in the books of accounts.

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Auditor’s Duty Regarding Verification
• The auditor of a business is required to report in concrete terms that the Balance Sheet exhibits a
true and fair view of the state of its affairs. In other words, he must examine and ascertain the
correctness of the money value of assets and liabilities appearing in the Balance Sheet and this
examination is known as verification of assets and liabilities. Therefore, an auditor must keep in
mind the following points while verifying the assets:

• · Ensuring the existence of assets.

• · Acquiring the assets for business.

• · Legal ownership and possession of the assets.

• · Ensuring the proper valuation of assets.

• · Ensuring that the assets are free from any charge

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Difference between Vouching and Verification

PARTICULARS VOUCHING VERIFICATION

Introduction Vouching is a process of Verification is a process to
examining the evidences. verify the assets and
liabilities of the business.

Basis Vouching is done on the Verification is done

basis of feasible narrative on the basis information
evidences counting the observation.
like invoice receipts.
Examination Examining of profit and Balance sheet is examined
loss accounts is done in in verification process.
vouching process.

Time of conduct Vouching is a never Verification is done at the

ending process and end of the financial year.
conducted
through out the financial
year.
Purpose Vouching is done to check Verification is done to
the accuracy of the check out the existence of
evidences provided by the the assets and liabilities
party. appearing in the balance
sheet.

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Valuation of Assets and Liabilities
• Valuation means estimation of various assets and liabilities. It is the duty of Auditor
to confirm that assets and liabilities are appearing in the balance sheet exhibiting
their proper and correct value. In the absence of proper valuation of assets and
liabilities, they will exhibit either overvalued or under-valued.
• It is therefore required for an Auditor to exercise reasonable care and skill to
analyse the basis of valuation from technical experts and satisfy himself that assets
shown in Balance-sheet are properly valued accordance with the generally accepted
conventions and accounting principles.

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Vouching vs Verification vs
Valuation
• In vouching, accounting entries are checked with the bona-fide vouchers.
• Verification proves the existence, ownership and title of assets.
• Valuation certifies the correct value of asset.
• Vouching is done after original entry in the books of accounts.
• Verification and valuation are done at the end of the financial year.
• Vouching is done by Audit Clerk.
• Verification and valuation are done by the Auditor himself.
• Bonafide vouchers are sufficient evidence for vouching
• For Valuation Auditor has to depend upon certification from owner/partner/director.
• Verification is done by physical verification, title deeds and receipt of payment, etc.

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Verification and Valuation of
Copyright
Copyright
• Copyright provides legal protection and legal rights to an author by which the publication of
his work by another is prohibited. Copyright remains with the author for lifetime and even
50 years after his death.
Verification of Copyright
• The Auditor should examine the agreement between the author and the publisher.
• If there are numbers of copyright with the same publisher. Auditor should ask for the
schedule of copyrights.
Valuation of Copyright
• Copyrights lose their value over a passage of time; hence the value of copyright is not
stable. In case where the sale of publication is very low or nil, value of copyright should be
written off.
• Value of copyright in the Balance-sheet will be shown as cost less the value written off.
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Verification and Valuation of
Fixed Assets
Verification of Freehold Land and Building
• Auditor should examine the title deed of the land and building.
• Land and building shown in the books should be according to the title deed.
• Profit or loss on sale of it should be duly adjusted in the account.
• Any addition to it should be carefully examined by the Auditor.
Verification of Mortgage Property
• The Auditor should confirm that there should be no second or third mortgage on it.
• The Auditor should obtain certificate from mortgagee that title deed is in his possession.
• The Auditor cannot be held responsible if there is any defect of title. The Auditor can only
verify that title deed apparently in order and in the name of client.
• If Auditor feels necessary, he can obtain certificate from legal advisor about the validity of
title deed of the client.
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Valuation of Building
• Building should always be valued at cost less depreciation.
• Although the market value of building may be much higher than the cost, still
depreciation on building should be provided.
• Depreciation will be provided even if building is not in use.
• Market or releasable value should not be taken into account because both are
fluctuating.
Verification of Freehold Land
• Freehold land is a non-depreciable asset, hence it will be shown at cost.
• Cost includes legal charges, registration fees, purchase price and broker
commission, etc.
• Payment made to improvement trust or Municipal Corporation for water, sewerage,
road, development charges, etc. it will also be included in the cost of the freehold
land.
• If the basis of valuation of it is market value or realizable value, it should be clearly
mentioned in the balance sheet.

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Verification of Building under Construction
• Auditor should verify the architect certificate and contractor receipt for the amount
paid.
• Auditor should obtain a certificate from a responsible officer to that effect, if the
staff of client is also engaged in its construction.
Verification of Leasehold Property
• There should be separate accounting for freehold and leasehold property. Leasehold
property is acquired for fix duration on lease. The Auditor should consider the
following −
• Inspection of lease agreement for value and duration.
• Lease agreement should be registered with the registrar.
• Terms and condition of the lease should be properly complied for.
• The Auditor should examine the last receipt of rent to ensure the lease agreement
is in continuation without any break due to non payment of rent.

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Verification and Valuation of
Current Assets
Cash-in-hand
• Cash-in-hand is verified by actual counting of cash. Cash-in-hand should be verified
at the close of the business or on the date of the balance sheet. Counting of cash
must be done in the presence of cashier. If physically verification of cash is not
feasible for an Auditor due to branch located abroad or in remote area, the Auditor
should ask the cashier to deposit all his Cash-in-hand in bank account on the last
date.
• It is the primary duty of an Auditor to verify the cash-in-hand and in case of non
verification, the Auditor will be held responsible for breach of his duty. If there is
heavy cash balance in hand at any time, the Auditor should immediately inform the
management beforehand.
• If the cashier is made accountable for payment to employees or others, the Auditor
should carefully verify the same.
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Cash at Bank
• The Auditor needs to consider the following points for verification of cash at bank −
• The Auditor should prepare a bank reconciliation of account as on date. With the
help of it, the Auditor will clearly come to know the status about the cheque issued
but not yet presented in the bank and cheques deposited in the bank but not yet
cleared. There are many kinds of frauds which are detectable through preparation
of bank reconciliation of account.
• The Auditor should obtain different certificates from banks for different types of
accounts like current account, fixed deposit account, savings account, overdraft
account or cash credit account, etc.
• The Auditor should obtain a letter of confirmation of bank balances directly from
banks.
• The Auditor should compare the bank balance as per the bank book and the pass
book.
• If payments are deposited in foreign banks under exchange control regulation it
should be verified by the Auditor.

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Verification and Valuation of
Fictitious Assets
Preliminary Expenses
• Preliminary expenses are incurred at the time of formation and commencement of
company. These expenses are of capital nature and include stamp duties,
registration fees, cost of printing, legal costs, etc. These expenses are shown in the
balance sheet. These expenses are written off during a span of time of 3 to 10
years. The Auditor should verify that un-written amount is shown in the balance
sheet.
Discount on Issue of Shares/Debentures
• The Auditor should see that the discount on issue of shares/debenture should be
written off as early as possible and the balance amount should be shown in the
balance sheet.

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Verification and Valuation of
Liabilities
Trade Creditors
• Auditor should take the following important steps for the verification and valuation of Trade Creditors −
• Auditor should collect schedule of creditors and that should tally with ledger balances.
• Purchase ledger should be checked and verified with purchase register, purchase invoices and debit notes
etc.
• Auditor should verify the discount received or receivable from creditors.
• Auditor should minutely check the purchase of first month and last month of the financial year to avoid any
possibility of booking purchases of current year to next year or last year purchase to current financial year.
• Auditor should pay special attention on any unpaid amount stands in ledger of creditor since long. It might be
possible that amount has misappropriated by the any official and balance stands as it is in books of accounts.
• Confirmation of balances should be done directly by the Auditor and if there is any kind of discrepancy that
might be sorted out.
• Auditor should carefully study the hire purchase agreement to verify the purchases made on the basis of Hire-
Purchase.

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Loans
• The Auditor should verify the following important points for verification and
valuation of Loans −
• The Auditor should verify the amount of loan, type of loan, rate of interest and
repayment terms, etc.
• He should collect and examine the agreement and certificate from bank in case
loan is granted by any Bank or financial institutions.
• He should obtain balance confirmation from party from whom loan is accepted by
the organization other than bank.
• Interest calculation should be duly checked by the Auditor according to agreement.
• Amount of interest due but not paid during the current financial year should be duly
accounted for in books of accounts and should be shown as current liabilities.
• In case of company, the Auditor examines the borrowing power, register of charges
and created charge should be registered with the Registrar of Companies.

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