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CA IPCC CHAPTER - 5  
VOUCHING 

by Amit • September 04, 2018 0

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CHAPTER - 5
VOUCHING Chapter (1) Purpose,
Evolution and Scope of
STATISTICS OF THE CHAPTER Tentative Weightage of Law of Contracts
Chapter: 10 to 15 Marks  December 17, 2018

IMPORTANCE OF THE CHAPTER This is the most

practical oriented chapter and the concepts of this Standard Costing
formula table, trick, for
chapter will be used the most in practical life. IPCC, easy
SAs COVERED SA 505
October 19, 2018

Presentation of Data-
COVERAGE OF THE CHAPTER
Geometric Diagram
(1)   Vouching
May 30, 2021

(2) Audit of Payments

(3) Audit of Reciepts

(4) Audit of Purchases

(5) Audit of Sales

(6) Balance Sheet Audit

(53) What do you mean by vouching?

The act of examining vouchers is referred to as vouching,

where vouchers refers to the documentary evidence in
support of a transaction recorded in the books of account.
The essential points to be borne in mind while examining
a voucher are that:

1. the date of the voucher falls within the accounting

period;

2. the voucher is made out in the client’s name;

3. the voucher is duly authorised;

4. the voucher comprised all the relevant documents and

is complete in all respects

5. the voucher has been posted to an appropriate

account.

After examination, each voucher should be either

impressed with a rubber stamp or initialed.

(54) What factors should be considered while audit of

payments?

The factors to be considered are:

1. Authorisation: It is duly authorized by a competent

person.

2. Accounting: Appropriate entries have been made in the

books of accounts as per applicable accounting principles.

3. Vouching: Payment is made to appropriate person,

posting is done under appropriate account & with correct
amount, date on voucher agrees with corresponding entry
in books.

4. Legality: It should bear a revenue stamp under the

Indian Stamp Act, 1899.

5. Audit evidences: All relevant documentary evidences

appropriately support the transaction.

6. Disclosures: Adequate disclosures are made in books.

(55) How will an auditor vouch transactions with Related

Parties?

The main things to be considered are provisions of the

Companies Act and resolutions passed at Board Meetings.
Some general considerations are:

As per Section 188 of Companies Act, 2013 Board’s

resolution is required for entering into any contract with
the related party [Sec. 2(76)] for:
a. sale, purchase or supply of any goods or materials;

b. selling or otherwise disposing of, or buying, property of

any kind;

c. leasing of property of any kind;

d. availing or rendering of any services;

e. appointment of any agent for purchase or sale of

goods, materials, services or property;

f. such related party's appointment to any office or place

of profit in the company, its subsidiary company or
associate company [Sec. 2(6)]; and

g. underwriting the subscription of any securities or

derivatives thereof, of the company. The above provision
is subject to the following conditions, namely:

1. The agenda of such Board meeting shall disclose full

details of transaction with related party.

2. Prior approval of company by special resolution is

required for entering into such contract if:

i. a company having a paid-up share capital ≥ Rs. 10

crores

ii. sale, purchase or supply of goods directly or through

agent exceeding 25% of annual turnover;

iii. selling or buying, any property directly or through

agent exceeding 10% of net worth;

iv. leasing of any property exceeding 10% of net worth or

exceeding 10% of turnover;

v. availing or rendering of any services directly or through

agents exceeding 10% of net worth;

vi. appointment to any office or place of profit in

company, its subsidiary or associate company at a
monthly remuneration exceeding Rs. 2,50,000;

vii. remuneration for underwriting subscription of

company exceeding 1% of net worth. Turnover or Net
Worth referred above shall be as per Audited Financial
Statement of last year.

3. Proviso to Section 188(1) provides that no provision to

this section shall apply to any transactions entered into
by company in its ordinary course of business which are
on an arm’s length basis.

4. Board’s report shall refer to all contract entered u/s

188(1).

5. Every interested director, must disclose his interest to

company at Board Meeting (Section 184).

6. Interested director is restrained from taking part in

such meeting. If he doesn’t disclose his interest or,
participate in such Board meeting, contract so entered
shall be voidable at option of company.

(56) How will an auditor vouch Remuneration paid to

Directors?

The main things to be considered are provisions of the

Companies Act, terms of articles of association and
resolution passed at general meeting. In case of vouching
director’s remuneration in case of a public company
following points must be considered:

1. Examine the Entitlement: The directors are entitled to

remuneration either according to:

a. the term of articles of association or

b. in accordance with a resolution of the general meeting.

2. Examine Adherence to Legal Provisions: Examine

compliance of Companies Act, such as:

⦁ Section 197(6) which deals with manner of payment of

managerial remuneration.

⦁ Section 197(5) which deals with payment of listing fees.

⦁ Section 197(1), which has prescribed the overall limit to

managerial remuneration.

⦁ Schedule V to Act that has laid down conditions for

payment of remuneration for companies having no profits
or inadequate profits and companies having negative
effective capital.

⦁ Proviso to Section 197(1) which provides for increase in

remuneration with the approval of Central Government.

3. Disclosure: Adequate disclosure should be made in

financial statements w.r.t. remuneration.

4.  Documents to be vouched includes:

a. Minutes book: to check terms of appointment

b. Articles of Association: to check authority to pay and

mode of payment

c. Register of Directors: to check entry as director for the

period under audit

d. Director’s Attendance Register: to check attendance at

Board Meetings

e. Payment Voucher: to check computation and proper

discharge

f. Financial Statements: to check appropriate disclosure

(57) How are the payments controlled by the Companies

Act, 2013?

There are certain specific provisions relating to payments

made as per Companies Act 2013, such as:

1. Reporting of personal expenses charged to company’s

revenue a/c as per Sec.143(1)(e)

2. Under Sec. 180, Board of Directors shall require consent

of company by special resolution to:

i. Sell, lease or dispose of the whole, or substantially the

whole of the undertaking of the co.

ii. Invest (except in trust securities), compensation

received as a result of any merger or amalgamation;

iii. Borrow monies, where the total borrowings including

proposed borrowings (apart from temporary loans)
exceeds the aggregate of paid up capital & free reserves.
Provided that the acceptance by a banking company, in
ordinary course of its business, of deposits from public,
repayable on demand and withdrawable by cheque, draft,
etc. shall not be deemed to be a borrowing of monies by
banking company within the meaning of this clause.

iv. Remit/give time for re-payment of any debt due by

directors.

3. Under section 181, Board of Directors can with prior

permission of company in general meeting, contribute to
bonafide charitable and other funds any amount in any
financial year, aggregate of which exceeds 5% of its
average net profits for three immediately preceding
financial years.

4. As per Section 182, a government company or any

other company which has been in existence for less than
three financial years cannot contribute any amount
directly or indirectly to any political party. In other cases,
contribution in any financial year should not exceed 7½ %
of average net profits during three immediately
preceding financial years.

5. Section 183 permits the Board and other person to

make contributions to the National Defence Fund or any
other Fund approved by Central Government for the
purpose of National Defence to any extent as it thinks fit.
(58) What factors should an auditor consider while
vouching payment of following expenses?
A. TRAVELLING EXPENSES: The main thing to be
considered is Travelling Allowance (T.A.) Rules approved
by directors or partners. Some general considerations are:

1. Authorisation: It should be authorized by the

competent person.

2. T.A. Rules: Check if the claim is as per the T.A. Rules

approved.

3. Voucher: Voucher for travelling expenses should contain

all details such as name & designation of person
travelling, location, fare details, boarding/lodging
expenses, etc.

4. Director’s travelling expense: Auditor should ensure

that it was incurred in the interest of the business and
that the directors were entitled to receive the amount
from the company.

5. Evidence: For travel by air, counterfoil of air ticket

should be inspected. For travel by rail or road, fare
claimed should be checked from some independent
source.

6. Foreign travel: such expenses should be sanctioned by

the Board before being paid.

7. Advances: Travelling advance taken, if any should be

settled on receipt of final bills.

8. Board Meeting: Directors can charge travelling

expenses for attending Board Meetings only if authorised
by the articles or by a resolution of shareholders.

9. RBI Approval: Check if RBI approval has been sought

for expenditure in foreign currency.

10. Accounting: Check if the entries are correctly reflected

in the books of accounts.

11. ARP: Compare current year figures with previous years

& inquire into any abnormalities.

B.REPAIRS TO ASSETS: The main thing to be considered is

that proper distinction should be made between Capital &
Revenue expenditure. Some general considerations are:

1. IC system: Examine the Internal Control System

related to repairs of assets.

2. AMCs: Examine the contracts if any and note the terms

& conditions.

3. Bills: Examine the bills w.r.t. estimate submitted by

contractor and the nature of repair.

4. Nature of expense: Check that the repairs which

increases the value of asset or enhance its capacity/life
should be treated as capital expenditure. In case of any
confusion as regards nature of repairs, a certificate from
the engineer should be obtained.
5. Accounting: Check if the entries are correctly reflected
in the books of accounts.

6. ARP: Compare current year figures with previous years

& inquire into any abnormalities.

B. ADVERTISEMENT EXPENSES: The advertisement

expenses will be vouched as follows:

1. Nature: Ascertain the nature of advertisement expenses

to ensure that it has been charged properly and relates to
the client’s business.

2. Advertisement schedule: Obtain the complete list of

advertisement, media wise (i.e., radio, newspapers,
television, etc.) showing dates, exact location, timings,
amounts paid, etc.

3. Contract: Ascertain if there is a regular contract with

the ad agency and regular statements are obtained.
Discounts should be properly adjusted and disclosed in the
bills.

4. Receipts: Check the receipts for amounts paid for the

advertising expenses incurred.

5. Accounting: Check if the entries are correctly reflected

in the books of accounts.

6. Disclosure: Examine if outstanding advertising expenses

have been shown as liability and advances paid as assets.
C. PAYMENT OF INCOME TAX: The main things to be
considered are provisions of Income Tax Act and
documents issued by ITO. Some general considerations
are:

1. Statement of Total Income: Check that taxable income

has been calculated as per the provisions of Income Tax
Act. Amount of tax, surcharge and rebates etc. have been
properly computed after considering the TDS or advance
tax paid.

2. Depreciation Schedule: Check the depreciation

calculation as per the provisions of IT Act.

3. Challan: Examine the challan to ascertain the amount,

nature & date of tax paid.

4. Bank Statements: Trace the tax payments from bank

accounts.

5. External evidences: Refer to the copy of the notice of

demand, assessment order, assessment form and the
receipted challan to ascertain payments or advance
payments of income tax.

6. Interest: Interest on refunds should be included as

income and penal interest charged for nonpayment
should be treated as expenditure.

7. CARO provisions: Check if any delay has been made in

deposit of tax.

8. Financial Statements: Verify if correct accounting entry

is reflected in the books and in the final financial
statements.

D. PAYMENT OF EXCISE DUTY (CENVAT)

Meaning: It is a duty levied upon goods

manufactured/produced by an entity and is payable at
the time of removal of excisable goods from the
factory/godown.

The main things to be considered are provisions of Central

Excise Act, 1944 and the related Rules, Circulars and
Notifications. Some general considerations are:

1. Central Excise Act: Refer to the Act to check the rates

applied.

2. Challans: Verify payment by examining challans with

reference to quantity of goods in respect of which issue
permits have been received.

3. Accounting: Ensure that it is correctly reflected in the

books.

4. ARP: Test check the accuracy of amount of duty paid

by multiplying the rate of excise duty with the value of
goods issued as per the client’s stock register.

5. Provisions: For excisable goods manufactured but not

released, ensure if the provision for unpaid excise duty has
been made.

6. CENVAT credit: Ensure that in every case CENVAT

credit has been adjusted and only net excise duty has
been paid.

7. Duty Drawback: Duty drawback refers to a scheme

under which central excise and customs duties paid for
raw-materials and other inputs used in the manufacture
of the product prior to its export are refunded to the
exporter. Verify that duty drawback has been claimed.

(59) What are the general considerations for Audit of

following Receipts?

A. INCOME FROM INVESTMENTS

1. In case of voluminous investments, the client generally

would have an Investment Register or else an investment
schedule should be made.

2. Dividend income is first vouched by reference to the

counterfoils of Dividend Warrants and Interest on
securities by reference to the tax-deduction certificates.

3. Trace the collection into the investment register and

the cash book.

4. Examine the documents to ascertain if any income is

unrealized and the reasons thereof.

5. Check if the entries are correctly reflected in the books,

as the gross amount should be shown in the P&L A/c and
TDS amount debited to income tax account.

6. It should be checked that if investments are sold on ex-

dividend basis or when purchase is on cum dividend basis,
the dividend has been received subsequently.

7. Ensure that the TDS certificates have been received and

kept safely.

8. Check that an entry for accrued income has been

appropriately made.

B.RENTAL RECEIPTS

1. Check the copies of bills issued to tenants by reference

to copies of tenancy agreements and bills of charges paid
on behalf of the tenants, i.e., house tax, water tax,
electricity bill, etc.

2. Study the terms & conditions in the tenancy agreement

and ensure that rent received is as per the agreement.

3. Check Rental Register for rent accrued & collection

made by reference to rental bills copies.

4. Trace the entries into the cash book.

5. Scruitinise rental register to find amt. unrecovered &

irrecoverable, so as to make provisions.

6. Check if any tax has been deducted at source & TDS

certificates been received & kept safely.

7. It should be verified that every available

accommodation has been let out and rental income has
been duly accounted for.

A. BANKRUPTCY DIVIDEND

The amount received from the estate of an insolvent

debtor against settlement of his account is called
bankruptcy dividend. Some general considerations in its
audit are:

1. Refer to the correspondence with the Official Receiver

or Assignee to find particulars of part amounts already
collected and the balance outstanding at the beginning of
the year.

2. Examine any advice received from the same authority

along with the payment.

3. Verify if amount received has been treated as bad

debts earlier.

4. Trace the entry in cash book and bank statement.

A. ROYALTIES RECEIVED

1. See the relevant contract and examine important

provisions relating to conditions of payment of royalty,
rate of royalty, mode of calculation and due dates.

2. Check the periodical statements received from the user

and calculation of royalty.

3. Trace the entry in cash book and bank statement.

4. In case of any deduction on account of recoupment of

royalty for past period, the records for earlier royalty
receipts should be seen to ensure that amount of
deduction is as per contract.

5. Verify if any tax is deducted at source & TDS certificate

has been received & kept safely.

6. Royalties due but not yet received should have been

properly accounted for.

B. INSURANCE CLAIMS

1. Check if the claim is in respect of fixed assets or current

assets.

2. Examine a copy of the insurance claim lodged with the

insurance company.

3. Correspondence with the insurance company and the

insurance agent should also be seen.

4. Check the counterfoils of receipts issued to the

insurance company.

5. Check if appropriate adjustment has been made of the

amount received in excess or short of the value of actual
loss as per the insurance policy.

6. Verify copy of certificate/report containing full

particulars of the amount of loss.

7. Check if appropriate entries are reflected in the books,

particularly to ensure that P&L A/c is debited with
shortfall of claim admitted against the book value of
asset.

8. Trace the entry in cash book and bank statement.

(60) How will an auditor perform Audit of Purchases?

► CLASSIFICATION OF PURCHASES: It is essential that

purchases be classified as follows:

1. Purchases of raw material.

2. Purchases of finished goods.

3. Purchases of consumable stores, fuel etc.

4. Purchases of packing materials, etc.

5. Purchases of articles like stationery for office use.

6. Purchases for making additions to assets.

► VOUCHING OF PURCHASE INVOICES

1. the date of invoice falls within the accounting period

2. the invoice is made out in the name of the client

3. the supplier’s a/c is credited with full amount &

deduction, if any, is made on a proper basis

4. the goods purchased are regularly dealt in by the

concern/ required for manufacture

5. invoice is signed by accountant & store-keeper. A copy

of report of a technical person be seen in case of purchase
of an item whose price is dependent on its quality.

6. the person competent to sanction payment has

authorised its payment.

7. appropriate entry is reflected in the books for

purchases

8. if an invoice runs into several pages or over several

accounts, all amounts so adjusted should be added
together to confirm that there has not been error under
adjustment.

9. if invoices are received in duplicate/triplicate, it should

be confirmed that original invoice has been paid or
adjusted separately.

10. if goods are purchased for use of an employee but

invoice is made in the name of concern, it should be seen
that cost has been charged to person concerned and not
to Purchases A/c.

11. check that the statement of accounts has been sent to

suppliers and it has been confirmed.

(61) How will an auditor audit Purchases Returns?

Goods found to be defective or of a poor quality are

sometimes returned to the supplier.

1. Ascertain the reasons for return and if the returns are

duly authorized.

2. Examine stores record/goods outward book to

ascertain if appropriate entries are made.

3. Examine the debit note to ascertain the calculations by

referring to the original invoice.

4. Refer original invoices of purchases to confirm that the

nominal account originally debited has been subsequently
credited on goods having been returned.

5. Special care should be taken if purchase returns are

large, either at beginning or at close of the year, as it
may be fictitious to cover bogus purchases recorded
earlier.

6. Rebates and allowances received should be adjusted on

the basis of Credit Notes received from the suppliers and
be verified by reference to the original invoices.

(62) Which are the factors which increase the gross profit?

1. Undervaluation of opening stock.

2. Overvaluation of closing stock.

3. Change in basis of valuation of stock, like where

opening stock was valued at cost or market rate
whichever was lower, valuing closing stock at market price
which is higher than cost.

4. Inclusion of goods sold but not delivered in the closing

stock.

5. Sales at close of previous year but invoices raised in

current year, taken as current year sales.

6. Inclusion in closing stock of goods received for sale on

approval or on a consignment basis.

7. Treatment of goods sent out for sale on consignment

basis as regular sales.

8. No provision or under-provision in the expenses

accounts included in the Trading Account.

9. Wrong allocations of expenses, e.g., carriage inwards

wrongly taken to P&L A/c.

(63) Which are the factors which decrease the gross

profit?

1. Over valuation of the opening stock or undervaluation

of closing stock.

2. Alteration of the basis of valuation of stock, e.g.,

closing stock valued at cost, which is below the market
price, when the opening stock was valued at market price
above cost.

3. Reversal of the fictitious sale entries recorded in the

previous year to boost up profit.

4. Entry of sales returns twice/failure to account for

purchase returns.

5. Excessive provisions made for wages or direct expenses.

6. Non-inclusion in closing stock of goods sent for sale on

approval or on a consignment basis.

7. Inclusion in Trading Account of expenses which should

have been included in P&L A/c.

8. Failure to take credit for insurance claim w.r.t. goods

lost or destroyed by fire.

9. Failure to account for goods sold or destroyed or given

away as samples.

(64) How will an auditor audit Credit Sales?

► CLASSIFICATION OF SALES: Different types of sales

should be classified as follows:

1. Sale of raw materials.

2. Sale of finished goods.

3. Sale of empties and other packing materials.

4. Sale of assets.

► VOUCHING OF SALES INVOICES: Credit sales should

be verified by reference to copies of invoices issued to
customers and attention should be paid to the following
matters:

1. each item of sales relates to the period of account

under audit

2. goods are those that are normally dealt in by the

concern

3. sale price has been correctly arrived at

4. Check copy of requisition slip issued by Sales

Department

5. the invoice has been adjusted in an appropriate

account

6. sale has been authorised by a responsible official who

has initialed invoice.

7. additional charges recovered along with sale price

should be credited to separate accounts.

8. Check if the statement of accounts has been sent to the

customers and confirmation received

9. Sales on hire-purchase basis, goods sold on sale or

return basis and sales on consignment basis should be
separately recorded.

(65) What do you understand by cut-off arrangement?

⦁ It is an arrangement adopted by management to

separate transactions of one period from other, so that
results of working of each period can be correctly
ascertained. It is a part of the internal check.

⦁ It is generally applied to accounts of sales, purchases

and stock. The main purpose is to ensure that revenue &
expenditure of one period are not recorded in the other
period.
⦁ The cut-off procedures should ensure that:

1. goods purchased, property in which has passed to

client, have been included in inventories and liability has
been provided for in case of credit purchase

2. goods sold have been excluded from inventories and

credit has been taken for sales and in case of credit sales
the concerned party has been debited.

⦁ Auditor may examine documents evidencing movement

of stocks, including documents pertaining to period
shortly before and after the cutoff date and check
whether stocks represented by those documents were
included or excluded as appropriate during stock taking.

(66) What do you understand by Balance Sheet Audit?

⦁ Due to increase in the size of business units & due to

mechanization of accounting, the test checks are applied
widely for verification of income & expense accounts as
well as assets & liabilities and not only for a few nominal
accounts. This has resulted into a form of audit known as
Balance  Sheet audit.

⦁ Balance Sheet audit consists of verification of all

Balance Sheet items, together with the examination of
expense and income accounts.

⦁ It includes the following:

1. Examination of partnership agreement, memorandum

& articles of association, minutes of Board Meeting and
accounting system in force.

2. Establishment of ownership of all assets and proof that

all owned assets are included in B/S.

3. Ensuring if asset are included in B/S as per the accepted

principles of accounting.

4. Proof that all liabilities are included and at proved

amounts.

5. Checking of adjusting & closing or any other entries

necessary for preparation of B/S.

6. Evidence that distinction has been made between

capital & revenue transactions.

7. Proof that share capital issues have been made as per

the law & are correctly recorded.

8. Analysis of charges & credit to revenue a/c & inclusion

of the balance in B/S.

(67) What do you understand by Outstanding Assets?

⦁ Outstanding assets may be of two types:

1. Accrued Income: income receivable for services

rendered.

2. Prepaid expenses: expense incurred in advance, benefit

of which will arise in subsequent years.

⦁ Following are some of the accounts in which adjustment

of outstanding assets could be made:

1. Rent receivable: All rents receivable due or accrued till

date of B/S should be calculated and brought into account
after making a provision for doubtful/irrecoverable
arrears of rent.

2. Interest and dividend: Interest receivable on loans

accrued till date of B/S and interest on debentures &
other securities receivable on fixed dates accrued and
receivable till B/S date should be brought into account
and dividend on shares should be accounted for as per the
dividend accounting policy followed by the management.

3. Insurance Premium: Insurance premiums are always

paid in advance, thus proportion thereof relating to
period subsequent to B/S date should be calculated &
taken as an outstanding asset.

4. Advertisement: Advances payments may be made

under advertising contracts, thus the proportion thereof
relating to period subsequent to B/S date be taken as an
outstanding asset.

Practical Questions - Chapter 5: Vouching

Question No. 1: A loss of Rs. 2,00,000 on account of

embezzlement of cash was suffered by the company and
it was debited to Salary Account. Comment.

Question No. 2: As an auditor comment on the following:

a) A sum of Rs. 15,000 p.m. has been paid as remuneration

to a Director, who is not in the whole- time employment
of the company.

b) Travelling expenses of Rs. 2.25 lakhs shown in P&L A/c

of X Ltd., including a sum of Rs. 1.10 lakhs spent by
Director on his foreign travel for Company’s business
accompanied by his mother for her medical treatment.

c) The sales proceeds from scrap which did not have a

significant value need not be verified if the company had
a good accounting and costing system.

d) The surplus arising from sale of investments was set-off

against a non-recurring loss and was not disclosed
separately.

e) Insurance claim of Rs. 2 lakhs received stands included

under Miscellaneous Income.

Question No. 3: While auditing the accounts of a

manufacturing company, you discover that the rate of
Gross Profit on sales has sharply risen in comparison to
the previous year. State eight possible causes of such
increase and the steps you would take to satisfy yourself.

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& Auditing- & Auditing- E,
(Unit-2) (Unit-2) November
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Answer) Answer) Suggested
Part-2 Part-1 Ans issued
October 31, October 31, by ICAI
2021 2021 With
explanation
June 06, 2019

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