BCom 3rd Year Vouching in Auditing Notes Study Material

BCom 3rd Year Vouching in Auditing Notes Study Material

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BCom Vouching Notes Study Material
BCom Vouching Notes Study Material

BCom 3rd Year Vouching in Auditing Notes Study Material

Meaning of Vouching

It is an important part of an auditor’s duty to certify as correct the transactions recorded in the books of accounts. The accountant of a business is responsible for passing entries in the books of prime entry. The question arises of how and on what basis such entries have been passed. The auditor’s primary duty is to check these entries and only then certify the accounts as correct and free from any error or fraud.

We all know that the accountant does not enter any transaction in the books of original entry for which he has not got proper documentary evidence. If he does, it is an irregularity in the strict sense of the term and such a step of the accountant would be an example of fraud leading to some manipulation of accounts or misappropriation of cash or goods. Hence, there should be no entry in the books without a voucher and no voucher without its entry. Every voucher must also, therefore, be recorded in the books.

Thus, when an auditor verifies the authority and authenticity of transactions as recorded in the books of accounts and submits his report accordingly to the effect that the accounts are correct, complete, and free from errors or fraud, he has to see that the entries passed in the books of prime entry are properly made, are supported by proper documentary evidence and are also in order. This is known as vouching.

A Few Definitions of Vouching

  1. “By vouching is meant the verification of the authority and authenticity of transactions as recorded in the books of accounts.” -R. B. Bose
  2. “Vouching does not mean merely the inspection of receipts with the cash book, but includes the examination of receipts with the transactions of a business, together with documentary and other evidence of sufficient validity to satisfy an auditor that such transactions are in order, have been properly authorized and are correctly recorded in the books.” -De Paula
  3. “It is often thought that vouching consists of the mere examination of the vouchers or documentary evidence with the book entries. This, however, is quite wrong, for vouching comprises such an examination of the ledger entries as will satisfy the auditor, not only that the entry is supported by documentary evidence but it has been properly made upon the books of accounts.”–Joseph Lancaster

Thus, it is evident that vouching for consists of checking the entries in the financial books with the help of available documentary evidence, e.g., vouchers, receipts, invoices, minutes, contracts, statements, correspondence, etc. For each entry, it is to be ascertained that it is properly authorized and no transaction has been omitted from recording in the books of accounts.

Routine Checking and Vouching

Routine checking has already been discussed earlier. It includes checking casts, postings, carry-forwards, extensions, and other calculations in the books of original entries. The auditor uses distinct ticks in routine checking and tries to establish the genuineness of records. e.g., that the casts are correct, postings are correctly made and no alterations have been made.

Broadly speaking, vouching includes routine checking and it is a part of it. Both are important in their own way. Vouching is the checking of entries while routine checking is the checking of castings and postings. Hence, there is nothing to distinguish one from the other. However, in routine checking, the arithmetical accuracy of the entries is to be verified and in vouching, entries are to be checked with the help of documentary evidence. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Objects of Vouching: In vouching, an auditor verifies the authority and authenticity of transactions as recorded in the financial books so that he can satisfy himself that:

(i) all transactions connected with the business have been recorded in the books of accounts and nothing pertaining to the business has been left unrecorded;

(ii) no transaction which is not connected with the business has been recorded. i.e., no extra item having no concern with the business has been entered in the books; and

(iii) all entries for transactions that are authorized, genuine, and supported by documentary evidence which is available in the business.

Importance of Vouching: The definition of vouching discloses that it is a sort of preliminary work which forms an important part of audit work. Since accounts of a business begin with the passing of entries, hence it becomes a basis for further scrutiny to be made at a later stage. Its importance, therefore, can hardly be over-emphasized. (BCom 3rd Year Vouching in Auditing Notes Study Material)

The purpose of checking entries by reference to appropriate documentary evidence is to ensure that the transactions relating to a particular period have been recorded and there is no voucher left unrecorded in the financial books. The auditor, after satisfying himself with regard to the authority, and authenticity of transactions, can only then say categorically that the books of accounts are correct and the Balance Sheet and Profit and Loss Account exhibit the true and correct state of the financial affairs of the business.

It is certainly true that vouching is done with care and caution by the auditor, he can proceed well further in this work. Thus, vouching becomes an indispensable preliminary to carry on further scrutiny with ease and to satisfy him that the financial books reveal the true position of the business. This is why vouching is said to be the backbone of auditing. Actually, it is the essence of auditing.

In practice, vouching may be a lengthy process in many big organizations. For this, an auditor may apply test checking depending upon the system of internal checks in existence in the organization. (BCom 3rd Year Vouching in Auditing Notes Study Material)

VOUCHERS

As quoted earlier, vouchers are the documentary or other evidence in support of transactions entered in the books of accounts. They may be of two types:

(1) Primary. Written evidence in the original is said to be the primary voucher, e.g., an invoice for a purchase.

(2) Collateral. When the original voucher is not available, copies thereof are produced support or subsidiary evidence is made available so as to remove suspicions and to satisfy the auditor. Such a voucher is usually known as a Collateral Voucher.

The following are some examples of vouchers :

(1) Cash Receipts. Carbon copies of receipts, contracts, minutes, correspondence, etc.

(2) Cash Payments. Invoice, Bill, Demand Notes, Wage Sheets, Salary Register, contracts, correspondence, etc.

(3) Purchases. Invoice, Goods Inward Book, copies of orders received correspondence, etc.

(4) Sales. Copies of Invoices. Orders Received, Goods Outward Book, correspondence, etc.

With these examples, it can be held that correspondence, Contracts, documents, receipts, invoices, bills, minute books maintained for recording resolutions of Directors or Shareholders and any other similar documentary evidences are vouchers that are quoted wherever necessary, in the pages that follow.

While examining vouchers, the following points should be noted by the auditor :

  1. General

(1) All the vouchers should be consecutively numbered and filed serially and in order of entries in the books. If it is not done, the auditor will have to waste a lot of time finding out a particular voucher. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(2) The vouchers which have been inspected by the auditor should be canceled by a stamp so that they may not be produced again. The auditor may also use a special type of tick mark right across the face of the vouchers if no stamp is available.

(3) It should be seen by the auditor that vouchers which are in the personal name of one of the Partners, Directors, Manager, Secretary, or any other official of a business may or may not relate to the business itself. If such a voucher is related to a purchase, the Goods Inward Book should be examined to ensure that goods have actually been received in the business. The client should be specially instructed not to adopt this practice in the business. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(4) If a voucher requires some special scrutiny, the auditor should proceed cautiously and use special ticks for its checking.

(5) As far as possible, the work relating to a particular period or a set of books should be completed in one sitting or as a continuous process.

(6) The auditor should see that every voucher is certified as correct by a responsible official who should put down his signature on it.

(7) For missing vouchers and receipts the auditor should satisfy himself with regard to the reasons for their being lost and demand for their duplicate copies. He has to be much more careful in this matter. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(8) The auditor should not usually take the help of any member of the staff of the client while vouching for the entries and checking the vouchers.

(9) While examining vouchers, the auditor should see that they are properly entered into the proper financial books. Sometimes, proper allocation of items is not made between capital and revenue. This should invariably be done to maintain a correct record and ensure faultless final accounts.

(10) Test-checking should be resorted to only in special circumstances when the auditor is satisfied with the internal check system in operation, otherwise, detailed checking should be done. After all, absolute responsibility is his.

  1. Particulars (i.e., relating to the voucher itself)

(1) The auditor should carefully examine the date, the amount, and the name of his client on the voucher so as to ensure that no voucher which is not related to the business has been entered into the books.

(2) He should see that the voucher is related to the business itself either for goods purchased or for expenses.

(3) It should further be seen that the voucher relates to the period, under audit.

(4) A voucher should be acceptable only when it is on the printed form of the payee.

(5) The amount of the voucher should be written both in words and figures.

(6) If the voucher is a receipt for cash payment over Rs. 500, it must bear a revenue stamp of one rupee.

(7) Every voucher should be signed by some responsible officer on behalf of the payee.

(8) The contents of a voucher should be examined with reference to the particulars of the relevant entry so as to ensure that they tally as regards the date, the amount, etc. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(9) It has to be remembered that if some alteration is made to the voucher, it is properly initialed by the invoice clerk.

Thus, it will be seen that while comparing vouchers with the entries made in the books of account, the auditor should be able to verify the following:

  1. The authority of the voucher:
  2. The authenticity of a transaction:
  3. The proper classification of the account; and
  4. The accuracy of the amount and correctness of the details connected with an entry.

Vouching of Cash Book: Cash Book is a very important financial book for a business concern. Mostly, errors and fraud arise in connection with receipts and payments of cash by making its misappropriation, wherever possible. That is why the auditor has to be on his guard in checking items of cash and he should ensure that no receipt or payment of cash is unrecorded in the Cash Book and no fictitious payment has been entered in it. (BCom 3rd Year Vouching in Auditing Notes Study Material)

In vouching Cash books, the checking of cash receipts is more difficult than cash payments; for cash receipts, the business under audit has to issue receipts and it gets nothing in return from other institutions as in the case of cash payment. The business issues receipts for cash receipts and on the basis of their carbon copies or counterfoils, entries are passed in the Cash Book. Hence, on the one hand, the auditor has to examine vouchers in support of entries, and on the other, he has to see that the receipt of cash has not been misappropriated or misused. For this, he has to proceed with care and caution. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Vouching of Cash Receipt Transactions: The following points should be noted in vouching for cash receipt transactions:

(1) Internal Check. The auditor has to satisfy himself that there is a good system of an internal check-in operation. This has to be thoroughly enquired into. He should fully understand the rules and regulations in vogue for granting receipts, making records thereof, dealing with the bank, etc. As quoted earlier, the auditor can resort to testing checking only if he has satisfied himself that there is an efficient system of internal checks. He may, in such a case, check a few items at random and if he finds that they are all in order and free from irregularities, he has reasons to assume that the remaining ones will be correct.

(2) Comparison of the Rough Cash Book with the Cash Book. Usually, cash receipts are list entered in the Rough Cash Book or the Diary before they are entered in the Cash Book. He should examine the Rough Cash Book or the Diary and compare it with Cash Book. If he does not do so, he might be held liable in case fraud is detected. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(3) Control over the use of the Receipt Book. Another point to be noted by the auditor in these connections is to see whether Receipt Books are kept under proper control. He should keep in mind the following points:

(i) All receipts are on printed forms.

(ii) Counterfoil receipts are used for cash receipts or a system of issuing carbon copies of receipts is in use. The system has to be examined.

(iii) All receipts and Receipt Books should be separately and consecutively numbered.

(iv) The particulars, as regards date, amount, name, etc, on the receipt should be compared with those given in the Cash Book.

(v) If there are certain entries in the Cash Book for which receipts have not been issued, they should be carefully checked.

(vi) Along with cash receipts, the rules for granting cash discounts should be examined. Usually, in such a case, the rules should be uniform for all customers.

(vii) The receipts have to be signed by a responsible officer.

(viii) The unused Receipt Books should be kept in safe custody with some responsible person or officer.

(ix) If there is a system under which a receipt accompanies the receipt of cash, such a receipt (usually known as a delivery note) should be properly signed before its return to the customer. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(4) The method of depositing daily receipts into the bank should be examined. The use of the Pay-in-Slip Book should invariably be made for this purpose.

Cash Sales (including payment by debit or credit cards). The auditor should examine the effectiveness of the system of internal check-in operation in regard to cash sales. Wherever loopholes exist in such a system, he should note them down and check the cash sales in their light very carefully and cautiously. (BCom 3rd Year Vouching in Auditing Notes Study Material)

He should thoroughly check the carbon duplicates of cash memos with the summaries of cash sales. Further, he should compare well the abstracts of the salesman with the cash analysis of the receiving cashier and then, should check the Cash Book. He can scrutinize the General Cash Book with the summaries prepared by the cashier. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Sometimes, in small businesses, cash memos are issued for credit sales to ensure prompt payment. Thus, the auditor will find so many cash memos for which no cash is received in the business and hence, no entry in the abstract prepared by the cashier. This is rather odd, i.e., issuing cash memos for which no cash is received. Such a practice has to be discouraged by the auditor.

(Vouchers-Carbon Duplicates of Cash Memos, Salesman’s Abstracts, Cashier’s Summaries.)

Receipts from Debtors. The cash received from debtors can be vouched with reference to the counterfoils of the receipts issued to them. Thus, the counterfoil is the only proper documentary evidence available for the purpose. But this is not a reliable voucher as frauds are usually committed:

(i) by inserting less amount in the counterfoil than what is actually received from a debtor; or

(ii) by recording less amount on the debit side of the Cash Book; or

(iii) by issuing a receipt from the unused books if these are not properly kept in custody:

(iv) by the process of ‘teeming and lading’ or ‘lapping’. ‘Lapping’ is done through concealment of a shortage by delaying the recording of receipt of cash while ‘teeming and lading’ is the process of misappropriating cash received from a debtor without entering it in his account. When cash is received from another debtor, it is posted to the account of the former.

There is a fraudulent practice on the part of the cashier to misappropriate or misuse cash through the process of teeming and lading, i.e., not entering cash in the Cash Book received from a debtor and entering it only when a similar amount is received from another debtor and so on. Such practices are common and the auditor can check them with reference to the Rough Cash Book and counterfoils of the Pay-in-Slips. If fraud is committed like this, less amount would have been deposited in the bank.

The auditor should pay special attention to discounts allowed to customers and bad debts written off. He should enquire about the method and rate of granting discounts. Discount rates should not exceed the usual percentage. Similarly, for bad debts written off, he should enquire as to who is made responsible for write-off debts as bad. Cash received can be misappropriated by writing off the whole or a part of the debit balance as bad. (BCom 3rd Year Vouching in Auditing Notes Study Material)

The auditor, with the permission of his client, can establish contact directly with the debtors by sending from time to time the statements or ‘verification slips’ and asking them to send their confirmation directly to him.

(Vouchers-Counterfoils, Correspondence, etc.)

Bills Receivable. All details about bills receivable can be available in the Bills Receivable Book. The receipts for bills receivable can be in two ways:

(1) Receipts from Bills Discounted. The bills receivable which have been discounted and have not matured at the date of the Balance Sheet, the cash so received should be properly entered in the Cash Book. The amount deducted for a discount on such bills should be separately debited in the Discount Account. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Contingent liability in respect of such bills should be shown on the Balance Sheet

(2) Receipt from Bills Matured. The cash receipt for the bills receivable in respect of which the amount has been received on the dates of maturity should be checked by comparing the Bills Receivable Book with the Cash Book and the Pass Book.

A special inquiry should be made about bills that have matured but the amount in respect thereof has not been received. Such bills might have been dishonored or retired. It is possible that such bills might have been paid but their proceeds might have been misappropriated by the cashier. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers-Bills Receivable Book, Cash Book, Pass Book.)

Income from Interest and Dividend. If interest is received on account of fixed deposits in the bank, such income should be vouched with the Bank Pass Book. The Pass Book should be a genuine one. If such interest is receivable from a loan granted to a borrower, the necessary agreement between the borrower and the business should be referred to for the rate of interest, date of payment, etc. If the interest comes from securities, then vouching of such income should be made from a schedule obtained from some responsible official.

For all such cash receipts, counterfoils of receipts may be checked. Usually, the interest from debentures and government securities is received half-yearly. The interest warrant is received from the company that has issued the debentures and is deposited with the bank. The interest is received along with the tax deduction certificates. (BCom 3rd Year Vouching in Auditing Notes Study Material)

For receipt of dividend, three vouchers, viz., counterfoils, dividend warrants, and letters received along with the cheques, should be seen. If the bank is authorized to collect this income, the Pass Book should be referred to. The auditor should ensure that all such income whether received or accrued has been accounted for in the books and shown in the Balance Sheet.

(Vouchers-(i) For Interest-Pass Book, Agreement, Schedule, Counterfoils. (ii) For Dividend Counterfoils. Dividend Warrants, Pass Book.)

Sale of Investments. Investments are usually sold through brokers. Hence, the broker’s sold note should be examined to vouch for the amount received from the sale of investments. The broker’s sold note contains details about the actual amount received on this account and the commission paid to the broker. If the sale has been affected by the bank, the bank’s advice should be examined.

If the investments have been sold cum-dividend, it should be seen that the dividend has subsequently been received and the sale proceeds thereof have been apportioned between capital and revenue. If they are sold ex-dividend, the entry for it has to be properly checked by the auditor.

(Vouchers—Broker’s Sold Note, Bank Advice.)

Receipts from Hire Purchase. The hire purchase agreement should be examined in detail so as to ascertain the duration of the agreement, the number of installments, and the total number of installments payable by the close of the period the accounts on which are under audit. The auditor has to keep in mind that the installment includes interest also. He should note that the whole amount of an installment is not credited to the Sales Account and it has been properly apportioned between sales and interest.

(Vouchers-Hire Purchase Agreement, Counterfoils of Receipts.)

Rent Received. If the rent rolls are maintained, the same should be examined and compared with the Cash Book. The lease deeds and agreements should be examined to ascertain the amount of rent, the due date, and the provision regarding repairs.

The counterfoils of rent receipts issued to tenants should be checked. If agents are appointed to collect rent, the accounts or statements submitted by them should be carefully checked. (BCom 3rd Year Vouching in Auditing Notes Study Material)

The auditor should be particularly careful about the outstanding rent. It is possible that the rent has been received but has been shown as outstanding and the necessary amount has been misappropriated. If need be, the auditor may ask the tenants to confirm the outstanding rent.

(Vouchers-Lease Deeds and Agreements, Rent-rolls, Accounts Received from Agents, Counterfoils, Correspondence.)

Commission Received. For commission received, the agreements between the client and the parties from whom it is receivable should be examined first so that the terms of commission, its rate, etc., may be examined. Counterfoils of receipts should be compared with the particulars entered in the Cash Book. If the commission is received in respect of goods received on consignment, the amount of commission should be vouched with reference to the copy of the account sale sent to the consignor. If necessary, the auditor should make calculations himself.

Proceeds from Sale of Fixed Assets. Whenever fixed assets, such as land, building, machinery, furniture, etc, are sold, correspondence is made with the parties who are willing to purchase them. Usually, fixed assets are sold through a broker or an auctioneer.

If it is made through a broker, the broker’s sold note should be seen otherwise the auctioneer’s note should be examined. If a Sale Deed has been executed, it may also be examined by the auditor. It has to be remembered that any profit so earned should be credited to the Capital Reserve Account and not to the General Profit and Loss Account. Due regard should be made to expenses payable in respect of such assets.

The auditor should see that the sale has been duly sanctioned.

(Vouchers-Auctioneer’s Note or Broker’s Sold Note, Sale Deed, Correspondence.)

Insurance Claim Money. Insurance claims money received from an insurance company against a claim should be checked by making a reference to the correspondence between the company and the client and the amount rendered by the insurance company to the client.

(Vouchers-Accounts, Correspondence.)

Subscriptions. The income received on account of subscriptions can be vouched with the help of the register of subscriptions and the counterfoils of the receipts.

(Vouchers-Register of Subscriptions, Counterfoils.)

Vouching for Cash Payments

The vouchers related to cash payments should be properly authorized, serially numbered, and filed in order. It is usually asserted that in vouching payments, an auditor does not merely seek proof that money has been paid away. It means that it is not merely the duty of an auditor to see that the payment has been made but he should satisfy himself that the payment:

(a) has been actually made for the business itself;

(b) relates to the period under audit;

(c) has been made to the right person;

(d) is properly sanctioned;

(e) is properly recorded;

(f) is supported by a proper voucher; and

(g) the particulars are given in the voucher tally with those of the cash book.

The payment has been made, but to whom and for what purpose, these are some of the big questions to be correctly answered. Thus, vouching for cash payments means ensuring that payment is correct, genuine, and properly authorized.

It is true that if an effective system of internal checks is in operation, the chances of errors and fraud are minimized.

Cash Purchases. The auditor should see that the goods paid for have actually been received. He should examine the entries in the Cash Book with the help of Cash Memos or receipted invoices issued by suppliers and also the Goods Inward Book or Stock Ledger. Thus, for cash purchases, he has especially to examine the genuineness of the purchase, receipt of goods, and also the relevant vouchers. It is to be seen that only the net amount (i.e., purchases minus trade discount) has to be carried to the books of accounts.

(Vouchers Cash Memos, Goods Inward Book.)

Payment to Creditors. Payment to creditors may be vouched with the receipts issued by the creditors. Money due to them can be compared with the accounts of the creditors. and for goods received, the invoices can be referred to. He should especially scrutinize the method of comparing the statements of accounts with their actual accounts. Before passing an entry as correct, he should refer to minutes, contracts, and other documentary evidence in support of it.

(Vouchers-Receipts, Statement of Accounts, Minutes, Contracts.)

Wages. Vouching for wage payment is one of the most important duties of the auditor. He should, first of all, assess the operation of an efficient and effective system of internal checks. If the system is good, the possibility of errors or fraud is minimized. He has to satisfy himself in regard to this system so far as it relates to the maintaining of wage records, preparation of wage sheets, and payment of wages.

The auditor should look for the following points while examining the system of internal check-in force:

1) Likely avenues for fraud, e.g., casual labor or the inclusion of dummy names in the Wage Sheet.

(2) Occurrence of clerical errors.

(3) Adequacy of both time and piece-work records.

He should note the following points:

(1) The system of internal checks has to be thoroughly investigated.

(2) The totals and calculations involved in the Wages Sheet should be checked.

(3) He should check a few items, i.e., deductions in the form of rent, fire insurance, provident fund, etc., and the method of deducting them should be scrutinized. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(4) It should be seen that the amount of the cheque drawn for payment of wages tallies with the net amount as shown in the Wage Sheets.

(5) Names of workers given in the Wage Sheets should be well-compared with those given in the wage records, e.g., Job Cards, Foremen’s Register, etc., to ensure that no dummy names have been included in the Wage Sheets.

(6) The auditor should see that the Wage Sheets have been properly initialed by those responsible for their preparation.

(7) He should carefully check the payments made to the casual labor.

It is advisable to prepare separate wage sheets for casual workers to be certified by the foreman or the departmental head. The auditor should ensure that casual workers are paid correctly. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Thus, as regards wages, the auditor has to see that:

(i) the wages as recorded in the Cash Book have actually been paid;

(ii) such an amount of wages was actually due to be paid by the business; and

(iii) such a payment was duly authorized.

(Vouchers-Wage Records, Job Cards, Wage Sheets, etc.)

Salary. The auditor should check the Salary Book and then compare it with the entries in the Cash Book. He should examine the Salary Accounts of each individual employee month by month if separate cheques are issued to employees but if one cheque is drawn for the whole amount of salary, the totals of Cash Book and of Salary Book may be examined. The counterfoils of cheques drawn can help him in verifying the different payments made to employees. (BCom 3rd Year Vouching in Auditing Notes Study Material)

The salaries of staff can also be directly credited to their bank accounts. The auditor should check whether the amounts have been actually credited to the accounts of the employees and whether these are correct.

The auditor should see that the Salary Book is duly signed by a responsible officer and that the increases in salaries are properly authorized. The variations in salary in certain cases may be due to annual increments falling due, to some special increments or rewards being granted. They should be carefully checked. He should also examine any alterations in the amounts due to deductions on account of fines, funds, rent, insurance, loans or advances, etc. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Besides examining the Salary Book, the auditor should refer to the appointment letters, agreements, and minutes. This will, however, depend upon the rules of a business as to who will sanction rewards or impose fines. The entire procedure has to be thoroughly examined by the auditor.

(Vouchers-Salary Book, Appointment Letters, Agreements, Minutes, Counterfoils of Cheques.)

Remuneration to an Auditor. Whatever may be the remuneration payable to an auditor for the audit work performed by him is not so important as the treatment that such remuneration should have in the Revenue Account of a company or a firm.

There are a lot of controversies about whether the remuneration given to an auditor should be charged to the Profit & Loss Account pertaining to the year under audit or to the Profit & Loss Account for the year during which such an audit is being conducted. In the former case, it is argued that such remuneration as payable after the close of the Financial Accounts should be shown as an outstanding liability in the accounts of the year under audit as it is payable for the work connected with that year.

It is further argued that since the audit work is to be performed by the auditor in the next financial year, the remuneration payable should be debited to the Profit & Loss. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Account for the next year and not for the current year. Both arguments have some basis. It is, however, justifiable to debit the Profit & Loss Account of the year under review if the audit work has commenced before the closing of the books and the auditor’s remuneration can be brought as an outstanding liability. But if the audit work begins after the books have been closed, such remuneration should be debited to the Profit & Loss Account of the subsequent years during which the accounts are audited. In no case, double the amount should be debited.

Bills Payable. The bills honored and returned by the payees should be examined together with the Bills Payable Book. If the payments are made through the bank, the Pass Book should be checked and a reference may also be made to the statement received from the bank.

(Vouchers-Receipts, Bills Payable Returned, Bills Payable Book, Pass Book.)

Purchase of Land and Building. If the asset is purchased through an auctioneer, the auctioneer’s accounts should be checked. In other cases, the receipt obtained from the vendor can be good evidence to vouch for the purchase. Two things have to be specially noted:

(1) If the purchase of freehold land or building is made, the Title Deed should be examined.

(2) If the property purchased is leasehold, in which case the purchaser’s right over the property is for some fixed period, the lease should be examined.

If the property is purchased through a broker, the broker’s note should be examined. The agreement for purchase is the proper documentation of any evidence in support. If the building is erected under contract, the actual contract should be checked together with the architect’s certificate on the basis of which the payments are made.

The expenses incurred, e.g., auctioneer’s commission, brokerage, registration fee, architect’s fee, etc., can be vouched with the help of the receipts obtained and it should be seen that they are capitalized.

(Vouchers—Title Deed Lease, Auctioneer’s Note, Broker’s Note. Receipts, Contract, Architect’s Certificate.)

Purchase of Plant and Machinery. A reference to the invoice and the receipt obtained from the supplier can be of much help to the auditor in vouching for the purchase of plant and machinery to see that the price has been paid. The auditor can well proceed on the lines as suggested in the case of land and building. It should be noted that the expenses incurred in erecting and fixing up the plant have been capitalized. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Purchase of Investments. Payments for the purchase of investments should be vouched with reference to the Broker’s Bought Note. The actual investments can also be examined. If they are purchased through the bank, the Pass Book may be examined. In the case of cum-dividend purchase, it should be seen that the expenditure has been properly apportioned between capital and revenue.

If it is a case of a new issue, letters of allotment, share certificates, etc., may be examined. It is needless to say that the purchase of investments should be properly authorized. If the investments consist of inscribed stocks, a certificate from the bank should be obtained.

(Vouchers-Broker’s Bought Note, Pass Book, Letters of Allotment, Share Certificates, etc.)

Patents and Copyrights. The agreement of purchase may be examined for the patent and copyright and the receipt in token of having paid the amount should also be examined. Any expenses incurred in connection with the purchase should be capitalized. If the purchase is affected through an agent, his commission should also be capitalized, however, the renewal fee is not a capital expenditure and must be treated as a revenue expenditure. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers-Agreement, Receipts, Agent’s Account.)

Payment under Hire Purchase Agreement. The vouching of the payment made for hire purchase should be done by examining the agreement and the receipt so received can be good evidence for it. The installment paid includes interest also and, therefore, the auditor should see that such an interest is charged as a revenue expenditure. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Such payments should be vouched with the periodical statements received from the hire trader and other relevant vouchers.

(Vouchers-Agreement, Receipt, etc.)

Traveling Expenses. It should be noted that traveling expenses are paid for the travel in connection with the business. The vouchers should contain details such as the name and designation of the person, particulars of the journey, amount of fare, amount of boarding and lodging expenses, and other expenses. Where the amount is payable as fixed, there is no difficulty in checking it, but in other cases, he has to check a lot of calculations made. The traveling expenses should be passed by a responsible officer as being in order. The receipts obtained from those receiving payments should be scrutinized. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers-Bills, Receipts, etc.)

Advertising. If the amounts spent on advertising are substantial, the auditor should see that adequate controls have been kept on this expenditure. It is essential to know the amount which has been budgeted for advertising for each product, the amount actually spent, the amount to which the company is committed, and the balance on the budget which has not been allocated. There may be some common or general advertising expenses such as prestige advertising where the name of the firm is published without reference to any particular product.

In case of heavy or abnormal advertising expenditure where the question of carrying forward a part of expenditure from one accounting period to another is involved, the auditor should be guided by the policy of the firm in this regard. Such expenditure is known as deferred revenue expenditure and a part of it charged against the current period should be budgeted as a revenue expense.

Usually, it is preferable to see that the financial records run parallel to the statistical records, and with the aid of such records, the budgeted and actual expenditures pertaining to a period can be comparable.

Interest on Loan. From whatever source, either a bank or any other, if the loan is obtained, interest thereon has to be paid. The terms of the loan should be studied and it should be seen that the rate of interest does not differ from the one given in the loan agreement. If interest is payable on debentures, the debentures interest book should be referred to. If the interest is payable through the bank, the Pass Book and Interest Register should be examined. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers—Loan Agreement, Debenture Interest Book, Pass Book.)

Dividends. The payment of dividends can be examined with the help of dividend warrants returned. If the payment is made through the bank, Dividend Warrants and Pass Book may be compared. The number of unclaimed dividends should tally with the balance given in the Pass Book on this account. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers-Dividend Warrants, Pass Book, etc.)

Directors’ Fees. To vouch for payment of Directors’ Fees, the Directors’ Minute Book, the Attendance Register, and the receipts obtained from directors for this payment should be examined. The auditor should also study the Articles of Association and see the provisions in regard to the payment of Directors’ fees. The resolution of Shareholders should also be seen to ensure that the correct payment has been made.

(Vouchers-Minute Book, Attendance Register, Articles of Association, Resolution of Shareholders.)

Remuneration to Directors. The amount of remuneration payable to Directors of Public Companies is controlled by the provisions contained in section 197, subject to the overall limit and explanation contained in section 197 of the Companies Act. Under the Companies Act, 2013 even a Director who is neither in the whole time employment of the company nor a managing director can be paid remuneration either by way of monthly by way of commission on profit. (BCom 3rd Year Vouching in Auditing Notes Study Material)

If payment is to be made as a commission, it has done with the sanction of the company by a special resolution and also with the approval of the Central Government if a monthly, quarterly, or annual payment is envisaged.

The amount of remuneration is, however, limited to 1 to 3 percent depending on whether or not the company has a Managing Director or a whole-time director. The auditor should see that legal provisions have been duly complied with.

(Vouchers Special Resolution, Approval Note of Central Government, Minute Book, etc.)

Deposits. Sundry deposits such as telephone deposits, gas and electricity deposits, and travel warrant deposits should be vouched with the help of relevant receipts. It is usual that these amounts remain in the books uncharged for a number of years. A schedule of the composition of such deposits should be kept. However, the cases of deposits should be reviewed to ensure that the circumstances under which they were originally made have been charged. Further, direct confirmation can be obtained from the persons holding these deposits.

As for the deposit of duty, it is made when the exact amount of duty payable cannot be agreed upon and the purchaser wants to obtain possession of the goods. This is applicable to certain kinds of machinery and equipment and similar other imported goods. It is to be seen that the invoices for duty have been clearly marked ‘Duty Deposits’ and debited to a debtor account for duty deposit and not written off to revenue. The auditor should examine the details of the amount on deposit and pay special attention to items that have been outstanding for a long time. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Commission. The conditions relating to the payment of commission should be examined with reference to the agreements between the clients and the agents. Usually, the commission is paid on the amount of net sales after deducting discounts, allowances, etc., from the gross sales. The statement of accounts submitted by the agents or representatives should also be seen.

(Vouchers-Agreements, Statement of Accounts.)

Payment of Taxes. To vouch for the payment of taxes, the auditor should be made reference to the copy of the assessment order, assessment form, notice of demand, and the receipted challan. The advance payment of Income tax under section 207 should be verified with the Notice on Demand and the relevant receipted challan.

The interest allowed on advance payments of Income tax under section 214 should be included as income and penal interest charged for non-payment of these should be debited to the Interest Account as given in sections 215, 216, and 217 of the Income tax act.

Payment of Vat and Service Tax can be vouched by reference to the return submitted by the dealer and Treasury or Bank Receipt. Such returns are submitted every month or quarter. At the final assessment for the year, if the amount of tax falls short, he is asked to deposit the difference and if it is in excess he is allowed a refund. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers 1. Income tax Assessment Order Form. Notice of Demand and Receipted Challan. 2. Vat-Return submitted by the dealer and, Treasury or Bank Receipt.)

Bank Charges. To vouch for bank charges such as commission, interest on overdrafts and loans, etc., the Bank Pass Book should be examined. If necessary, the auditor should check the calculation of interest.

(Vouchers-Bank Pass Book.)

Insurance. For payment made on account of insurance premiums, the receipts from the insurance company and the policy itself may be examined. In case of renewal, the renewal receipt for the premium should be referred to. The auditor should call for a schedule of all the policies if their number is large and check them accordingly. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(Vouchers-Insurance Policy. Receipts.)

Petty Cash. To vouch for petty cash payments, the auditor should examine the Petty Cash Book which is dealt with in detail in the pages that follow. However, he can check petty cash payments by reference to the Requisition Slips and Petty Cashier’s Receipts.

(Vouchers–Requisition Slip. Petty Cashier’s Receipts.)

Postage. The auditor should compare the Postage Book with the Cash Book and Petty Cash Book and count the stamps in hand. He should see that postage includes only the postal expenses connected with the business and not with any private account.

Petty Cash Book. First of all, the auditor should check the system of internal checks in regard to petty cash transactions. Since there are no proper vouchers, chances of misappropriation of cash exist, the petty cash is usually maintained on the imprest system. If he finds that the system of internal check is sound, he should adopt the following course of action:

(1) He should check the payment entered in the Cash Book which has been made to the Petty Cashier for petty expenses.

(2) He should examine the totals and balances etc., of the Petty Cash Book.

(3) If vouchers for a few months are available, they should be examined. He should insist upon having vouchers for every expenditure above Rs. 2 or so.

(4) For expenses for which vouchers are not available, he should call for a summary from the Petty Cashier which should be duly signed by a responsible officer. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(5) He should see that the Petty Cash Book is periodically checked and initialed by some responsible person to ensure that the petty cash payments are bona fide. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(6) He should verify the closing balance of the petty cash on the Balance Sheet date. The auditor should count the amount of petty cash in hand if he is unable to attend on the date of the Balance Sheet and also arranges for the petty cash balance to be paid into the Bank, it will be necessary for him to carry it vouching to the day of his visit and count the petty cash as at that date.

In the case of London Oil Storage Co. Ltd. vs. Seear Hasluck & Co. (1904), it was held that the auditor had committed a breach of duty in not vouching for the existence of the petty cash balance which was shown in the books to be £ 796 but was in fact only about £30.

(7) No IOUs should be included in the petty cash balance.

Purchases Book. It is the first and foremost duty of an auditor to satisfy himself with the internal check system in operation in regard to purchases. He should especially be made investigations into the procedure of placing orders, receiving goods, examining invoices, and maintaining records in regard thereto. If the system of internal check-in operation is efficient and effective, he can conveniently proceed with the vouching of the Purchases Book. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(1) He should keep in mind the following points while checking invoices:

(i) The invoice is in the name of his client.

(ii) The date is given in the invoice relating to the period under audit.

(iii) The invoice relates to the business in which the concern deals.

(iv) The invoice is initialed by some responsible person who has checked it.

(v) The invoice is entered in the name of the supplier in the Purchases Book.

(vi) The trade discount has been deducted from the amount of the invoice and then, only the net amount has been entered.

(2) Often business houses maintain a Goods Inward Book recording receipt of goods purchased and received on the premises. Such records should be checked with the invoices. This will avoid the inclusion of fictitious invoices or duplicates as ‘original’ ones.

(3) Sometimes, invoices are suppressed to manipulate accounts and purchases shown at fewer figures than the actual Goods Inward Book and the Stock Sheets with the purchases Book, especially for goods received during the last two or three weeks of a financial year and during a few weeks of the beginning of the next financial year. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(4) It should be seen that no invoice has been entered twice in the books.

(5) It has to be examined that capital purchases have not been written as revenue purchases in the financial book.

(6) He should examine the costs and balances of the Purchases Book, and posting to the respective ledger accounts should also be checked.

(7) If for a purchase, the proper voucher is not available, he should ask for a duplicate. If it is not supplied, he may mention the fact in his report.

(8) If the invoice contains several pages, its total should be checked with reference to the totals given on separate pages.

Purchases Returns Book. The auditor should examine the system of an internal check-in operation. Having satisfied himself with the system, he should vouch for the Purchases Returns Book and proceed in the following manners:

(1) He should compare the credit notes with the Purchases Returns Book and also the Goods Outward Book. He should ensure that the Credit Notes have not been suppressed. Usually, such frauds are committed for goods returned at the close or at the beginning of the financial year. Hence, the accounts relating to these periods should especially be examined.

(2) The auditor should also check castings and postings of the Purchases Returns Book and their postings to the Ledger Accounts.

Sales Book. As usual, the auditor should examine the system of internal checks in regard to credit sales. This includes the procedure beginning from receiving orders to the delivery of goods and making payments the, therefore. The following points may be noted:

(1) He should compare the name, the date, the amounts, etc., given on the copy of le invoice with those given in the Sales Book.

(2) If some distinction is made in granting trade discounts to two different customers, the reason thereof should be enquired into.

(3) The Sales Book should be vouched with the help of the Orders Received Book and the Goods Outward Book to ensure that no sales have been omitted from the recording. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(4) If goods are supplied on an ‘approve or return’ basis, it should be seen that such goods are not to be treated as sales till the letters of acceptance have been received. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(5) The auditor should especially examine the sales relating to the periods at the beginning or at the close of the financial year to ensure that no manipulation has been made in accounts. He may check such sales with the Goods Outward Book.

(6) It should be seen that capital sales have not been treated as revenue sales.

(7) He should check the castings and postings of the Sales Book and also examine the postings to the Ledger Accounts.

To see that the sales transactions are bona fide, the auditor has to be very careful.

Sales Return Book. The auditor should examine the system of an internal check-in operation. The goods returned by customers on account of their being defective or inferior in quality are recorded in the Goods Inward Book on their receipt. The following points should be kept in mind while vouching for sales returns:

(1) He should check the entries in the Sales Returns Book with the help of the copies of notes maintained and the Goods Inward Book.

(2) He should especially check a few entries made at the beginning or at the close of the financial year. This may involve some sort of manipulation of accounts.

(3) He should check the castings of the Sales Returns Book and their postings in the Ledger Accounts.

Bills Receivable Book. Entries for bills receivable are passed in the Bills Receivable Book. There may be five such categories:

(1) Bills matured for which payments have been received. The receipt of money on this account may be checked by reference to the Cash Book. If payments are received through the bank, the Bank Pass Book should be examined.

(2) For bills discounted, the Cash Book and the Pass Book entries should be checked.

(3) There may be bills in hand which is not matured. If such bills are with the client, personal verification should be done by the auditor. If they are deposited with the bank, a certificate to that effect should be obtained from the bank.

(4) For bills dishonored, it should be seen that the proper entries have been passed in the financial books.

(5) For bills discounted and dishonored, the auditor should verify such bills returned by the bank and see that the bank’s advice has been attached to the voucher. It is to be ensured that the number of such bills along with the commission if charged by the bank. has been debited to the party and credited to the bank account. (BCom 3rd Year Vouching in Auditing Notes Study Material)

He should check the castings of the Bills Receivable Book and their postings to the Ledger Accounts. The liability for bills discounted should be properly shown on the liabilities side of the Balance Sheet. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Bills Payable Book. Bills accepted and entered in the Bills Payable Book may be of two types:

(1) Bills for which payment has been made by the client on maturity. The evidence of the payment will be found in the returned bills. Cash Book should be checked for such bills and if the payment is made through the bank, Pass Book should be examined.

(2) Bills that have not yet matured. The counterfoils or copies of such bills will be the documents in support of such bills. The Bills Payable Book should be examined and if necessary, the statement of accounts submitted by creditors should be referred to.

The castings of the Bills Payable Book should be checked and their postings into the Ledger Account should be examined.

Journal Proper. The entries which cannot be passed through any other book of original entries are passed through the Journal Proper. The auditor should see that all such entries recorded in the Journal are duly supported by vouchers and that relevant documents are correct. He should remember that there is a lot of scope for the manipulation of accounts in the Journal.

(1) Opening Entries. The opening entries may be checked by reference to the various relevant items on the previous Balance Sheet. If the business has been purchased from the vendor and then the opening entries have been passed, an agreement between the client and the vendor, Articles of Association (if it is a company) and Directors’ Minutes should be examined to ensure that correct records are maintained and there is no manipulation in the accounts. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(2) Closing Entries. Such entries are those which are passed for closing and transferring balances from the nominal accounts to the Profit & Loss Account. It should be seen that balances have been correctly arrived at and carried to proper accounts.

(3) Adjusting Entries. Adjusting entries include such items as provisions for bad and doubtful debts and outstanding and prepaid expenses. accrued and unearned income, depreciation, reserves, allocations between capital and revenue, etc.

The auditor should check all the available evidence in order to ensure that such entries are accurately and correctly made. He should explore the chances of committing fraud through the Journal and check them thoroughly.

Provision for bad debts should be based on the procedures followed in its adequacy should be verified. Bad debts should be written off only under P authority. For outstanding and prepaid expenses and also for accrued and income, the auditor should obtain schedules from the client and ensure that item has been correctly arrived at. Thus, he should not pass any entry until he is satisfied with regard to its validity and correctness. (BCom 3rd Year Vouching in Auditing Notes Study Material)

To vouch for entries for provision for depreciation, he should obtain information with regard to the nature of assets, their estimated effective life, and also the bases upon which provision for depreciation has been made. Director’s Minutes should also be seen by the authority.

(4) Issue, Allotment, and Forfeiture of Shares. Entries relating to issues, allotment, and forfeiture of shares are also passed through the Journal. For such entries, the auditor should study the Prospectus, Articles of Association, Director’s Minutes Book, Applications, Copies of Allotment Letters, Correspondence, etc. These items are dealt with in detail in the chapter on Company Audit’.

(5) Consignment Transactions. Consignment transactions are usually entered in the Journal but if the volume of such transactions is large, it would be advisable to maintain a separate book called ‘Consignment Outward Journal’. The vouching of consignment transactions should be done with copies of the proforma invoices, and correspondence. account sales received and contracts with the consignees.

If the price quoted is higher than the cost the necessary adjustment should be made before finding out the actual profit or loss. The goods unsold should be separately shown in the Balance Sheet as ‘Stock of Goods on Consignment’.

If goods are received on consignment from other parties, entries therefore will also be passed through the Journal. Such entries should be vouched with the help of the one of account sales submitted to the consignor. The sales of such goods should not be included in ordinary sales but should be dealt with separately. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Purchases (Creditors) Ledger. The Purchases Ledger contains accounts relating to creditors. The following points may be noted:

(1) The opening balance of different accounts may be checked with the Audit Balance Sheet of the previous year.

(2) All supporting books, viz., Purchases Book. Goods Outward Book, Cash Book. Allowance Book, Discount Register. Bills Payable Book etc. should be thoroughly investigated. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(3) If the self-balancing system is in use, the auditor should call for a schedule of creditors from the client, and the total of the schedule should be tallied with the creditor’s Ledger Adjustment Account in the Ledger Account.

(4) The auditor should examine all the Creditors’ Statements and with their help, the Purchases Ledger balance should be checked.

(5) It should be seen that the balances of the Purchases Ledger whether debit or credit are shown on the proper side of the Balance Sheet.

(6) If a provision for reserve for a discount on creditors is made, it should be ensured that it is not excessive.

Sales (Debtors) Ledger. The Sales Ledger contains accounts relating to debtors.

The auditor has to place considerable reliance upon the system of internal checks as regards the Sales Ledger. He should note the following points.

(1) He should ensure that the work of each Ledger Clerk is independently checked.

(2) He should see that entries in the ledger are made by some other person who is not the Ledger Clerk.

(3) He should verify that the ledger is balanced frequently and the extraction of the balances is independently checked.

(4) It is to be examined that the collection of accounts and the writing-off of bad debts are properly supervised by a responsible official.

The following steps should be taken to vouch for the Sales Ledger:

(1) The opening balance should be checked with the balance given in the previous year’s Balance Sheet.

(2) Books like Bills Receivable Books, Cash Books, Sales Returns Books or Goods Outward Books, Journals, or other subsidiary books should be checked to vouch for the accounts in the Sales Ledger. (BCom 3rd Year Vouching in Auditing Notes Study Material)

(3) The auditor should call for a schedule of Debtors’ Accounts and check it carefully.

(4) If the books are maintained on the self-balancing system, the total of the balance in the schedule of debtors should tally with the total of the balance shown in the Debtors’ Ledger Adjustment Accounts.

(5) It should be ensured that the debit or credit balance of the Sales Ledger should be shown on the proper side of the Balance Sheet.

(6) He should call for a list of bad, doubtful, and good debts and verify them thoroughly.

Total Account. A total or control account is an account that is debited in total with all the amounts on the debit of the individual accounts and credited in total with all the amounts on the credit of individual accounts in the ledger. The balance of this account would be equal to the difference between the sum of the debit and credit balances appearing in that ledger.

Thus, in the preparation of a total account, a reference is made to the various books of original entry and the Cash Book. Such separate accounts are prepared for Sales Ledger and Purchases Ledger. This account, therefore, provides a check on the balances of the Purchases and Sales Ledger.

Total accounts are maintained in the general or impersonal ledger. Monthly totals of the Purchases Book or Sales Book or Returns Inward or Outward Book are posted in the total accounts. Total monthly receipts from customers and payments to the suppliers are posted in these accounts. Any entry which affects debtors or creditors is also posted to the control or total accounts and simultaneously, it is posted with the individual account either in the bought ledger or sales ledger. In the control accounts, monthly summaries are posted.

Thus, the balance in the total account must be equal to the total of the summary of the respective ledgers. This is however true that under the self-balancing system, the chances of errors are always reduced to the minimum.

Computerized Accounting

In computerized accounting computers are used to facilitate the handling of numerous transactions and provide mechanisms to apply controls and checks. Thus, there can be some inconveniences in the checking work and procedures, computerized system of accounting can best be applied with advantage if the auditor is consulted before it is introduced.

Under the traditional system of accounting, everything relating to the maintenance of accounts is done by hand and one transaction has to pass through many books from journals to ledger and so on. This involves a lot of waste of time and unnecessary burden of expenditure.

Today, the wide expansion of industries in different directions has brought about a significant change in the demand for an accounting system so that the cost can be lessened and work performed with the least possible hands in the minimum possible time.

In these days of modernization, it has become absolutely essential to recognize the accounting procedures so that the entire process of work may be simplified. ‘Short-cut Methods’ are being evolved and adopted to speed up the work and tendencies for the adoption of such methods are increasing day by day. As a result, a computerized system of accounting has evolved and computers have been put to service for the preparation of accounts. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Advantages

The following are the main advantages of a computerized accounting system:

  1. Since under the computerized accounting system computers are used to record transactions and to prepare accounts, the speed of work can be enhanced. (BCom 3rd Year Vouching in Auditing Notes Study Material)
  2. Computers can prove to be better servants than human beings and as such chances of errors are reduced to the minimum.
  3. Computers always do better and therefore, the work done by computers is always more legible and neat than that done by hand.
  4. The work under the computerized system can be done with the minimum amount of manpower and with little cost. There are, therefore, more chances of affecting the greater economy. (BCom 3rd Year Vouching in Auditing Notes Study Material)
  5. Under the computerized system of accounting, as many as required copies of records can be made available for action at the Board or any other level by incurring little extra cost. (BCom 3rd Year Vouching in Auditing Notes Study Material)
  6. This system minimizes Overtime Payments which can be avoided under the system, as the balances of accounts are struck whenever an entry is made.
  7. Computerized accounting, thus, facilitates the preparation of Interim Accounts whenever there is a need for doing so. Besides this, the Collection of Accounts becomes very quick as the Statement of Accounts is made available to customers without any delay.
  8. As computers always perform better, the expenditure on audit internal audits and internal checks can be minimized.
  9. This system facilitates the compilation of Statistical Records and, therefore, it becomes very convenient for the management to make analyses and take quick decisions thereafter. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Disadvantages

  1. Installing a computerized system of accounting involves heavy costs on equipment and training of staff.
  2. Such accounts are not easily understandable to an auditor.
  3. The initial stage of recording transactions is very risky and, therefore, it involves a lot of time and energy on the part of an auditor to certify the results shown by the financial accounts. (BCom 3rd Year Vouching in Auditing Notes Study Material)

Auditor in Relation to Computerised Accounting

An auditor has to perform his duties quite carefully as there is no change in the procedure of auditing even if the computerized system of accounting is adopted. He has to see whether there are errors at the initial stage of recording transactions and whether only authorized transactions have been entered into the books. He has to be quite cautious to ensure whether there has been some collusion between the clerks and whether there are cases of manipulation or misappropriation in the records as a result thereof.

A close scrutiny of the system of internal checks would be very much necessary on his part. The ultimate responsibility, however, rests on his shoulders. (BCom 3rd Year Vouching in Auditing Notes Study Material)

At the very outset, he should call for a certificate from some responsible officer to the effect that the computers used in the business are operating in proper order. The mistake of miscoding is very common under the system and the auditor should guard against it. He should see that an efficient system of internal checks is the only answer in case of loss or substitution of any sheet or card.

BCom 3rd Year Vouching in Auditing Notes Study Material

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