VOUCHING OF CASH TRANSACTION

Receipts in cash book

1. Cash sales

Cash sales usually are verified with carbon copies of cash memos. One of the matters, to
which attention of the auditor should be paid in the process, is that the dates on the cash
memos should tally with those on which cash collected in respect thereof has been entered
in the Cash Book.

To verify that the price of goods sold has been calculated correctly; the computation of the
sales should be ascertained. If a cash memo has been cancelled, its original copy should be
inspected, for it could be that the amount thereof has been misappropriated.EG: For
instance, an employee could cancel a sale after receiving payment and pocket the cash,
leaving no trace in the accounting records.

2. Receipts from debtor

Receipt of cash from the account receivables against the price of goods sold are checked
with the counterfoils of receipt issued to them. At the same time, it is also verified that
there is a system of internal check-in operation that acts as a safeguard against amounts
collected being misappropriated.

One of the common devices for misappropriating cash collections from account
receivables is the one known as Teeming and Lading. Such a fraud, usually, remains
undetected for a long since the cashier is able to make good the amounts
misappropriated before the cash balance is checked. At times, the cashier who has
committed such a fraud may cover up the amounts misappropriated, by raising a
fictitious debit in an expense account.

When such fraud is suspected, the first step in its investigation should be making a
comparison of the entries of amounts deposited in the bank account with those on
counterfoils of the Pay-in-Slip Book. If the composition of the deposits is different from
that shown on the counterfoils of the Pay-in-Slip Book, it would be prima facie evidence
of the fact that the amounts collected were not deposited as soon as these were
received.

Another evidence of the existence of such a fraud can be the fact that debits in account
receivables accounts, which ought to have been collected in whole, are shown in small
installments. If such evidence exists, the matter should be investigated further. This can
be done by all the account receivables being requested to send statements of account
from their books, for the period during which the fraud is suspected to have been in
progress. On comparing items in each statement, with the entries in the account
receivable accounts, it would be possible to locate amounts that were not deposited on
the day these were collected.

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 3. Bills receivable
 The auditor should examine the entries in the Bill Received Book and compare them
with the entries in the cash book for bills realized.
 In case, when bills are collected through a banker, the auditor should compare the
entries in the bank column of the cash book with that of the passbook. The amount
received from bills discounted can be vouched with the help of bills discounted book.
Special attention should be given to the dishonoured bills. If the bills have been
discounted, the contingent liability in respect of the discounted bill is disclosed in the
balance sheet; Enquiries should be made from the client as regards the position of a
bill or bill receivable dishonoured and if it is suspected that the amount due on a bill
may not be recovered, a provision thereof should be made.

4. Rent received

Before proceeding to vouch rental receipts, copies of bills issued to tenants should be test-
checked by reference to copies of tenancy agreements and bills of charges paid by the
landlord on behalf of the tenants, i.e., house tax, water tax, tax deducted at source,
electricity consumed etc.

The entries in the Rental Register in respect of rental accrued afterward should be verified
by reference to copies of rental bills.

The amounts collected from tenants on account of rent should be checked by reference to
receipts issued to them.

These afterward should be traced into the Rental Register. At the end, the register should be
scrutinized to find the amount or rents which have not been recovered and are considered
bad or irrecoverable, for deciding whether these should be written off or a provision against
the same should be made.

An overall check of rental receipts is also necessary. For this purpose, particulars of total
accommodation available for being let out, in different buildings, belonging to the client,
should be ascertained it should be verified that every available accommodation has been let
out and rental income has been duly accounted for. If it is reported that one or more
tenements have remained vacant a certificate in respect thereof should be obtained from
the client.

5. Commission received

This item can be vouched with the accounts of the parties from whom the commission has
been received. Agreements with the parties should be examined to find out the rate of

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commission. Counterfoils of the receipts should be checked with the amount in the cash
book.

6. Interest and dividends received

Interest received on account of fixed deposits in the bank should be examined with the help
of the bank's pass book. Dividends received can be vouched with the counterfoils of the
dividend warrants. In case the collection of dividends is made through the bank, the bank
passbook should be verified.

7. Sale of investments

Only the person who is authorised to purchase an investment can sell the investment. Thus,
in the case of a company, an investment can be sold only by the Board of Directors. The
normal method of selling investments is through a Stock Broker, either directly or through a
bank, the sale proceeds of investments are vouched by reference to the Stock broker' Sold
Note.

8. Sale of fixed asset

In this case also, as in the case of sale of investments, the authority for sale is most
important. It is, therefore, a matter which should receive the attention of the auditor.

Another important aspect that requires consideration is the basis of sale, whether by
auction or by negotiation, for determining that the asset was sold at the maximum price that
could be contained for it and that the sale proceeds of the asset have been fully accounted
for. It should further be confirmed that sale proceeds have been credited to an appropriate
head of account and the amount of profit arising out of it has been segregated between
revenue profits and capital profits, if any, accordingly appropriate accounts are credited,
where there is a loss, the same should be written off.

9. Receipts from hire purchase

Receipts from Hire Sale: The auditor should examine the hire sale agreement in order to
ascertain the amount of installments, due date of installments, rate of interest, etc. He
should vouch the amount of instalment received with the help of counterfoils of the receipts
issued. He should also see that the whole installments amount is not credited to sales
account and it has been properly apportioned between sales and interest

10. Subscriptions Received

The membership subscriptions received by a club and other institutions should be vouched
with the register of members and counterfoils of the receipts.

11. Insurance Claim

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The policy, premium receipts, correspondence with the insurer, etc, should be examined.
The account rendered by the insurance company to the client should also be inspected.

12. Miscellaneous Receipts

Any other receipts i.e., bad debts recovery. share capital, income from royalty etc. can be
vouched with correspondence and contracts with the parties or any other relevant
documents or evidence available. (Vouchers Correspondence and Contracts with the Parties,
relevant documents)

VOUCHING OF PURCHASES BOOK

Procedure of Vouching of Entries in the Purchases Book is as follows

The extent and scope of vouching of the purchase(s) will depend upon the adequacy of
internal control and internal check system in force in the organisation. If the auditor is
satisfied with the system of internal check regarding the purchases, he should start vouching
the Purchases Book. In case the internal check system in operation is inefficient, he should
exercise great care and should check all the purchase transactions exhaustively, ie, in-depth
checking.

For vouching entries in the purchases book:

(1) He will require the invoices relating to the purchases, copies of the requisition slips,
copies of the orders placed, goods inward book and delivery notes.

(2) He should see that only credit purchases are entered in the purchases book.

(3) The auditor should ask his client to arrange all the invoices serially and in the same order
in which they have been entered in the Purchases Book.

While examining the purchase invoice, the auditor should pay special attention to the
following points:

(a) The name of the creditor agrees with the name entered in the purchases book.

(b) The invoices are in the name of the client.

(c) The date of the invoices should relate to the period under audit.

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(d) check whether responsible person placed order. Only a responsible officer should be
authorised to place orders for goods and another responsible officer to pass the invoice for
payment.

(e) if there is any trade discounts it must be deducted from the invoice before making
entries in the purchases book. He should see that only the net figure is entered.

(g) The invoice has been checked by the invoice clerk, and they've marked it with their
initials to confirm

(h) If directors or partners and officials buy goods for personal use through the firm ,in order
to get advantage of the trade discount the purchases should be charged to their personal
accounts. If it is not done, it would mean that the firm pays for the goods purchased by the
official.

(i) The auditor should also see that goods mentioned in the invoice are not capital goods ie
plant and machinery etc. If these are capital goods, they should not be mixed up with the
purchases of goods but carried to the fixed assets account.

(j) He should compare a few invoices with the goods inward book in order to ensure that the
goods have actually been received

At the end of the financial period, the auditor should compare the Goods Inward Book and
the stock sheets with the purchases book to ensure that all goods taken into stock have been
entered in the purchases book.

It is possible that towards the closing of the financial period, goods have been received and
included in the closing stock but not recorded in the Purchases Book. This will inflate profits
to a large extent. The auditor should be extremely careful about the inclusion of such items
in the purchases, otherwise he will be held responsible to pay damages as was decided in
the case of 'Smith vs. Offer and others. The auditor should ensure that entry has been made
both in the purchases book as well as in the stock book

For the satisfaction of the auditor that all invoices have been included, the client should
write to all the creditors to send their statements of account (balance due to him at that
date) . Sometimes the auditor may write independently to all the suppliers to send up-to-
date statements for conforming balances. The auditor can compare the statements received
with the ledger accounts. If there is no discrepancy, then the auditor should take it for
granted that no invoice has been left out.

Type of fraud to be watch out by the auditor:

1. Duplicate Invoices: Fraudsters may enter the same invoice twice in the Purchases Book,
leading to two payments being made. To detect this, auditors must carefully check invoices
against the Purchases Book.

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2. Post-Dated Invoices: Some businesses may post-date invoices to show a longer credit
period. Auditors must ensure that entries in the Purchases Book are only made for goods
received during the financial year.

3. Lost Invoices: If an invoice is marked "duplicate," auditors must verify that it's a genuine
replacement for a lost invoice.

Auditor's Tasks

1. Check Invoices and Goods Inward Book: Compare invoices with the Goods Inward Book to
ensure accuracy.

2. Verify Casts and Carry-Forward: Check the arithmetic accuracy of the Purchases Book and
ensure correct carry-forward of balances.

3. Check Postings to Ledgers: Verify that entries in the Purchases Book are correctly posted
to the ledgers.

4. Cancel Invoices: Use an audit stamp to mark each invoice as checked, preventing it from
being used again.

By following these steps, auditors can detect potential fraud and ensure the accuracy of
the purchase book.

VOUCHING OF PURCHASES RETURN BOOK

In case of Purchase Returns Book, auditor should pay his/her attention to the following
points:

(1) Examine the copies of debit notes with reference to goods outward returned notes,
original purchase invoice, and advise note for returns.

Sometimes, goods purchased are rejected or returned to the supplier or seller for various
reasons. For example, the goods may not be of the required quantity, or not according to the
sample or may be defective etc. The auditor should see that there is a proper internal check
system to deal with such cases.

(2) He should compare the record of the purchases returns book and the gatekeeper's Goods
Outward Book. He should also compare the credit notes received from the suppliers with
the purchases returns journal or Returns outward book and the gate-keeper's outward book
or the store record.

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(3) Credit notes are also received from the sellers when they give an allowance for damages,
short weight and errors in calculations etc. These should also be scrutinised by the auditor.
In short, he should ensure that full credit has been obtained for all the goods returned to the
suppliers and there is no manipulation in the accounts for the purchases. He should also
verify the purchases returns of the first few months of the last year.

(4) He should pay particular attention to the heavy returns made at the close of the year and
in the beginning of the next year as the entries might have been passed to adjust fictitious
purchases of previous months.

VOUCHING OF PURCHASE OF LAND AND BUILDING

Definition of Vouching:
Vouching is the process of verifying the authenticity of transactions recorded in the books of
accounts by examining relevant documentary evidence. It is considered the backbone of
auditing.

OBJECTIVES OF VOUCHING PURCHASE OF LAND AND BUILDING

1. To verify ownership and title of the property purchased.

2. To ensure proper authorization of the purchase by the appropriate authority.

3. To confirm the accuracy and validity of the amount paid.

4. To ensure compliance with accounting standards, particularly AS-10 (Accounting for

Fixed Assets).

5. To check the correct capitalisation of expenditure.

6. To ensure proper disclosure in the financial statements.

7. To detect fraud, misstatement, or misrepresentation.

DOCUMENTS TO BE VERIFIED BY AUDITOR

1. Title Deeds / Sale Deeds

 Verify the registered sale deed to ensure legal title of the property has passed to the
client.

 Confirm buyer’s name, property description, property area, and registration date.

 Verify receipt and proper payment records.

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  For immovable assets:

o Inspect registered title deed.

o Confirm registration in buyer’s name under the Transfer of Property Act,

1882.

o Ensure title verification by a qualified solicitor or advocate.

 For movable assets requiring registration (e.g., car, ship):

o Confirm registration in the name of purchaser.

 Confirm existence, ownership, and value of the asset.

 Ensure purchase was authorised under Section 179 of the Companies Act, 2013
(Board approval).

 If asset includes additional prepaid expenses (e.g., insurance or taxes), debit to a

separate account.

 For self-constructed/manufactured assets:

o Ensure allocation of labour, material, and direct expenses.

 Avoid over- or under-capitalisation.

2. Purchase Agreement

 Cross-verify terms with the sale deed and payment records.

 Examine any conditional clauses, possession dates, and penalties.

3. Payment Vouchers and Receipts

 Match payment details with the sale deed.

 Confirm proper authorization and verify bank statements or NEFT/RTGS records.

4. Board Resolution

 Confirm board approval (as per Section 179 of the Companies Act, 2013) for asset
purchase.

 Review minutes of the board meeting.

5. Registration Documents

 Ensure proper registration at the sub-registrar’s office.

 Verify payment of stamp duty and registration charges.

6. Broker’s Commission (if any)

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  Review agreement and verify receipts.

 Ensure commission is either capitalised or expensed appropriately.

7. Legal Opinion / Due Diligence Report

 Verify legal due diligence and clear title confirmation.

 Examine any encumbrances or litigations pending on the property.

8. Property Tax Receipts / Municipal Records

 Confirm taxes have been paid or adjusted at time of sale.

 Verify mutation records reflecting new ownership.

9. Physical Verification Report

 Confirm actual possession and physical existence of the asset.

ACCOUNTING TREATMENT

 Capitalise the following costs:

o Purchase price

o Stamp duty and registration charges

o Legal fees

o Site preparation/demolition expenses

 Do not capitalise routine post-acquisition expenses such as repairs or annual

property taxes.

DISCLOSURE IN FINANCIAL STATEMENTS

 Report under "Non-Current Assets" as Property, Plant & Equipment.

 Show assets under construction as "Capital Work-in-Progress."

 Disclose:

o Basis of valuation

o Depreciation policy

o Estimated useful life

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AUDITOR’S DUTIES

1. Scrutinise all relevant supporting documentation.

2. Confirm existence, legal ownership, and physical possession.

3. Check proper classification and accounting treatment.

4. Verify accurate capitalisation.

5. Ensure no fictitious asset is recorded.

6. Detect any fraud or irregularity.

RED FLAGS TO WATCH FOR

 Missing or incomplete documentation.

 Omission from fixed asset register.

 Discrepancy between deed value and recorded amount.

 Payment made to unrelated or suspicious parties.

 Property registered in individual’s name instead of the entity.

ASSETS ACQUIRED ON HIRE PURCHASE BASIS (SECTION 5.2.6)

1. Examine Board’s approval through minutes.

2. Review hire-purchase agreement:

o Asset details

o Cash value

o Hire-purchase charges

o Payment terms

o Interest rate

3. Record asset at full cash value; show liability separately.

4. If cash value is unavailable, calculate using applicable interest.

5. Disclose in balance sheet with a note indicating partial ownership.

6. Debit interest portion of instalments to interest account (not asset account).

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ASSETS ACQUIRED ON LEASE (SECTION 5.2.7)

1. Review lease deed thoroughly.

2. If sub-leased, examine tenant agreements.

3. Verify acquisition cost from relevant documents.

4. Operating Lease:

o Recognise lease payments as expense over the lease term on a straight-line

basis.

5. Finance Lease:

o Ensure substantial risks and rewards of ownership transferred (per AS-19).

o Recognise asset and liability at fair value.

o Recognise contingent rents as expense.

6. Segregate finance lease assets from owned assets.

7. Disclose as per Schedule III of Companies Act, 2013.

AUDIT PROCEDURES FOR SALARIES AND WAGES

1. Examination of Internal Controls

Before verifying salary and wage payments, auditors should assess the organization's
internal control systems related to:

 Employee Lifecycle Management: Review processes for hiring, promotions,

transfers, and terminations to ensure proper authorization and documentation.

 Attendance Recording: Evaluate the methods used to record employee attendance,

such as time clocks or digital systems, ensuring they are tamper-proof and reconciled
with payroll records.

 Payroll Preparation and Authorization: Ensure that payroll calculations are prepared
by personnel independent of those recording attendance or authorizing payments,
with appropriate checks and approvals in place.

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  Disbursement Procedures: Verify that salary payments are made through secure
channels, like direct bank transfers, and that unclaimed wages are promptly recorded
and monitored.

 Record Maintenance: Confirm that payroll records are securely stored and access is
restricted to authorized personnel only.

Effective internal controls are crucial for preventing errors and fraud in payroll processing.

2. Substantive Audit Procedures

Once internal controls are deemed reliable, auditors should perform the following checks:

 Detailed Payroll Verification: For a selected period, match payroll entries with
attendance records, employment contracts, and authorized pay rates to ensure
accuracy.

 Calculation Accuracy: Recalculate gross and net pay, considering deductions like
taxes, provident fund contributions, and other withholdings, ensuring compliance
with statutory requirements.

 Ledger Classifications: Ensure salaries and wages are properly allocated to the
correct expense heads/accounts.
 Acknowledgement of Payments: Confirm that payments are received and
acknowledged by employees.
 Document Authentication: Wage sheets must be signed by preparers and disbursing
officials, with work roles specified.
 Authorization Checks: Verify that any overtime, bonuses, or special allowances have
been properly authorized and documented.

 Bank Reconciliations: Compare payroll-related bank transactions with payroll records

to ensure that disbursed amounts align with authorized payroll figures.

 Unclaimed Wages Monitoring: Review the register of unclaimed wages to identify

any patterns or anomalies that might indicate issues like ghost employees.

 Loan and Advance Recoveries: Ensure that any deductions for employee loans or
advances are correctly applied and recorded in the respective ledgers.

3. Disclosure Requirements under Schedule III

According to Schedule III of the Companies Act, 2013, companies must disclose employee
benefit expenses in the Statement of Profit and Loss, categorized as:

 Salaries and Wages: Total remuneration paid to employees.

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  Contributions to Provident and Other Funds: Employer's contributions to statutory
and other employee benefit funds.

 Expenses on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase
Plan (ESPP): Costs associated with stock-based compensation.

 Staff Welfare Expenses: Expenditures on employee welfare activities.

These disclosures ensure transparency and provide stakeholders with a clear understanding
of the company's employee-related expenditures.

4. Additional Considerations

 Segregation of Duties: Ensure that responsibilities for payroll processing,

authorization, and disbursement are divided among different individuals to reduce
the risk of fraud.

 Regular Audits: Conduct periodic internal audits of the payroll system to identify and
rectify discrepancies promptly.

 Technology Utilization: Implement robust payroll software with built-in controls and
audit trails to enhance accuracy and compliance.

By adhering to these practices, auditors can provide reasonable assurance that salary and
wage payments are accurate, authorized, and properly disclosed in the financial statements.

Audit of Share Transfer

6–8 minutes

Auditing the process of share transfer is an essential part of company audits, especially for
companies with significant shareholder transactions. A share transfer is the process by which
ownership of a company’s shares is transferred from one party to another. This process is
crucial in maintaining accurate records of shareholder ownership and complying with legal
requirements, particularly under the Companies Act and relevant regulations. Ensuring a
compliant, accurate, and transparent process for share transfers is essential for protecting
shareholders’ interests and promoting trust in the company’s governance practices.

Understanding Share Transfers:

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 1. Voluntary Transfer: This involves shareholders willingly transferring shares to
another person or entity.

2. Involuntary Transfer: This can occur due to events like a shareholder’s death,
bankruptcy, or court orders.

Companies, especially private limited companies, may have restrictions on share transfers.
These restrictions should be clearly stated in the Articles of Association and can include
limitations on transferring shares outside the company without approval from existing
shareholders or the board.

Objectives of Auditing Share Transfers

1. Verification of Ownership Changes: Ensuring that changes in share ownership are

accurately reflected in the company’s records.

2. Compliance with Legal and Regulatory Requirements: Confirming adherence to legal

requirements and company policies for share transfers.

3. Prevention of Fraud: Detecting any fraudulent transfers or misuse of shares.

4. Transparency in Transactions: Ensuring fair and transparent practices in recording

share transfers, which is crucial for stakeholder trust.

5. Accuracy in Shareholder Records: Verifying that shareholder registers and related

records are up-to-date and accurately reflect ownership.

Audit Procedures for Share Transfers:

1. Reviewing Articles of Association and Company Policies

The auditor starts by reviewing the Articles of Association and any internal policies that
govern share transfers. This review helps the auditor understand any restrictions, such as
preemptive rights of existing shareholders or the board’s right to approve transfers. The
auditor also checks if the company’s transfer policies align with the Companies Act and other
applicable regulations.

2. Examining Share Transfer Forms and Documents

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A thorough examination of share transfer forms and related documents is essential. This
includes verifying that:

 A duly completed transfer form (often a Share Transfer Form or Form SH-4) is
submitted.

 The form contains essential details such as the name of the transferor, transferee,
and number of shares being transferred.

 Signatures on the transfer forms are authentic and verified, ideally matched against
records in the company’s possession or through independent verification if required.

 The correct transfer stamp duty has been paid, as required by law.

3. Verification of Board Approval

For private companies or companies with restrictions on share transfers, board approval is
typically required. The auditor examines minutes of board meetings to ensure that approvals
for share transfers were duly granted. This verification confirms that transfers comply with
internal controls and are conducted transparently and in line with governance practices.

4. Updating the Shareholder Register

The auditor verifies whether the changes in share ownership have been accurately recorded
in the shareholders’ register. This involves confirming that:

 The transferor’s and transferee’s details are updated correctly.

 The new shareholding is accurately reflected in the register.

 Any discrepancies in shareholding are promptly corrected and disclosed.

Keeping an updated shareholder register ensures that the company accurately tracks
ownership changes, which is essential for accurate financial reporting and legal compliance.

5. Checking Compliance with the Companies Act and SEBI Regulations

Auditors must ensure that share transfers comply with the Companies Act, SEBI regulations,
and any other applicable laws. For instance, listed companies must follow specific SEBI
guidelines for share transfers. This includes ensuring that the transfers are completed within
a specified timeframe and that required disclosures are made to the relevant authorities.
Non-compliance can lead to penalties and damage the company’s reputation.

6. Examining the Process for Stamp Duty Payment

Stamp duty is a mandatory fee paid on share transfer transactions, based on the share value.
Auditors ensure that this duty is calculated accurately and paid according to legal
requirements. They verify that:

 The amount is correctly calculated based on the transaction value.

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  Payment records are available, showing that the duty was paid.

 The duty payment process is compliant with relevant regulations, and there are no
delays or discrepancies.

Proper stamp duty payments help the company avoid legal issues and penalties.

7. Testing for Fraudulent Transfers

Auditors must remain vigilant for signs of fraudulent activity, such as unauthorized transfers
or attempts to misrepresent share ownership. They can use various testing techniques, such
as verifying the authenticity of signatures, cross-checking shareholder identities, and
reviewing unusual or suspicious transactions. Auditors may also verify transactions against
external records or conduct interviews with responsible company officials to clarify unclear
or suspicious transfers.

8. Confirming Disclosure Requirements

The auditor ensures that any changes in shareholding due to transfers are adequately
disclosed in the financial statements or annual reports if required. This is particularly
important for significant transfers or transfers involving related parties, which may need
specific disclosure under regulatory guidelines.

Importance of Share Transfer Audits:

Audit of share transfers is vital for protecting shareholder interests and maintaining accurate
ownership records. By ensuring that all share transfers are conducted legally and
transparently, auditors help companies mitigate risks related to legal non-compliance,
misrepresentation, and potential fraud. This transparency enhances the credibility of the
company’s financial and operational reports and assures shareholders that the company’s
governance practices are sound.

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