IPCC Paper  6 Chapter 5 (Vol–1)

CA. Ranajit Kumar Pramanik

Topics Covered

Vouching Audit of Payments

Documentary Evidences Safeguards

Audit of Cash Transactions Verifications Audit Check Points Enquiries for Internal Check System

Cash Receipts from Cash Sales Receipts from Customers Sale of Investments Rental Receipts Loans Sale of Assets

Topics Covered ‐contd Income from Investments Royalties Receipts Insurance Claims Sales Process of Junk Materials Audit of Purchases

Control expenditure on Purchases Vouching entries for purchasing with invoices

Purchase Return Verification of Purchase Return

Audit of Sales Verification of Credit Sales Sales Categories Revised schedule

Audit of Ledgers Audit of Bought Ledgers Audit of Sales Ledgers

Audit of Impersonal Ledgers

‐ Verification a transaction recorded in the books ofaccounts

‐ Confirmation that the amount mentioned in thevoucher

‐ Primary document of an entity based on whichprimary books of accounts is maintained.

‐ Verification a transaction recorded in the books ofaccounts

‐ Confirmation that the amount mentioned in thevoucher

‐ Primary document of an entity based on whichprimary books of accounts is maintained.

Voucher is the foundation for maintenance of transactions in the books of account.

Points to Note:

1. The date of voucher falls within the accounting period.

2. The voucher is made out of in the client’s name.3. The voucher is duly authorized.4. The voucher is complete in all respects.5. Account for voucher amount adjustment

Audit Of Payments

The process of verification of entries in the books of accounts with the documentary evidence is referred to as vouching.

Documentary Evidences:

(i) Internal & External. ‐the payments can also be cashpayments

(ii) Payment through bank which are payments throughcash/bank transactions.

Payments by cash or by cheque should beacknowledged by the payee

In the event of payment payees acknowledgment of receipts should be properly stamped under the Indian stamp act, 1899.

To safeguard that the payments not been made to wrong person ,cheque forms should have on ‘account payee’ only printed on them

Payments by cash or by cheque should beacknowledged by the payee

In the event of payment payees acknowledgment of receipts should be properly stamped under the Indian stamp act, 1899.

To safeguard that the payments not been made to wrong person ,cheque forms should have on ‘account payee’ only printed on them

Refer other connected documents, viz invoices, debit notesetc. against which payments have been made before acceptingsuch receipts as evidence of payment of money.

The auditor would be well advised to obtain confirmation ofbalances of personal accounts, wherever possible/ practicable,these should be obtained directly by him.

Refer other connected documents, viz invoices, debit notesetc. against which payments have been made before acceptingsuch receipts as evidence of payment of money.

The auditor would be well advised to obtain confirmation ofbalances of personal accounts, wherever possible/ practicable,these should be obtained directly by him.

Audit  Of  Cash  TransactionAudit  Of  Cash  Transaction

The system of accounting and internal control operating in the organization should be reviewed The recording of each transaction should be checked ;Each relevant voucher should have valid documentary evidenceThe statement is authorized by a competent official Its nature would be truly disclosed on inclusion in the final accounts,.

The system of accounting and internal control operating in the organization should be reviewed The recording of each transaction should be checked ;Each relevant voucher should have valid documentary evidenceThe statement is authorized by a competent official Its nature would be truly disclosed on inclusion in the final accounts,.

(a) Internal control system : It is a combination of severalprocedures adopted by an entity designed ;

• To give protection against losses through fraud, waste,mistakes etc.

• To ensure that the transaction entered into shall becorrectly recorded

• To enable the concern to take policy decisions as regards toplanning and operation of the business at the appropriatetime.

b)Correctness of book–keeping records : 

Detailed checking of  the  record of transactions for verifying that entries have been  made in the books of account according to the system of   accounting which is being regularly followed. 

c) Observance of accounting principles:‐ The transaction should be recorded in the books of accounts

having record to the principles of accounting; the principlesinclude Distinction being drawn between capital and revenueexpenditure. Distinction being drawn between capital and revenue receipts. The expenses or cost should be matched to the income orbenefit. The expenditure and income should be treated on accrualbasis. That the fixed assets should be depreciated on a consistentbasis. That fictitious assets are written off at the earliest, and Outstanding Assets and liabilities have been properly adjusted

d) Evidence of transactions:‐ Two kinds of evidence

‐ Internal Evidence – the one generated within theorganization

‐ External Evidence – the one obtained from partieswith whom, the entity enters into transactions.

e) Validity of Transactions:Reference to documentary  evidence which may exist in any of the following forms:the legal provision, if any having bearing of the

accounts of the entity under audit; the rules or regulation governing the internal working

of the organization eg. Articles of association,Partnership deed, Trust Deed etc.

minutes of the proceeding of a meeting of members ofthe company, or that of the Directors or that of theManaging Committee.

copy of agreement eg. Managing Director Agreement,Lease Deed, Vendor’s agreement, Agency agreement,Contract with an employee etc.

f) Disclosure in the final accounts

Audit of Receipts1. The function of audit in respect of cash receipts being almost

the same as that in the case of cash payments; the procedure forverification as stated shall be applied.

2. The internal check in respect of cash receipts should be closerand stricter, primarily because these have to be verifiedgenerally only with reference to the internal evidence, eg. if inrespect of sale proceeds of goods or an item of miscellaneousincome no bill or voucher has been prepared, audit would notdisclose that the amount has beenmisappropriated .

3. Cash receipts are usually checked with counterfoils of thereceipts issued, but the issue of receipts with counter foil inrespect of amount collected by it would not ensure that all theamounts collected have been fully accounted for or have beencorrectly adjusted.

i) Who opens letter, what record is kept, and whether all cheques or postal orders areimmediately endorsed to bankers and crossed “Account Payee Only”.ii) Whose duty is to enter cash, cheques and other form of receipts /remittance in thepay‐in‐slip and who deposited it in the bank?iii) Are all receipts banked daily?iv) Who prepares receipts and who counter signs the same before these are issued tothe parties from whom the amount have been received?v) Whether printed receipts with counterfoils, numbered seriallyby a machine are used and who maintains the stock of unused receipts?vi)Are the receipt books kept in safe custody and are they issued only when thecurrent receipt book has been used up?vii)What internal check is being exercised over the collection of cash sales and miscellaneous income?viii) Are travelling salesmen allowed to collect any advance against order booked and what control exists over such collections?ix) How often are the banks statements checked and compared with the cash book?x) Who controls the preparation and despatch of monthly tatements of accounts to customers?xi) Are ledgers posted by the cashier or some other persons?

The system of internal check should be examined;Cash memos to be verified with carbon copies of cash memos andtraced in the summary book if cash sales are voluminous andthereafter in the cash book;Dates on the cash memos should tally with those on which cashcollected in respect thereof has been entered in the cash book. If a cash memo has been cancelled, its original copies should beinspected, for it could be that the amount has been misappropriated.

1. The cash receipts from the customers should be checked with thecounterfoils of receipt issued to them.

2. Verification of a system of internal check in operation which actsas a safeguard against the amount collected beingmisappropriated.

3. Teaming and Lading4. To safeguard the loop‐wholes, customer should be requested to

send statements of accounts from their books. On comparingitems in each statement in the entries in the customer’s account, itwould be possible to locate amounts which were not deposited onthe day these were collected but subsequently.

The income from investments can be vouched by reference to thedividend warrants and the interest on securities by reference to thetax deduction certificates.

In case of a company, the board of directors are authorize to saleinvestment and in case of trust, by the board of trusties. The normalmethod of selling investment is through stock broker. The saleproceeds of investments are vouched by reference to broker’s salenote.

• Copies of rental receipts, Copies of bills issued to the tenantsshould be checked by reference to copies of tenancy agreement andbill of charges paid by the land lord on behalf the tenants, ie.House tax, water tax, electricity etc.

• The amounts collected from tenants on account of rent should bechecked by reference to receipts issued to them and thereafterthese should be traced into rental register.

The authority under which the loan has been raised should beverified. A copy of the loan agreement should be referred to find out the rateof interest, the terms of repayment and the condition as to thesecurity agreed by the client. If any guarantee has been provided for the repayment of the loan,the particulars thereof should be ascertained for the purpose ofdisclosure in the balance sheet.

The authority for sale is most important, which shouldreceive the attention of the auditor : The basis of sales, whether by auction or by negotiation forpurpose of determining that the assets were sold at themaximum price that could be obtained. It should further be confirmed that the sale proceeds havebeen credited to an appropriate head of account and theamount of profit arising out of it has been segregated betweenrevenue profit and capital profits, if any accordingly appropriateaccounts are credited, where there is a loss the same should bewritten off.

The auditor should see the relevant contract and examine the important provisions relating to the conditions of payment of royalty. In particular, the rate of royalty, mode of calculation and the due dates should be noted. If there is any deduction on account of recoupment of royalty forthe past period, the records for earlier royalty receipts should be seento ensure that the amount of deduction is as per the contract. Royalties due but not yet received should have been properlyaccounted for.

While vouching the receipts of the insurance claims the auditorshould examine a copy of the insurance claims lodged with theinsurance company. Correspondence with the insurance companyand insurance agent should also be seen. A counterfoil of the receipts issued to the insurance companyshould also be seen. The auditor should also determine the adjustment of theamount received in excess or short of the value of the actual loss asper the insurance policy. The copy of certificate/report containing full particular of theamount of loss should also be verified. The accounting treatment of the amount received should beseen particularly to ensure that revenue is credited with theappropriate amount and that in respect of claim against an asset,the profit and loss account is debited with the shortfall of theclaim admitted against the book value.

i) Review the internal control on junk materials as regards its generation, storage and disposal and see whether it was properly followed at every stage.

ii) Ascertain whether the organization is maintaining the reasonable records for the sale and disposal of junk materials.

iii)Review the production and cost records for the determination of extent of junk materials that may arise in a given period.

iv) Compare the income from the sale of junk materials with the corresponding figures of the preceding three years.

v) Check the rates at which different types of junk materials have been sold and compare the same with the rates that prevailed in the preceding year.

vi)See that all junk materials sold have been billed and check the calculations on the invoice.

vii)Ensure that there exists a proper procedure to identify the junk materials and good quality materials are not mixed up with it.

viii)Make an overall assessment of the value of the realization from the sale of junk materials as to its reasonableness. 

Audit Of Purchases

Verification by reference to the suppliers invoices supported by copies of delivery notes disclosing the dates and particulars of goods received and acknowledged by the receiving department are also attached.

Classification under the following heads: Purchases of raw materials, for each material separately Purchases of finished goods. Purchases of consumable stores, fuels etc. Purchases of packing materials etc. Purchases of articles likes stationary for office use Purchases for making additions to assets.

Points to be noted: That the date of invoice falls within the accounting period That the invoice is made out in the name of the client That the suppliers account has been credited with the full amountof the invoice and that the deduction in the amount of the invoiceif any has been made on a proper basis.

That the goods purchased are those that are regularly dealt in bythe concern or required for the process of manufacture and thatthe price payable has been correctly arrived at.

That the cost of purchases has been debited to appropriateaccounts.

That the invoice is signed by the accountant to show that he hasverified it as well as the store–keeper to indicate that the delivery ofgoods have been taken by him.

That the manager or some other official competent to sanctionpayment has authorized its payment.

If a part or whole of consignment of goods found to bedefective or of a poor quality, the goods some times arereturned to the supplier and his account is debited. Thedebit is raised in the purchase return book on the basis ofdebit notes.

Verification of Purchase Returns Examine debit note issued to the supplier, which in turn may

be confirmed by the corresponding credit note issued by thesupplier. The relevant correspondence may also beexamined.

Verify by reference to relevant corresponding record ingoods outward book or stores record. Figures in thedocumentary evidence should be compared with thesupplier’s original invoices for rates and other charges andthe calculation should also be checked.

Examine in depth to eliminate the possibility of fictitiouspurchase returns for covering bogus purchases recordedearlier.

Cross‐check with reference to original invoices any rebatesin price or allowances if any , given by suppliers on thestrength of their credit notes.

Audit Of Sales

The internal check system of credit sales should be exercised

Each item of sales relates to period of account under audit.

The goods are to be normally dealt in by the concern.

The sales price has been correctly arrived at and the copy of therequisition slip issued by the sales department and the copy of thedespatch note showing the date and mode of despatch of goods areattached with the invoice

The amount of the invoice has been adjusted in an appropriate account

That the sale has been authorized by a responsible official and in tokenthereof he has initialized the invoiceAn alteration in the invoice has been attested by the same person.

i) Sale of raw materials.ii) Sale of finished goods.iii) Sale of empties and packing materials.iv) Sale of assets.

a)In respect of company other than Finance company, sales revenueshall be disclosed separately in notes form under “Statement of Profit& Loss Account”:

Sale of productsSale of servicesOther operating revenuesLess excise duty.

b)In respect of Finance company, revenue shall be disclosed separatelyin notes form:

InterestOther financial services

The auditor should see that a separate record in respect of these itemshas been maintained for purpose of disclosure.

Ledgers are the secondary books of accounts in which posting aremade from the primary books of account. The audit of ledgers isthus an important step in the process of verification of thecorrectness of the final accounts.

It is an occasion to review the transactions entered during anaccounting period, duly classified in the totality

1. Creditor’s ledger.2. The structure of every account in the bought ledger; opening

balance, credits on account of goods purchased and debits raised inrespect of return, allowances and discount receivable, advances paidagainst goods payments and transfers.

3. The accounts in the bought ledgers usually are in credit.

4. When the amount of the opening balance of the account of the costof goods purchased earlier has not been paid for the goodspurchased subsequent thereto have been paid, the reasons for thenon‐payment of the amount or amounts should be enquired into.

5. An account in bought ledger may be in debit.

Finally the auditor should insist on periodical and also yearly statement of accounts and balance conformation certificates from each party so as to ascertain the 

correctness of the creditor’s balance.

Debtor’s ledger. The structure of each account in the sales ledger is opening balance,

debits representing values of goods sold, payments made for goodsreturned and transfers, credit representing amounts received forgood sold, advances received against order, discount and allowancesallowed, value of goods returned back and debts written off.

If the amount paid by a debtor has been misappropriated, though thebalance in the account would be outstanding for payment, it wouldnot be recoverable.

Finally, the composition of balance outstanding of recovery should beexamined. In every case where the composition of balance is not clear,the copy of the statement of the account received from the partyshould be referred to.

When any bad debt is written off, the client should be advised that arecord thereof should be kept in the bad debt register in order that ifsubsequently any recovery is made out of it, may be possible toidentify the amount.

Audit Of Impersonal Ledgers

Has two kinds of accounts, viz. nominal accounts which relate to theTrading & Profit and Loss Accounts and Real Accounts which recordsassets.

If the accounts in the general ledger are incorrect, they will affect theProfit & Loss account and the balance sheet.

It is the final review of balances which on inclusion in the finalaccount, cumulatively reflect the financial position of the concern.

The certificate which an auditor will sign, will, therefore, be incorrectin the event the final accounts do not reflect the true financialposition of any concern.

Entries in the general ledger usually are posted in a summary formfrom the cash book, the journal, and other subsidiary books likepurchase book, sales book etc.

1. Balances in all the income and expense accounts have been adjustedi) According to standard accounting practices, andii) Consideration of the legal provisions which are applicable to the

concern.2. Each ledger balance finally should be examined on a consideration

of its position in the final accounts to see how the financial positionof the concern would be affected by the inaccuracy in the balance.

3. Balances in the general ledger should be traced simultaneously on tothe trial balance, grouping schedules and the final accounts.

4. Accounts have been kept according to the accepted accountingprinciple and the balance sheet and the profit & loss account havebeen drawn up on the same basis as in the previous year.

5. Clause 3 (XV) Part – II of the Schedule VI to companies act isinvited.