Unit – I
Audit of Receipts
Meaning of Audit of Receipts
The act of examining documentary evidence in order to ascertain
the accuracy and authenticity of entries in the books of accounts is
called Vouching.
Vouching means a careful examination of all original evidences
that is invoices, statements, receipts, correspondence, minutes,
contracts etc, with a view to ascertain the accuracy of the entries in
the books of accounts and also to find out, as far as possible that no
entries have been omitted in the books of accounts.
Definition
Vouching means testing the truth of items appearing in the books of
original entry.
Vouching is an act of comparing entries in the books of accounts
with documentary evidence in support thereof.
Vouching is the examination of the evidence offered in
substantiation of entries in the books, including in such
examination the proof, so far as possible, that no entries have been
omitted from the books.
Importance of Vouching
Backbone of Auditing – Vouching is the only way of detecting all
sorts of errors and planned frauds. Hence it is the backbone of
auditing.
Essence of Auditing – Auditing checks if transactions are related
to business or not. It checks for fictitious transactions created for
committing frauds. All these facts can be found with the help of
vouching. So, vouching is essential for auditing.
To check whether evidences are correct or not – Frauds may be
committed presenting duplicate vouchers. Evidential documents or
records are to be checked carefully which is the scope of vouching.
Importance of Vouching
Proper evidence – It acts as an evidence for the entries recorded in the
books of accounts. It is the work of vouching to ensure that proper
evidence is available for every entry.
Proper authority – To verify proper authority behind every transaction.
Transaction is not accepted without signature of concerned manager.
Cash balance – It is conducted to check if the cash in hand is correct. To
count cash and compare it with cash book.
Helps to detect frauds – Success of an audit will depend on the
efficiency with which vouching has been applied during the process of
auditing.
Arithmetical accuracy – To maintain arithmetical accuracy of books of
accounts.
Types of Vouchers
Primary Vouchers – When written evidence is available in
original, it is known as primary vouchers. (Purchase invoices &
Cash receipts)
Collateral Vouchers – When evidence in original is not available.
Copies of such evidences are made available for the purpose of
audit. These documents are known as collateral vouchers. (copy of
demand draft)
Internal Vouchers – Vouchers originating within the organization
are known as internal vouchers. (Sales invoices & material
requisition slip)
External Vouchers – Vouchers originating from outside sources
are known as external vouchers. (Mortgage deed & bank statement)
Vouching of Receipts
Vouching of Receipts means vouching of the cash receipt
transactions, verifying the vouchers of the receipts side or debit side
of the cash book.
Usually it is difficult to vouch the receipt of cash than to vouch
payments as some entries might have been omitted altogether and
therefore only an indirect evidence like counterfoils of receipts
issued, carbon copies of receipts, contracts and letter from debtors
are available.
Audit of Cash Sales
Cash Sales – Auditor should evaluate the Internal Check System
and if it is proper then he should rely on it. He has to check the cash
sales memos and compare it with the daily summaries of salesman
and cashier. Also check the figures of the salesman and cashier
summaries in the cash book.
Documents to be checked by the Auditor – Sales Invoices, Cash
Sales Summary and Copies of Cash Memo.
Reason
There are three common ways that (apparently original) receipts can be used
to hide fraud or theft on an aid program:
Fake receipt: The company itself may be fake, or the person making the
purchase may have created a fake receipt in order to keep the money.
Altered receipt: It is possible that someone may have altered the receipt
after receiving it from the supplier. For example, adding 0′s to the end.
Kickbacks: The employee purchasing the item and the supplier could have
colluded to inflate the price, splitting the extra profits between them.
Methods in Vouching of Cash
Sales
Internal Check – Auditor should evaluate the Internal Check System
and if it is proper then he should rely on it. He should examine the
system of internal checks pertaining to proceeds from cash sales to
ensure no loop holes on omission of cash sales are existing and prompt
banking into the bank.
Checking of Memos – Auditor should check the cash sales memos and
compare it with the daily summaries of salesman and cashier. Verify
cash sales with carbon copies of cash memos.
Entry in Cash Book – Auditor should check the figures of the salesman
and cashier summaries entry in the cash book. Ensure that the dates of
cash memos/cash sales bills tally with those of their entry in the cash
book.
Methods in Vouching of Cash
Sales
Checking of Cash Book – Auditor should compare the cash book
with the general ledger. The dates on the cash memos should tally
with those on which cash collected in respect thereof has been
entered in the cash book.
Checking of Price Lists – Auditor should obtain and verify the price
lists and compare the price list with cash sale memo. If a cash
memo has been cancelled, its original copy should be inspected
because there could be a possibility of misappropriation of the
amount thereof.
Checking the practice – Auditor has to ascertain the practice
followed in the matter of issuing cash memos of cash sales bills.
Cash sales memo/cash bills must be in number and in sequence.
Receipts from Debtors
Copies of sales invoice.
Statement of accounts received from
debtors.
The counterfoils of receipts.
Correspondence with the debtor
Role of Auditor
The auditor should verify whether all the receipts are
deposited into the bank in the immediate following day.
He should ensure that the discounts given are at uniform rate
to all debtors and that due authorization is obtained in case of
higher discounts.
If a customer becomes insolvent, the amount due from him
can be claimed through his Official Receiver. If possible, a part
of the total amount due can be recovered in installments
(dividends).
The auditor can verify the same by examining the
correspondence with the official receiver and the statement
received from him.
If the debtors have not sent their statement of accounts, the auditor can
contact the customers directly and ask for their confirmation of balance.
Types of frauds in collection from debtors
Teeming and lading: Where the amount collected from
one customer is misappropriated by the cashier and the customer account is
adjusted with the amount collected from some other customer. Such
adjustments can be made for a longer period if the internal control systems
is ineffective
Amount collected from customers: The amount
collected from the customer may be misappropriated and the amount
standing to the debit of the customer account is written off as bad debts.
The auditor should be very careful while auditing the receipts from the
customers to ensure that no fraud of the above nature is committed
Audit of Purchase
Audit of purchases is a significant part of
independent financial audit because the
purchases constitute the largest item of
expense in the income summary of an
organization. Purchase transaction might
be resulted from different sources such as
purchase of materials, merchandise, fixed
assets of various types etc
Auditors objectives in auditing
purchases
Consider the internal control over purchases
Determine the existence of purchases
Establish the completeness of the
Determine that the client has the rights to the recorded purchases
Establish the clerical accuracy of the records and supporting schedules of
purchases
Determine the valuation of purchases
Determine that the presentation and disclosure of inventories and cost of
goods sold is adequate including disclosure of classification of inventories,
accounting methods and any inventories pledged as collateral for loans.
Audit program for Purchase-
Procedures applied to internal control of
the company over different purchase
transactions and
Substantive testing procedures applied to
a sample of purchase transactions and
account balances.
Consideration of internal control
over purchases
The auditor studies and evaluates the
accounting systems and internal controls
relating to purchases. It helps the auditor
to determine the nature, extent, and
timing of the substantive procedures
Engagements for the verification of
purchase transactions
Consider internal control over purchases
Obtain an understanding of internal control over purchases
Assess control risk and design additional tests of control for the assertions
about purchase transactions.
Perform additional tests of controls for those controls that the auditors
plant to consider to support their planned assessed levels of control risk
Reassess control risk for each of the major financial statements
Purchase cycle – Study Internal
control
Processing of purchase orders.
Receiving of goods.
Recognizing the liability of purchase.
Processing and recording of payments
Processing of Purchasing Orders:
Whether the purchases are centralized or decentralized.
Whether the purchase procedure provide for the preparation of the return purchase
requisition
Whether the purchase requisition are prepared in a standard format
Whether the standard format requires furnishing of sufficient details about quantity
required, technical specification, delivery schedule etc.
Whether the authorities regarding sanctioning of purchases have been clearly laid
down with proper authority.
Whether a list of approved suppliers maintained for each major item
Whether purchases are made from approved suppliers
Whether tenders and quotations are invited from suppliers
Whether any long term purchase contracts have been entered into with suppliers
and if so, whether the provision in the contract is clear and unambiguous.
Whether any undue advantage is given to any supplier
Processing of Purchasing
Orders(cont)
Whether any special authorization required in case of lowest quotation accepted.
Whether there is any system for approving the prices and other terms and
conditions in case of purchases, which are not made on quotations.
Whether any purchases are made from organizations in which the related parties
are interested.
Whether the purchase orders are pre-numbered and kept in the proper custody.
Whether the purchase orders are made in detail and precise
Whether the copy of the purchase order required to be signed by the supplier
significant his acceptance of the terms of the order.
Whether a copy of the purchase order is forwarded to the receiving and inspection
department and to the accounting department.
Whether any periodic review has been done on the purchase order, which remained,
unexecuted beyond the due dates.
Receiving goods:
Whether all the goods are received only in the receiving department and if not
whether there is any procedure for obtaining conformations about the quantity and
quality of the goods received
Whether goods received note is prepared when the materials are received.
Whether the goods received note are pre-numbered
Whether there is any procedure for verifying the quantities and the quality of the
materials at the time of receipt
Whether there is any procedure for verifying the specifications given in the
purchase order with that of the materials received.
Whether any system exist for the receiving department to reject the material if
there is any variation in the goods received with that of the purchase order.
Whether there is any procedure for the receiving department to inform the
accounts department, purchase department, and stores with regard to the receipt of
materials
Whether the materials received are promptly sent to the stores.
Recognizing the liability for
purchase:
Whether the supplier’s invoices received by the accounting department
and matched with the purchase order, good received note and advance
payment records.
Whether the invoices are checked thoroughly to ensure the terms and
conditions of the purchase order have been complied with.
Whether the invoices are checked for arithmetical accuracy
Whether invoices are entered promptly in the purchase book
Whether proper debit notes are prepared for any variations in quantity
and quality of the materials received with those specified in the purchase
order.
Recognizing the liability for
purchase:
Whether the debit notes are pre-numbered
Whether the debit notes are issued with proper authority
Whether the debit notes are entered in the proper books.
Whether duplicate invoices are accepted when original invoices are
accepted with proper authority
Whether the advances are made only as per the terms of the purchase
order and with proper authority.
Whether all advances are reviewed periodically and properly followed up
Whether there is any periodic reconciliation of goods paid for and goods
received as per stores record.
Overall controls
Whether there is any proper segregation of duties in relation to
the activities involved in purchase.
Whether there is any system for the rotation of duties of
personnel involved in the purchase transaction.
Whether there is a proper procedures for cut off transactions
Whether there is any proper procedure for returning the
purchases.
Whether there is any internal audit in respect of the purchase
cycle.
Whether there is any system for sending periodic statement of
accounts to the suppliers.
Substantive testing procedures
The procedures may involve
Tests of individual transactions and
purchase.
Analytical procedures
Presentation and disclosures.
Tests of individual transactions
and purchase:
Examine the entries in the purchase book with reference to the
invoices and supporting documents such as goods received note,
inspection reports, etc.
Examine a sample of invoices selected at random and conduct an
in-depth audit.
Examine the numerical sequence of purchase orders and goods
received note and determine whether all the members are duly
accounted.
Examine the Arithmetical accuracy of the purchase records and
check the totals, balances, and their carry forwards.
Examine the entries in the purchase return book and examine
Arithmetical accuracy
Examine whether proper adjustments have been done for the
debit notes.
Tests of individual transactions
and purchase:
Examine whether the debit notes are issued with proper authority.
Examine the debit notes issued at the year-end, which appear unusual.
Examine the numerical sequence of the debit notes and see whether all
debit notes are duly accounted.
Examine the sales invoice of goods directly delivered to the third
parties.
Examine the cutoff transactions relating to purchases and purchase
returns.
Examine the response of the suppliers to the periodic statement of
accounts sent by the client.
Obtain the conformation of balance form the suppliers
Analytical Procedures
Compare the purchase figures of different periods of the current
year and enquire into the unusual fluctuations.
Prepare a reconciliation statement for the quantities of purchases.
Compare the budgeted purchases with the actual purchases.
Compare the ratios of value of each item to the total purchases for
the current year with the figures of the previous year.
Compare the gross profit ratio for the current year with the ratio of
the previous year and with the industry average.
Forward Purchase
Forward contracts are made for future purchase
of raw materials at a fixed price. Such deals are
called “Forward Purchases
Forward contract is an informal contract
between the contracting parties
Forward purchase transactions are commonly
found in cotton textiles, and oil seeds businesses
Purchase Return
There are times when due to the quality of purchase
goods or due to excess supply of ordered goods or any
other reasons, goods are returned back to supplier.
The Auditor needs to verify the following points −
A debit note or purchase return invoice should be
prepared mentioning the original purchase invoice
number, quantity, price, applicable taxes, etc. These
should be according to the original purchase invoice
against which material was purchased.
A corresponding credit note should be received from
the supplier
Purchase Return
Separate goods return book should be maintained.
Adjustment of the amount of goods return invoice
should be done while making payments to the
supplier.
vouch the quantity returned with the Purchase Returns
Book, Gatekeepers Outward Register, storekeepers
record and credit notes received from the supplier.
verify the purchase returns of the first and last month
of the year to avoid manipulation of accounts.
The auditor should ensure that current year’s returns
are not accounted in the subsequent year.
Allowances from supplier
When a supplier grants a purchase allowance, the
buyer records the amount of the allowance as a debit
to accounts payable and a credit to inventory.
The seller records the allowance in the sales
allowances account; this is a contra revenue account
that is paired with and offsets gross sales.
The seller also records a reduction in its accounts
receivable account via a credit memo, thereby
reducing the receivable expected from the buyer.
