AMIT BACHHAWAT TRAINING FORUM VOUCHING EXTRA QUESTIONS Q. A trader is worried that in spite of substantial increase in sales compared to earlier year, there is considerable fall in Gross Profit after satisfying himself that sales and expenses are correctly recorded and that the valuation of inventories is on consistent basis, he wants to ensure that purchases have been truthfully recorded. How will you proceed with this assignment? There are three steps involved in such an assignment: A. Study and evaluation of internal control system. B. Vouching of purchase transactions C. Analytical procedures A. Study and evaluation of internal control system: This involves the following steps: (i) Internal check: it should consist of the segregation of duties at the following points: a. Requisitioning the goods: Specified employees from the stores department or from the production departments store unit should prepare and approve a purchase requisition for raw materials or goods used in production. The purchase department is sent to the purchase department. b. Ordering the goods requisitioned: the purchase department is responsible for negotiating the best prices, fixing delivery dates with suppliers and ensuing that appropriate quality goods are obtained. It should prepare a serially numbered purchase order. c. Receiving the goods ordered: Goods ordered should be inspected and counted by the receiving department, if satisfied it prepares serially numbered receiving report or goods received note and forwards its notification copies to the stores, purchase department and finance department. d. Preparing the payment voucher: the accounts payable department or accounts payable unit of finance department will receive the invoices and process for its payment and accounting. (ii) Physical controls a. Physical controls over inventory include locked warehouses and store rooms and limiting access to them to authorised personnel and b. Printed and pre numbered forms should be used for purchase requisitions, purchase orders, receiving reports and vouchers. (iii) Authorised procedures a. RE ORDER points should be established for various inventory items that may trigger a manual request. b. Authorization procedures should be designed for all the four control points requesting the goods, ordering the goods requisitioned, receiving the goods ordered and preparing the payment voucher. (iv) Internal review: a. It should ensure that there is adequate separation of duties and proper authorization procedures with regard to processing and recording the purchase transactions. b. Paid invoices should be reviewed to ascertain the accuracy of these invoices and if possible, these invoices should be traced back to purchase requisition through receiving reports or goods received notes and purchase orders. B. Vouching of purchases transactions The auditor should vouch credit purchases in the following manner: 1. Examine purchase book The auditor should examine the transactions recorded in purchase book with reference to related purchase invoice. 2. examine purchase invoice the auditor should select a small sample of vendors invoices at random and should conduct in depth audit of them i.e. trace the transaction from placing the order to the entries a inventory goods for actual receipt and payment made to the suppliers. In respect of imports, document such as bill of loading customs clearance should be examined. the auditor should ensure that subsidies, rebates, duty drawbacks or other similar items have been properly accounted for. 3. examine the numerical sequence of sources of documents the auditor should ensure the numerical sequence of source of document such as purchase requisition, purchase orders, receiving reports and voucher have been maintained and missing number have been duly accounted for. 4. Examine cut off points: in order to ensure that purchases were recorded at the point of time when title was passed to the client, the auditor should examine cut off points or pre numbered purchase requisitions, purchase orders and goods received notes. The auditor should, then, trace the goods received notes pertaining to few days before the end of the period under audit to the related purchase invoice. Such a comparison would ensure that purchases represented by such invoice have been recorded as the purchases of period under audit. 5. Examine transaction with related parties carefully. Page 1
C. Analytical procedures The auditor should compare item wise and located wise both quantity and value of purchases for the current period with the corresponding figures for the previous period and ensure that major variations are explained and justified. various analytical ratio should also be calculated and compare. Q. Explain what are the factors to be considered while vouching of travelling expenses? The following factors are to be considered while vouching of travelling expenses 1. travelling expenses are normally payable to staff according to rules approved by director or pa where no rules exist, the auditor should recommend that these be framed for controlling expenditure. in the absence of T.A. Rules, the expenditure should we vouched on the basic of expenditure incurred. A voucher should be demanded for all items of expenses incurred, except which are capable of independent verification. 2. As regards travelling expenses claimed by directors the auditor should satisfy himself that these incurred by them in the interest of the business and the directors were entitled to receive amount from the business. 3. the voucher of travelling expenses should normally contain the under mentioned information a. Name of designation of person claiming the amount. b. Particular of the journey c. amount of railway or air fair d. Amount of boarding or lodging expenses or daily allowance along with the dates and time arrival and, departure from each station. e. Other expenses claimed. 4.if the journey was undertaken by air, the counterfoil of the air ticket should be attached the voucher, this should be inspected. for travel by rail or road, the amount of the fair claimed should checked from some independent sources. 5. particular of boarding and lodging expenses and in the case of halting allowances the rates th should be verified. 6. the evidence in regards to sundry expenses claimed is generally not attached to T.A. bills. so long amount appears to be responsible it is usually not questioned. All voucher for travelling expenses should be authorised by some responsible official. In the case of foreign travel or any extraord travel, the expenses, before being paid, should be sanctioned by the board. 7. the travelling advance taken, if any, should be settled on receipt of final bills. At the year end amount not settled should be shown appropriately in the balance sheet. 8.unless the articles specifically provided or their payment has been authorised by a resolution shareholders, directors are not be entitled to charge travelling for attending board meetings. Expenditure of foreign travelling; 1. Examine travelling allowance bills submitted by the employee stating the details of tour, details of expenses, etc. 2. verify that tour programme was properly authorized by the competent authority. 3. check the T.A. bills along with accompany supporting documents such as air ticket, travel agents bills and hotel bills with reference to the internal rules for entitlement of the employees and also make sure that the bills are properly passed. 4. see that the tour report accompanies the T.A. bill. The tour report will show the purpose of the tour. Satisfy that the purpose of tour as shown by the tour report conforms to the authorization for the tour. 5. check reserve Bank of India s permission, if necessary, for withdrawing the foreign exchange. For a company the amount of foreign exchange spent is to be disclose separately in the accounts as per requirement of schedule III to the companies Act, 2013 and accounting standard II The Effects of changes in foreign exchange rates. C. Premium paid on insurance of Motor car; (i) check insurance cover note issued by the insurance company. Verify car no. period of insurances coverage etc. (ii) verify that No Claim Bonus is given where entitled, by the insurance company. (iii) Ensure that proper adjustment is made for pre paid insurances premium. Q. Give your comment on The CC Ltd a pharmaceutical company, while valuing its finished stock at the year end wants to included interest on Bank overdraft as an element of cost, for the reason that overdraft has been taken specifically for the purpose of financing current assets like inventory and for meeting day to day working expenses. Cost of inventories : As per accounting Standard 2 valuation of inventories, cost of inventories comprises all cost of purchase, cost of conservation and the other cost incurred in bringing the inventories to their present location and condition. However, it makes clear that interest and other borrowing cost are usually not included in the cost of inventories to their present location and condition. Therefore, the proposal of cc ltd. to included interest on bank overdraft as an element of cost is not acceptable because it does not from part of cost of production. Page 2
Q. How will you vouch and verify the following: (a) Profit or loss arising on sale of plots held by real estate dealer.( 4 Marks, November, 2013), Profit or loss arising on sale of plots held by real estate dealer: The land holding in the case of real estate dealer will be a current asset and not a fixed asset. The same should, therefore, be valued at cost or market value whichever is less. (1) Each property account should be examined from the beginning of the development with special reference to the nature of charges so as to find out that only the appropriate cost and charges have been debited to the account and the total cost of the property has been set off against the price realised for it. (2) This basis of distribution of the common charges between different plots of land developed during the period, and basis for allocation of cost to individual properties comprised in a particular piece of land should be scrutinised. (3) If the land price list are available, these should be compared with actual selling prices obtained. And it should be verified that contracts entered into in respect of sale have been duly sanctioned by appropriate authorities. (4) Where part of the sale price is intended to reimburse taxes or expenses, suitable provisions should be maintained for the purpose. (5) The prices obtained for various plots of land sold should be checked with the plan map of the entire tract and any discrepancy or unreasonable price variations should be inquired into. The sale price of different plots of land should be verified on a reference to certified copies of sale deeds executed. (6) Out of the sale proceeds, provision should be made for expenditure incurred on improvement of land, which so far has been accounted for. Q. List out some examples of fraud that can be done by ledger keeper in Bought ledger and sales ledger.( 8 Marks, May, 2011) Ledger Keeper & Frauds: Examples of frauds that can be done by ledger keeper in bought ledger: (1) Crediting the account of a supplier on the basis of a fictitious invoice, showing that certain supplies have been received from the firm, whereas in fact no goods have been received or on the basis of duplicate invoice from a supplier, the original amount whereof has already been adjusted to the credit of the supplier's accounts. (2) Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an amount equivalent there to out of the payment made to him. For if a credit note issued by a supplier either in respect of goods returned to him or for an allowance granted by him, is not debited to his account, the balance of his account in the Bought Ledger would be larger than the amount actually due to him. The ledger-keeper thus will be able to misappropriate the excess amount standing to the supplier's credit. (3) Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance. Examples of frauds that can be done in sales ledger: (1) Teeming and lading : Amount received from a customer being misappropriated; also to prevent its detection the money received from another customer subsequently being credited to the account of the customer who has paid earlier. Similarly, moneys received from the customer who has paid thereafter being credited to the account of the second customer and such a practice is continued so that no one account is outstanding for payment for any lenght of time, which may lead the management to either send out a statement of account to him or communicate with him. (2) Adjusting an unauthorised credit or fictitious rebate, allowance, discount, etc in the account with a view to reduce the balance and when payment is received from the trade receivable, misappropriating an amount equivalent to the credit. (3) Writing off the amount receivable from a customer's bad debt account and misappropriating the amount received in payment of the debt. Q. How will you vouch and/or verify personal expenses of directors met by the company. Personal expenses of directors (i) check of articles of association, services contract, minutes of general meeting, etc, to check the authorization for such payment. (ii) enquire to ensure that personal expenses are not camouflaged in any other revenue items as contemplated under section 143(1) of the companies Act, 2013. (iii) ascertain compliance with disclosure according to requirements of schedule III to the companies Act, 2013 (iv) check documentary evidences to examine the payment reimbursed. Bank Overdraft (i) The auditor should ensure that the facility of overdraft is authorised by board s resolution /partner resolution. (ii) pursue the agreement with the blank and see whether the overdraft is clean or against hypothecation or pledge of company s property. (iii) verify the register of charges and ensure that the charge has been registered with registrar of companies. (iv) verify the rate of interest and other terms and conditions from the agreement. (v)verify the amount of overdraft from the books of accounts and compare it with the passbook. Page 3
(vi) if the overdraft against hypothecation of assets like inventories, a certificate from the bank should be obtained. (vii)if the overdraft is against hypothecation of assets or pledge of company s property, see that overdraft is properly shown under secured loans and nature of security has been property disclosed. Income from Investments 1. If the investment is many, the client generally would have an investment Register. 2. In such case, the dividend income is first vouched by reference to the counterfoils of dividend warrants and the interest of securities by references to tax deduction certificates issued by Reserve Bank. 3. Afterwards the amounts collected are traced into the investment Register; it is scanned to find out whether interest or dividend, relating to any investment, has remained unrealized. 4. If so, the reason, thereof are ascertained. In order that the gross amount of interest are disclose in the profit and loss account, the tax deducted out of interest is debited to the Income tax Account and credited to interest Account. The auditor should verify that this has been done. 5. Where investments are sold ex-dividend, it should be seen that the dividends are subsequently received. Similarly when a purchase is on cum dividend basis, the receipt of dividend should be checked. In case of interest on deposit with banks, verification should be done by reference to the bank s statement and the agreed rate of interest. Q. As an auditor, comment on the following: Sk ltd. has fully computerized its accounting operations. The stock records are maintained up to date with timely entries passed for all receipts and issues. The company has hired a professional security agency, which monitors and implements a close vigilance over the operations of company. As such, the company has dispensed with the practice of taking stock of their inventories at the year end as in their opinion the exercise is redundant, time consuming and intrusion to normal functioning of the operations. Verification of inventories auditor s duties: the audit procedures to be performed by an auditor to obtain sufficient appropriate audit evidence in relation to inventories have been recommended in the Guidance note on audit of inventories issued by ICAI. On the basis of his evaluation of the effectiveness of the internal controls, the auditor should carry out appropriate substantive procedures in relation to inventories. These substantive procedures include examination of records, attendance at inventory taking, examination of valuation and disclosure of inventories, carrying out analytical procedures, and obtaining confirmations from third parties and representations from the management. In view of above, an auditor should insist on the company to do physical verification of inventory. Verification must be done at least yearly, it not more frequently within a year. Dispensing with physical verification altogether is unacceptable. It is not enough that the company had installed good control procedures. It must be tested, for example in case of inventory, physically verifying the same as to see that no discrepancy exists. Pilferage, misappropriation is not the only causes for discrepancies. Inherent product qualities like shrinkage, evaporation, handling loss, etc. may also account for discrepancies. The auditor should require the management to conduct physical verification by or near the year end. If the management does not accept to the auditor s view the auditor may appropriately make modification in his audit report. Q. What point shall an auditor keep in mind while auditing an account of bought ledger having debit balance? Auditing an account of bought ledger : the structure of every account in bought ledger is ; opening balance, credits on account of goods purchased and debit raised in respect of returns, allowance and discount receivable, advances paid against goods, payment and transfers. An account in the bought ledger may be debit. The balance may represent the amount receivable on account of goods returned, rebate allowed by the suppliers or advance paid against an order. The auditor should confirm that the advance against the order had been paid in pursuance of a recognized trade practice, also that subsequently goods have been received against the advance or will be received, for such an advance may represent a disguised loan to accommodate a business associate. The book balance also may represent the cost of goods purchase wrongly debited to the account of the supplier, instead of the purchase account. In each such case it should be ascertained that the book balance is good and recoverable and if it is not considered recoverable, a provision against the same has been made. The book balance should be appropriately classified for purposes of disclosure in the balance sheet. If debit balance represents a loan to a director or officer of the company, either jointly or severally with another person or it is a debit due by a firm or a private company which the director is a partner or a member, the same should be separately disclosed in the balance sheet in accordance with the provisions contained in schedule III to be companies Act, 2013. The maximum account due from the directors or other officers of the company at any time during the year and debts due from companies under the same management should also be disclosed along with the names of companies (part I, Schedule III to the companies Act, 2013). Q. State with reasons (in short) whether the following statement are true or false: Page 4
(i) The auditor compares entries in the books of account with voucher and if two agrees, his work is done. (ii) Confirmations received by the auditor directly from third parties are conclusive evidence in support of a transaction. (i) False: The totalling of entries in the books with vouchers shows fairness of financial statement. But auditor has to be determined reliability of annual statement of accounts along with the truth and fairness. (ii) False: Confirmation received directly from the third parties by the auditor are more reliable but same cannot be treated as conclusive evidence. Page 5