An Introduction to Auditing and Vouching
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Auditing is a systematic examination of financial records and operations to ensure accuracy, transparency, and compliance with standards. It encompasses several key components such as Internal Control, Internal Check, Internal Audit, and Vouching. Internal Control refers to the overall system of policies, procedures, and practices implemented by management to safeguard assets, prevent fraud, and ensure reliable financial reporting. Internal Check is a subset of internal control where duties are distributed among employees in such a way that the work of one automatically checks the work of another, minimizing errors and fraud. Internal Audit is an independent appraisal function within an organization that evaluates the effectiveness of internal controls, risk management, and governance processes. Vouching is a core auditing technique involving the examination of documentary evidence to verify the authenticity and accuracy of financial transactions. Together, these elements form the foundation of effective auditing, promoting accountability and operational efficiency.
An Introduction to Auditing and Vouching
- 1. Dr. Priyanka Jayaraj Associate Professor Department of Commerce IT Sri Ramakrishna College of Arts and Science Coimbatore - 641 006 Tamil Nadu, India Auditing – Internal Control, Internal Check, Internal Audit and Vouching
- 2. Internal Control: Meaning and objectives Internal control refers to the rules, policies, or procedures adopted to ensure the correctness of finance and accounting, protection of business assets, accountability, and preventing errors, risks, frauds, and other possible financial and reputational issues in the company. • Early Detection of Errors and Frauds • Minimization of Errors and Frauds • Division of Work • Fixation of Responsibility
- 3. Fundamental principles of Internal Control Principle of Separation: Financial and accounting operations must be separated and be done by different persons Principle of Responsibility: Responsibility for the performance of the job must be clearly stated Principle of Skepticism: Too much confidence should not be pinned on one individual. Principle of Rotation: The rotation principle relating to transferring employees from one job to another should be the inflexible guiding rule. Principle of Review: The work should be so arranged that work done by one employee should be promptly checked by another independent employee. Principle of Clarification: Clear and well-defined rules should be laid down and practically followed, relating to handling cash, ordering, receiving, issuing goods, etc. Principle of Documentation: The work arrangement should be in such a manner that a written record should be maintained
- 4. Limitations of Internal control 1. Human Error 2. Collusion 3. Management Override 4. Cost vs. Benefit 5. Changing Environments
- 5. Internal Check: Meaning and Objectives An internal check refers to the segregation and delegation of tasks to subordinates for the smooth running of a business. 1. Occurrence: management authorizes all expenditures. 2. Completeness: Authorizations are recorded in appropriate fashion. 3. Accuracy: Authorizations are stated in correct amounts throughout financial statements. 4. Classification: Authorized expenditures are classified according to established guidelines. 5. Timing: Authorizations are dated and recorded on correct dates. 6. Reporting and summarization: Authorizations are documented in appropriate reports and include a summary of each transaction.
- 6. Advantages and Disadvantages of Internal check Advantages Error Detection and Prevention Fraud Prevention Improved Accuracy Efficiency in Work Encourages Responsibility Time-Saving for Auditors Cost Saving in Audit Better Supervision Early Error Rectification Creates Trust Among Stakeholders Disadvantages Costly Implementation Complicated Setup Risk of Collusion False Sense of Security Inflexibility Employee Dissatisfaction
- 7. Principles of effective internal check Internal Check as regards Wage Payments: Wages Preparation of wage sheet: Worker number, name, occupation and rate of wages per day or per month or per unit. Time-ordinary or overtime. Gross amount payable and Deductions Payment of wages: Wage sheet must be given to the cashier, with all details, before payment, signature to be obtained
- 8. Principles of effective internal check Cash Sales and Purchases • Whenever cash is received, the receipt should be properly acknowledged by a printed receipt • As soon as cash is received, it should be entered in a rough cash book • All cheques received should be crossed by account payee • All the receipts of a particular day should be deposited in the bank at the end of the day or next morning. • Bank reconciliation statement should be prepared and make sure that all is correct • The method of recording cash sales has to be dealt in a proper way because the chance of fraud or cheating can take place easily
- 9. • Internal audits evaluate a company’s internal controls, including its corporate governance (Corporate governance is the system by which companies are directed and controlled.) and accounting processes. • An internal audit offers risk management and evaluates the effectiveness of many different aspects of the company. Internal Audit: Meaning and objectives
- 10. Difference between Internal Audit and Statutory audit Basis of Difference Internal Audit Statutory Audit 1. Purpose To improve internal controls and operational efficiency To give an opinion on the true and fair view of financial statements 2. Appointment Appointed by the management Appointed as per legal requirements (e.g., by shareholders) 3. Requirement Not mandatory for all companies (only for specific ones) Mandatory for certain companies under the law 4. Scope of Work Decided by management Defined by law and professional standards 5. Reporting Report submitted to management Report submitted to shareholders and regulatory bodies
- 11. Distinction between Internal Control, Internal Check and Internal Audit Basis of Difference Internal Control Internal Check Internal Audit 1. Meaning System to ensure efficiency, accuracy, and prevention of fraud Division of work to automatically check work of others Independent review of operations and financial records 2. Objective To ensure overall control over operations To detect errors and fraud during routine operations To evaluate the effectiveness of internal control and compliance 3. Nature Broad and comprehensive system Part of internal control Independent and systematic examination 4. Performed by All departments/employees involved in operations Employees by cross- checking each other's work Internal auditors appointed by the management 5. Reporting No separate report, it's a system No formal report, it's ongoing Formal report submitted to management
- 12. Vouching: Meaning and Importance A voucher is documentary evidence in support of a transaction in the books of accounts. Importance: • Backbone of audit • Comprehensive check • Accuracy and authenticity of transactions • Locate fake invoices • Find missing transactions • Highlight personal transactions • Authorization (Approval) • Correct recording in books
- 13. Routine Checking and Vouching Constitute bills, invoices, purchase or sale receipts, goods inward/outward register, minute book, and similar evidence that form the foundation of recording transactions in a business. Basis Routine checking Vouching Objective Ensure arithmetical accuracy of entries made in the books of original entry as well as Ledger Examine the accounting transactions recorded in the books of accounts by using documentary proof Concerned with Concerned with posting, and balancing Accuracy, authenticity, and completeness of transactions Frauds and errors Routine checking can help to detect only minor cases of fraud. Vouching can detect well- planned frauds and errors Performed by Junior staff in an organization Performed by the auditor and his staff Compensating errors and errors of principle Does not reveal Reveals
- 14. Voucher: Uses Recording Transactions Evidence of Payment or Receipt Authorization and Approval Audit and Verification Internal Control Budget Tracking Resolving Disputes Regulatory Compliance Systematic Record Keeping Support for Financial Statements
- 15. Voucher: Importance Proof of Transactions Internal Control and Accountability Audit and Compliance Budget Monitoring Record-Keeping and Documentation Dispute Resolution Efficiency in Operations
- 16. Vouching of Different Transactions Vouching of Cash Receipts and Payments Vouching of Purchases and Sales Vouching of Wages and Salaries Vouching of Petty Cash Transactions
- 17. Role of Auditor in Vouching Verification of Authenticity of Transactions Checking Proper Authorization Detection of Errors and Frauds Ensuring Accuracy in Books of Accounts Evaluating Internal Control Systems Compliance with Accounting Principles Tracing Transactions Reporting Irregularities Maintaining Audit Evidence Ensuring Completeness of Records
- 18. Voucher-Types of Vouchers Documentary evidence in support of any business transaction is called as a Voucher. It may be a receipt, invoice, bill, cash memo, bank pay-in-slip, counterfoil of a cheque, correspondences, agreements, resolutions passed in the meeting etc. Types: Primary Voucher: Written evidence in original Collateral Voucher: When the original voucher is not available, copies thereof are produced in support