During conduct of an inspection by auditors, a major chunk of field work in validating management’s representations and collecting proofs takes the shape of corroborating and vouching. Without the auditing of vouching, no investigation is complete and therefore it is imperative to grasp the concept of vouchers and what it means to ‘vouch’ in audit.
Definition of Vouching
The term vouching has its roots in the word ‘vouch’ which means to satisfy through in person check that what is represented is true. Building on this, vouching therefore means to confirm the amounts mentioned in fiscal ledgers are accurate by looking at documents from which data is extracted.
That is to say that in order to vouch the correctness of a travelling expenditure documented within the books, legit supports such as travel authorization, booking emails and receipts for transport and rent in the name of the relevant corporate officials will be inspected.
When an auditor sets out to establish credibility of the facts and figures presented by the management, the best aid is to corroborate and examine the base documents from which those figures were extracted in the first place.
Hence, it would not be wrong to say that the fundamental objective when vouching is undertaken as part of audit work is to ascertain that all figures and facts that should be in the ledgers have made it there; that these belong to the period of the financial statements being examined and there are no erroneous or falsified elements in the records.
To be more specific, the objectives of auditing of vouching are as follows:
- Purpose of expense:
All the expenditure incurred during the year is for business use only and no personal expenses have been included by the owners or directors of the company. Though proprietors have authority to take money from their business, the proper channel for this is recording it through ‘drawings’ account rather than directly in expenses.
- Period of cashflows:
Since majority of the businesses operate on the accrual basis of accounting, it is necessary to ascertain that all cashflows that relate to the period under audit only are included in the books.
This means that auditors normally set a cut-off period and check expense vouchers of that period plus a few from the periods immediately before and after.
This way there is no under recording of expense (to boost profits or show better performance perhaps) or over recording of expense (for lower tax calculations or avoiding declaring dividends) by manipulating it into different time periods.
- Classification of expenditure:
When an expense, material or otherwise, is incurred for repairs of office machinery and is recorded in ‘Stationery & Supplies’ instead of ‘Repairs & Maintenance’ the auditor will have to have the expense reclassified to reflect the proper substance of the transaction.
Another example maybe when major computer parts are purchased that fulfill the criteria of capital expense but are erroneously recorded as ‘Misc’ or ‘Stationery & Supplies’. Improper recording of expense may not only be due to mistakes and lack of understanding but could be indicative of malpractices that management or staff may be involved in.
- Accurate and correct numbers:
All the figures appearing in the accounting books should be supported by evidence with the same figures. While auditing of vouching the auditor has to also ensure that totaling of expense is correct and there have been no mathematical errors when making entries.
- Proper authorization:
Those required to sanction the expense have signed off on the voucher and proper check and balances have been in effect during the whole period under review. This means appropriate segregation of duties so that the person expending the cash is not the same one who makes and signs off on the voucher.
- Prepared in accordance with laws:
If the accrual basis of accounting is valid, then auditor should confirm cash basis is not being used. Rules of the applicable laws and regulations should have been followed and disclosure requirements relating to certain elements should have been appropriately revealed.
Kinds of vouchers and what to look for
Vouchers maybe supportive documentation generated internally within the organization or they could be external pieces of paper from third parties outside the business. The key kinds of vouchers that make up the composition of evidence an auditor looks for are logically two.
- Primary documentation: Authentic pieces of record retained in their true condition by the entity. Some examples would be bank statements issued by Bank, bills of items purchased from vendors and goods outward registers, etc.
- Collateral documentation: Photocopied or duplicates serving as evidence like would be the scenario when dealing with sales invoices where the original goes with the customer and only duplicate remains.
When any voucher is inspected, the key points that need to be verified include the date of the cashflow, amount in numbers and/ or words, authorization and approval by the right personnel, classification and nature of the figure within.
Additional points that hold significance to the auditor are specific to certain documents such as cheques, cash memos, sales invoices etc. in that they should be sequentially numbered so auditor can verify completeness of that account.
Alterations in vouching documents should be authorized by concerned individual. Double entry of transactions should be correct and complete.
Scope of Vouching
When laying the foundation for work, the auditors strive to attain satisfactory affirmation regarding the financial and non-financial controls implemented internally by the caretakers of the business.
When this satisfaction is gained of management having strong controls in place, the auditors opt for selective vouching of basic documentation in place of a substantial examination to gain comfort over the accounting records.
However, a vital point to note is that auditing of vouching must be undertaken fully when there is a dearth of controls to gain adequate reliance on the financial statements. When the management does not agree to or hinders such efforts the auditors may consider withdrawing from such an assignment.
It is well-acknowledged that the auditing of vouching is the main pillar in establishing a credible opinion on financial statements. Although it is not the only component of an audit, yet majority of the audit proof is collected via this method.
Its importance is further enhanced by smart analysis of errors and omissions as this may reveal efforts to conceal malpractices. Vouching done efficiently will lead to an unquestionably successful audit.