Auditing Vouching of Cash Transactions – tryspring

By | February 12, 2019

Auditing – Vouching of Cash Transactions

Vouching of Cash Receipts (Debit Side of Cash Book)

We will discuss the cash receipt which are placed on the debit
side of cash book for following items −

Opening Balance of Cash Book

Opening balance of cash book represents cash in hand at the start
of the year and should verified from the balance sheet of last
financial year.

Cash Received from Debtors

Consider the following points for verification of cash received
from debtors −

  • The carbon copies or counterfoils of cash receipt book should
    be verified.

  • Cash receipt should be serially numbered.

  • Cash received should be entered on the same date when the
    cash is actually received.

  • The discount allowed to customers should be properly
    authorized by a responsible officer.

  • Correspondence with customer and ledger account should be
    tallied.

Following are the different ways used for misappropriation of
cash −

  • Cash received from customer not recorded in books and no cash
    receipt may be issued.

  • Issuance of receipt for lesser amounts than amount actually
    received.

  • Using teeming and lading method; it is a very common
    method to misappropriate the money, in which the cash
    received from any customer not recorded in the books and the
    cash received from same customer at a later instance or
    another customer recorded in the books and so on.

Repayment of Loan by Others

Repayment of loan by others may be verified in the following ways

  • Calculation of interest received and interest should be
    credited to interest received account.

  • Verification from bank statement if directly deposited by
    party into bank.

  • Checking of carbon copies or counterfoils of cash receipts.

  • To ensure that there should be no violation of Income Tax
    rules as payment of loan exceeding Rs. 20,000/- cannot be
    repaid in cash. It should be through Cheques, Demand Draft,
    NEFT, RTGS or any other available banking channels.

Rent Received

  • To check rental agreement or lease deed.

  • In case where the rental income is received from more than
    one property, separate account for each property should be
    maintained.

  • The Auditor should verify that the rent for all the twelve
    month is received or not.

  • The amount of rent should be verified from the rent deed or
    the lease deed.

  • If TDS (Tax Deducted at Source) is deducted by the party,
    there should be proper accounting of TDS.

Sale of Investments

  • To check bank statement if the sales proceeds have reached
    the bank account.

  • To verify broker commission, note or debit note, if
    investments are sold through broker.

  • To ensure separate accounting is being done for capital
    receipts and revenue receipts. Dividend or profit or loss on
    sale of investment is a revenue receipt and the sales
    proceeds of the investment cost should be booked as capital
    receipt.

Subscription

Subscriptions are received from the members of a club and the
following points need to be considered by the Auditor while
vouching subscription −

  • Subscription register should be verified.

  • Verification of subscription received during the year and the
    subscription receivable.

  • Counterfoil of cash receipt should be verified.

Sale of Fixed Assets

  • To check minutes of the meetings of the Board of Directors.

  • Sale agreement or sale contract.

  • Verification of agent account if sale is made through an
    agent.

  • Profit or Loss on sale of fixed assets should be booked to
    revenue account.

  • Authorization of sale of fixed assets.

  • Sale proceed of fixed assets should be credited to fixed
    assets account after deducting expenses on sale of fixed
    assets if any.

Interest and Dividend Received

  • Verification of the dividend warrant letter along with the
    covering letter for verification of dividends in case of
    dividends received through cheque.

  • Verification of bank statement, if the dividend is directly
    credited to the bank account.

  • Interest on security can be vouched from the securities
    schedule.

  • Interest on fixed deposit can be verified from bank statement
    and TDS certificates.

  • Interest received from outsiders to whom company has granted
    loan could be verified from statement of account of party
    along with TDS certificates.

  • Provision should be made for interest accrued but not due.

  • All interest received and accrued should be properly
    accounted for in the books of accounts.

Commission Received

  • Verification of agreement on the basis of which the
    commission is received.

  • Calculation of the commission receivable.

  • The commission received should be verified from counterfoils,
    bank statements, cash receipts, etc. and the provision for
    commission receivable should be rightly accounted for in the
    books of accounts.

  • Commission receivable on “sale of goods sent on consignment”
    should be verified from sale account.

Installments Received on Hire-Purchase Sale

  • Study of the Hire-Purchase agreement for hire-purchase-sale
    price, number of installment, rate of interest etc.

  • Segregation of principle amount and interest amount should be
    done and both should separately account for.

  • Profit on sale on hire-purchase should be duly calculated on
    the basis of installment received during the year.

Vouching of Cash Payments (Credit Side of Cash Book)

All the payment made to creditors, expenses incurred in cash and
all other payments done appear on the credit side of cash book
and the Auditor is required to vouch cash payments because
chances of cash misappropriation are very high.

Following points need to be considered for different types of
cash payment −

Opening Balance

The opening balance of cash book can never be credited because
cash of company cannot be in negative but the credit bank balance
represents the overdraft account from bank or utilization of cash
credit limit as sanctioned from bank.

Payment to Creditors

Payment to creditors may be examined by the following −

  • Receipt issued by the creditors.

  • If the creditor is paid amount as full and final settlement,
    the balance amount, if any stands in the ledger account of
    the creditor; this amount should be credited to discount
    received.

  • If any advance payment is made to creditor that should be
    clearly mention.

  • Statement of account of creditor.

Payment of Salaries

Depending upon the adequacy of internal control system in an
organization Auditor will decide his audit Program. It is very
important for Auditor to check the following −

  • Attendance record of employee and salary register.

  • Appointment letter of new employees.

  • Comparison of current month salary with last month’s salary
    and if there is any abnormal change in amount, Auditor should
    verify the same.

  • Alteration in amount of deductions on account of advance,
    loan, fine, funds, insurance, TDS, etc.

Payment of Wages

At the time of vouching of wages paid, the Auditor should verify
the following points to avoid misappropriation of cash −

  • Adequacy of Internal Control System.

  • Payment of wages at higher rate than allowed.

  • Payment shown to ex-workers in the current month.

  • Lower or non-deduction of advance or other deductions due.

  • Payment to fictitious workers.

  • Payment to workers who were absent from duty.

  • Wages sheet should compare with wages register.

  • Comparison of current month wages with last month’s wages and
    proper verification should be there for extra ordinary
    changes.

  • Detailed verification for payment to casual workers.

  • Vouching and verification of treatment accounting treatment
    for unpaid wages.

Purchase of Plant and Machinery

The Auditor should pay attention to the following −

  • Purchase invoice of machinery.

  • Freight inward charges, installation charges, erection and
    commissioning charges should be capitalized.

  • Treatment of Excise duty according to the excise rules.

Purchase of Land & Building

Purchase of Land and Building can be vouched as follows −

  • Study of Lease hold agreement, if land is purchased on lease
    hold basis.

  • Payment should be as per lease term.

  • All the expenses incurred to acquire lease hold property
    should be debited to respective property account.

  • Auditor should study the conveyance deeds in case property is
    purchased under free hold basis.

  • For verification of payment, the Auditor can check the
    payment receipt and the conveyance deed.

Rent Paid

Consider the following points for the verification of rent by the
auditor −

  • Rent Deed.
  • Rent receipt from Land lord.
  • Provision for un-paid rent at the end of the year.

Insurance Premium

Consider the following points for the verification of Insurance
Premium −

  • Insurance policy issued by the Insurance Company.
  • Insurance premium receipt
  • Insurance premium should not be related to any official of
    the company.

Income Tax

Consider the following for the verification of Income −

  • Advance Tax Challan
  • Self-Assessment Tax challan
  • Income Tax demand notice
  • Assessment order

Excise Duty

Consider the following for the verification of Excise Duty −

  • Rate of Excise Duty
  • Excise records and sale invoice for verification of excise
    duty

Commission on Sale

Consider the following for the verification of Commission on Sale

  • Agreement of sale.
  • Rate of commission on sale.
  • Calculation of commission on the basis of sale.
  • Cash receipt issued by agent.
  • Provision for commission payable

Director’s Fees

Consider the following for the verification of Director’s Fees −

  • Directors receive fees for attending the Board meetings.
  • Verification of attendance register.
  • Verification of payment receipt duly acknowledged by the
    directors.

Internal Control System for Cash Transactions

Following are the main features of a good internal control system

  • All cash received should be accounted for immediately.

  • All received cheques should be crossed immediately on
    receipt.

  • Cash receipt should be issued to debtors and daily
    reconciliation of account should be done where the debtors
    pay cash on daily basis.

  • All cash receipts should be deposited in bank on a daily
    basis.

  • Bank reconciliation account should be prepared on a regular
    basis.

  • Payments other than petty payments should be done through
    crossed cheques.

  • Cash receipt should be obtained for every cash payment to
    creditors.

  • Cash expenses should be duly supported by proper and genuine
    bills or vouchers.

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