Vouching of Cash and Trading Transactions
1. Vouching of Cash Receipts (Debit Side of Cash Book)
The primary audit risk on the cash receipts side is the omission or suppression of receipts (e.g., pocketing cash and not recording the transaction):
Audit Procedures for Key Cash Receipt Heads
Cash Sales
- Compare carbon copies of cash sales memos with daily cashier summaries.
- Check electronic cash register rolls / POS system audit logs.
- Verify daily total cash receipts are deposited into the bank account intact on the following morning.
Receipts from Debtors
- Check counterfoils of official receipts issued to customers with dates and discount terms.
- Scrutinize cash discount allowed to ensure unauthorized discounts are not pocketed by staff.
- Obtain external balance confirmations directly from debtors under SA 505 to detect teeming and lading.
Sale of Fixed Assets / Investments
- Inspect Board of Directors minutes sanctioning the asset disposal.
- Inspect sale agreement, auctioneer's notes, broker contract notes, and bank deposit slips.
- Verify that profit or loss on sale is correctly calculated and segregated from operational revenue.
Dividends & Interest Received
- Inspect dividend warrants, counterfoils, bank statements, and TDS certificates (Form 26AS).
- Verify against Investment Register to ensure dividends on all held shares were collected and accounted for.
2. Vouching of Cash Payments (Credit Side of Cash Book)
The primary audit risk on the payments side is the recording of fictitious payments or unauthorized personal expenses:
Audit Procedures for Key Cash Payment Heads
Area 1
Payments to Creditors (Accounts Payable):
Inspect official receipts from vendors, original vendor statements of account, cancelled cheques, and bank debit advice. Ensure trade discounts were claimed and credit notes for returned goods were deducted.
Area 2
Salaries & Factory Wages:
Cross-check payroll register with biometric attendance sheets. Verify deductions for Provident Fund (PF), ESI, Professional Tax, and Income Tax (TDS). Check bank transfer mandate for electronic wage transfers to identify ghost workers.
Area 3
Purchase of Plant & Machinery (Capital Expenditure):
Inspect supplier contract, invoices, customs clearing documents, transit insurance policies, and installation certificates. Verify that installation costs are capitalized and not booked as routine repair expenses.
Area 4
Petty Cash Payments (Imprest System):
Verify that the petty cash operates under the strict Imprest System. Scrutinize petty vouchers for postage, taxi, and refreshments; ensure each is approved and supported by original bus/fuel slips or vendor receipts.
3. Vouching of Trading Transactions (Purchases & Sales Books)
A. Vouching of Purchases Book (Credit Purchases)
- Purchase Orders & Requisitions: Compare entries in the Purchases Book with original carbon copies of Purchase Orders (POs) and department stores requisitions.
- Goods Received Notes (GRN): Match supplier invoices against warehouse Goods Inward Books and GRNs to ensure goods were physically received before booking the liability.
- Cut-off Testing: Verify transactions near the close of the financial year to ensure goods received before year-end are included in both purchases and closing inventory, while post-year-end purchases are excluded.
B. Vouching of Sales Book (Credit Sales)
- Customer Orders & Dispatch Notes: Compare Sales Book entries with customer purchase orders, delivery challans, and transporter lorry receipts (LR) or railway receipts (RR).
- Fictitious Sales Detection: Ensure sales are not booked without actual dispatch of goods to artificially inflate annual profits (a classic window-dressing technique).
- Goods on Approval / Consignment: Ensure goods sent out on approval or on consignment are not treated as outright credit sales until accepted by customers or sold by consignees.
C. Vouching of Purchases Returns & Sales Returns
- Purchases Returns: Inspect Debit Notes sent to suppliers, Credit Notes received from suppliers, and gatekeeper outwards registers.
- Sales Returns: Scrutinize Credit Notes issued to customers and goods inward registers. Pay special attention to large sales returns occurring immediately after year-end, which often expose fictitious sales booked prior to closing.
4. Key Comparative Checklist for Vouching
| Ledger Head | Primary Source Documents | Key Risks / Frauds to Guard Against |
|---|---|---|
| Cash Sales | Cash memo carbon copies, POS rolls, daily bank deposit slips. | Under-recording sales; skimming cash before banking. |
| Payments to Creditors | Stamped receipts, supplier invoices, bank statements. | Duplicate payments; payments to non-existent vendor accounts. |
| Credit Purchases | Supplier invoices, PO copies, Goods Received Notes (GRN). | Recording purchases without receiving goods; double-booking bills. |
| Credit Sales | Sales invoices, customer orders, delivery challans, LR notes. | Booking fictitious sales before year-end to window-dress revenues. |
| Wages & Salaries | Biometric attendance logs, pay sheets, PF/ESI challans. | Dummy/ghost workers; pocketing unclaimed wages. |
| Petty Cash | Vouchers with supporting receipts, Imprest cash book. | Inflated expense claims; IOUs treated as authorized cash expenses. |
5. Key Exam Review Questions
- How would you vouch the following transactions in an audit of accounts?
- (a) Cash sales
- (b) Payment of wages
- (c) Purchase of plant and machinery
- Explain the audit procedure for vouching the Purchases Book and Purchases Returns Book.
- What precautions should an auditor take when checking sales returns recorded in the first month of the subsequent financial year?