Vouching (financial auditing)

Overview

Vouching is the practice followed in an audit, with the objective of establishing the authenticity of the transactions recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the final statements of account. Vouching does not include valuation.

Importance in Auditing

Vouching can be described as the essence or backbone of auditing. The success of an audit depends on the thoroughness with which vouching is done. After entering in all vouchers, only then can auditing start. Vouching is defined as the "verification of entries in the books of account by examination of documentary evidence or vouchers, such as invoices, debit and credit notes, statements, receipts, etc.

The object of vouching is to establish that the transactions recorded in the books of accounts are:

1. In order and have been properly authorized.
2. Correctly recorded.

“Simple routine checking cannot establish the same accuracy that vouching can. In routine checking, entries recorded in the books only show what information the bookkeeper chooses to disclose, however these entries can be fictitious without any vouching or vouchers. By using a vouching or a voucher system a company will have concrete and solid documentation and evidence of expenses, capital, and written proof in audits.

Legal Precedents and Fraud Detection

Vouching is critical because an auditor must have proof of all transactions; without it, claims are unsubstantiated. In most cases, hard to detect frauds can only be discovered through the use of vouching. Failure to conduct vouching with due importance may lead to charges of negligence.

This was demonstrated in the legal case of Armitage v. Brewer and Knott. The auditors were found guilty of negligence because they did not display enough reasonable care and skill in vouching wage sheets, failing to detect fraud in the manipulation of wage records and cash vouchers. The judge stated, "It was clear that a good many documents were suspicious on either face and called for Inquiry," reinforcing that due care and attention are essential to the process.

Vouching Checklist

When performing vouching of payments, an auditor typically verifies the following attributes to ensure compliance and prevent fraud:

• Authenticity: Verification that the transaction relates to the business and actually occurred.
• Authorization: Ensuring the voucher was approved by an authorized official per the entity's internal control policy.
• Mapping and Accuracy: Confirming the amount on the source document matches the entry in the General ledger.
• Classification: Checking that the transaction is posted to the correct account (e.g., distinguishing between capital and revenue expenditure).
• Periodicity (Cut-off): Ensuring the voucher date falls within the specific financial period under audit.
• Anti-Fraud Controls: Verifying that documents are stamped "Paid" or "Cancelled" to prevent duplicate payment claims.
• Compliance: Ensuring the document meets statutory requirements, such as valid tax or VAT invoicing rules.

References

• http://www.caclubindia.com/articles/vouching-is-the-essence-of-auditing-3563.asp#.ULexzKz7KYY
• http://www.enotes.com/business/q-and-a/vouching-said-back-bone-auditing-substantiate-132595
• Auditing: Principles and Practice By: Ravinder Kumar, Virender Sharma

References

1. (2011). "Auditing and Assurance Vol.1". The Institute of Chartered Accountants of India.
2. Bragg, Steven. "Vouching definition".
3. "Voucher In Accounting - What It Is, Types, Examples, Format".
4. "Audit Tracing & Vouching: A Complete Guide".
5. "What is Vouching? definition, types, sources, objectives and importance".
6. "Vouching - The Backbone of Auditing".
7. "Armitage v Brewer and Knott: 1932".
8. "Importance of Vouching in Auditing". Financial Auditings Overview.