INCOME TAX NOTES

CA IPCC CHAPTER - 5 VOUCHING

CHAPTER - 5
VOUCHING

STATISTICS OF THE CHAPTER Tentative Weightage of Chapter: 10 to 15 Marks 
IMPORTANCE OF THE CHAPTER This is the most practical oriented chapter and the concepts of this chapter will be used the most in practical life.
SAs COVERED SA 505


COVERAGE OF THE CHAPTER
(1)   Vouching
(2) Audit of Payments
(3) Audit of Reciepts
(4) Audit of Purchases
(5) Audit of Sales
(6) Balance Sheet Audit

CA IPCC STUDY Material free


(53) What do you mean by vouching?
The act of examining vouchers is referred to as vouching, where vouchers refers to the documentary evidence in support of a transaction recorded in the books of account. The essential points to be borne in mind while examining a voucher are that:
1. the date of the voucher falls within the accounting period;
2. the voucher is made out in the client’s name;
3. the voucher is duly authorised;
4. the voucher comprised all the relevant documents and is complete in all respects
5. the voucher has been posted to an appropriate account.
After examination, each voucher should be either impressed with a rubber stamp or initialed.

(54) What factors should be considered while audit of payments?
The factors to be considered are:
1. Authorisation: It is duly authorized by a competent person.
2. Accounting: Appropriate entries have been made in the books of accounts as per applicable accounting principles.
3. Vouching: Payment is made to appropriate person, posting is done under appropriate account & with correct amount, date on voucher agrees with corresponding entry in books.
4. Legality: It should bear a revenue stamp under the Indian Stamp Act, 1899.
5. Audit evidences: All relevant documentary evidences appropriately support the transaction.
6. Disclosures: Adequate disclosures are made in books.

(55) How will an auditor vouch transactions with Related Parties?
The main things to be considered are provisions of the Companies Act and resolutions passed at Board Meetings. Some general considerations are:
As per Section 188 of Companies Act, 2013 Board’s resolution is required for entering into any contract with the related party [Sec. 2(76)] for:
a. sale, purchase or supply of any goods or materials;
b. selling or otherwise disposing of, or buying, property of any kind;
c. leasing of property of any kind;
d. availing or rendering of any services;
e. appointment of any agent for purchase or sale of goods, materials, services or property;
f. such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company [Sec. 2(6)]; and
g. underwriting the subscription of any securities or derivatives thereof, of the company. The above provision is subject to the following conditions, namely:
1. The agenda of such Board meeting shall disclose full details of transaction with related party.
2. Prior approval of company by special resolution is required for entering into such contract if:
i. a company having a paid-up share capital ≥ Rs. 10 crores
ii. sale, purchase or supply of goods directly or through agent exceeding 25% of annual turnover;
iii. selling or buying, any property directly or through agent exceeding 10% of net worth;
iv. leasing of any property exceeding 10% of net worth or exceeding 10% of turnover;
v. availing or rendering of any services directly or through agents exceeding 10% of net worth;
vi. appointment to any office or place of profit in company, its subsidiary or associate company at a monthly remuneration exceeding Rs. 2,50,000;
vii. remuneration for underwriting subscription of company exceeding 1% of net worth. Turnover or Net Worth referred above shall be as per Audited Financial Statement of last year.
3. Proviso to Section 188(1) provides that no provision to this section shall apply to any transactions entered into by company in its ordinary course of business which are on an arm’s length basis.
4. Board’s report shall refer to all contract entered u/s 188(1).
5. Every interested director, must disclose his interest to company at Board Meeting (Section 184).
6. Interested director is restrained from taking part in such meeting. If he doesn’t disclose his interest or, participate in such Board meeting, contract so entered shall be voidable at option of company.

(56) How will an auditor vouch Remuneration paid to Directors?
The main things to be considered are provisions of the Companies Act, terms of articles of association and resolution passed at general meeting. In case of vouching director’s remuneration in case of a public company following points must be considered:
1. Examine the Entitlement: The directors are entitled to remuneration either according to:
a. the term of articles of association or
b. in accordance with a resolution of the general meeting.
2. Examine Adherence to Legal Provisions: Examine compliance of Companies Act, such as:
Section 197(6) which deals with manner of payment of managerial remuneration.
Section 197(5) which deals with payment of listing fees.
Section 197(1), which has prescribed the overall limit to managerial remuneration.
Schedule V to Act that has laid down conditions for payment of remuneration for companies having no profits or inadequate profits and companies having negative effective capital.
Proviso to Section 197(1) which provides for increase in remuneration with the approval of Central Government.
3. Disclosure: Adequate disclosure should be made in financial statements w.r.t. remuneration.
4.  Documents to be vouched includes:

a. Minutes book: to check terms of appointment
b. Articles of Association: to check authority to pay and mode of payment
c. Register of Directors: to check entry as director for the period under audit
d. Director’s Attendance Register: to check attendance at Board Meetings
e. Payment Voucher: to check computation and proper discharge
f. Financial Statements: to check appropriate disclosure

(57) How are the payments controlled by the Companies Act, 2013?
There are certain specific provisions relating to payments made as per Companies Act 2013, such as:
1. Reporting of personal expenses charged to company’s revenue a/c as per Sec.143(1)(e)
2. Under Sec. 180, Board of Directors shall require consent of company by special resolution to:
i. Sell, lease or dispose of the whole, or substantially the whole of the undertaking of the co.
ii. Invest (except in trust securities), compensation received as a result of any merger or amalgamation;
iii. Borrow monies, where the total borrowings including proposed borrowings (apart from temporary loans) exceeds the aggregate of paid up capital & free reserves. Provided that the acceptance by a banking company, in ordinary course of its business, of deposits from public, repayable on demand and withdrawable by cheque, draft, etc. shall not be deemed to be a borrowing of monies by banking company within the meaning of this clause.
iv. Remit/give time for re-payment of any debt due by directors.
3. Under section 181, Board of Directors can with prior permission of company in general meeting, contribute to bonafide charitable and other funds any amount in any financial year, aggregate of which exceeds 5% of its average net profits for three immediately preceding financial years.
4. As per Section 182, a government company or any other company which has been in existence for less than three financial years cannot contribute any amount directly or indirectly to any political party. In other cases, contribution in any financial year should not exceed 7½ % of average net profits during three immediately preceding financial years.
5. Section 183 permits the Board and other person to make contributions to the National Defence Fund or any other Fund approved by Central Government for the purpose of National Defence to any extent as it thinks fit.

(58) What factors should an auditor consider while vouching payment of following expenses?
A. TRAVELLING EXPENSES: The main thing to be considered is Travelling Allowance (T.A.) Rules approved by directors or partners. Some general considerations are:
1. Authorisation: It should be authorized by the competent person.
2. T.A. Rules: Check if the claim is as per the T.A. Rules approved.
3. Voucher: Voucher for travelling expenses should contain all details such as name & designation of person travelling, location, fare details, boarding/lodging expenses, etc.
4. Director’s travelling expense: Auditor should ensure that it was incurred in the interest of the business and that the directors were entitled to receive the amount from the company.
5. Evidence: For travel by air, counterfoil of air ticket should be inspected. For travel by rail or road, fare claimed should be checked from some independent source.
6. Foreign travel: such expenses should be sanctioned by the Board before being paid.
7. Advances: Travelling advance taken, if any should be settled on receipt of final bills.
8. Board Meeting: Directors can charge travelling expenses for attending Board Meetings only if authorised by the articles or by a resolution of shareholders.
9. RBI Approval: Check if RBI approval has been sought for expenditure in foreign currency.
10. Accounting: Check if the entries are correctly reflected in the books of accounts.
11. ARP: Compare current year figures with previous years & inquire into any abnormalities.
B.REPAIRS TO ASSETS: The main thing to be considered is that proper distinction should be made between Capital & Revenue expenditure. Some general considerations are:
1. IC system: Examine the Internal Control System related to repairs of assets.
2. AMCs: Examine the contracts if any and note the terms & conditions.
3. Bills: Examine the bills w.r.t. estimate submitted by contractor and the nature of repair.
4. Nature of expense: Check that the repairs which increases the value of asset or enhance its capacity/life should be treated as capital expenditure. In case of any confusion as regards nature of repairs, a certificate from the engineer should be obtained.
5. Accounting: Check if the entries are correctly reflected in the books of accounts.
6. ARP: Compare current year figures with previous years & inquire into any abnormalities.
B. ADVERTISEMENT EXPENSES: The advertisement expenses will be vouched as follows:
1. Nature: Ascertain the nature of advertisement expenses to ensure that it has been charged properly and relates to the client’s business.
2. Advertisement schedule: Obtain the complete list of advertisement, media wise (i.e., radio, newspapers, television, etc.) showing dates, exact location, timings, amounts paid, etc.
3. Contract: Ascertain if there is a regular contract with the ad agency and regular statements are obtained. Discounts should be properly adjusted and disclosed in the bills.
4. Receipts: Check the receipts for amounts paid for the advertising expenses incurred.
5. Accounting: Check if the entries are correctly reflected in the books of accounts.
6. Disclosure: Examine if outstanding advertising expenses have been shown as liability and advances paid as assets.
C. PAYMENT OF INCOME TAX: The main things to be considered are provisions of Income Tax Act and documents issued by ITO. Some general considerations are:
1. Statement of Total Income: Check that taxable income has been calculated as per the provisions of Income Tax Act. Amount of tax, surcharge and rebates etc. have been properly computed after considering the TDS or advance tax paid.
2. Depreciation Schedule: Check the depreciation calculation as per the provisions of IT Act.
3. Challan: Examine the challan to ascertain the amount, nature & date of tax paid.
4. Bank Statements: Trace the tax payments from bank accounts.
5. External evidences: Refer to the copy of the notice of demand, assessment order, assessment form and the receipted challan to ascertain payments or advance payments of income tax.
6. Interest: Interest on refunds should be included as income and penal interest charged for nonpayment should be treated as expenditure.
7. CARO provisions: Check if any delay has been made in deposit of tax.
8. Financial Statements: Verify if correct accounting entry is reflected in the books and in the final financial statements.
D. PAYMENT OF EXCISE DUTY (CENVAT)
Meaning: It is a duty levied upon goods manufactured/produced by an entity and is payable at the time of removal of excisable goods from the factory/godown.
The main things to be considered are provisions of Central Excise Act, 1944 and the related Rules, Circulars and Notifications. Some general considerations are:
1. Central Excise Act: Refer to the Act to check the rates applied.
2. Challans: Verify payment by examining challans with reference to quantity of goods in respect of which issue permits have been received.
3. Accounting: Ensure that it is correctly reflected in the books.
4. ARP: Test check the accuracy of amount of duty paid by multiplying the rate of excise duty with the value of goods issued as per the client’s stock register.
5. Provisions: For excisable goods manufactured but not released, ensure if the provision for unpaid excise duty has been made.
6. CENVAT credit: Ensure that in every case CENVAT credit has been adjusted and only net excise duty has been paid.
7. Duty Drawback: Duty drawback refers to a scheme under which central excise and customs duties paid for raw-materials and other inputs used in the manufacture of the product prior to its export are refunded to the exporter. Verify that duty drawback has been claimed.

(59) What are the general considerations for Audit of following Receipts?
A. INCOME FROM INVESTMENTS
1. In case of voluminous investments, the client generally would have an Investment Register or else an investment schedule should be made.
2. Dividend income is first vouched by reference to the counterfoils of Dividend Warrants and Interest on securities by reference to the tax-deduction certificates.
3. Trace the collection into the investment register and the cash book.
4. Examine the documents to ascertain if any income is unrealized and the reasons thereof.
5. Check if the entries are correctly reflected in the books, as the gross amount should be shown in the P&L A/c and TDS amount debited to income tax account.
6. It should be checked that if investments are sold on ex-dividend basis or when purchase is on cum dividend basis, the dividend has been received subsequently.
7. Ensure that the TDS certificates have been received and kept safely.
8. Check that an entry for accrued income has been appropriately made.

B.RENTAL RECEIPTS
1. Check the copies of bills issued to tenants by reference to copies of tenancy agreements and bills of charges paid on behalf of the tenants, i.e., house tax, water tax, electricity bill, etc.
2. Study the terms & conditions in the tenancy agreement and ensure that rent received is as per the agreement.
3. Check Rental Register for rent accrued & collection made by reference to rental bills copies.
4. Trace the entries into the cash book.
5. Scruitinise rental register to find amt. unrecovered & irrecoverable, so as to make provisions.
6. Check if any tax has been deducted at source & TDS certificates been received & kept safely.
7. It should be verified that every available accommodation has been let out and rental income has been duly accounted for.

A. BANKRUPTCY DIVIDEND
The amount received from the estate of an insolvent debtor against settlement of his account is called bankruptcy dividend. Some general considerations in its audit are:
1. Refer to the correspondence with the Official Receiver or Assignee to find particulars of part amounts already collected and the balance outstanding at the beginning of the year.
2. Examine any advice received from the same authority along with the payment.
3. Verify if amount received has been treated as bad debts earlier.
4. Trace the entry in cash book and bank statement.

A. ROYALTIES RECEIVED
1. See the relevant contract and examine important provisions relating to conditions of payment of royalty, rate of royalty, mode of calculation and due dates.
2. Check the periodical statements received from the user and calculation of royalty.
3. Trace the entry in cash book and bank statement.
4. In case of any deduction on account of recoupment of royalty for past period, the records for earlier royalty receipts should be seen to ensure that amount of deduction is as per contract.
5. Verify if any tax is deducted at source & TDS certificate has been received & kept safely.
6. Royalties due but not yet received should have been properly accounted for.
B. INSURANCE CLAIMS
1. Check if the claim is in respect of fixed assets or current assets.
2. Examine a copy of the insurance claim lodged with the insurance company.
3. Correspondence with the insurance company and the insurance agent should also be seen.
4. Check the counterfoils of receipts issued to the insurance company.
5. Check if appropriate adjustment has been made of the amount received in excess or short of the value of actual loss as per the insurance policy.
6. Verify copy of certificate/report containing full particulars of the amount of loss.
7. Check if appropriate entries are reflected in the books, particularly to ensure that P&L A/c is debited with shortfall of claim admitted against the book value of asset.
8. Trace the entry in cash book and bank statement.

(60) How will an auditor perform Audit of Purchases?
► CLASSIFICATION OF PURCHASES: It is essential that purchases be classified as follows:
1. Purchases of raw material.
2. Purchases of finished goods.
3. Purchases of consumable stores, fuel etc.
4. Purchases of packing materials, etc.
5. Purchases of articles like stationery for office use.
6. Purchases for making additions to assets.
► VOUCHING OF PURCHASE INVOICES
1. the date of invoice falls within the accounting period
2. the invoice is made out in the name of the client
3. the supplier’s a/c is credited with full amount & deduction, if any, is made on a proper basis
4. the goods purchased are regularly dealt in by the concern/ required for manufacture
5. invoice is signed by accountant & store-keeper. A copy of report of a technical person be seen in case of purchase of an item whose price is dependent on its quality.
6. the person competent to sanction payment has authorised its payment.
7. appropriate entry is reflected in the books for purchases
8. if an invoice runs into several pages or over several accounts, all amounts so adjusted should be added together to confirm that there has not been error under adjustment.
9. if invoices are received in duplicate/triplicate, it should be confirmed that original invoice has been paid or adjusted separately.
10. if goods are purchased for use of an employee but invoice is made in the name of concern, it should be seen that cost has been charged to person concerned and not to Purchases A/c.
11. check that the statement of accounts has been sent to suppliers and it has been confirmed.

(61) How will an auditor audit Purchases Returns?
Goods found to be defective or of a poor quality are sometimes returned to the supplier.
1. Ascertain the reasons for return and if the returns are duly authorized.
2. Examine stores record/goods outward book to ascertain if appropriate entries are made.
3. Examine the debit note to ascertain the calculations by referring to the original invoice.
4. Refer original invoices of purchases to confirm that the nominal account originally debited has been subsequently credited on goods having been returned.
5. Special care should be taken if purchase returns are large, either at beginning or at close of the year, as it may be fictitious to cover bogus purchases recorded earlier.
6. Rebates and allowances received should be adjusted on the basis of Credit Notes received from the suppliers and be verified by reference to the original invoices.

(62) Which are the factors which increase the gross profit?
1. Undervaluation of opening stock.
2. Overvaluation of closing stock.
3. Change in basis of valuation of stock, like where opening stock was valued at cost or market rate whichever was lower, valuing closing stock at market price which is higher than cost.
4. Inclusion of goods sold but not delivered in the closing stock.
5. Sales at close of previous year but invoices raised in current year, taken as current year sales.
6. Inclusion in closing stock of goods received for sale on approval or on a consignment basis.
7. Treatment of goods sent out for sale on consignment basis as regular sales.
8. No provision or under-provision in the expenses accounts included in the Trading Account.
9. Wrong allocations of expenses, e.g., carriage inwards wrongly taken to P&L A/c.

(63) Which are the factors which decrease the gross profit?
1. Over valuation of the opening stock or undervaluation of closing stock.
2. Alteration of the basis of valuation of stock, e.g., closing stock valued at cost, which is below the market price, when the opening stock was valued at market price above cost.
3. Reversal of the fictitious sale entries recorded in the previous year to boost up profit.
4. Entry of sales returns twice/failure to account for purchase returns.
5. Excessive provisions made for wages or direct expenses.
6. Non-inclusion in closing stock of goods sent for sale on approval or on a consignment basis.
7. Inclusion in Trading Account of expenses which should have been included in P&L A/c.
8. Failure to take credit for insurance claim w.r.t. goods lost or destroyed by fire.
9. Failure to account for goods sold or destroyed or given away as samples.



(64) How will an auditor audit Credit Sales?
► CLASSIFICATION OF SALES: Different types of sales should be classified as follows:
1. Sale of raw materials.
2. Sale of finished goods.
3. Sale of empties and other packing materials.
4. Sale of assets.
► VOUCHING OF SALES INVOICES: Credit sales should be verified by reference to copies of invoices issued to customers and attention should be paid to the following matters:
1. each item of sales relates to the period of account under audit
2. goods are those that are normally dealt in by the concern
3. sale price has been correctly arrived at
4. Check copy of requisition slip issued by Sales Department
5. the invoice has been adjusted in an appropriate account
6. sale has been authorised by a responsible official who has initialed invoice.
7. additional charges recovered along with sale price should be credited to separate accounts.
8. Check if the statement of accounts has been sent to the customers and confirmation received
9. Sales on hire-purchase basis, goods sold on sale or return basis and sales on consignment basis should be separately recorded.

(65) What do you understand by cut-off arrangement?
It is an arrangement adopted by management to separate transactions of one period from other, so that results of working of each period can be correctly ascertained. It is a part of the internal check.
It is generally applied to accounts of sales, purchases and stock. The main purpose is to ensure that revenue & expenditure of one period are not recorded in the other period.
The cut-off procedures should ensure that:
1. goods purchased, property in which has passed to client, have been included in inventories and liability has been provided for in case of credit purchase
2. goods sold have been excluded from inventories and credit has been taken for sales and in case of credit sales the concerned party has been debited.
Auditor may examine documents evidencing movement of stocks, including documents pertaining to period shortly before and after the cutoff date and check whether stocks represented by those documents were included or excluded as appropriate during stock taking.
(66) What do you understand by Balance Sheet Audit?

Due to increase in the size of business units & due to mechanization of accounting, the test checks are applied widely for verification of income & expense accounts as well as assets & liabilities and not only for a few nominal accounts. This has resulted into a form of audit known as Balance  Sheet audit.
Balance Sheet audit consists of verification of all Balance Sheet items, together with the examination of expense and income accounts.
It includes the following:
1. Examination of partnership agreement, memorandum & articles of association, minutes of Board Meeting and accounting system in force.
2. Establishment of ownership of all assets and proof that all owned assets are included in B/S.
3. Ensuring if asset are included in B/S as per the accepted principles of accounting.
4. Proof that all liabilities are included and at proved amounts.
5. Checking of adjusting & closing or any other entries necessary for preparation of B/S.
6. Evidence that distinction has been made between capital & revenue transactions.
7. Proof that share capital issues have been made as per the law & are correctly recorded.
8. Analysis of charges & credit to revenue a/c & inclusion of the balance in B/S.

(67) What do you understand by Outstanding Assets?

Outstanding assets may be of two types:
1. Accrued Income: income receivable for services rendered.
2. Prepaid expenses: expense incurred in advance, benefit of which will arise in subsequent years.
Following are some of the accounts in which adjustment of outstanding assets could be made:
1. Rent receivable: All rents receivable due or accrued till date of B/S should be calculated and brought into account after making a provision for doubtful/irrecoverable arrears of rent.
2. Interest and dividend: Interest receivable on loans accrued till date of B/S and interest on debentures & other securities receivable on fixed dates accrued and receivable till B/S date should be brought into account and dividend on shares should be accounted for as per the dividend accounting policy followed by the management.
3. Insurance Premium: Insurance premiums are always paid in advance, thus proportion thereof relating to period subsequent to B/S date should be calculated & taken as an outstanding asset.
4. Advertisement: Advances payments may be made under advertising contracts, thus the proportion thereof relating to period subsequent to B/S date be taken as an outstanding asset.

Practical Questions - Chapter 5: Vouching

Question No. 1: A loss of Rs. 2,00,000 on account of embezzlement of cash was suffered by the company and it was debited to Salary Account. Comment.
Question No. 2: As an auditor comment on the following:
a) A sum of Rs. 15,000 p.m. has been paid as remuneration to a Director, who is not in the whole- time employment of the company.
b) Travelling expenses of Rs. 2.25 lakhs shown in P&L A/c of X Ltd., including a sum of Rs. 1.10 lakhs spent by Director on his foreign travel for Company’s business accompanied by his mother for her medical treatment.
c) The sales proceeds from scrap which did not have a significant value need not be verified if the company had a good accounting and costing system.
d) The surplus arising from sale of investments was set-off against a non-recurring loss and was not disclosed separately.
e) Insurance claim of Rs. 2 lakhs received stands included under Miscellaneous Income.
Question No. 3: While auditing the accounts of a manufacturing company, you discover that the rate of Gross Profit on sales has sharply risen in comparison to the previous year. State eight possible causes of such increase and the steps you would take to satisfy yourself.