Definition of Vouching
Vouching is a procedure that auditors use to authorize the credibility of the entries allowed in the books of accounts. In other words, it is the documentation that helps the auditors to check the authentication and the accuracy of the documents that the client has presented.
During the audit process, the auditors cannot simply rely on the information that the accountants present. Auditors need to check the authenticity of the information presented to ensure that the financial statements have no material misstatements.
In this regard, it is also important to consider that it might not be humanly possible for auditors to go through every single item in the Income Statement or the Balance Sheet. Therefore, they need to select a sample of invoices, based on which they can gather evidence and reasonable assurance that there are no material misstatements in the financial statements.
Vouching tends to be one of the most primitive points of concern in the audit planning phase. It helps auditors determine the scope of work involved and the ground they need to cover to ensure that they can gather reasonable evidence based on which they can issue their opinion.
Therefore, the process of vouching tends to be one of the crucial phases of the audit process, which helps auditors gather reasonable evidence.
Types and Sources of Vouching
There are two types of vouchers that are used by auditors during the auditing process. They can either be primary or collaterals.
- Primary Vouchers: These are the original copies of the vouchers that the company uses.
- Collateral Vouchers: Collateral Vouchers are duplicate copies (or photocopies) of the original invoices or bills that auditors use for verification purposes.
No hard and fast rule states that auditors need to rely on primary vouchers or collateral vouchers. They can rely on any of these voucher types, depending on the materiality threshold. If the transaction is material from the perspective of the company’s perspective will likely rely on primary vouchers to authenticate the stated transactions.
As far as sources of vouching are concerned, it can be seen that they can either be internal, or external.
- Internal Vouchers: Internal Vouchers are vouchers that are available from within the company. Examples of internal vouching include purchase orders received or inter-departmental sales.
- External Vouchers: External vouchers, on the other hand, are generated from the company’s external sources. Examples of external vouching include bank statements and invoices generated from banks.
Objectives of Vouching
As mentioned earlier, it can be seen that vouching is the technique that auditors use to judge the authenticity of transactions that are presented in the financial statements. The overall process of accuracy and vouching procedure determines the overall extent of the effectiveness of auditing. Some of the major objectives of vouching are given below:
- To ensure that all the reported transactions in the company’s financial statements took place during the company’s financial year. In the same way, the reported transactions should also be used for purposes of the business only and nothing else.
- To check the accuracy of the totaling and carrying forward amount presented in the financial statements.
- To check for material misstatements from the amount mentioned on the voucher and the amount disclosed on the financial statements.
Characteristics of Vouching
There are certain characteristics of vouching for that help auditors to design the audit processes with proper accuracy. Here are some of the most salient features of vouching:
- Imperative Aspect in Auditing: It can be seen that vouching is regarded as one of the most important auditing processes because it helps auditors verify the claims made by the management about their financial statements. It plays a vital role in formulating the auditors’ opinion regarding the accuracy of the financial statements.
- Audit Process design: Vouching also plays a vital role in helping auditors design subsequent audit processes. In this regard, it is also important to consider that vouching helps auditors design their audit processes. Based on the risk assessment conducted, auditors can determine the audit procedures that need to be executed to gather reasonable assurance.
- Evidence: Audit work (and working papers) constitute documentation of audit procedures that auditors have conducted to arrive at the stated response. Vouching helps auditors draft and document their observations regarding the audit process and the overall accuracy of the prepared financial statements.
- Checking for fraudulent activities: Since vouchers are signed on by verified personnel, they should be treated as important conjectures. It is also important to note that these fraudulent activities need to be checked to have no leakages within the company. Factually, vouching is also resourceful as it helps categorize expenses into personal expenses and business expenses. In the case where there’s a possible overlap, it should be segregated.
Therefore, it can be seen that all the characteristics of vouching are designed to help minimize the risk associated with detection and a material misstatement.
Example of Vouching
Even though several different types of vouching are involved, it can be seen that there is a need to carry out different vouching processes for all the various transactions involved in a business. Some of the examples are given below:
For transactions recorded as Cash Receipts
- Opening and Closing Balances: Opening balances for a given year are supposed to be the same as a closing balance for the previous year. This needs to be checked and verified.
- Cash received from debtors: When it comes to receivables, what needs to be checked from vouchers is the correct date of payment and discounts that have been authorized.
- Loan repayments: For loan repayments that the organization has received, there should be clear segregation between the interest payment received and the principal amount recovered. The payments need to be checked from the bank account of the business.
- Other income received: In the same manner, for all the other income received, vouching for needs to cover ground about make sure all receipts are present. This might require auditors to go through the agreement of all the other income received during the fiscal year.
Is vouching necessary for all audits?
Auditing is a process that encapsulates several different aspects and processes. Factually, it can be seen that vouching in itself tends to be a significant part of the overall audit process. Although it’s not necessary to carry out this process in a very structured manner, vouching is still critical on several grounds. This is because it helps auditors realize what needs to be undertaken to ensure that they can get the best assurance.
Hence, it can be seen that even though vouching is not entirely necessary. Yet, there is a need to ensure that audit planning tends to be increasingly important because of the same reason. Hence, it should be catered to streamline the auditing process and gather as much reasonable evidence as possible.