Vouching is the act of inspecting supporting documents to ensure that the accounting record is correct. Auditors will ensure that the transactions are recorded in accordance with all financial assertions. In real practice, the auditor will ask for the hard copy of supporting documents such as Payment Voucher, Receipt Voucher, Journal Voucher, Loan application, Rental Contract, Shareholder agreement in order to verify and ensure that there is no any error in accounting record.
Auditor is reviewing the financial statement of Company ABC. The team leader assigns one senior auditor to test operating expenses. He has reconciled the balance in the Income statement to the general ledgers. After some discussion with the team leader, he selects the high-risk transactions and vouches the supporting documents. During vouching, he looks for any pieces of evidence to ensure that all financial assertions are correct if there are any unusual, he will perform further investigation.
Objective of Vouching
Ensure Cut Off
By reviewing the supporting documents, the auditors will be able to ensure that the business transactions are recorded within the correct accounting period. This issue usually happens during the cut off period. For example, we review the expense during January to ensure if any transactions related to the prior year but client miss record. On the other hand, we also review transaction during December if accountant record transactions which are going to occur in January next year.
The auditor wants to ensure that all transactions authorize base on the level of authorization. Without authorization, it will be an indication of the risk of misstatement where the transaction record by the junior accountant without any review. So we should extend our testing or increase the sample size.
Auditor want to ensure that the recorded amount is the same as supporting documents. This is the first item which auditor want to double check. The accountant may have some error during recording which lead to misstatement.
The accountants may record in the wrong classification due to the judgment, so by reviewing the documents, we will be able to decide between the actual transaction and recording. For example, the client may have a mistake in recording repair & maintenance expenses and the fixed asset. Auditor can review the nature of business transaction if it should be capitalized as fixed assets or repair & maintenance expense.
Relevant to business
Not all records are relevant to business, some accountants record based on their management or business owner which include their personal expense. Auditors will make the adjustment for any transactions that are not relevant to the business if they can quantify them.
Any impact on other accounts
We may select and perform the test on some accounts in the financial statement, however, it may lead us to the error in other accounts as the recording follows double entries. If one side is not correct, it may be incorrect on other sides too. For example, during testing of repair and maintenance expenses, we found that clients have over record some expenses even they meet the definition of fixed assets. So we know that fixed assets are under record as well as the depreciation expense.
To Find Unrecorded Transaction
It sounds strange when auditor inspects supporting documents to find unrecorded transactions but the accountants may make this kind of mistake. We can detect the unrecorded transaction by go through the sequential number of the payment voucher or receipt voucher. If there are any missing numbers, we can go through to supporting vouchers if they are voided or not. If there are valid documents for the missing number, we should check with an accountant if they are missed records.
Another example, when we check some expenses such as Performance bonus in the early new year, there should be an accrued expense in the prior year. If not, it means that clients under record their expenses.
Important of Vouching
The main objective of auditing is to ensure that financial statements are free from material misstatement. So auditors must review all significant accounts, and these accounts consist of multiple transactions. Therefore, we need to verify those transactions against the supporting documents in order to conclude that the total balance is correct.
Some account such as rental and payroll expense is less efficient to review the supporting document as they are not supposed to fluctuate from month to month. However, we may require to vouch rental contract, employment contract, and staff movement in order to ensure that our base assumptions are backed by appropriate audit evidence.
Efficient vouching can decrease time spend and increase the chance of detecting risk within financial statements. Not all accounts require detail vouching, it depends on our judgment, business risk, and nature of account during our analytic procedure. For example, if client has unusual revenue during year-end, it may have risk of fake sales and reverse back in next year.
However, due to the global trend of reducing paperwork, most of the supporting documents will be stored in electronic form so that hard copy inspection will become history in a few decades. The auditor will rely on other verification methods such as reconciliation and some tests of control in order to reduce the risk of material misstatement.
Vouching Vs Tracing
Tracing is similar to vouching but it follows the opposite way around. We trace the transaction by picking the supporting document and compare with the recording (journal entries) in financial statements. It helps to ensure all documents are recorded into financial statements. As auditors, we want to ensure that clients do not understate their liabilities by not recording some transactions.
Tracing is one of the techniques used by the auditor during the financial audit. It is the way that auditor randomly selects the original accounting documents from the shelf or folder and checks with the accounting record. the auditor will ask the accountant to show the journal entry of that transaction. He will compare between entries and documents, to ensure that the entries really belong to supporting documents.
The objective of tracing is to ensure that all transactions are recorded in the accounting system. It will ensure that the financial statement is completed. There are no other transactions left behind due to any other reasons. There is a risk that company excludes some transactions due to error or fraud.