In the context of auditing, the primary objective of vouching is :

Correct — C, (c) To verify the authenticity of transactions. Vouching is the examination of the documentary evidence supporting an entry in the books, and its primary object is to satisfy the auditor that the transaction the entry records actually happened, in the amount and on the date recorded, on the entity's own account and with proper authority.

The word itself points to the method. A VOUCHER is any documentary evidence supporting an entry — an invoice, a receipt, a counterfoil, a contract, a minute, a bank statement, a goods received note. To vouch an entry is to trace it back to its voucher and ask five questions of the pair:

is the transaction GENUINE, or was it fabricated? is it the entity's OWN transaction, and not a personal expense of a director put through the business? is it properly AUTHORISED by the person competent to sanction it? is it correctly RECORDED as to amount, date, account and period? is it supported by evidence that has not been altered, duplicated or previously used?

That is why vouching is often described as the backbone of auditing. Everything downstream — the trial balance, the final accounts, the auditor's opinion — rests on the transactions in the books being real, and vouching is the procedure directed at exactly that.

It is worth fixing the boundary with the procedure the paper tests in the very next item. VOUCHING is concerned with transactions and therefore with the profit and loss account and the entries that produced it; VERIFICATION is concerned with the assets and liabilities standing in the balance sheet at the year end — their existence, ownership, valuation, possession and freedom from charge. Vouching looks backwards at what happened during the year; verification looks at what is there at the end of it. An auditor who has vouched a purchase invoice has satisfied himself that a machine was bought; only verification tells him that the machine still exists, belongs to the entity and is carried at a proper value.

Why the others are wrong

• (a)To detect errors in financial statements — Detecting errors is a by-product of vouching rather than its primary objective, and the distinction is one the standards insist on. SA 200 states that the auditor's objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to express an opinion — not to detect every error. Errors and frauds are found in the course of vouching, and vouching is one of the more productive procedures for finding them, but an auditor who set out to detect errors as his object would be conducting an investigation rather than an audit. The primary object stated in this option also puts the emphasis in the wrong place: the auditor tests transactions to establish that they are authentic, and what he finds when they are not is a consequence.
• (b)To evaluate internal controls — Evaluating internal controls is a different procedure with a different name and a different standard behind it. Under SA 315 the auditor obtains an understanding of the entity and its environment, including its internal control, in order to identify and assess the risks of material misstatement, and under SA 330 he designs responses to those risks — which may include tests of controls where he intends to rely on them. That work is directed at the SYSTEM; vouching is directed at the TRANSACTION. The two are related in a specific way: the auditor's assessment of internal control determines how extensive his vouching needs to be, since strong controls justify a smaller sample. But evaluating the control is the reason for choosing the extent of the vouching, not the object of the vouching itself.
• (d)To assess management performance — Assessing management performance is not an object of a statutory audit at all. The auditor reports on whether the financial statements give a true and fair view and comply with the applicable framework; he does not report on whether the management has run the business well, whether its decisions were commercially sound, or whether its results compare favourably with those of others. That kind of evaluation belongs to a MANAGEMENT AUDIT or a performance or efficiency audit, which is a different engagement undertaken for a different purpose and usually at the instance of the management or the owners rather than under a statute. Confusing the two would also enlarge the auditor's duty far beyond the opinion he is asked to give and beyond the evidence vouching could ever supply.

Vouching is the examination of documentary evidence in support of entries in the books of account, and its purposes are to establish that a transaction is genuine, relates to the entity, is properly authorised, is correctly recorded in amount, date and account, and falls in the right accounting period. In practice the auditor works from the entry to the voucher, checking the voucher's date, its addressee, its amount in figures and words, the evidence of authorisation, the account to which it has been posted, and the cancellation of the voucher so that it cannot be used a second time. Vouching is directed at income and expenditure, so it is the principal procedure behind the profit and loss account: cash and credit purchases, cash and credit sales, wages, rent, purchase of assets, receipts from debtors, and so on. VERIFICATION, by contrast, is directed at the assets and liabilities in the balance sheet, and its objects are existence, ownership, valuation, possession and freedom from encumbrance; VALUATION is a component of verification rather than a separate procedure. The two together let the auditor form the opinion required by section 143 of the Companies Act, 2013 and by SA 700. Two related distinctions complete the vocabulary of this area. Routine checking is the arithmetical checking of casts, postings and balances, a mechanical exercise that vouching goes well beyond. And test checking is the selection of a representative sample rather than a hundred per cent examination, justified where internal controls are strong and now governed by SA 530 on audit sampling.

Key facts

• Vouching is the examination of documentary evidence in support of entries in the books; its primary object is to establish the authenticity of the transactions recorded.
• A voucher is any documentary evidence supporting an entry — invoice, receipt, counterfoil, contract, minute, bank statement, goods received note.
• Vouching asks whether the transaction is genuine, relates to the entity, is properly authorised, is correctly recorded, and falls in the right accounting period.
• Vouchers are cancelled after examination so that they cannot be produced twice.
• Vouching is described as the backbone of auditing because the reliability of the final accounts depends on the transactions being real.
• Vouching relates principally to transactions and the profit and loss account; verification relates to assets and liabilities in the balance sheet.
• Verification covers existence, ownership, valuation, possession and freedom from encumbrance; valuation is a part of verification.
• SA 200 — the auditor's objective is reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error.
• Routine checking is the arithmetical checking of casts, postings and balances; test checking is examination of a representative sample, governed by SA 530.

Common traps

• Choosing detection of errors. It is a by-product of vouching, not its primary object.
• Confusing vouching with verification. Transactions against balances, profit and loss account against balance sheet.
• Confusing vouching with the evaluation of internal control, which determines the extent of vouching rather than being its object.
• Reading a statutory audit as an assessment of managerial performance. That is a management audit.

• practice — not a real PYQ

  Verification of assets is primarily concerned with :

  • (a)The arithmetical accuracy of the books
  • (b)The existence, ownership, valuation and possession of assets, and their freedom from encumbrance
  • (c)The authenticity of the transactions recorded during the year
  • (d)The evaluation of the entity's internal control system

  Answer(b) The existence, ownership, valuation and possession of assets, and their freedom from encumbrance

• practice — not a real PYQ

  After a voucher has been examined by the auditor, it is cancelled or stamped in order to :

  • (a)Record the amount for the working papers
  • (b)Prevent it being produced a second time in support of another entry
  • (c)Comply with the requirements of the income-tax authorities
  • (d)Enable the entity to destroy it at the year end

  Answer(b) Prevent it being produced a second time in support of another entry