Vouching – Part 2: Sales, Purchases and Other Items

Every aspiring auditor must develop a sharp, attentive approach to vouching which is the backbone of reliable Auditing. When you learn to vouch sales, purchases, and their related items, you gain both technical skills and also professional skepticism. These are the areas where most errors and frauds first emerge. Let’s walk through the essential concepts.

Introduction

Vouching is the process of checking the authenticity of transactions recorded in the books of accounts by examining supporting evidence. In audit terminology, it’s the act of tracing entries from the accounting records to the original documents, ensuring both accuracy and legitimacy. Within this, the vouching of credit sales, purchases, and related items holds particular importance because these transactions directly affect profitability, cash flow, and the detection of potential fraud.

Vouching of Credit Sales

a. Sales Book and Supporting Documents

Start with the Sales Book, which records all credit sales. The auditor must verify every entry by checking the following documents:

• Sales Invoices: Confirm the details (date, amount, customer name, description) match the entry.
• Sales Orders: Ensure the sale was properly authorized and the goods were actually ordered by the customer.
• Dispatch Documents (e.g., delivery challans, transport receipts): These prove that goods were dispatched to the customer.
• Gate Passes/Outward Register: Additional evidence that goods physically left the premises.

When you vouch these documents, always check for:

• Genuine customer names—not fictitious or related parties unless properly disclosed.
• Consistency of dates—the sale, dispatch, and invoice dates should logically follow.
• Proper authorization—especially in larger organizations, no sale should be recorded without approval.

b. Vouching Sales Returns and Allowances

Sales returns and allowances can mask fraud or conceal errors. The auditor should:

• Examine the Sales Return Book and corroborate each entry with credit notes, return inward notes, and correspondence with the customer.
• Verify that goods returned are physically received and recorded in the inventory.
• Check that sales allowances (such as discounts or rebates) are authorized and adequately documented.

c. Provisions Related to Sales

Provisions, such as for doubtful debts, need careful attention. The auditor should:

• Review the basis for provision "Are the criteria for doubtful debts consistent and reasonable?"
• Check management’s calculation against supporting documents (e.g., aging schedules, correspondence with debtors).
• Ensure that provisions are neither understated (to inflate profits) nor overstated (to suppress taxable income).

d. Importance in Preventing Frauds in Sales

Fictitious sales, recording sales that never occurred, are a classic area of fraud. Effective vouching exposes such attempts by demanding evidence at every point. For example, if an auditor finds an invoice but no corresponding dispatch document, alarm bells should ring. Similarly, inflated sales returns can be used to manipulate reported profits, so auditors must stay vigilant.

Vouching of Purchases

a. Purchase Book and Supporting Documents

The purchase book records all credit purchases. Auditor’s duties include:

• Purchase Invoices: Confirm all details with the purchase book entries.
• Purchase Orders: Verify that the purchase was authorized and necessary for business operations.
• Goods Inward Notes: Evidence that goods were actually received.
• Inspection Reports: In some organizations, goods are inspected upon receipt. These reports further substantiate the transaction.
• Correspondence: Any communications related to purchase disputes, returns, or terms modifications.

Carefully check:

• Supplier legitimacy—vendors should be genuine, not shell companies.
• Price and quantity—ensure the invoice matches the order and goods received.
• Entry timing—purchases must be recorded in the correct accounting period.

b. Vouching Purchase Returns and Allowances

Returns outwards (goods returned to suppliers) and purchase allowances require:

• Cross-checking the purchase return book with debit notes, return outward notes, and supplier acknowledgments.
• Verifying that goods returned are deducted from inventory and that payments or credits are adjusted accordingly.
• Ensuring all allowances (e.g., price reductions due to defects) are justified and approved.

c. Provisions Related to Purchases

Provisions might include accruals for goods received but not invoiced. The auditor should:

• Review cut-off procedures—ensuring purchases are recorded in the right period.
• Check supporting documentation for accrued liabilities.
• Scrutinize management judgments for reasonableness and consistency.

d. Importance in Preventing Frauds in Purchases

Fake purchases, inflated invoices, or recording goods not received can all distort financial statements. Auditors can spot such frauds by insisting on a clear trail from the purchase book to physical evidence of goods received. Frequent mismatches between invoices and goods inward notes often signal either error or fraud.

Vouching of Other Items

a. Other Items Commonly Vouched

Beyond sales and purchases, vouching applies to:

• Expenses: Salaries, rent, utilities—check against contracts, receipts, and payroll records.
• Income: Interest, dividends—verify with bank statements and related correspondence.
• Provisions and Accruals: Scrutinize calculations and supporting schedules.

Each item demands a tailored approach, but the core principle remains: trace every transaction to a reliable, original document.

Differences Between Vouching of Sales and Purchases

Example

Suppose an auditor is vouching a sales transaction recorded on 12th March for Rs. 50,000:

1. Locate the entry in the sales book for 12th March.
2. Check the corresponding sales invoice and ensure it matches the sales book entry.
3. Verify the customer order—does it match the invoice?
4. Review the dispatch note or delivery challan to confirm the goods were sent.
5. If possible, check the gate pass or transport receipt for evidence of dispatch.
6. Trace the payment, if already received, to the bank statement.
7. If it’s a credit sale, examine the customer’s account for timely recovery.