What Is Vouching?
Definition: Vouching is a technique that auditors use to establish the accuracy of transactions that an accountant recorded in a company’s books of account. Since the goal of auditing to verify that the information in the books of account is true, then vouching is simply the essence of the whole task.
The vouching process involves selecting a sample of transactions and then going through all the documentary evidence (vouchers) to ascertain the truthfulness of business-related transactions.
Vouching Process Explained
Every company keeps a record of its transactions for the benefit of its stakeholders. That is why serious businesses hire highly qualified accountants or even professional firms to undertake accounting tasks. Particularly, it is in everyone’s best interest that the transaction records be accurate and properly authorized. Shareholders, for example, will want accurate financial information to have an idea of the probability of higher returns from the company in future. Auditors, on the other hand, will want accurate information to ascertain the company’s adherence to all regulations.
Technically, vouching entails inspecting the accounting records of a company. Auditors undertake a careful examination of the transactions recorded in the books of accounts. However, the auditors do not just take the accountants’ word for it. They need to examine the documentary evidence for each transaction that they inspect. Examples of such documentary evidence include receipts, invoices, statements, credit and debit notes, requisition form, and more. Simply, all the documentary evidence supporting a transaction are collectively referred to as vouchers, hence vouching.
Vouching Example
Company Theta has just closed its books and it is readying for the submission of the financial statements for the reporting period just ended. After preparation of the financial statements, Company Theta invites a top auditing to inspect them. To complete the vouching process, the auditing firm puts the task on Chris Comb, a senior partner at the firm.
Before starting vouching, Mr. Comb sets out three objectives that he ought to fulfill by the end of the exercise. First, he wants to verify the validity of the transactions in the financial statements. Secondly, he wants ascertain that all the transactions recorded are material to the operation of Company Theta. Lastly, Mr. Comb intends to ensure that all transactions recorded were authorized in the right manner.
On inspecting the cashbook, Mr. Comb confirms that interest income, mortgage payments, cash sales, accounts receivable, and other entries are correctly entered. Next, Mr. Comb peruses through capital expenses, receipts, and invoices to ascertain the veracity of the entries in the cashbook. He concludes that the entries are valid and that the vouchers are relevant to all the transactions inspected. All that remains is for the auditor to write his report and to conclude that all the transactions recorded in Company Theta’s accounting books are true and that there is proper justification for it. Technically, such a conclusion is referred to as vouching for the financial statements.
If Mr. Comb saw an instance of wrong reporting and failed to note it, then he is liable to fraud. It is more serious if an auditor gives a blind eye to accounting mistakes because his responsibility is to highlight it. If the mistake was unintentional, the company can sought it out. Otherwise, there are grounds for criminal proceedings against the accountant who prepared the financial statements.
Objectives of Vouching
Most importantly, vouching seeks to highlight errors in financial statements. Such errors might be transaction records that do not have supporting vouchers. If the authorizing authority cannot vouch for documentary evidence, then the voucher is invalid. From there, the company can determine whether the error was legitimate or it was an instance of fraud.
Also, vouching helps to establish the truth of the financial statements. Oftentimes, companies misrepresent numbers to hide huge deficits. It is the auditor’s responsibility to ensure that this is not the case. In addition, the vouching process intends to ensure that financial statements include only transactions related to business operations.