1. Importance of Vouching
Vouching is not the mere examination or comparison of the vouchers with the
entries in the books of account. It is much more than that. It is such an
examination of the entries in the books of account as will satisfy the auditor that
the entries are not only supported by the vouchers but also they took place as
stated, that they have been duly authorized by a competent official, that they
properly related to the business and that they have been recorded in the books
in conformity with accepted principles of accounting. Vouching is the essence
or ‘backbone’ of auditing and it is one of the most important tools in the hands of
the auditor. It is the foundation upon which the very superstructure of auditing
stands. An entry may appear to be innocent; but unless the auditor goes beyond
the books and trace the very source it will not be possible to ascertain the truth
and genuineness of the transaction.
As observed earlier, the auditor has to go beyond establishing its
arithmetical accuracy. He/she has to ensure that the entry is accurate, duly
authorized by an appropriate official, relates to the period under review and
properly relates to the business. For instance, a fictitious payment may have
been entered in the books in order to misappropriate money, or the payment
may be genuine but not on account of the business, or it may not relate to that
accounting year. Herein lies the importance of vouching with professional care
and skill. The observation of the learned judge in Armitage vs Brewer and Knott
that “it was clear that a good many documents were suspicious on their face
and called for an enquiry” brings out the importance of vouching with due And
reasonable care by an auditor. In this case, the auditors were found guilty of
negligence for their failure to display enough reasonable care and skill in vouching
wages sheets and ending up in their failure to detect fraud in manipulation of
the wages records and cash vouchers.
Routine Checking and Vouching
Routine checking consists of checking of casts, subcasts, carry forwards,
extensions, calculations, etc in subsidiary books, checking of postings into the
ledger, casting of ledger accounts, extraction of the balances, etc in the books
of original entry, the checking of postings to the ledgers, the checking of ledger accounts in
relation to their casts, balancing the carrying forward of balances
and the transfer of balances to the trial balance. Normally this work is assigned
to junior members of the audit staff. Routine checking is done with the principal
objective of verification of the arithmetical accuracy of the entries with a view to
ascertaining the accuracy of the postings to the ledgers, checking the ledger
accounts and ascertaining the correct balancing and to make sure that there
has been no alterations in the figures once the checking has been completed.
As against this, the objects of vouching are much wider in scope. Besides the
objects of routine checking mentioned above, vouching is done with the object
of going behind the books and satisfying that the transactions recorded in the
books of account are appropriately authorized and correctly entered into, thereby
finding out facts behind the figures. Simple routine checking cannot establish
the same accuracy which vouching can. The extent of vouching to be carried
out by an auditor is dependent on the systems of accounting and related internal
controls.

2. 2
Purpose of an Audit
The above definitions and observations throw light on the objectives and scope
of an audit. The primary object of an audit is to enable the auditor to express an
opinion on the financial statements that have been subject to such audit. This
opinion is then embodied in what is known as ‘audit report’, addressed to those
interested parties who commissioned the audit, or to whom the auditor is
responsible under the relevant statute. It is true that there are certain inherent
limitations present in any kind of examination where the person carrying out the
examination will have to use his judgment. Also, much of the evidence available
to auditors is persuasive rather than conclusive in nature. Hence there is an
unavoidable risk that even some material misstatements may remain
undiscovered, and absolute certainty in auditing is rarely attainable. However it
is the sacred duty of an auditor to extend his procedures even at the slightest
indication of the existence of fraud or error which may result in material
misstatement so that he can confirm or dispel his suspicions. And wherever it is
not possible to give an affirmative opinion whether or not the financial statements
give a true and fair view, the auditor has to express a qualified opinion or disclaimer of opinion,
as appropriate. Thus the opinion expressed by the auditor
helps to establish the extent of credibility of the financial statements. Of course,
such an opinion should not be construed as an assurance as to the future viability
of the organization or as to the efficiency or effectiveness with which the
management has conducted the affairs of that unit.
There is often a mistaken impression that the primary object of an audit is
to detect fraud and errors. This however, is not actually the case. It is true that
the examination of books and records that the auditor undertakes to form an
opinion often reveals material irregularities, including the presence of fraud and
errors; but this is incidental to the primary objective of an audit mentioned above.
Again, the regular conduct of an audit acts as a moral check on the persons
responsible for proper management of the business which, in turn, facilitates
prevention of fraud and errors. Thus, it may be emphasized that detection and
prevention of fraud and errors, though of vital importance, are only subsidiary to
the main objective of an audit.
If circumstances indicate the possible existence of fraud or error, it is the
duty of the auditor to consider its potential effect on the financial statements.
Where the auditor has reason to believe that the suspected fraud or error could
have a material effect on the financial statements, he should carry out such
modified or additional procedures as he determines to be appropriate.
In conclusion it may be pointed out that because of the inherent limitations
of an audit together with the inherent limitations of any system of internal control,
there is a possibility that even material misstatements of financial information
resulting from fraud and/or error may remain undetected by the auditor.
3

3. Basic Principles of Government Audit
The basic aim of government auditing is to achieve public accountability. The
idea of public accountability can be classified into six kinds of focus, viz., (i)
highlighting the public sector, (ii) highlighting public authority and power along
with national and local governments themselves, (iii) highlighting the function of
governmental services, (iv) highlighting expenditure of the public sector, (v) highlighting the
interest in, and concern for, and degree of trust in public
organizations, and (vi) highlighting the management of public funds and
resources.
The scope of accountability in contemporary government auditing is wide
and it includes not only financial accountability but also management
accountability and programme accountability. The focus of government auditing
has changed from financial auditing to performance auditing in order to respond
to the demands of taxpayers for performance-related information and as a result,
necessitating performance evaluation. Thus, expansion in the scope of
government auditing has taken place. Government auditing has certain areas
that are different from auditing of profit-oriented organizations. In government
auditing, the scope of financial auditing includes areas other than the audit of
accounts and it includes the evaluation of economy, efficiency and effectiveness
(sometimes referred to as the ‘3 Es’). Of course, the role of government auditing
is not to criticize the government but to monitor and instruct the government,
based on the evaluation of its programmes.
In government audit conducted by the office of the Comptroller and Auditor
General, audit of government expenditure is one of the major components. The
basic standards set for this component are to make sure that there is provision
of funds authorized by competent authority by laying down the limits within
which expenditure can be incurred. These standards consist of : (i) it is the duty
of the auditor to ensure that the expenditure incurred conforms to the relevant
provisions of the statute and is in accordance with the financial rules and
regulations; (ii) it is the duty of the auditor to see that each item of expenditure
is covered by a sanction accorded by the competent authority - such sanction
may be either general or special; (iii) it is the duty of the auditor to ensure that
there is a provision of funds out of which expenditure is incurred and the amount
of expenditure is not more than the appropriations made; (iv) it is the duty of the
auditor to ensure that various programmes, schemes and projects where large
expenditure has been incurred are being done economically and are yielding
results expected of them (i.e., performance audit); (v) it is the duty of the auditor
to ensure that the expenditure is incurred with due regard to broad and general
principles of financial propriety (i.e., propriety audit)
4
Difference between Investigation and Auditing
It is true that the detailed procedures adopted to carry out an investigation
resemble, in many ways, those of an audit. Nevertheless there are certain
essential differences between investigation and audit. These differences must
to be understood as both can be carried out by the same auditors at different

4. periods. These may be summarized as follows:
1. Object: The object of an audit remains the same in all cases. More
specifically, the object of an audit is to enable the auditor to report whether
the balance sheet shows a true and fair view of the state of affairs of the
business at the end of the accounting period and whether the profit and
loss account shows a true and fair view of the profit or loss of the business
for the accounting period under review. In the case of investigation, the
object of each investigation may be different. The specific requirement of
the party concerned is the object of a particular investigation. For instance,
a proposed purchaser of a business may appoint an accountant to find
out whether the purchase is likely to be beneficial to him. In another case,
the proprietors of a business may suspect fraud in which case, the object
of investigation will be the detection of fraud. In a third case, an incoming
partner may require the accountant to assess the feasibility of joining the
partnership.
2. Period: The period covered by an audit is normally one accounting year
while in the case of an investigation, the period covered will vary depending
on the nature and complexity of the issue involved and will usually extend
beyond one accounting year.
3. Who conducts it: Audit of a joint stock company is to be conducted only
by qualified accountants as specified in the relevant statutes. An
investigator, in most cases, need not necessarily be a qualified accountant
although qualified accountants are best suited to carry out an investigation.
4. Mandatory: Annual audit is a compulsory requirement in the case of joint
stock companies and other corporate bodies. Investigation is not a
compulsory annual requirement. It is carried out only when a specific
requirement arises.
5. Nature and scope: An audit is an examination of books, accounts and
vouchers of a business to report whether the annual accounts show a
true and fair view according to the books, as shown by the accounts and
as per the explanations given to the auditor. The auditor has to make
sure that proper accounting policies are adopted and the accounts strictly
adhere to the disclosure requirements. On the other hand, an investigator
is not usually bound by accounting policies, disclosure requirements, etc.
In most cases, the investigator will find it necessary to go beyond the
facts contained in the books of accounts and make an assessment of
many outside factors to arrive at conclusions. For example, in the case of
an investigation on behalf of an intending purchaser of a business, the
investigator has to take into consideration, among other factors, the impact
of intending legislations and impending local developments on the future
earning capacity of the business. Also, in most cases the investigator
makes certain adjustments to the net profit as shown by the audited profit
and loss account.
6. Magnitude of work: An audit report is brief and follows the same pattern
except for the qualifications which may be necessary. An investigator’s
report, on the other hand, is usually lengthy. It contains the instructions
given by the client, the method of approach, the detailed work conducted
by the investigator, the adjustments he finds necessary and any
recommendations made by him.

5. 5
Assessment of Depreciation
The important factors in computing the rate of depreciation are as follows:
The cost of the asset.
Its effective life and the degree of use to which it will be put.
The residual value which it will fetch at the end of its effective life.
Foreseeable risk of obsolescence.
Of these, the cost of the asset can be ascertained exactly. In this connection
it is sometimes pointed out that depreciation of an asset should be based on
the replacement value of the asset and not on the original cost. The reason
advanced in support of this view is that as a result of the changes which have
taken place in the purchasing power of money, the original cost of a fixed asset
is far below its current replacement price and if depreciation is provided on the
basis of the original cost the amounts accumulated out of profits for replacement
of the asset will be quite inadequate. Although this argument contains an element of truth, it
should be remembered that the main object of providing for depreciation
is not to provide a fund for the replacement of the asset (this may be its incidental
and useful result) but for accounting as an expense the cost of using it up.
Depreciation is first and foremost the recovery, spread over the life of the asset,
of the prepaid cost incurred by its acquisition. In the opinion of leading
professional bodies, provision for depreciation should be on the basis of historical
cost; but where it is anticipated that the cost of replacing an asset will be generally
in excess of its original cost an additional amount should be set aside to provide
the additional funds that will eventually be required for replacement. Such an
additional amount should not be treated as a provision which must be made
before profits for the year can be ascertained; but as a transfer to reserves
which is an appropriation of profits rather than a charge against them. Thus the
basic depreciation would continue to be deducted from the book value of the
assets in the balance sheet and the supplementary depreciation brought to a
special replacement reserve account.
In many cases the second factor, viz., the effective life of the asset and
the degree of use to which it will be put, is not susceptible of precise calculation.
For example, the effective life of the asset is curtailed to a great extent on the
necessity of shift working. On the other hand, its commercially useful life is
prolonged as a result of exceptional maintenance expenditure. Assessment of
such factors to arrive at an appropriate rate of depreciation will greatly be
facilitated by the maintenance of a fixed assets register, the details of which are
mentioned elsewhere. Of course, there are certain fixed assets like leases where
the effective life of the asset can be ascertained exactly and hence the loss
occasioned by effluxion of time can be calculated precisely.
The residual value which the asset will fetch at the end of its effective life
is also a matter of estimation. It is recommended that where the residual value
is likely to be small in relation to cost it is convenient to regard it as ‘nil’ and to
deal with any proceeds on eventual disposal in the same way as depreciation
over provided on disposal, viz., by showing this in the results of the year and
disclosing it separately if material.

6. 6
Duties of Company Auditors
Section 227 of the Indian Companies Act, as amended in 1960, 1965, 1999 and
2000, deals with the duties of company auditors.
In terms of Section 227 (2) of the Act, company auditors are required to
make a report on the accounts of a company audited by them and on every
balance sheet and profit and loss account and on every document declared by
the Act to be part of or annexed to the balance sheet and profit and loss account,
which are laid before the company in general meeting during their tenure of
office. Under the Companies Act, it is the duty of the auditor to state in his/her
report whether in the opinion of the auditor and to the best of his/her information
and according to the explanations given to him/her, the said accounts give the
information required by the Act in the manner so required and give a true and
fair view:
(i) in the case of the balance sheet of the state of the company’s affairs
as at the end of the financial year; and
(ii) in the case of the profit and loss account, of the profit or loss for the
financial year.
It is further provided that the duty of the company auditor to state in the
report:
(a) whether he/she has obtained all the information and explanations to
the best of his/her knowledge and belief which were necessary for
the purpose of his/her audit;
(b) whether in his/her opinion, proper books of account as required by
law have been kept by the company so far as appears from his/her
examination of those books, and proper returns adequate for the
purpose of his/her audit have been received from the branches not
visited by him/her;
(c) whether the report on the account of any branch office audit under
Section 228 by any person other than the company’s auditor has
been forwarded to him/her as required by that section and how he/
she has dealt with the same in preparing the auditor’s report;
(d) whether the company’s balance sheet and profit and loss account
dealt with by the report are in agreement with the books of account
and returns;
(e) whether in his/her opinion the profit and loss account and balance
sheet comply with the accounting standards referred to in sub section
3C of Section 211;1
(f) in thick type or in italics the observations or comments of the auditor
which have any adverse effect on the functioning of the company;2
(g) whether any director is disqualified from being appointed as director
as director under clause (g) of sub section (1) of Section 274.3
Where any of the matters referred to in (i) and (ii) or in (a), (b), (c), (d) and
(e) above is answered in the negative or with a qualification, it shall be the duty
of the auditor to state in his/her report the reason for the answer.