Evidence of Transactions : Entries in the account books are usually made on the basis of some kind of documentary evidence. It generally exists in a variety of forms e.g., payee’s receipts, suppliers’ invoices, statements of account of parties, minutes of Board of Directors or of the shareholders, contracts, documents of title, entries in subsidiary ledger,etc. The process of verification of entries in the books of account with the documentary evidence is referred to as vouching.
Documentary evidence is of two types : (1) Internal; and (2) External. Documents which are part of the records of the concern, and have been prepared in the normal processes of accounting constitutes internal evidence, e.g., counterfoils of receipts, carbon copies of cash memos or invoices, wages books, etc. On the other hand, a document issued by a person with whom some business transaction had been entered into or who paid or was advanced an amount constitutes external evidence, e.g., a payee’s receipt, an invoice for purchases, a court decree, a lease agreement, a bank statement, etc. because these documents are issued by persons not belonging to the concern. External evidence, in respect of certain transactions, sometimes may have to be obtained directly by the auditors, e.g., certificate as regards bank balances, or confirmation balances of debtors and creditors, etc.
The auditor, obviously, should endeavour in the course of his examination to get as much external evidence as possible since such evidence ordinarily provides confirmation. When it is not possible to obtain external evidence and he is obliged to accept internal evidence, he should first satisfy himself on a careful consideration of the position whether the evidence which has been produced to him, can be reasonably assumed to have come into existence in the normal course of working of the business and that there exists a system of internal check which would act as a safeguard against its being altered subsequently.
External evidence should be preferred, since the likelihood of its being duplicated or fabricated is much less. This is because it requires collusion with an outsider which, normally is not practicable. However, every evidence ‘whether internal or external’ should be subjected to appropriate scrutiny and corroboration should be obtained, if possible. The auditor will always keep in mind the circumstances of the case and see whether the evidence is prima facie authentic and correct.