How to verify cash transactions?

To  verify  cash  transactions,  more  than  anything  else,  it  is  necessary  that  the  system  of accounting and internal control operating in the organisation should be reviewed; also the recording  of  each  transaction  should  be  checked.  It  should  also  be  seen  that  each relevant  voucher  has  documentary  evidence  which  is  valid  and  that  the  statement  is authorised by a competent official. 

(i)  Internal Control System : It is a combination of several procedures adopted by an entity designed:
(a)  to give protection against losses through fraud, waste, mistakes, etc.,
(b)  to ensure that the transactions entered into shall be correctly recorded; and
(c)  to enable the concern to take policy decision as regards planning and operation of the business at the appropriate time.

(ii) Correctness  of  book-keeping  records  :  The  audit  of  cash  transactions  entails  detailed checking  of  the  record  of  transactions  for  verifying  that  entries  have  been  made  in  the books of account according to the system of accounting which is being regularly followed and the books of account balance 

(iii)  Observance  of  accounting  principles  :  It  is  of  utmost  importance  that  the  transactions should  be  recorded  in  the  books  of  accounts  having  regard  to  the  principles  of accounting.

(iv)  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.

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, however, 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. 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.

(v)  Validity of Transactions : It is also the function of audit to establish that payments have been made validly to persons who are shown to be recipients. For example, it must be verified  that  salaries  to  partners  were  paid  according  to  a  provision  contained  in  the partnership  deed  and  the  directors  fees  were  paid  according  to  the  provisions  in  that regard in the Articles of Association or the resolution passed by members of the company at a general meeting. 

(vi)  Disclosure in the Final Accounts : The object of audit ultimately is that the statements of account prepared from books of account which have been checked should present a true and fair picture of the financial position of the entity. This particular objective should be kept in view while checking the grouping of accounts. The auditor must see that not only items of a like nature be grouped together but also the description of each account truly reflects  the  nature  of  the  amounts  accumulated  therein.  Unless  this  is  verified,  the classification  of  income  and  expenditure  and  that  of  assets  and  liabilities  would  be misleading.