Q.As an auditor, describe the procedure you would follow to vouch Loans taken by a business from outsiders.

Vouching a loan means confirming it is genuine, properly sanctioned, correctly terms-matched, and correctly disclosed.

Vouching procedure for a Loan taken from outsiders:

1. Examine the loan agreement/bond. This is the primary documentary evidence of the loan's existence and its terms — principal amount, rate of interest, repayment schedule, and any security/collateral pledged.
2. Examine the sanctioning minutes. Where the entity's own governing document requires it (e.g. a partnership deed requiring partners' consent for borrowing beyond a limit, or a company's Articles requiring Board approval), the auditor should verify the minute book records proper authorisation for the loan.
3. Examine the bank statement/pass book. The auditor should confirm the loan amount was ACTUALLY received into the business's bank account (or genuinely received in cash, with a proper receipt), on a date consistent with the loan agreement — this guards against a loan being recorded in the books without the money genuinely having been received.
4. Confirm interest and repayment terms. The rate of interest, and the interest amount actually accrued/paid and recorded in the books, should be recalculated and checked against the agreement's stated terms; the repayment schedule recorded in the books should also match the agreement. …

Students sometimes vouch a loan only by checking that 'the amount appears in the Cash Book' — this misses the more substantive checks (genuine outside lender, proper authorisation, correct Balance Sheet classification) …