Summary of Audit of Items of Financial Statements
Summary of Audit of Items of Financial Statements
Summary of Audit of Items of Financial Statements
Tally the period-end balance- authorised, issued and A company shall not issue shares at a discount, except
paid up, to the previous year audited FS. in the case of an issue of sweat equity shares
Obtain a written confirmation/ representation from the Any share issued by a company at a discounted price
Company Secretary - If there is no change shall be void
Verify whether the paid up capital as at the period-end A company may issue shares at a discount to its
is within the limits of authorised capital creditors when its debt is converted into shares in
Obtain the certified copies of resolutions passed at the pursuance of any statutory resolution plan or debt
meetings of board of directors, shareholders restructuring scheme
Check the compliance with the companies act in cases Where any company fails to comply with the provisions
of fresh issue of this section
Check if Shares are issued for cash or for Consideration company and every officer who is in default shall be
other than cash. liable to a penalty which may extend to an amount
Compliance with SEBI regulations and Guidelines. equal to the amount raised through the issue of
Also, obtain and verify copies of forms filed with shares at a discount or five lakh rupees, whichever
Ministry of Corporate Affairs is less and
In case of increase in share capital, verify whether the Company shall also be liable to refund all monies
Company has accurately calculated the required fee received with interest at the rate of twelve per
and stamp duty payable to MCA. cent. per annum
reduction
HA
Examine the order of the Tribunal confirming the consideration, if any, and the
class or classes of directors or employees to
A
Check the Registrar’s Certificate as regards to whom such equity shares are to be issued;
reduction of capital M where the equity shares of the company are listed
the capital CA
Vouch the accounting entries recorded to reduce on a recognised stock exchange, the sweat equity
shares are issued in accordance with the regulations
Check whether the requirements of Schedule III, made by the Securities and Exchange Board
Part I, have been complied with in relation to
presentation Application of securities premium
Confirm whether the revaluation of assets has been
Issue of unissued shares of the company to the
properly disclosed in the Balance Sheet
members of the company as fully paid bonus shares;
Confirm whether the revaluation of assets has been
In writing off the preliminary expenses of the
properly disclosed in the Balance Sheet
Company;
Confirm that the words “and reduced”, if required
In writing off the expenses of, or the commission paid
by the order of the Tribunal
or discount allowed on, any issue of shares or
Verify that the Memorandum of Association of the
debentures of the company;
company has been suitably altered.
In providing for the premium payable on the
redemption of any redeemable preference shares or
of any debentures of the company; or
Purchase of its own shares or other securities under
Section 68. (Buyback)
Trade receivables
Existence Completeness
Proper controls in place to ensure that invoices cannot Perform Cut off procedures
be recorded more than once Test invoices listed in receivable report.
Trace the balance as per aging report to the general Match invoices to shipping/ dispatch log.
ledger. Review the receiving log to see if the Company has
Whether realization is recorded invoice-wise or not recorded an inordinately large amount of customer
If any large balance is due for a long time, auditor returns after the audit period
should ask for reasons and justification for the same.
K
Review the process of giving discounts/ incentives
I
A
Follow external confirmation procedure as per SA 505 Review credit memos, on a sample basis, issued during
Related Party receivables - review collectability and
authorization SH
the audit period
Surprise checking of cash is necessary Obtain a list of all provisions and compare them
The cash should be checked not only on the last day with balances in the ledger
of the year, but also checked again sometime after Inspect the underlying agreements
the close of the year Obtain the underlying working and the basis for
If there are more than one cash balances, all of each of the provisions
them should be checked simultaneously Wherever required, obtain expert’s report,
Cashier to be present while cash is being counted calculation and underlying working for the provision
and he should be made to sign the statement amount
The auditor should test entries from the rough Cash While using the work of the expert the auditor shall:
Book with those in the Cash Book Evaluate the competence, capabilities and
Auditor should also perform a cash sensitivity objectivity of that expert
analysis of receipts and payments Obtain an understanding of the work of that
The auditor needs to obtain bank reconciliation expert
statements (BRS) for all bank accounts Evaluate the appropriateness of his work as
The auditor should ensure that BRS is signed by the audit evidence for the relevant assertion
authorized personnel The auditor shall obtain written representation
Auditor should obtain direct confirmation regarding from the management that it has made all the
all bank accounts provisions
The Company should be asked to investigate and
reconcile the discrepancies
In remote situations, where no reply is received, the
auditor should perform additional testing
The auditor should ensure that all bank accounts
holding foreign currency have been restated at the
closing exchange rates
Property, Plant and equipment
Valuation
Existence
Verify that the entity has charged depreciation on all items
Review entity’s plan for performing physical
of PPE
verification of PPE
Depreciation method used reflects the pattern in which the
Evidence of appropriate supervision of those
asset’s future economic benefits
performing physical verification of PPE should
whether the management has done an impairment
be examined.
assessment as per AS 2
Obtain PPE physical verification report backed
by the working sheets Rights and obligations
Assess if all items of PPE are properly tagged verify that all PPE purchase invoices are in the name of the
and carry identification marks entity
Verify the discrepancies noted, based on For all additions to land and building in particular, the
physical verification undertaken and the auditor should check the conveyance deed/ sale deed
manner in which such discrepancies have been verify the original title deeds for all immoveable properties
dealt also verify the register of charges
Completeness
Verify the movement in the PPE schedule
Check the arithmetical accuracy of the movement in PPE schedule.
For all material additions, verify if such expenditure meets the criteria of PPE as per AS 10
Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with AS 10
Test the purchase invoice, installation certificate or report or other similar documentation
Verify whether proper internal processes and procedures like inviting competitive quotations/ floating tenders
In relation to deletions to PPE,
understand from the management the reason and rationale for deletion
IK
manner of disposal
HA
management approval and discard note
S
process followed for sale of discarded
O D
O
Intangible assets
A M
Existence
H
Aasset
for establishing the existence of such assets, the
Completeness
Verify the movement in the intangible assets
M
auditor should verify whether such intangible schedule i.e. Opening balances + Additions –
is
in active use in the production C
A
or supply of goods
Deletions = Closing balances.
Check the arithmetical accuracy
or services, For all material additions, verify such
for rental to others or expenditure meets the criterion for recognition
for administrative purposes. as per AS 26.
If intangible asset is not in active use, deletion Ensure that no intangible asset arising from
should have been recorded in the books of account research should be recognised.
post approvals by the entity’s management and Verify whether the additions have been
amortization charge should have ceased beyond the approved by appropriate entity’s personnel.
date of deletion. Verify whether proper internal processes and
procedures for procuring intangible assets
Valuation In relation to deletions to PPE,
Verify that the entity has charged amortization understand from the management the
on all intangible assets reason and rationale for deletion
Amortization method used reflects the pattern in manner of disposal
which the asset’s future economic benefits are management approval and discard note
expected to be consumed by the entity process followed for sale of discarded
Verify whether the management has done an
impairment assessment as per AS 28
Existence Completeness
Whether there are controls in place to Perform cut off procedures
ensure that any purchase/ expense invoice For the last 5 invoices included in the trade payables; the
does not get recorded more than once goods should have been received/ risk and rewards of
Obtain the accounts payable ageing report ownership in goods should have been transferred in
and trace its balances to the general favour of the entity
ledger. Test purchases/ expenses on a sample basis selecting the
The auditor employs direct confirmation same from the accounts payable ledgers
procedure with the consent of the entity Match purchase invoice dates to the gate entry (inward)
under audit as per SA 505 dates to check whether the purchases are being recorded in
The trade creditors may be requested to the correct accounting period.
confirm the balances either Review subsequent expense vouchers.
as at the date of the balance sheet, or For advance received from customers/ revenue received in
as at any other selected date which is advance, obtain the customer wise listing along with its
reasonably close to the date of the ageing and the nature.
balance sheet In relation to statutory dues liability like withholding tax
Any discrepancies revealed by the (TDS) payable, GST payable, luxury tax payable, professional
confirmation - entity should be asked to tax payable, PF and ESI payable etc., prepare a reasonability
investigate and reconcile the with respect to sales/ purchases/ employee benefit expenses.
discrepancies.
Valuation
Where no reply is received:
Review the process followed by the Company to identify if
Testing of subsequent payments
any old creditor balance/ liability needs to be written back.
Agreeing the details of the respective
balance to the underlying vendor
IK
Obtain the ageing of payable balances, and the list of vendors
A
with whom the Company has disputes
invoices;
Preparing a detailed analysis of the
SH
Check that write backs in the liability balances assessed as
no longer payable have been approved
balance
Related party payables - properly
OD
Check that the restatement of foreign currency trade
authorized and the value is reasonable Opayables has been done properly in accordance with AS 11.
and at arm’s length
AM Understand management’s process to identify the principal
H
amount and the interest due thereon (if any) remaining
CA
Loans and Advances and Other Current Assets
Existence Completeness
For establishing existence of loans and Obtain a list of all advances and other current assets and
advances, direct confirmation procedures, compare them with balances in the ledger.
similar to those performed for Accounts Verify loan agreements and acknowledgements
receivable balances are should be performed Check authrorisations by MOA and AOA
with the only difference that while In addition, the auditor should confirm that the loans
performing circularisation of advanced were within the competence of persons
directconfirmations, in addition to the Inspect the minutes of meeting of board of directors
principal amount, interest receivable, if any, Verify that the loan has been acknowledged by the party and
as per the agreed terms between the parties, in addition, inspect if any security has been deposited
may also be included as part of the balance Related party loans - check authorisations and reasonableness
to be confirmed. Balances with statutory authorities like GST input credit -
check reasonability by applying the applicable rate to the
purchases/ expenses and verify the statutory returns filed.
Valuation
Assess the allowance for doubtful accounts.
Obtain the ageing report of loans and advances. Also, obtain the list of loans and advances under
litigation and compare with previous year.
Scrutinize the analysis and identify those loans and advances that appear doubtful and discuss with
management
Assess bad loans/ advances write-offs. Prepare schedule of movements on Bad loans/ advances
Check that write-offs or other reductions in the recoverable balances have been approved
Check that the restatement of foreign currency loans and advances/ other current assets has been done
properly in accordance with AS 11
PROFIT AND LOSS ITEMS
Occurrence Completeness
Ensure revenue is not overstated: Perform cut-off procedures to ensure that revenues are
Check whether a single sales invoice is recognised in the current accounting period
recorded twice Auditors should also verify the credit notes issued after the
Test check few invoices with their accounting period.
relevant entries Trace from the shipping documents to the sales journal.
Obtain confirmation from few customers Review GST tax and GST returns and ensure that the same
Whether any fictitious customers and are reconciled with revenue reported
sales have been recorded.
Measurement
Whether any shipments were done
IK
Trace a few transactions from inception to completion.
A
without the consent
(Examination in depth)
Whether unearned revenue recorded as
earned SH
If the client is engaged in export sales, then compliance
Whether any substantial uncertainty
OD with AS 11 shall be ensured
Auditor must understand client’s operations and related
exists
O GAAP issues
Review sequence of sales invoices
Review journal entries for unusual
AM Compare the rate of sales affected with related parties
transactions
AH and review them for collectability and authorization
M
Calculate the ratio of sales return to sales
CA
and compare it with previous year
H
materials as a percentage of total stock and compare the
A
Performing substantive audit procedures same with previous year and ask for reasons from
M
is must. Substantive analytical procedure management in case of significant variations.
CA
will consist of purchase trend analysis, Compare the creditors turnover ratios and stock turnover
comparison with previous accounting ratios with previous year
period, category wise purchases etc., Review quantitative reconciliation of closing stocks with
opening stock, purchases and consumption.
OD
Reconcile the figure of the goods on hand, with
Examine documents for the grant of subsidy and
note the conditions attached
the Performa invoices and accounts sales O Ensure that the conditions to be fulfilled and
received during the year.
AM whether the same is for a specific asset or is for
AH
Obtain confirmation from the consignee for the
goods held on consignment on the balance sheet
setting up a factory at a specific location.
Check relevant entries for receipt of subsidy.
date.
M Check compliance with requirements of AS 12
CA
Verify the terms of agreement
Ensure that the quantity of goods in hand with Sale of Scrap
the consignee has been valued at cost plus Review the internal control as regards generation,
proportionate non-recurring expenses, storage and disposal of scrap.
In case NRV is lower, the inventory in hand of Whether the organization is maintaining
the consignee should be valued at NRV. reasonable record
See that goods in hand with the consignee have Analyze the raw material used, production and
been shown separately under the head generation pattern of scrap and compare the same
inventories with figures of earlier year.
Check the rates at which scrap has been sold and
compare the rate with previous year.
Vouch sales, with invoices raised, advertisement for
tender, rate contract with scrap dealers.
Ensure that there exists a proper control procedure
to identify scrap and good units and they are not
mixed up and sold as scrap.
Make an overall assessment of the value of
realization from scrap as to its reasonableness
Other expenses
General attributes for all other Rent expense Power and fuel expense
expenses: Obtain a month wise expense Obtain a month wise expense
Expenditure pertained to current schedule along with the rent schedule along with the power bills.
period under audit agreements Verify if expense has been recorded
Expenditure qualified as a revenue Verify if expense has been recorded for all 12 months.
and not capital expenditure for all 12 months Compile a month wise summary of
Expenditure had a valid supporting whether the rent amount is as per power units consumed and the
documents the underlying agreement applicable rate and check the
Expenditure has been classified Specific consideration should be arithmetical accuracy
under the correct expense head given to escalation clause Analyse the monthly power units
Expenditure was authorised as per Also, verify if the agreement is in consumed by linking it to units of
the delegation of authority matrix the name of the entity finished goods
Expenditure was in relation to the Whether the expense pertains to
entity’s business and not a personal premises used for running business
expenditure. operations of the entity.
IK
The auditor should be cautious while vouching for legal
A
expenses as the same may highlight a dispute
H
S
O D
SOME IMPORTANT DISCLOSURES
O
Details of Benami Property held
A M Relationship with Struck off Companies
AH
The company shall disclose the following:- The Company shall disclose the following
M
Details of such property, including year of acquisition, details:
A
Amount thereof, Name of struck off Company
Details of Beneficiaries,
C
If property is in the books, then reference to the item in
Nature of transactions with struck off
Company
the Balance Sheet, investments in securities
If property is not in the books, then the fact shall be stated Receivables
with reasons, Payables
Where there are proceedings against the company under Shares held by stuck off company
this law as an abetter of the transaction or as the Other outstanding balances (to be
transferor then the details shall be provided, specified)
Nature of proceedings, status of same and company‘s view Balance outstanding
on same. Relationship with the Struck off company,
if any, to be disclosed
Corporate Social Responsibility (CSR) Following Ratios to be disclosed
amount required to be spent by the company during the
Current Ratio,
year,
Debt-Equity Ratio,
amount of expenditure incurred,
Debt Service Coverage Ratio,
shortfall at the end of the year,
Return on Equity Ratio,
total of previous years shortfall,
Inventory turnover ratio,
reason for shortfall,
Trade Receivables turnover ratio,
nature of CSR activities,
Trade payables turnover ratio,
details of related party transactions, e.g., contribution to a
Net capital turnover ratio,
trust controlled by the company in relation to CSR
Net profit ratio,
expenditure as per relevant Accounting Standard,
Return on Capital employed,
where a provision is made with respect to a liability
Return on investment.
incurred by entering into a contractual obligation, the
movements in the provision during the year should be
shown separately.
Details of Crypto Currency or Virtual Currency Trade receivables aging schedule
profit or loss on transactions involving
Crypto currency or Virtual Currency
amount of currency held as at the reporting
date,
deposits or advances from any person for
the purpose of trading or investing in Crypto
Currency/ virtual currency.