CHAPTER 5- AUDIT OF ITEMS OF FS

Coverage of (A) Assertions

this chapter (B) Audit of Balance sheet Items
1) Share Capital
2) Reserve & Surplus
3) Borrowings-Long term
4) Trade payables & current liabilities
5) Provisions & Contingent liability
6) Audit of PPE
7) Trade Receivables
8) Inventories
9) Cash & cash Equivalent
10) Intangible assets
11) Loans & Advances & Other current asset
(C) P& L Items
1) Sale of Products & services
2) Other Income comprising Interest Income , Dividend Income ,
Gain/ loss on Investments etc.
3) Purchases
4) Employee Benefit Expenses
5) Depreciation & Amortization
6) Other Expenses like Power and Fuel, Rent, Repair to Building,
Plant and Machinery, Insurance, Travelling, Legal and
Professional, Miscellaneous Expenses
(D) Disclosures Requirements
1) Disclosure of Corporate Social Responsibility
2) Details of Crypto Currency or Virtual Currency
3) Other information as per requirement of Part I, Schedule III,
to be disclosed as Additional Regulatory Information.
a) Details of Benami Property held
b) Relationship with Struck off Companies
c) Different Ratios to be disclosed
Assertions Definition-It refers to the representations by management, explicit or
[Refer Q.2 of otherwise, that are embodied in the FS, as used by the auditor to consider
Q. Bank to the different types of potential misstatements that may occur.
understand theIn In preparing FS, company’s management makes various implicit or explicit
assertions with claims (i.e. assertions) regarding:
examples] 1) existence/ occurrence;
2) valuation/ measurement/Accuracy;
3) completeness;
4) cut-off;
5) rights and obligations; and
6) presentation and disclosure

Class of transactions
1. Occurrence - transactions that have been recorded have occurred
during the year: and relate to the entity.
2. Completeness – All transactions that were supposed to be recorded
 have been recognized in the financial statements. Transactions have not
been omitted.
3. Accuracy (Measurement) - transactions have been recorded
accurately at their appropriate amounts in the financial statements.
4. Cut-off - transactions have been recorded in correct accounting
period.
5. Classification (Presentation and Disclosure) - transactions have been
properly classified and presented fairly in the financial statements.

Account Balances-
1. Existence - assets and liabilities shown in the balance sheet exists
2. Rights and obligations –Entity has the right to assets (i.e. ownership)
and the liabilities recognized in the financial statements represent all
the entity’s obligations to repayment as at a given date
3. Completeness – All assets, liabilities and equity balances that were
supposed to be recorded have been recognized in the financial
statements.
4. Valuation - assets and liabilities are included in the financial
statements at appropriate amounts. There has been no over statement
or understatement.
5. Presentation and Disclosure: Whether particular items in the financial
statements are properly classified, described and disclosed.
AUDIT OF 1) Compare the year end balances of authorised, issued and paid-up share
SHARE capital, with the Previous yr. AFS.
CAPITAL 2) If no change during the year, obtain a WR from the management that
there were no changes to capital structure during the year.
3) If there is any change, obtain the certified copies of relevant
resolutions passed at the meetings of BOD, members authorising the
changes in authorised and paid-up share capital.
4) Also, obtain and verify copies of forms filed with MCA- (Form SH-7,
notice to Registrar of any alteration of share capital, Form PAS 3
company making allotment of shares/ securities required to file a
return of allotment to the Registrar.
5) Verify whether the paid-up capital as at the year-end is within the
limits of authorised capital.
6) In case of increase in authorised share capital, verify whether the
Company has accurately calculated the fee and stamp duty payable to
MCA and obtain a copy of the receipt in support of the payment made.
7) In case of Fresh issue, check with compliance of Companies Act 2013
with regard to Minimum Subscription, minimum application money to be
collected, maintenance of separate Bank account, payment of
underwriting commission as per Sec 40 etc.
8) No shares have been issued at Discount (Sec. 53 of Companies Act)
9) Check if Shares are issued for cash or for Consideration other than
cash. (Eg: To promoters for their services, underwriters for
commission payable to them etc.)
10) Compliance with SEBI regulations and Guidelines.
ISSUE OF Securities premium account may be applied for
SHARES AT There is no restriction to issue shares at premium. Premium amount
should be credited to securities premium account.
PREMIUM- 1) issue of unissued shares of the company to the members of the
SEC-52 company as fully paid bonus shares;
2) for the purchase of its own shares or other securities under section
68. (buy back)
3) writing off the preliminary expenses of the company;
4) writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
5) providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company;
Auditor shall verify:
1. Is it applied as per the requirements of section 52.
2. Whether balances are properly transferred to securities premium
account.
ISSUE OF 1) A company cannot issue shares at discount as provided by Sec. 53
SHARES AT 2) Any share issued by a company at a discounted price shall be void.
DISCOUNT- 3) except in the case of an issue of sweat equity shares given u/s 54 &
SEC. 53-(PYP a company may issue shares at discount to its creditors when its
4 Marks, debt is converted into shares in pursuance of statutory resolution
Nov’19) plan or debt restructuring scheme as per guidelines or directions
specified by the RBI under the RBI Act, 1934
4) Auditor needs to verify that the company has not issued any of its
shares at a discount.
5) For this purpose, he may read the minutes of meeting of its directors
and shareholders authorizing issue of share capital.
REDUCTION 1) Check -AOA authorizes the reduction of capital.
2) Verifying that the SR has been passed.
OF CAPITAL-
3) Examine order of the Tribunal confirming the reduction & ensure that
66
Read-1-4 a copy of the order is filed with the ROC.
4) Inspecting the ROC Certificate as regards reduction of capital.
5-6
5) Vouching the journal entries recorded to reduce the capital and to
7-9
write down the assets.
6) Ensure requirements of Schedule III have been complied.
7) Verifying the adjustment made in the members’ accounts in the
Register of Members.
8) Confirming that the words "and reduced”, to the name of the company
in the Balance sheet if required by the order of the Tribunal.
9) Verifying that MOA of the company has been properly altered.
ISSUE OF "Sweat Equity Shares" means equity shares issued by the company to
SWEAT employees or directors at a discount or for consideration other than cash
EQUITY for providing know-how or making available right in the nature of
SHARES-54 intellectual property rights or value additions, by whatever name called.
Verification aspects
 class of shares - already issued
 special resolution passed by the company;
 SR shall be valid for making allotment within a period of not more than
12 months from the date of SR.
 the resolution specifies the number of shares, the current market
price, consideration, if any, and the class or classes of directors or
employees to whom such equity shares are to be issued;
 in case of listed company- regulations made by the SEBI in this behalf
and if they are not so listed- rules as may be prescribed.
  Company shall maintain a register of Sweat Equity Shares in Form
SH-3.
RESERVE & Reserves are the amounts appropriated out of profits that are not
SURPLUS intended to meet any liability, contingency, commitment or diminution in
the value of assets as at B/S date.
Aspects Revenue reserves Capital Reserve
Source Derived from profits created from capital
generated from profits earned through
regular business. sale of capital assets
such as sale of fixed
assets, profit on sale
of shares.
Utilization Used for operational only for certain
expenses or dividend limited purposes ex.
payments. writing down fictitious
assets or losses
Distribution as Can be used for Cannot be used for
dividends distributing as distributing as
dividends. dividends
Examples General Reserve Securities premium,
capital redemption
reserve
Audit procedures
1. Compare the opening balance of reserves and surplus to the previous
year audited FS.
2. For addition/utilization in current year, in case of:
 Profit and Loss balance –
 Trace the movement to surplus/ deficit as per the Statement of
profit and loss for the year under audit.
 The movement should be traced in the Statement of Changes in
Equity.
 Verify the resolution passed by BOD regarding the
recommendation of dividend, resolution passed by shareholders
declaring the dividend.
 Securities Premium - It needs to be confirmed that the company has
issued shares in excess of the nominal value of the shares and for the
same, the auditor should obtain and verify the resolution passed by
the BOD.
Provision v/s Provision Reserves
reserves-(MTP Charges against Profits Appropriation of Profits
3 Marks It is created even in case of losses In case of losses reserve cannot be
March ‘19) created
To discharge a liability Not applicable
Generally, provision is compulsory Generally, not compulsory,
sometimes exceptions like creating
CRR.
 AUDIT OF BORROWINGS

EXISTENCE- (MTP COMPLETENESS VALUATION

5 Marks March ’18,
Oct ‘18)
Check board minutes Obtain a schedule of short term & Agree loan balance & loan payables
for approval of new long-term borrowings, showing with the loan agreement.
lending agreements. beginning & ending balances &
borrowings taken & repaid during
the year.
Check whether loan Perform the following: Determine that the accounting
agreement is Opening balance – match from last policies & methods of recording debt
prepared as per year AFS. are appropriate & applied
BOD approval. Additions-check with minutes of consistently.
BOD & related agreements.
closing balances – trace as per the
schedules to the general ledger.
Agree details of Review subsequent transactions For foreign currency loans, check the
loans recorded after the end of the reporting closing exchange rate used & verify
(interest rate, period to determine if there are the computations of the
nature & repayment unrecorded liabilities at year- end. restatements of foreign currency
terms) to the loan balances outstanding at year end. (As
agreement. per AS 11).
Agree details of Direct confirmation procedure: Recompute the interest and discount
leases and hire  Ascertain that confirmation asks or premium on redemption, if any.
purchase creditors for all relevant information like
recorded to applicable interest rates, due
underlying dates, collateral etc.
agreements.  Compare the balances are per the
In case of confirmations obtained to the Examine the hire purchase
Debentures, books of the accounts. Ask for agreements for the purchase of
examine trust deed reconciliations, if there are any assets by the entity and ensure the
for terms & dates of differences and auditor will check correctness of the amounts shown as
redemption, the same. outstanding in the accounts.
borrowing  Send reminders for non-replies.
restrictions etc.

When debt is
retired, ensure that
a discharge is
received on assets
securing the debt.
Obtain WR that all
the liabilities which
have been recorded
represent a valid
claim by the lenders.
 AUDIT OF TRADE PAYABLES & OTHER CURRENT LIABILTIES

EXISTENCE-(MTP Aug ‘18) COMPLETENESS

Check whether there are controls in place to The auditor needs to perform the following cut
ensure that any purchase/ expense invoice does off procedures:
not get recorded more than once.  For the last 5 invoices recorded at the
end of the reporting date (cutoff date);
the goods should have been received/ risk
and rewards of ownership in goods should
have been transferred in favour of the
entity;
 All goods received prior to the period/
year- end should have been booked in the
form of purchases and included in trade
creditors.
Obtain the accounts payable ageing report and Test purchases on a sample basis selecting the
trace its balances to the general ledger. Journal same from the accounts payable ledgers and
entries specially for large amounts should be checking their supporting documents to ensure
carefully examined. that the purchases were recorded at the
correct amounts and correct dates.
Direct confirmation procedure Match purchase invoice dates to the gate
1. Auditor employs direct confirmation procedure entry (inward) dates to check whether the
with the consent of entity under audit. purchases are being recorded in the
correct accounting period.
2.The trade creditors may be requested to Review subsequent expense vouchers. Review
confirm the balances either (a) as at the date of all material expense vouchers recorded post
the balance sheet, or (b) as at any other selected the balance sheet date to see if they relate
date which is reasonably close to the date of the to transactions from within the audit period.
balance sheet.
3. Either ask with balance as at year end wherein
the trade creditor is requested to respond
whether or not he is in agreement with the
balance shown.
Note-use of the form with no balance is
preferable.
4. Any discrepancies revealed by the confirmations In relation to statutory dues liability like
received, the entity should be asked to investigate withholding tax (TDS) payable, GST payable,
and reconcile the discrepancies. luxury tax payable, professional tax payable,
PF and ESI payable etc., prepare a
reasonability with respect to sales/
purchases/ employee benefit expenses
5.Where no reply is received, the auditor should
perform additional testing regarding the
balances. This testing could include:
 Testing of subsequent payments in respect of
the trade payables to whom confirmations
were rolled out but no replies received;
 Comparing the details of the respective
balance with the underlying vendor invoices;
  Preparing a detailed analysis of the balance,
and confirming that these purchases/ expense
transactions actually occurred. (examination
in depth)

Note-The method of selection of the trade

creditors to be circularised should not be
revealed to the Company until the trial balance of
the trade payables’ ledger is handed over to the
auditor.

VALUATION
 Trade payables and other liability balances have been VALUED appropriately.
 Review the process followed by the Company to identify if any old creditor balance/ liability
needs to be written back.
 Check whether method is consistently applied year on year & is appropriate as per business
environment.
 Obtain the ageing of payable balances.
 Obtain list of vendors with whom the Company has disputes and any claims from customer,
under litigation.
 If company thinks that liability is no longer payable & should be written back then it should be
approved by appropriate authority.

 AUDIT OF PURCHASES
Audit steps
1) An auditor to identify the control points over purchases e.g. whether segregation of
duties exist, whether competitive quotes are invited, whether a purchase committee
exists who authorises purchase price, issues and authorizes purchase orders, when and
how the goods are received, who checks the quality, quantity and specifications of the
goods received.
2) auditor tests the controls the entity has set up for the purchase cycle to determine
whether they are effective or not. If the controls are effective, the auditor can
reduce the extent of substantive testing.
3) auditor selects a random sample of transactions and examines the related purchase
orders, GRN, purchase invoices, inward gate entry register and vendor statements etc.
4) Performing substantive audit procedures is must. Substantive analytical procedure will
consist of purchase trend analysis, comparison with previous accounting period, and
most important of all setting a purchase expectation in relation to the sales made
during the period under audit and compare that with the client’s purchase records.

 How to check OCCURRENCE in purchases. [Purchases ki process hi check kar lo-steps in

sequence]
1) Whether any fictitious vendors have been booked or purchases have been recorded by
reviewing the vendor selection process followed by the entity.
2) Whether the goods were received at the factory gate and whether there exists an entry
in the security gate inward register
3) Whether quality inspection of goods was done.
4) Whether a goods receipt note was prepared and signed by an appropriate client personnel.
5) Whether the purchase invoice was approved as per delegation of authority and whether
a 3 or 2-way match (as discussed above) was done.
 6) Whether stock record has been updated by the store’s personnel

 SPECIAL CONSIDERATIONS during audit of purchases

1) Purchase invoice received should be the “Original” copy against which the entity has recorded
the purchase in its books of account.
2) Purchase invoice should have been booked only once risk and reward incidental to ownership
has been transferred to the entity.
3) Purchase invoice should be in the name of entity.
4) The auditor should obtain tax returns filed with the authorities and tally the input tax as
reflected in the books to the amount disclosed in the returns.
5) In case of purchases made from related parties, the auditor needs to verify if requisite
approval from BOD has been obtained.
6) The auditor should review whether purchases should be capitalized or expensed off in
Statement of Profit and loss according to his professional judgement.
7) Review journal entries for unusual transactions.

Audit procedures for ensuring COMPLETENESS & MEASUREMENT

The auditor should:
 Perform cut-off test to ensure that purchases are recognised in the correct accounting period.
For the purpose, the auditor should examine material inward records, say, last 5 transactions at
the period end to check that all corresponding invoices have been duly entered in the Purchases
book and none have been omitted.
 Ensure correct accounting treatment of goods – in – transit as per the agreed terms with the
vendor regarding transfer of risk and reward of ownership in goods.
 Obtain written representation from the management that all the purchases that took place
during the year have been properly recorded in the books.
 Perform analytical procedures to obtain audit evidence as to overall reasonableness of purchase
quantity and price which may include:
• Consumption Analysis: Auditor should scrutinize raw material consumed as per
manufacturing account and compare the same with previous years and ask for the reasons
from the management, if any significant variations are found.
• Stock Composition Analysis: Auditor to collect the reports from management for
composition of stock i.e. raw materials as a percentage of total stock and compare the
same with previous year and ask for reasons from management in case of significant
variations.
• Ratios: Auditor should compare the creditors turnover ratios and stock turnover
ratios of the current year with previous years.
• Auditor should review quantitative reconciliation of closing stocks with opening stock,
purchases and consumption.

EMPLOYEE BENEFITS EXPENSES

Auditor needs to obtain a clear understanding about the organisation and its hiring, appraisal and
retirement process in the following manner:
1. An auditor tests the controls the entity has set around employee benefit payment process to
determine how effective they are. If they are effective, the auditor can reduce the substantive
testing. Common internal controls over the employee benefit payment cycle includes maintaining of
attendance records, employee master, authorisation and approval of monthly payroll processing and
disbursement, computation of employee deductions like payroll taxes, accrual of other benefits like
gratuity, leave encashment, bonus etc.
2. The auditor selects a random sample of transactions and examines the related appointment
 letters, appraisal letters, attendance records, HR policies, employee master etc.
3. Performing substantive audit procedures is must. Substantive analytical procedure will consist of
monthly expense reasonability, comparison with previous period and setting an expectation of the
and compare that with the client’s business operations and overall trend in the industry.

Audit procedures
 Obtain an understanding of entity’s process of capturing employee attendance. There is always a
risk that an entity could record expense for fictitious employees. To address this risk, the
auditor may choose to meet the employees in person, on a sample basis.
 Obtain a list of employees as at the period- end along with a monthly movement split between
new hires, leavers and continuing employees.
 For a sample of resigned employees, obtain their full and final computation and verify
whether all their dues including post- retirement benefits like gratuity, leave encashment have
been paid and whether the respective employee’s acknowledgement on final computation has been
obtained.
 Verify if accrual/ provision has been made for all employee benefits and obligations like bonus,
gratuity, leave encashment, etc.
 In case provident fund (PF), employee state insurance (ESI) are applicable to the entity, compile
a reasonability by applying the rate to the basic wages and comparing to the amount recorded in
books and analyse reasons for variance, if any. Also, obtain monthly deposit challans to verify if
the month- o n - m o n t h liability was subsequently deposited with the authorities and within the
defined timelines.
 Perform analytical procedures to obtain audit evidence as to overall reasonableness of employee
benefit expenses.
 Obtain the monthly salary registers for all 12 months. Compile a monthly payroll reasonability
by calculating the average salary per employee per month and compare with the previous year and
preceding month and analyse the reasons for variance which could be attributable to annual
increments, an employee at senior level joining/ leaving the entity, bonus pay-out etc.

 AUDIT OF DEPRECIATION AND AMORTISATION

DEPRECIATION AND AMORTISATION

Auditor needs to consider the following Audit procedures
attributes while verifying for depreciation and
amortisation expenses:
1) understanding of entity’s accounting 1. Obtain the list of all the components
policy. identified by the management.
2. Obtain understanding of entity’s process
of charging depreciation & amortization.
2) Company policy- applicable accounting
standards & Companies Act 2013.
3) accounting policy applied consistently year
on year
4) Calculation of Dep- after adjustment of 3. Residual values have been properly verified
residual value from cost of asset. as that impacts the computation of
depreciation.
5) Calculation- accurately calculated & 4. Dep. & amortization is charged as per the
recorded. useful lives of PPE & Intangible asset.
6) Calculation- most appropriate 5. verify the rates of depreciation and
 depreciation method. depreciation calculations.
7) Each part of an item of PPE- Cost- 6. Ensure depreciation is charged on the
significant- depreciated separately. assets from the date when it is ready to
use and not from the date of actual usage.
7. Perform analytical procedures- overall
reasonableness of dep. and amortisation.
8. Intangible assets- properly amortized over
the period.
9. Depreciation computation as per Income tax
Act, 1961- additions are tallying with the
additions as per Companies Act.
10. Ensure that the depreciation and
amortization has been computed
prospectively whenever there is any change
in useful lives of PPE and intangible assets.
11. Ensure Intangible assets like patents,
goodwill, copy rights have been properly
amortized over the period.

Required disclosures for depreciation and amortisation have been appropriately made
Ensure whether the following disclosures as required have been made:
 Accounting policy for depreciation and amortization.
 Useful lives of assets as per Schedule II to the Companies Act, 2013.
 Residual value of assets.
 Depreciation method.

OTHER EXPENSES LIKE POWER & FUEL, RENT, REPAIR TO BUILDING, PLANT &
MACHINERY, INSURANCE, TRAVELLING, LEGAL & PROFESSIONAL, MISC. EXPENSES
While the auditor may choose to analyse the monthly trends for expenses like rent, power and fuel,
an auditor generally prefers to vouch for other expenses to verify following attributes:
 Whether the expenditure pertained to current period under audit;
 Whether the expenditure qualified as a revenue and not capital expenditure;
 Whether the expenditure had a valid supporting documents like travel tickets, insurance policy,
third party invoice etc.;
 Whether the expenditure has been classified under the correct expense head;
 Whether the expenditure was authorised as per the delegation of authority matrix;
 Whether the expenditure was in relation to the entity’s business and not a personal
expenditure.

Audit procedures
Rent expense-
 Obtain a month wise expense schedule along with the rent agreements.
 Also, verify if the agreement is in the name of the entity and
 whether the expense pertains to premises used for running business operations of the entity.
 Verify if expense has been recorded for all 12 months and whether the rent amount is as per the
underlying agreement.
 Specific consideration should be given to escalation clause in the agreement to verify if the rent
was required to be recorded on a straight-line basis during the period under audit.
 Power and fuel expense –
 Obtain a month wise expense schedule along with the power bills.
 Verify if expense has been recorded for all 12 months.
 Also, compile a month wise summary of power units consumed and the applicable rate and check
the arithmetical accuracy of the bill raised on monthly basis.
 In relation to the units consumed, analyse the monthly power units consumed by linking it to units
of finished goods produced and investigate reasons for variance in monthly trends.

Insurance expense -
 Obtain a summary of insurance policies taken along with their validity period.
 Verify whether the expense has been correctly classified between prepaid and expense for the
period based on number of days.

Legal and professional expenses -

 Obtain a month-wise and consultant-wise summary.
 In case of monthly retainership agreements, verify whether the expenditure for all 12 months
has been recorded correctly.
 For non- recurring expenses, select a sample and vouch for the attributes discussed above.
 The auditor should be cautious while vouching for legal expenses as the same may highlight a
dispute for which the entity may not have made any provision and the matter may also not have
been discussed/ highlighted to the auditor for his specific consideration.

Travel, repair and maintenance, printing and stationery, miscellaneous expenses –

 The auditor should select a sample and vouch for the attributes discussed above.
Wherever possible, the auditor should try to prepare a summary of expenditure on monthly basis
and then analytically compare the trends.
 Perform analytical procedures to obtain audit evidence as to overall reasonableness of other
expense which may include expenditure per unit of production analysis.
 Auditor should analyse expense per unit produced and compare the same with previous years and
present industry trends and ask for the reasons from the management, if any significant variations
are found.

Summary for checking any expenses-General attributes + Specific points

 Obtain a month wise expense schedule along with the rent agreements.
 Verify if expense has been recorded for all 12 months.
 Perform analytical procedures to obtain audit evidence as to overall reasonableness of that
expenses by comparing with Previous years.
 Prepare a summary of expenditure on monthly basis and then analytically compare the
trends.
 Auditor should analyse expense per unit produced and compare the same with previous years

 TRADE RECEIVABLES-
It is important to carry out Test of Controls for checking the effectiveness of internal control over
sales as a part of the debtors’ audit procedure.
Following points need to be considered in respect of trade receivables: (MTP 5 Marks March ’18,
MTP 5 Marks Oct’18)
 Only bona fide sales lead to trade receivables.
 All such sales are made to approved customers.
 All such sales are properly recorded in the books of accounts. (correct accounting)
 Once recorded, the debtors can be settled only by receipt of cash or on the authority of a
responsible official.
 Segregation of duties at every point in sales transaction. (accounting for debtors,
collecting the payments, sending reminders etc.)
 Debtors are collected on time.
 In case debtors are not collected in time, sending reminders and taking legal actions if
required.
 Balances are regularly reviewed.
 A proper system of follow up exists and if necessary, adequate provision for bad debt should
be made by preparing adequate ageing schedule of the debtors.

After performing Test of Controls over sales, the auditor will decide upon the audit procedure to
be applied to verify debtor’s balance.

Audit procedures to establish EXISTENCE of trade receivables as at the period- end

 Check whether there are controls in place to ensure that invoices cannot be recorded more
than once.
 If any large balance is due for a long time, auditor should ask for reasons and justification
for the same.
 If there are any related party receivables, review them for collectability as well as whether
they were properly authorized and the value of such transactions were reasonable and at arm’s
length.
 Check that the receivables for other than sales or services are not included in the list.
 Perform analytical procedures. This will enable the auditor to check the reasonableness of
balances.
 Review a trend line of sales and accounts receivable, or a comparison of the two over time, to
check if there are any unusual trends.
 Check whether realization is recorded invoice-wise or not. If not, check that money received
from debtors is adjusted chronologically invoice-wise and on FIFO basis i.e. previous bill is
adjusted first.

Direct confirmation procedures

 Obtain direct confirmation from debtors about the amounts of unpaid accounts receivable as
of the end of the reporting period under audit.
 The auditor employs direct confirmation procedure with the consent of the entity under audit.
 The trade receivables may be requested to confirm the balances either (a) as at the date of
balance sheet, or (b) as at any other selected date which is reasonably close to the date of
balance sheet.
 The form of requesting confirmation from the trade receivables may be either (a) the form
mentioning with balance outstanding amount as per the company or (b) the form without
mentioning any balance therein, wherein the trade receivable is requested to respond with the
balance outstanding as per his records. The use of the form without any balance is preferable.
 The method of selection of the trade receivables to be circularised should not be revealed to
the Company until the trial balance of the trade receivables’ ledger is handed over to the
auditor.
 A list of trade receivables selected for confirmation should be given to the entity for preparing
request letters for confirmation which should be properly addressed. The auditor should
maintain strict control to ensure the correctness and proper despatch of request letters.
 Any discrepancies revealed by the confirmations received or by the additional tests carried
 out by the auditor may have effect on other accounts not included in the original sample.
 Where no reply is received, the auditor should perform alternate procedures regarding the
balances. This could include:
— Agreeing the balance to cash received subsequently;
— Preparing a detailed analysis of the balance, ensuring it consists of identifiable
transactions and confirming that these revenue transactions actually occurred.
(examination in depth for those balances)

Audit Procedures to ensure All Trade receivable balances that were supposed to be
recorded have been recognized in the FS. (COMPLETENESS)
 The auditor needs to satisfy himself of the cut-offs. Without a cut-off, sales could be
understated or overstated, hence there is a need to perform the following cut off procedure:
— For the invoices issued during the last few days (last 5 days of the reporting year) i.e.
cut-off date and which have been included in the debtors; check that the goods should
have been dispatched and not lying with the Company;
— Ensure that all goods dispatched prior to the period/ year-end have been invoiced and
included in debtors on a test check basis;
— Ensure that no goods dispatched after the year- end have been invoiced and included
in debtors for the period under audit.
— Select few invoices from the accounts receivable ageing report and compare them to
supporting documentation to see if they were billed with the correct amounts, to the
correct customers, and on the correct dates.
 Match invoices to shipping/ dispatch log. Match invoice dates to the shipment dates for those
items in the shipping/ dispatch log, to see if sales are being recorded in the correct
accounting period.
 This can include an examination of invoices issued subsequent to the period being audited, to see
if they should have been included in the period under audit.
 Assess bill and hold sales. If there is a situation where the Company is billing customers for
sales despite still retaining the goods on-site (known as “bill and hold”), examine supporting
documentation to determine whether a sale has actually taken place or not.
 Review the receiving log to see if the Company has recorded a large amount of customer
returns after the audit period, which would suggest that the Company may have shipped more
goods near the end of the audit period than what the customers had authorized to inflate the
profits of the company;

Audit Procedures to ensure that Trade receivable balances have been VALUED appropriately.
1. Review the process followed by the Company to derive an allowance for doubtful accounts.
2. Check whether method/ process is consistently applied year on year basis. And whether the
method is appropriate for the underlying business environment.
3. Obtain the ageing report of accounts receivable (both Dr/Cr balance).
4. Also, obtain the list of debtors under litigation and compare with previous year.
5. Check that write-offs of the receivable balances have been approved by an appropriate
authority i.e. the Board of Directors in case of a company.
6. Scrutinize the analysis and identify those debtors which appear doubtful; discuss with
management about reasons as to why these debtors are not included in the provision for bad
debts.
7. He should check if provisions are made at appropriate rates considering the recoverability
of amounts due.
8. Prepare schedule of movements of bad debts – Provision accounts and debts written off and
compare the proportion of bad debt expense to sales for the current year in comparison to
 prior years to see if the current expense appears reasonable.

 INTANGIBLE ASSETS (COMPRISING GOODWILL, BRAND/ TRADEMARKS, COMPUTER

SOFTWARE ETC.)
 An intangible asset is an identifiable non-monetary asset, without physical substance, held for
use in the production or supply of goods or services, for rental to others, or for administrative
purposes.
 Common examples are computer software, patents, copyrights, motion picture films, customer lists,
mortgage servicing rights, fishing licenses, import quotas, franchises, customer or supplier
relationships, customer loyalty, market share and marketing rights. Goodwill is another example of
an item of intangible nature which either arises on acquisition or may be internally generated.
 As per AS 26 – Intangible Assets, internally generated goodwill should not be recognized as an
asset.
 Some intangible assets may be contained in or on a physical substance such as a compact disk (in
the case of computer software), legal documentation (in the case of a licence or patent) or film (in
the case of motion pictures). The cost of the physical substance containing the intangible assets is
usually not significant. Accordingly, the physical substance containing an intangible asset, though
tangible in nature, is commonly treated as a part of the intangible asset contained in or on it.
 In some cases, an asset may incorporate both intangible and tangible elements that are, in
practice, inseparable. Judgement is required to assess as to which element is predominant.
For example, computer software for a computer-controlled machine tool that cannot operate
without that specific software is an integral part of the related hardware and it is treated as a
fixed asset. The same applies to the operating system of a computer.
 Where the software is not an integral part of the related hardware, computer software is treated
as an intangible asset.

EXISTENCE OF INTANGIBLE FIXED ASSETS -AUDIT PROCEDURES-(MTP 3 MARKS APRIL

19, RTP NOV ’19 & NOV ‘18)
 Auditor should verify whether such intangible asset is in active use in the production or supply of
goods or services, for rental to others or for administrative purposes.
Example- for verifying the existence of software, the auditor should verify whether such
software is in active use by the entity and for the purpose, the auditor should verify the sale of
related services/ goods during the period under audit, in which such software has been used.
Example- For verifying the existence of design/ drawings, the auditor should verify the
production data to establish if such products for which the design/ drawings were purchased, are
being produced and sold by the entity.
 In case any intangible asset is not in active use, deletion should have been recorded in the books
of account post approvals by the entity’s management and amortization charge should have ceased
beyond the date of deletion.

COMPLETENESS-All additions to Intangible assets during the period under audit have been recorded
appropriately in the FS.
 Verify the movement in the intangible assets schedule (asset class wise like software, designs/
drawings, goodwill etc.) compiled by the management i.e. Opening balances + Additions – Deletions =
Closing balances.
 Tally the closing balances to the entity’s books of account.
 Check the arithmetical accuracy of the movement in intangible assets schedule.
FOR ADDITIONS during the period under audit, obtain a listing of all additions from the
management and undertake the following procedures: (MTP 6 Marks March 22, Sep 22)
 For all material additions, verify whether such expenditure meets the criterion for recognition
of an intangible asset as per AS 26.
 Ensure that no intangible asset arising from research (or from the research phase of an
internal project) should be recognised. Expenditure on research (or on the research phase of
an internal project) should be recognised as an expense when it is incurred.
 Verify whether the additions (acquisitions) have been approved by appropriate entity’s
personnel.
 Verify whether proper internal processes and procedures like inviting competitive quotations/
proper tenders etc. were followed prior to finalizing the vendor for procuring item of intangible
assets by testing those documents on a sample basis.
 In relation to deletions of intangible assets, understand from the management the reason and
rationale for deletion and the manner of disposal. Obtain the management approval and disposal
note authoring disposal of the asset from its active use.
 Verify the process followed for sale of discarded asset, example inviting competitive quotes,
tenders and the basis of calculation of sales proceeds.
 Verify that the management has accurately recorded the deletion of intangible asset (original
cost and accumulated amortization up to the date of disposal) and the resultant gain/ loss
on disposal in the entity’s books of account.

VALUATION- Intangible assets have been VALUED appropriately and as per generally accepted
accounting policies and practices.
The auditor should:
 Verify that the entity has charged amortization on all intangible assets;
 Verify that the amortization method used reflects the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
 The auditor should also verify whether the management has done an impairment assessment to
determine whether an intangible asset is impaired. For this purpose, the auditor needs to verify
whether the entity has applied AS 28 - Impairment of Assets for determining the manner of
reviewing the carrying amount of its intangible asset, determining the recoverable amount of
the asset to determine impairment loss, if any.

RIGHTS AND OBLIGATION -The entity has valid legal ownership rights over the Intangible Assets
recorded in the FS.
the auditor while performing testing of additions should also verify that all expense invoices/
purchase contracts are in the name of the entity that entitles legal title of ownership to the entity.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the form of cash in hand, stamps in hand, balances held with bank in current
accounts/ margin money accounts, cash credit accounts (debit balance), fixed deposits, cheques in hand
etc. represent the most liquid assets of an enterprise i.e. readily convertible into cash and subject to
insignificant value risk. Utmost professional skepticism needs to be exercised while auditing such
balances as they are prone to misappropriation.

COMPLETENESS)-Audit Procedures - CASH AND CASH EQUIVALENT BALANCES

 Special care is necessary in regard to verification of cash balances. Unless they are checked by
surprise, there can be no certainty that the cash produced for inspection was in fact held by the
custodian. For this reason, the cash should be checked not only on the last day of the year, but
also checked again sometime after the close of the year without giving notice of the auditor’s visit
 either to the entity or to his staff. (Surprise check)
 If there are more than one cash balances, e.g., when there is a cashier, a petty cashier, a branch
cashier and, in addition, there are imprest balances with employees, all of them should be checked
simultaneously, as far as practicable so that the shortage in one balance is not made good by
transfer of amount from the others.
 It is desirable for the cashier to be present while cash is being counted and he should be made
to sign the statement prepared containing details of the cash balance counted along with
denomination of cash. If he is absent at the time the cash is being verified, he may hold the
auditor responsible for the shortage, if any, in cash.
 If there is any rough Cash Book or details of daily balance are separately kept, the auditor should
test entries from the rough Cash Book with those in the Cash Book to prove that entries in the
Cash Book are correct.
 If the auditor finds any slip, chit or I.O.U.s in respect of temporary advances paid to the employees
included as part of the cash balance, he should check whether those are approved by an authorized
official and recorded in the appropriate accounts.
 The auditor should also perform a cash sensitivity analysis by compiling a summary of total cash
receipts and payments each month and analyzing the trends to see if there have been variations
in any specific month and request brief descriptions from the management.
 The auditor needs to obtain bank reconciliation statements (BRS) for all bank accounts maintained
by the entity as at the reporting period and additionally need to understand the client’s process
and periodicity of making the BRS.
 The auditor should ensure that BRS is signed by the authorized personnel so that he is able to
assign responsibility in case of any errors.
 Verification of BRS shall entail the following:
— Tallying the balance as per bank book to the bank confirmation/ statement.
— Checking of all material reconciling items included under cheques issued but presented for
payment to the underlying bank book forming part of books of account. In addition, the auditor
should request for bank statements of subsequent period and should verify if the cheques
issued have subsequently been cleared by the bank. For all cases where cheques have become
stale i.e. 3 months or more have lapsed since the issue date, the same should not appear in the
BRS and should instead be taken back to liabilities.
— Checking of all material reconciling items included under cheques deposited but not credited
by bank by requesting for bank deposit slips, duly acknowledged by bank and verifying if the
balances were credited by bank subsequently by tallying to the bank statement of subsequent
period. For any instances related to cheques not cleared beyond reasonable time, the auditor
should seek brief descriptions from the management and in case such explanations are found
to be unsatisfactory, the auditor should verify the revenue recognition related to such parties
was in order and as per the Company’s revenue recognition policy.
— Checking of all material reconciling items included under amounts or charges debited/ credited
by bank but not accounted for by requesting for bank statements for the period under audit
and tallying the same. If the amounts are found to be material, the auditor should ensure that
the management records the adjustments for the same in its books of account. If management
does not adjust, the auditor shall consider to qualify his report.
Direct confirmation procedure
 A significant and important audit activity is to contact banks/ financial institutions directly
and ask them to confirm the amounts held in current accounts, deposit accounts, EEFC
account, cash credit accounts, restrictive use accounts like dividend, escrow accounts as of
the end of the reporting period under audit. This should necessarily be done for all account
balances as at the period-end.
 The Company should be asked to investigate and reconcile the discrepancies, if any, including
 seeking written explanations/ clarifications from the banks/ financial institutions on any
unresolved queries.
 The auditor should emphasize for confirmation of 100% of bank account balances. In remote
situations, where no reply is received, the auditor should perform additional testing regarding
the balances. This testing could include:
— Agreeing the balance to bank statement received by the Company or internet/ online login
to account in auditor’s personal presence;
— Sending the audit team member to the bank branch along with the entity’s personal to
obtain balance confirmation from the bank directly.

Cash and cash equivalent balances have been VALUED appropriately.

In addition to the procedures performed above, the auditor should ensure that all bank accounts
holding foreign currency have been restated at the closing exchange rates as per applicable Financial
Reporting Framework.

INVENTORIES
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering
of services.
As per AS 2 – “Valuation of Inventories”, Inventory is valued at lower of cost and net realisable value.
The basis for valuation shall be applied consistently year on year. Any change in accounting policy shall
have adequate disclosures in FS.
The below table summarises the audit procedures generally required to be undertaken while auditing
inventories:

EXISTENCE OF INVENTORIES AS AT THE PERIOD- END.

 Review entity’s plan for performing inventory count.
 Ensure that consigned goods have been segregated.
 Auditor should participate in the inventory count with the management.
 Test counts of inventory by auditor should include:
— observing employees are adhering to the agreed plan.
— assuring that there is appropriate supervision on the count procedure.
— assuring that all items are properly tagged.
— observing that proper amounts are shown on tags.
— determining that tags and summary sheets are controlled and reconciled.
— reconciliation of test counts with tags and summary sheets and discrepancies noted, if any,
are summarized and agreed with client personnel.
— staying alert at all times and specifically being cautious about empty boxes, etc. and obsolete
items.
— performing cut-off testing by documenting last 5-10 receiving reports and shipping
documents as of the period end.
— ensuring exclusion of third-party stock and damaged or obsolete stock.
— ensuring the accounting of all stock sheets.
— investigating any significant differences between the physical stock take and the stock
records as per books. Further, the auditor should ask the entity’s personnel to sign all stock
count sheets and also agree the variances observed, if any, to avoid any conflicts.
 When the entity uses periodic system for inventory count, it should be undertaken at the end
of the period. If the entity uses perpetual system with proper and adequate records, inventory
 may be counted at interim dates.
 Confirm or investigate any inventory of the entity lying with a third party (specifically relevant
for cases where the entity gets job work done in its process of production).

COMPLETENESS-Only the inventories held by entity have been recorded in the FS and do not
include any inventories that belong to third parties but does include inventories owned by the
entity and lying with a third party.
 Perform analytical procedures (comparison tests with industry averages, budgets, prior years,
trend analysis, etc.).
 Compute inventory turnover ratio (COGS/ average inventory)
 Perform vertical analysis (inventory/ total assets)
 Compare budgetary expectations vis-à-vis actuals
 Examine non-financial information related to inventory, such as weights and other measurements.
 Perform purchase and sales cut-off tests. Trace shipping documents (bills of lading and receiving
reports, warehouse records, and inventory records) to accounting records immediately before and
after year-end.
 With respect to tagged inventory, perform tests for omitted transactions and tests for invalid
transactions.
 Verify the clerical and arithmetical accuracy of inventory listings.
 Reconcile physical inventory amounts with perpetual records.
 Reconcile physical counts with general ledger control totals.
 Reconcile inventories which belong to client but are held with third parties like transporters,
warehouses, port authorities etc.
 Goods received on consignment basis have been properly segregated from other items of
inventory.

OWNERSHIP RIGHTS - The entity has valid legal ownership rights over the inventories claimed
to be held by the entity and recorded in the FS
 Vouch recorded purchases to underlying documentation (purchase requisition, purchase order,
receiving report, vendor invoice and cancelled cheque or payment file).
 Evaluate the consigned goods.
 Examine client correspondence, sales and receivables records, purchase documents.
 Determine existence of collateral agreements.
 Review consignment agreements.
 Review material purchase commitment agreements.
 Examine invoices for evidence of ownership i.e. the invoices shall be in the name of the client.
 Auditor shall obtain confirmation for significant items of inventory.
 For instances of inventory held by third party, the auditor should insist on obtaining declaration
from the third party on its business letterhead and signed by an authorized personnel of that
third party confirming that the items of inventory belong to the entity and are being held by such
third party on behalf of and for the benefit of the entity under audit.

VALUATION-Inventories have been VALUED appropriately and as per generally accepted accounting
policies and practices
 Depending on how the business operates, the management may value inventory using First-in first-
out (FIFO) or weighted average basis. Consider the reasonableness of the method adopted.
 For Raw materials and consumables
 Ascertain what elements of cost are included e.g. carriage inward, non- refundable duties etc.
 If standard costs are used, enquire into basis of standards; how these are compared with
actual costs and how variances are analyzed and accounted for/ treated in accounting records.
  Test check cost prices used with purchase invoices received in the month(s) prior to counting.
 Follow up valuation of all damaged or obsolete inventories noted during observance of physical
counting with a view to establishing a realistic net realizable value.
 For Work in progress
 Ascertain how the various stages of production/ value additions are measured and in case
estimates are made, understand the basis for such estimates.
 Ascertain what elements of cost are included. If overheads are included, ascertain the
basis on which they are included and compare such basis with the available costing and
financial data/ information maintained by the entity.
 Ensure that material costs exclude any abnormal wastage factors.
 For Finished goods and goods for resale
 Enquire as to what costs are included, how these have been established and ensure that the
overheads included have been determined based on normal costs and appear reasonable in
relation to the information disclosed in the FS.
 Ensure that inventories are valued at net realizable value if they are likely to fetch a value
lower than their cost. For any such items, also verify if the relevant semi/ partly processed
inventories (work in progress) and raw materials have also been written down.
Follow up for items that are obsolete, damaged, slow moving and ascertain the possible realizable
value of such items. Carefully examine the valuation of obsolete and damaged inventory. For the
purpose, request the client to provide inventory ageing split and follow up for any inventories
which at time of observance of physical counting were noted as being damaged or obsolete.
 Compare recorded costs with replacement costs.
 Examine vendor price lists to determine if recorded cost is less than current prices.
 Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is significantly
lower.
 In manufacturing environments, test overhead allocation rates and ensure that only direct
labor, direct material and overhead have been included.
 Verify the correct application of lower-of- cost-or-net realizable value principles.

LAND, BUILDING, PLANT & EQUIPMENT, FURNITURE & FIXTURES, VEHICLES, OFFICE
EQUIPMENT, COMPUTERS ETC. REFERRED TO AS “PROPERTY, PLANT AND EQUIPMENT”
(“PPE”)
The Valuation of PPE becomes a very important aspect of consideration by the auditor in the course of
his audit. The auditor should analyze the expenditure incurred on PPE, whether they are of Revenue
or Capital in nature.
Recognition Criteria for PPE
The cost of an item of PPE should be recognised as an asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
enterprise, and
(b) The cost of the item can be measured reliably.
An enterprise evaluates under this recognition principle all its costs on property, plant and
equipment at the time they are incurred. These costs include costs incurred:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.

Measurement at Recognition
An item of property, plant and equipment that qualifies for recognition as an asset should be
measured at its cost.

Elements of Cost
The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non –refundable purchase taxes, after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling, removing the item and restoring the site on which
it is located, referred to as decommissioning, restoration and similar liabilities’, the obligation for
which an enterprise incurs either when the item is acquired or as a consequence of having used
the item during a particular period for purposes other than to produce inventories during that
period.

Examples of directly attributable costs are:

(a) costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from the
construction or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from
selling any items produced while bringing the asset to that location and condition (such as samples
produced when testing equipment); and
(f) Professional fees.

Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service (including costs of advertising and promotional
activities);
(c) costs of conducting business in a new location or with a new class of customer (including costs of
staff training); and
(d) administration and other general overhead costs.
The expenses have to be analyzed and properly classified. The revenue expense like regular repairs
on assets have to be charged off to the Statement of Profit and Loss.

EXISTENCE of PPE as at the period-end- Audit Procedures

 Review entity’s plan for performing physical verification of PPE i.e. whether performed by own
staff or by a third party and the policy regarding periodicity i.e. whether physical verification
shall be done on annual basis or once in two years/ three years.
 Evidence of appropriate supervision of those performing physical verification of PPE should be
examined.
 Obtain PPE physical verification report backed by the working sheets from the entity and perform
the following procedures:
— Assess if all items of PPE are properly tagged and carry identification marks/ numbers and
physical verification work papers do capture the asset identification numbers for assets
physically verified.
— Reconciliation of items of PPE as physically verified with the fixed asset register maintained
by the entity as at the date/ period of undertaking physical verification. Specifically verify if
the PPE additions up to the date of physical verification have been updated in the fixed asset
register.
— Verify the discrepancies noted, based on physical verification undertaken and the manner in
which such discrepancies have been dealt with in the entity’s books and FS. For example, any
identified shortages/ assets not in working condition and/or active use should be accounted
 for as deletions in the books of account post approvals by the entity’s management and
depreciation should have ceased to be charged after the date of deletion.

COMPLETENESS- Additions to PPE during the period under audit have been recorded in the FS and
do not include any PPE that belong to third parties but does include PPE owned and controlled by
the entity although lying with a third party
 Verify the movement in the PPE schedule (asset class-wise like building, Plant & machinery etc.)
compiled by the management i.e. Opening balances + Additions during the period – Deletions
during the period = Closing balances. Tally the closing balance to the entity’s books of account.
 Check the arithmetical accuracy of the movement in PPE schedule. Tally the opening balances to
the previous year audited FS. For additions during the period under audit, obtain a listing of
all additions from the management and perform the following procedures:
— For all material additions, verify if such expenditure meets the criteria of PPE as per AS
10 (Revised).
These costs include costs incurred initially to acquire or construct an item of property, plant and
equipment and costs incurred subsequently to add to, replace part of, or service it.
Verify that the cost of an item of property, plant and equipment is as per AS 10 (Revised).
o Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with AS10 (Revised) when they meet the definition of property, plant and
equipment. Otherwise, such items are classified as inventory. Ensure that the entity is
not recognizing costs of the day-to-day servicing in the carrying amount of an item of
property, plant and equipment.
o Test the purchase invoice, installation certificate or report or other similar
documentation maintained by the entity to verify the date of addition, for all additions
samples of PPE during the period under audit.
o Verify whether the PPE additions have been approved by authorized personnel.
Verify whether proper internal processes and procedures like inviting competitive
quotations/ floating tenders etc. were followed prior to finalising the vendor for
procuring items of PPE/ awarding of work contract for capital projects by checking the
supporting documents of the samples selected.
o In relation to deletions to PPE, understand from the management the reason and rationale
for deletion (example could be new purchase of similar asset once the old asset was no
longer fit to be used in production process) and the manner of disposal. Obtain the
management approval and discard note authoring disposal of the asset from its active use.
Verify the process followed for sale of discarded PPE, for example - inviting competitive
quotes, tenders and the basis of calculation of sales proceeds. Verify that the
management has accurately recorded the deletion of PPE (original cost and accumulated
depreciation up to the date of disposal) and the resultant gain/ loss on disposal of PPE
item in the entity’s books of account.

VALUATION- PPE have been VALUED appropriately and as per generally accepted accounting
policies and practices.
It is a common understanding that the value of fixed assets/ PPE depreciates due to efflux of
time, use and obsolescence. The diminution of the value represents an item of cost to the entity
for earning revenue during a given period. Unless this cost in the form of depreciation is charged
to the accounts, the profit or loss would not be correctly ascertained and the values of PPE would
be shown at higher amounts. The auditor should:
 Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is
non- depreciable like freehold land;
 Assess that the depreciation method used reflects the pattern in which the asset’s
 future economic benefits are expected to be consumed by the entity. It could be Straight line
method, diminishing value method, unit of production method, as applicable.
 The auditor should also verify whether the management has done an impairment assessment to
determine whether an item of property, plant and equipment is impaired as per the requirements
of AS 28 - Impairment of Assets.

RIGHTS AND OBLIGATION –(MTP 3 Marks Oct 19, RTP Nov ’19 & May ’18, & New SM)
The entity has valid legal ownership rights over the PPE claimed to be held by the entity and recorded
in the FS.
 verify that all PPE purchase invoices are in the name of the entity that entitles legal title of
ownership to the respective entity.
 For all additions to land and building in particular, the auditor should check the conveyance
deed/ sale deed to verify whether the entity is the legal and valid owner or not.
 The auditor should insist and verify the original title deeds for all immoveable properties held
as at the balance sheet date.
 In case the entity has given such immoveable property as security for any borrowings and the
original title deeds are not available with the entity, the auditor should request the entity’s
management for obtaining a confirmation from the respective lenders that they are holding the
original title deeds of immoveable property as security.
 In addition, the auditor should also verify the register of charges, available with the entity to
assess that any charge has been created against the PPE.

DISCLOSURES for PPE

Ensure whether the following disclosures as required under Schedule III (Part I) to Companies
Act, 2013 have been made under the heading “Property, Plant and Equipment”:
i. Classification shall be given as:
(a) Land;
(b) Buildings;
(c) Plant and Equipment;
(d) Furniture and Fixtures;
(e) Vehicles;
(f) Office equipment;
(g) Others (specify nature).
ii. Assets under lease shall be separately specified under each class of asset.
iii. A reconciliation of the gross and net carrying amounts of each class of assets at the beginning
and end of the reporting period showing additions, disposals, acquisitions through business
combinations, amount of change due to revaluation (if change is 10% or more in the aggregate
of the net carrying value of each class of Property, Plant and Equipment) and other adjustments
and the related depreciation and impairment losses/reversals shall be disclosed separately.
iv. Where sums have been written-off on a reduction of capital or revaluation of assets or where
sums have been added on revaluation of assets, every balance sheet subsequent to date of such
write-off, or addition shall show the reduced or increased figures as applicable and shall by way
of a note also show the amount of the reduction or increase as applicable together with the
date thereof for the first five years subsequent to the date of such reduction or increase.

INTANGIBLE ASSETS (COMPRISING GOODWILL, BRAND/ TRADEMARKS, COMPUTER

SOFTWARE ETC.)
 An intangible asset is an identifiable non-monetary asset, without physical substance, held for
use in the production or supply of goods or services, for rental to others, or for administrative
purposes.
 Common examples are computer software, patents, copyrights, motion picture films, customer lists,
mortgage servicing rights, fishing licenses, import quotas, franchises, customer or supplier
relationships, customer loyalty, market share and marketing rights. Goodwill is another example of
an item of intangible nature which either arises on acquisition or may be internally generated.
 As per AS 26 – Intangible Assets, internally generated goodwill should not be recognized as an
asset.
 Some intangible assets may be contained in or on a physical substance such as a compact disk (in
the case of computer software), legal documentation (in the case of a licence or patent) or film (in
the case of motion pictures). The cost of the physical substance containing the intangible assets is
usually not significant. Accordingly, the physical substance containing an intangible asset, though
tangible in nature, is commonly treated as a part of the intangible asset contained in or on it.
 In some cases, an asset may incorporate both intangible and tangible elements that are, in
practice, inseparable. Judgement is required to assess as to which element is predominant.
For example, computer software for a computer-controlled machine tool that cannot operate
without that specific software is an integral part of the related hardware and it is treated as a
fixed asset. The same applies to the operating system of a computer.
 Where the software is not an integral part of the related hardware, computer software is treated
as an intangible asset.

To establish the EXISTENCE of intangible fixed assets -Audit procedures

 Auditor should verify whether such intangible asset is in active use in the production or supply of
goods or services, for rental to others or for administrative purposes.
Example- for verifying the existence of software, the auditor should verify whether such
software is in active use by the entity and for the purpose, the auditor should verify the sale of
related services/ goods during the period under audit, in which such software has been used.
Example- For verifying the existence of design/ drawings, the auditor should verify the
production data to establish if such products for which the design/ drawings were purchased, are
being produced and sold by the entity.
 In case any intangible asset is not in active use, deletion should have been recorded in the books
of account post approvals by the entity’s management and amortization charge should have ceased
beyond the date of deletion.

COMPLETENESS-All additions to Intangible assets during the period under audit have been recorded
appropriately in the FS.
 Verify the movement in the intangible assets schedule (asset class wise like software, designs/
drawings, goodwill etc.) compiled by the management i.e. Opening balances + Additions – Deletions =
Closing balances.
 Tally the closing balances to the entity’s books of account.
 Check the arithmetical accuracy of the movement in intangible assets schedule.

FOR ADDITIONS during the period under audit, obtain a listing of all additions from the
management and undertake the following procedures:
 For all material additions, verify whether such expenditure meets the criterion for recognition
of an intangible asset as per AS 26.
 Ensure that no intangible asset arising from research (or from the research phase of an
internal project) should be recognised. Expenditure on research (or on the research phase of
an internal project) should be recognised as an expense when it is incurred. Check the
certificate or report or other similar documentation maintained by the entity to verify the date
of use of the intangible which could be linked to date of commencement of commercial
production/ economic use to the entity, for all additions to intangible assets during the period
 under audit.
 Verify whether the additions (acquisitions) have been approved by appropriate entity’s
personnel.
 Verify whether proper internal processes and procedures like inviting competitive quotations/
proper tenders etc. were followed prior to finalizing the vendor for procuring item of intangible
assets by testing those documents on a sample basis.
 In relation to deletions of intangible assets, understand from the management the reason and
rationale for deletion and the manner of disposal. Obtain the management approval and disposal
note authoring disposal of the asset from its active use.
 Verify the process followed for sale of discarded asset, example inviting competitive quotes,
tenders and the basis of calculation of sales proceeds.
 Verify that the management has accurately recorded the deletion of intangible asset (original
cost and accumulated amortization up to the date of disposal) and the resultant gain/ loss
on disposal in the entity’s books of account.

VALUATION- Intangible assets have been VALUED appropriately and as per generally accepted
accounting policies and practices.
The auditor should:
 Verify that the entity has charged amortization on all intangible assets;
 Verify that the amortization method used reflects the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
 The auditor should also verify whether the management has done an impairment assessment to
determine whether an intangible asset is impaired. For this purpose, the auditor needs to verify
whether the entity has applied AS 28 - Impairment of Assets for determining the manner of
reviewing the carrying amount of its intangible asset, determining the recoverable amount of
the asset to determine impairment loss, if any.

RIGHTS AND OBLIGATION -The entity has valid legal ownership rights over the Intangible Assets
claimed to be held by the entity and recorded in the FS.
the auditor while performing testing of additions should also verify that all expense invoices/
purchase contracts are in the name of the entity that entitles legal title of ownership to the
entity.

PROVISIONS AND CONTINGENT LIABILITIES

A provision is a liability which can be measured only by using a substantial degree of estimation.
A provision is recognised when:
(i) an entity has a present obligation (legal or constructive) as a result of a past event;
(ii) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
(iii) a reliable estimate can be made of the amount of the obligation. If the above conditions are
not met, no provision is recognised.
Example: - Provision may include provision for litigation, provision for warranties etc.
A contingent liability is:
(i) a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the entity; or
(ii) a present obligation that arises from past events but is not recognized because:
 it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
  the amount of the obligation cannot be measured with sufficient reliability.

Audit procedures generally required to be undertaken while auditing provisions and

contingent liabilities:
 Obtain the underlying working and the basis for each of the provisions made, from the management
and verify whether the same is complete and accurate.
 Wherever required, obtain expert’s report, calculation and underlying working for the provision
amount, example for warranty involving complex calculations, some entities get that valued through
an actuary. In such a case, the auditor may request the management to share the actuarial valuation
report and in case of any matter under legal dispute, the auditor should request for assessment
made by a legal expert in relation to likelihood of a liability devolving on the entity i.e. whether
probable or possible or remote as defined above. The auditor should then verify the underlying
assumptions used by the expert with the data shared by the management.
 As per SA 500 – “Audit Evidence”, issued by ICAI, when using the work of a management’s expert,
audit evidence that the auditor should obtain include:
o Evaluate the competence, capabilities and objectivity of that expert:
 Whether the expert is employed by the entity or is an outside party.
 Whether the expert is independent in respect of the entity.
 Auditor’s previous experience of the work of the expert.
 Knowledge of the expert, his qualification, membership of a professional body or industry
association, etc.
 Obtain an understanding of the work of that expert:
 Whether the auditor has expertise to evaluate the work of the expert.
 Evaluating the assumptions and methods used by the management.
 Evaluating the nature of internal or external data used by the expert.
 Evaluate the appropriateness of his work as audit evidence for the relevant assertion:
 Relevance and reasonableness of the expert’s findings or conclusions
 Evaluating the relevance, completeness and accuracy of the source data used by the
expert.
 The auditor shall obtain written representation from the management that it has made all the
provisions which were required to be made as per the recognized accounting principles.

AUDIT OF SALES OF PRODUCTS AND SERVICES

The sales and collections cycle in a business refers to the set of processes that begin when a
customer purchases goods or services and ends when the entity receives complete payment against
the sales. As per SA 315, the ROMM in case of revenue items is generally high.
Auditor needs to obtain a clear understanding about the organisation and its revenue
centers.
1. An auditor needs to obtain an understanding of the management control (internal control) in
respect of sales process.
2. An auditor tests the controls the entity has set up for the sales cycle to determine how strong
and reliable they are. If they are strong and operating effectively, the auditor can reduce the
extent of substantive testing. Any deficiencies in the internal control shall be communicated as
per SA 265.
3. The auditor selects a random sample of transactions and examines the related customer
purchase orders, invoices and customer statements to ensure that the control being tested is a
numbered sales invoice. This will enable the auditor to determine the NTE of his substantive
procedures to be applied.
4. Performing substantive audit procedures is a must. Substantive analytical procedures will
consist of sales trend analysis, comparison with previous accounting period, category-wise sales
 analysis, any analysis the auditor may find relevant and most important of all, building a sales
expectation and comparing that with the client’s sales records. The auditor will need to know the
sales prices of the products or services over the year, monthly average sales price per product
or service, discount policy.

OCCURRENCE- Recorded sales represent goods shipped/ services performed during the period
Audit procedures
 Ensure revenue is not overstated by performing following audit procedures:
 Check whether a single sales invoice is recorded twice or a cancelled sales invoice could also
be recorded.
 Whether any fictitious customers and sales have been recorded.
 Whether any shipments were done without the consent and agreement of the customer,
especially at the year end to inflate the sales figure
 Whether unearned revenue recorded as earned.
 Test check few invoices with their relevant entries in sales journal.
 Obtain confirmation from few customers to ensure genuineness of sales transaction
 Whether any substantial uncertainty exists about collectability.
 Whether customer obligations are contingent on other actions (financing, resale, etc.).
 Review sequence of sales invoices
 Review journal entries for unusual transactions
 Calculate the ratio of sales return to sales and compare it with previous year and enquire for
the reasons for increase/ decrease.

COMPLETENESS-
 All sales made during the period were recorded and there is no understatement or overstatement.
 Perform cut-off procedures to ensure that revenues are recognised in the current accounting
period and sales were not tampered towards the period end.
 Cut-off errors will usually arise when companies recognise revenue based on the date on which
the sales invoices are generated rather than the date on which the risks and rewards are
transferred to the buyer. In order to perform a robust sales cut-off test, auditors need to
understand and consider the specific cut-off error risk.
 Auditors should also verify the credit notes issued after the accounting period. Sometimes sales
team or sales personnel can make fictitious sales before the year- end to meet performance
target and cancel out those sales with a post year end credit note.
 Trace from the shipping documents to the sales journal.
 Check whether quantity is appearing in sales register or not and check reconciliation of total
sales/goods dispatched as per stock records and financial records and statutory records like
GST.
 Review GST tax and GST returns and ensure that the same are reconciled with revenue reported
in the profit and loss account.
MEASUREMENT-
 All sales are accurately measured as per applicable accounting standards and correctly journalized,
summarized, and posted.
 Trace a few transactions from inception to completion. (Examination in depth)
E.g: Take few sales transaction, and check from the receipt of sales order to the payment of
receivable balance, every underlying document to ensure if it is properly recorded a t
every stage and measured accurately taking into consideration all the incentives, discounts, if
any.
 if the client is engaged in export sales, then compliance with AS 11 shall be ensured.
 Auditor must understand client’s operations and related GAAP issues e.g. point of sale revenue
 recognition vs. percentage of completion, wherever applicable.
 Compare the rate of sales affected with related parties and review them for collectability, and
the value of such transactions were reasonable and at arm’s length.

OTHER INCOME COMPRISING INTEREST INCOME, DIVIDEND INCOME, GAIN/ LOSS ON

SALE OF INVESTMENTS ETC.
Any form of income earned by an entity which is not linked to the entity’s core business operations is
generally classified as other income.
 Interest income on fixed deposits is recognized on a time proportion basis taking into account
the amount outstanding and the applicable interest rate.
 Dividends are recognised in the statement of profit and loss only when:
(i) the entity’s right to receive payment of the dividend is established;
(ii) it is probable that the economic benefits associated with the dividend will flow to the
entity; and
(iii) the amount of the dividend can be measured reliably.
 Gain/(loss) on sale of investment in mutual funds is recorded as other income on transfer of
title from the entity and is determined as the difference between the redemption price and
carrying value of the investments.

Audit Procedures for verifying interest income on fixed deposits:

 Obtain a listing of fixed deposits opened during the period under audit along with the applicable
interest rate and the number of days for which the deposit was outstanding during the period.
 Verify the arithmetical accuracy of the interest calculation made by the entity by recomputing
i.e. multiplying the deposit amount with the applicable rate and number of days during the period
under audit.
 For deposits still outstanding as at the period- end, trace the same to the direct confirmations
obtained from the respective bank/ financial institution.
 Obtain a confirmation of interest income from the bank and verify that the interest income as
per bank reconciles to the calculation shared by the entity.
 Also, obtain a copy of Form 26AS (TDS withholding by the bank/ financial institution) and
reconcile the interest reflected therein to the calculation shared by client.
 For Dividends, verify that the same are recognised in the statement of profit and loss only when
the entity’s right to receive payment of the dividend is established.
 Verify that Gain/(loss) on sale of investment in mutual funds is recorded as other income only
on
(i) transfer of title from the entity AND
(ii) is determined as the difference between the redemption price and carrying value of the
investments.

DISCLOSURE REQUIREMENTS

DISCLOSURES IN RESPECT OF BORROWINGS

1. Long-term borrowings shall be classified as:

(a) Bonds/debentures;
(b) Term loans:
(A) from banks.
(B) from other parties.
(c) Deferred payment liabilities;
 (d) Deposits;
(e) Loans & advances from related parties;
(f) Long term maturities of finance lease obligations;
(g) Other loans & advances.
2. Borrowings shall further be sub- classified as secured and unsecured. Nature of security shall
be specified separately in each case.
3. Where loans have been guaranteed by directors or others, the aggregate amount of such loans
under each head shall be disclosed.
4. Particulars of any redeemed bonds/debentures which the company has power to reissue shall be
disclosed.
5. Terms of repayment of term loans and other loans shall be stated.
6. Period and amount of continuing default as on the balance sheet date in repayment of loans
and interest, shall be specified separately in each case.

SHORT TERM BORROWINGS- NOV. 23 EXAM.

(i) Short-term borrowings shall be classified as:
(A) Loans repayable on demand;
• from banks.
• from other parties.
(B) Loans and advances from related parties;
(C) Deposits;
(D) Other loans and advances (specify nature).
(ii) Borrowings shall further be sub- classified as secured and unsecured. Nature of security shall
be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the aggregate amount of such loans
under each head shall be disclosed.
(iv) Period and amount of default as on the balance sheet date in repayment of loans and interest,
shall be specified separately in each case.
(v) current maturities of long-term borrowings shall be disclosed separately.

Note- Disclosure requirements are almost same for both short term & long-term liabilities.

DISCLOSURE OF TRADE PAYABLES - Schedule III (Part I) to Companies Act, 2013.

1. Whether the Company has disclosed the following details relating to micro and small enterprises
in the notes:
 the principal amount and the interest due thereon.
 amount of penal interest paid by the buyer in terms of section 16 of the Micro, Small and
Medium Enterprises Development Act, 2006.
 amount of interest due and payable for the period of delay in making payment.
 amount of interest accrued and remaining unpaid at the end of each accounting year.
2. Trade payables due for payment
following ageing schedule shall be given for Trade payables due for payment: -
Trade Payables ageing schedule
(Amount in Rs.)
Particulars Outstanding for following periods from due date of
payment#
Less than 1 1-2 2-3 More than Total
year years years 3
years
 (i) MSME
(ii) Others
(iii) Disputed Dues- MSME
(iv) Disputed Dues Others

Other Current Liabilities-

other current liabilities are classified as below:
 Current maturities of finance lease obligations
 Interest accrued but not due on borrowings
 Interest accrued and due on borrowings
 Income received in advance
 Unpaid Dividends
 Application money received for allotment of securities and due for refund and interest
accrued thereon
 Unpaid matured deposits/debentures and interest accrued thereon
 Unpaid matured debentures and interest accrued thereon
 Others (specify nature).

Other information as per requirement of Part I, Schedule III, to be disclosed as Additional

Regulatory Information

DETAILS OF BENAMI PROPERTY HELD

Where any proceedings have been initiated or pending against the company for holding any benami
property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made
thereunder, the company shall disclose the following: -
(a) Details of such property, including year of acquisition,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with reasons,
(f) Where there are proceedings against the company under this law as an abetter of the
transaction or as the transferor then the details shall be provided,
(g) Nature of proceedings, status of same and company‘s view on same.

RELATIONSHIP WITH STRUCK OFF COMPANIES

Where the company has any transactions with companies struck off under section
248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall
disclose the following details:-
Name of Nature of transactions with Balance Relationship with the
struck off struck off Company outstanding Struck off company, if
Company any, to be disclosed

Investments in securities
Receivables
Payables
Shares held by stuck off
company
 Other outstanding
balances (to be specified)
Following Ratios to be disclosed: -
(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain the items included in numerator and denominator for computing the above
ratios. Further explanation shall be provided for any change in the ratio by more than 25% as
compared to the preceding year.

DISCLOSURE OF CORPORATE SOCIAL RESPONSIBILITY (CSR)

Where the company covered under section 135 of the companies act, the following shall be
disclosed with regard to CSR activities:-
(a) amount required to be spent by the company during the year,
(b) amount of expenditure incurred,
(c) shortfall at the end of the year,
(d) total of previous years shortfall,
(e) reason for shortfall,
(f) nature of CSR activities,
(g) details of related party transactions, e.g., contribution to a trust controlled by the company
in relation to CSR expenditure as per relevant Accounting Standard,
(h) Where a provision is made with respect to a liability 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

Where the Company has traded or invested in Crypto currency or Virtual Currency during the
financial year, the following shall be disclosed: -
(a) profit or loss on transactions involving Crypto currency or Virtual Currency
(b) amount of currency held as at the reporting date,
(c) Deposits or advances from any person for the purpose of trading or investing in Crypto
Currency/ virtual currency.

DISCLOSURE for other income as per - Schedule III (Part II)

Other income shall be classified as:
(a) Interest Income (in case of a company other than a finance company);
(b) Dividend Income;
(c) Net gain/loss on sale of investments;
(d) Other non-operating income (net of expenses directly attributable to such income).

Note:
To be disclosed as Additional Information Undisclosed income
The Company shall give details of any transaction not recorded in the books of accounts that has been
surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act,
1961 (such as, search or survey or any other relevant provisions of the Income Tax Act, 1961), unless
there is immunity for disclosure under any scheme and also shall state whether the previously
unrecorded income and related assets have been properly recorded in the books of account during
the year.

DISCLOSURE for sales appropriately made - Schedule III (Part II) to Companies Act, 2013.
(A) In respect of a company other than a finance company revenue from operations shall disclose
separately in the notes revenue from—
(a) Sale of products;
(b) Sale of services;
(ba) Grants or donations received (relevant in case of section 8 companies only),]
(c) Other operating revenues;
Less:
(d) Excise duty.
(B) In respect of a finance company, revenue from operations shall include revenue from—
(a) Interest; and
(b) Other financial services.
Revenue under each of the above heads shall be disclosed separately by way of notes to accounts to
the extent applicable.
 Whether brokerage and discount on sales other than usual trade discount has been disclosed.
 Whether the transactions with related parties are appropriately disclosed in notes to
accounts.

DISCLOSURE FOR PROVISIONS

Schedule III (Part I) to Companies Act, 2013:
Long-term provisions
The amounts shall be classified as:
(a) Provision for employee benefits;
(b) Others (specify nature).
Short-term provisions
The amounts shall be classified as:
(a) Provision for employee benefits.
(b) Others (specify nature).
Contingent liabilities and commitments (to the extent not provided for)
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees;
(c) Other money for which the company is contingently liable.
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on capital account and not
provided for;
(b) Uncalled liability on shares and other investments partly paid;
(c) Other commitments (specify nature).
In terms of AS 29, “Provisions, Contingent Liabilities and Contingent Assets”, ensure whether
following disclosures have been made:
 For each class of provision, an enterprise shall disclose:
 the carrying amount at the beginning and end of the period;
 additional provisions made in the period, including increases to existing provisions;
 amounts used (i.e. incurred and charged against the provision) during the period; unused
 amounts reversed during the period.
 An enterprise shall disclose the following for each class of provision:
 a brief description of the nature of the obligation and the expected timing of any resulting
outflows of economic benefits;
 an indication of the uncertainties about the amount or timing of those outflows. Where
necessary to provide adequate information, an entity shall disclose the major assumptions
made concerning future events; and
 the amount of any expected reimbursement, stating the amount of any asset that has been
recognized for that expected reimbursement.
 Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for
each class of contingent liability at the balance sheet date a brief description of the nature of
the contingent liability and, where practicable:
 an estimate of its financial effect
 an indication of the uncertainties relating to any outflow; and
 the possibility of any reimbursement.
Where any of the information required by above paragraph is not disclosed because it is not
practicable to do so, that fact should be stated.

DISCLOSURES FOR INTANGIBLE ASSETS-

Appropriately made under Schedule III (Part I) to Companies Act, 2013 have been made
under the heading “Intangible Assets”:
(i) Classification shall be given as:
(a) Goodwill;
(b) Brands /trademarks;
(c) Computer software;
(d) Mastheads and publishing titles;
(e) Mining rights;
(f) Copyrights, and patents and other intellectual property rights, services and operating rights;
(g) Recipes, formulae, models, designs and prototypes;
(h) Licences and franchise;
(i) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning
and end of the reporting period showing additions, disposals, acquisitions through business
combinations, amount of change due to revaluation (if change is 10% or more in the aggregate of the
net carrying value of each class of intangible assets) and other adjustments and the related
depreciation and impairment losses or reversals shall be disclosed separately.
(iii) Where sums have been written-off on a reduction of capital or revaluation of assets or where
sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-
off, or addition shall show the reduced or increased figures as applicable and shall by way of a note
also show the amount of the reduction or increase as applicable together with the date thereof for
the first five years subsequent to the date of such reduction or increase.
Notes:
To be disclosed as Additional Regulatory Information.
Intangible assets under development:
(a) For Intangible assets under development, following ageing schedule shall be given:
Intangible assets under development ageing schedule

(Amount in Rs.)
Amount in CWIP for a period of Total*
 Intangible asset under Less than 1 1-2 2-3 More than 3
development year years years years

Projects in Progress
Projects temporarily
suspended
* Total shall tally with the amount of Intangible assets under development in the balance sheet.
(b) For Intangible assets under development, whose completion is overdue or has exceeded its
cost compared to its original plan, following Intangible assets under development completion
schedule shall be given**:
(Amount in Rs.)
To be completed in
Intangible asset under Less than 1 1-2 2-3 years More than 3 years
development year years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given separately.

DISCLOSURES FOR INVENTORIES

Ensure whether the following disclosures as required under Schedule III (Part I) to the Companies
Act, 2013 have been made:
 Whether inventory has been classified as:
— Raw materials
— Work-in-progress
— Finished goods
— Stock-in-trade (goods acquired for trading)
— Stores and spares
— Loose tools
— Others (specify nature).
 Whether goods-in-transit have been disclosed separately under each sub-head of inventories.
 Mode of valuation shall be stated.

Required DISCLOSURES for employee benefit expenses have been appropriately made
Ensure whether the following disclosures as required under Schedule III (Part II) to Companies Act,
2013 have been made:
Employee Benefits Expense [showing separately
(i) salaries and wages,
(ii) contribution to provident and other funds,
(iii) expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP),
(iv) staff welfare expenses].

DISCLOSURES FOR PURCHASES

Ensure whether the following disclosures as required under Schedule III (Part II) to Companies
Act, 2013 have been made:
 Whether purchases of stock-in-trade have been specifically disclosed.
 Whether changes in inventories of finished goods, stock–in-trade and work- in-progress have
been specifically disclosed.
 Whether the transactions with related parties are appropriately disclosed in notes to
 accounts.

DISCLOSURE for TRADE RECEIVABLES

 Check that the restatement of foreign currency trade receivables has been done properly in
accordance with AS 11.
 Proper disclosure of Related Party Transactions regarding receivables have been made as per
AS 18 or IND AS 24.
 Ensure that the transactions with parties covered under Section 189 (Register of Contracts
or Arrangements in which Directors are interested) of the Companies Act, 2013 are reported
properly in CARO-2020.

Ensure whether the following disclosures as required under Schedule III (Part I) to Companies
Act, 2013 are made for each amount disclosed under the heading “Trade Receivables”
(i) Trade Receivables ageing schedule
(Amount in
Rs.)

Particulars Outstanding for following periods from due date of

payment

Less than 6 months - 1-2 years 2-3 years More than Total
6 months 1 year 3 years
Undisputed Trade
receivables– considered
good

Undisputed Trade
Receivable- considered
doubtful

Disputed Trade
Receivables considered
good

Disputed Trade
Receivables considered
doubtful

Unbilled dues shall be disclosed separately.

(ii) Trade receivables shall be sub-classified as:
a) Secured, considered good;
b) Unsecured, considered good;
c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
(iv) Debts due by
 directors or other officers of the company or any of them either severally or jointly with
any other person or
 firms or private companies respectively in which any director is a partner or a director or a
member should be separately stated.

DISCLOSURE for OTHER EXPENSES

Ensure other expense have been classified under:
 Rent.
  Insurance.
 Power and fuel.
 Repairs and maintenance- Building, Plant and machinery, others.
 Legal and professional.
 Printing and stationary.
 Travel expenses.
 Miscellaneous expenses.

DISCLOSURES for Intangible Assets-

Appropriately made under Schedule III (Part I) to Companies Act, 2013 have been made
under the heading “Intangible Assets”:
(ii) Classification shall be given as:
(a) Goodwill;
(b) Brands /trademarks;
(c) Computer software;
(d) Mastheads and publishing titles;
(e) Mining rights;
(f) Copyrights, and patents and other intellectual property rights, services and operating rights;
(g) Recipes, formulae, models, designs and prototypes;
(h) Licences and franchise;
(i) Others (specify nature).
(iv) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning
and end of the reporting period showing additions, disposals, acquisitions through business
combinations, amount of change due to revaluation (if change is 10% or more in the aggregate of the
net carrying value of each class of intangible assets) and other adjustments and the related
depreciation and impairment losses or reversals shall be disclosed separately.
(v) Where sums have been written-off on a reduction of capital or revaluation of assets or where
sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-
off, or addition shall show the reduced or increased figures as applicable and shall by way of a note
also show the amount of the reduction or increase as applicable together with the date thereof for
the first five years subsequent to the date of such reduction or increase.
Notes:
To be disclosed as Additional Regulatory Information.
Intangible assets under development:
(c) For Intangible assets under development, following ageing schedule shall be given:
Intangible assets under development ageing schedule

(Amount in Rs.)
Amount in CWIP for a period of Total*
Intangible asset under Less than 1 1-2 2-3 More than 3
development year years years years

Projects in Progress
Projects temporarily
suspended
* Total shall tally with the amount of Intangible assets under development in the balance sheet.
(d) For Intangible assets under development, whose completion is overdue or has exceeded its
cost compared to its original plan, following Intangible assets under development completion
schedule shall be given**:
 (Amount in Rs.)
To be completed in
Intangible asset under Less than 1 1-2 2-3 years More than 3
development year years years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given separately.

DISCLOSURES for CASH AND CASH EQUIVALENTS have been appropriately made
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature)
(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated.
(iii) Balances with banks to the extent held as margin money or security against the borrowings,
guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
(v) Bank deposits with more than 12 months’ maturity shall be disclosed separately.