AIFS Notes
AIFS Notes
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
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
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.
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.
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.
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 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.
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.
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:
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 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.
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.
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.
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.
DISCLOSURE REQUIREMENTS
Note- Disclosure requirements are almost same for both short term & long-term liabilities.
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.
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.
(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.
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].
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.)
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
(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.