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Audit Chapter 9

Audit of Various Items of Financial Statements (with Special Emphasis on Audit of Inventory and
PPE)

Vouching and Verification

Vouching refers to the examination of accuracy, authority and authenticity of transactions that appear in
the books of accounts with the help of vouchers of these transactions. Thus, vouching examines whether –
(i) all transactions undertaken by the entity have been recorded and nothing has been purposefully left
out.
(ii) transactions recorded in the books of accounts are supported by documentary evidence.
(iii) no fraudulent transaction has been recorded in the books of accounts.
(iv) transactions that have been recorded belong to the current accounting year (in case of accrual basis of
accounting).
(v) necessary vouchers relating to entries recorded in books are with the client.

Verification, on the other hand, can be defined as a process of substantiation of assets and liabilities
recorded in the books of account, by means of physical inspection and examination of legal and official
documents, and then forming expert opinion as to the existence, ownership, possession, classification and
valuation of assets and liabilities of an entity.
Thus, verification includes –
(i) Examination of existence of the assets or liabilities on the reporting date.
(ii) Examination of ownership and control of the asset or liabilities on the reporting date.
(iii) Examination of possession of the assets on the reporting date.
(iv) Examination of charges, if any, against the assets.
(v) Examination of accounting of assets or liabilities.

Role of Management Assertions in Designing the Audit Procedure in Audit of Financial Statements
While preparing the financial statements of an entity, company’s management makes various implicit or
explicit claims i.e., assertions with regard to completeness, cut-off, existence/occurrence, valuation/
measurement, rights and obligations and presentation of assets, liabilities, income and expenditures and
disclosure in accordance with the applicable accounting or financial reporting standards. Since an auditor
is to appraise the truthfulness and fairness of financial performance and position as exhibited in the
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financial statements, he must design the audit procedure in such a way that these assertions by
management are verified appropriately.
These assertions comprise the following:

Audit of Income Statement Items

A. Revenue from Operation
Revenue from operation comprises sale of goods, sale of services and other operating revenues. Other
operating revenue includes any revenue earned by the company from its operations other than its principal
activities. For example, Discount Received, Bad Debt Recovery etc.
 Audit Procedure to be Followed
The auditor shall resort to the following audit procedure to audit the revenue from operations.
(a) Occurrence:
(i) The auditor should ensure that all revenue items recognised are genuine and no sale
transactions have been recorded twice.
(ii) He may test check a few invoices with accounting entries. Further, he should check the
sequence of sales invoices, review the recording of unusual transactions, verify the return
transactions with sales invoice, challan, credit note and stock records.

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 (iii) He should also obtain confirmation from few customers to check whether the transactions are
genuine.
(iv) He should ensure that no fake sale transactions have been recorded.
(v) For services, he must see that revenue has been recognised based on the policy undertaken.
(b) Cut-off
He shall see whether revenue from operation includes the sale made and services performed during the
year only.
(c) Completeness
The auditor should verify that all sales effected during the year have been included in revenue. He should
apply the cut-off procedure to ensure that revenues are recognised in the current accounting period and
check if year end sale transactions have been tempered.

(d) Measurement
(i) The auditor shall see that revenues are accurately measured based on applicable Accounting
Standards.
(ii) Trade discount allowed to the customers should be checked. No separate entry for trade
discount should be passed in the books. If there is any significant variation in trade discount
allowed to different customers, the auditor is required to inquire into the reason for such
variations.
(iii) The sales tax, insurance charges, etc. collected through sales invoices must be recorded under
separate accounts.
(e) Presentation and Disclosures
The auditor shall ensure the following disclosure for revenue from operation in respect of a company
(i) Disclosure should be available for each class of goods.
(ii) Revenue from operations shall disclose separately in the notes revenue from - (a) Sale of
products; (b) Sale of services; (c) Other operating revenues; Less: (d) Excise duty.
(iii) In respect of a finance company, revenue from operations shall include revenue from - (a)
Interest; and (b) Other financial services
(iv) Discount other than usual trade discount must be disclosed. Similarly, transactions with
related parties should be separately disclosed in the Notes.
(v) In the case of companies rendering or supplying services, gross income derived from services
rendered or supplied under broad heads.

B. Other Income
Other income comprises interest income (for companies other than a finance company), dividend income,
net gain on sale of investments and other non-operating income such as royalties, lease rentals etc.
 Audit Procedure to be Followed

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The auditor shall resort to the following audit procedure to audit the other income:
(a) Occurrence
(i) The auditor shall obtain a list of new fixed deposits opened during the year along with the
information on rate, tenure and date of investment.
(ii) He shall obtain a confirmation of interest income from bank.
(iii) He should investigate the investment ledger further to see the new investments made in other
securities such as corporate bonds, debentures and shares and check the interest and dividend
income generated therefrom.
(iv) He should trace a sample of dividend/interest received from the cash book through
dividend/interest warrants to investment certificates and their deposit into the bank.
(v) He should also check the net gain or loss on sale of investment based on relevant documents
such as DEMAT and Trading Account details, transfer deeds etc.
(b) Cut-off
The auditor must ensure that interest income does not include any unearned interest and includes interest
accrued on investment.
(c) Completeness
The auditor must ensure that all interest received and accrued and dividend received have been recorded
and the recording has been done appropriately.
(d) Measurement
(i) The auditor must check the accuracy of interest calculation on new fixed deposits and fixed
deposits existing on the opening date of the year.
(ii) He should also see that dividend income received is accurate.
(iii) In certain cases, dividends and interest are received by the client after deduction of tax at
source. The auditor should ensure that dividends and interests are recorded at gross amounts.
(iv) If interest or dividend is received for the pre-acquisition period, the auditor should see
whether proper adjustment has been made with the cost of investment for this preacquisition
dividend or interest.
(e) Presentation and Disclosure
The auditor shall ensure the following disclosure
Other income shall be classified as: (i) Interest Income (in case of a company other than a finance
company); (ii) Dividend Income; (iii) Net gain/loss on sale of investments; (iv) Other non-operating
income (net of expenses directly attributable to such income).

C. Purchases
 Audit Procedure to be Followed
The auditor shall resort to the following audit procedure to audit purchases:
(a) Occurrence
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 (i) The auditor must ensure that only genuine purchases have been recorded in the books of
accounts. He may examine the purchase orders, goods received notes and purchase invoices to
satisfy himself.
(ii) Photocopy of purchase invoices should not be allowed. Moreover, purchase invoices must be
in the name of the entity.
(iii) He shall see whether all the purchases are approved by the relevant authority. The same is
extremely important for purchases from related parties.
(b) Cut-off
The auditor shall see that only purchases during the year have been recognised as expense.
(c) Completeness
(i) He should apply the cut-off procedure to ensure that purchases effected during the year are
only recognised in the current accounting period.
(ii) The auditor should see that purchase invoice should be booked only once the risk and reward
incidental to the ownership has been transferred. He should be careful with delivery terms such as
F.O.B and C.I.F etc.
(iii) The auditor must check the return transactions carefully based on relevant documents.
(iv) He shall ensure correct accounting for goods-in-transit.
(d) Measurement
(i) The auditor shall see that purchase transaction values have been correctly calculated
considering the trade discount applied.
(ii) Information relating to input tax credit shall be verified. The auditor shall see that appropriate
adjustments have been made in this respect.
(e) Presentation and Disclosure
The auditor shall see that the following disclosure as per Schedule III (Part 1) has been appropriately
done:
(i) In the case of manufacturing companies, —
(1) raw materials under broad heads;
(2) goods purchased under broad heads;
(ii) In the case of trading companies, purchases in respect of goods traded in by the company under broad
heads.
(iii) Transactions with related parties.

D. Employee Benefit Expenses

 Audit Procedure to be Followed
In addition, the auditor shall resort to the following audit procedure:
(a) Occurrence
(i) The auditor should ensure that all expenses included in the ‘employee benefit expenses’ are genuine.
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(ii) He should obtain a complete list of employees with data on new hires, their appointment dates and
remuneration terms and conditions.
(iii) For a sample of newly appointed employees, he may conduct a complete examination of their
appointment and remuneration paid as per terms.
(iv) Similarly, he may collect a list of employees resigned or terminated during the year and see that their
payments have been appropriately decided and settled.
(v) He should obtain the pay roll register and conduct and examination of reasonability of remuneration
and investigate irregularities, if any.
(b) Cut-off
The auditor must ensure that only employee benefit expenses relating to current year have been
recognised.
(c) Completeness
(i) The auditor shall see that all the employee benefit expenses have been appropriately recorded in the
books of accounts.
(ii) He should also check whether all the amount of money deducted from salary have been duly
deposited and if not, the same have been shown as a current liability.
(d) Measurement
(i) The auditor must see that the total amount of remuneration is correctly determined. He may conduct a
test on a sample to check the same.
(ii) He should check whether statutory deductions have been accurate and post-employment benefits have
been determined as per the policy adopted.
(e) Presentation and Disclosure
Employee Benefits Expense shall be shown separately as (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.

E. Depreciation and Amortisation

 Audit Procedure to be Followed
In addition, the auditor shall resort to the following audit procedure:
(a) Occurrence
(i) The auditor shall obtain the fixed asset register and identify the items of assets acquired, sold
and discarded during the year. This will help him to determine the items of assets eligible for
depreciation and amortisation during the year.
(ii) He may select a sample of assets on materiality considerations and verify the rates and amount
of depreciation and amortisation calculated.
(b) Cut-off

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The auditor needs to ensure that depreciation is charged on the assets purchased from its date of put to use
and not form purchase date. Moreover, he shall also see that, in case the company has a policy of
charging depreciation on time basis, deprecation on items acquired during the year is calculated from the
date of put to use to year end and for items sold, from the beginning of the year up to the date of sale.
(c) Completeness
(i) He must ensure that depreciation and amortisation have been charged on all eligible tangible
and intangible assets respectively and no fake assets have been considered for this purpose.
(ii) The auditor shall see that the amount of depreciation and amortisation have been appropriately
accounted in primary books and posted to appropriate accounts.
(iii) He shall also ensure that depreciation on revalued amount has been properly accounted from
revaluation reserve.
(iv) He should also ensure that for any retrospective change in the method of depreciation, due
effect has been given in the Income Statement.
(d) Measurement
(i) The auditor shall see that the rate of depreciation is consistent with the rates suggested in
Schedule II and the amount of depreciation and amortisation has been calculated accurately based
on the rates and time involved.
(ii) He shall ensure that the rates have been decided in conformity with the effective life of assets.
(iii) He should also see that residual value has been properly determined.
(iv) The auditor shall also see that in case of change in estimation of useful life or in case of
impairment, the amount of depreciation has been calculated appropriately.
(e) Presentation and Disclosure
The auditor must see that the following disclosure requirements as per Schedule III (Part 1) have been
duly complied with:
(i) Accounting policy for depreciation and amortisation.
(ii) Useful life of assets as per Schedule II.
(iii) Residual value and the method of depreciation.

F. Finance Cost
 Audit Procedure to be Followed
In addition, the auditor shall resort to the following audit procedure:
(a) Occurrence
(i) The auditor shall see whether interest has been provided on all eligible debt instruments and
loans.
(ii) He shall verify the amount of interest payment form bank statement and shall check the same
with accounting entries in the cash book and general ledger.

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 (iii) He shall see that interest was paid and provided only in respect of loans outstanding either for
a part of the year or for entire year.
(b) Cut-off
The auditor shall ensure that interest has been provided only for the period the loan was outstanding
during the year.
(c) Completeness
The auditor shall ensure that interest due but not paid has also been considered as Accrued Interest and
the same is appropriately accounted and shown in the financial statement.
(d) Measurement
(i) The auditor must verify the calculation of interest payable based on the rate, loan amount
outstanding and the period for which the loan remains outstanding during the year.
(ii) He shall be extra careful with loan items repaid during the year and debentures redeemed
during the year.
(e) Presentation and Disclosure
The auditor must see that the disclosure requirements as per Schedule III (Part 1) and various Accounting
Standards (or Ind ASs) have been duly complied with.

G. Other Expenses
 Audit Procedure to be Followed
In addition, the auditor shall resort to the following audit procedure:
(a) Occurrence
(i) The auditor needs to ensure that all expenditure charged against the revenue are genuine. For this
purpose, he should vouch the expenditure based on relevant documents.
(ii) With respect to rent he should obtain a monthly expense schedule along with the rent agreements and
verify whether the agreement is in the name of the company and whether the rent for all the months has
been recorded.
(iii) With respect to power and fuel expenses, the auditor should collect a monthly expense schedule and
see that the expense for all the months has been recorded.
(iv) With respect to insurance expenses, the auditor should obtain a summary of insurance policies taken
along with their validity period and see that the expense shown is genuine.
(v) With respect to legal and professional expenses, the auditor should collect a consultation-wise
summary and see that the expense is genuine. For monthly retainership agreements, he shall verify that
expense for all 12 months has been recorded. For non-recurring expenses a test on selected sample may
be preferable.
(b) Cut-off
The auditor should ensure that expenses charged against the revenue are related to current year only. He
should be extra cautious with rent and insurance expenses as the often involve advance payments.
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(c) Completeness
The auditor should ensure that the transactions are properly authenticated as per the policy of the
company, appropriately classified and proper accounting entry has been done for their payment and
adjustments (e.g., outstanding and prepaid expenses).
(d) Measurement
In case of monthly expenses as per agreement, the auditor should verify the calculation of the expense
and adjustment for outstanding and prepaid expense, if any. He should be extra careful with escalation
clause and rent agreements terminated during the year.
Audit of Balance Sheet Items
A. Property, Plant and Equipment
 Audit Procedure to be Followed
(a) Existence
(i) The auditor must ensure physical verification of the assets to confirm that they exist and are
under the possession of the client.
(ii) He must tally the physical verification report with the asset register maintained by the
company as at the reporting date. He shall ensure that PPE additions up to the date of verification
have been updated in the register.
(iii) He shall demand explanations for any discrepancies found in the above process.
(iv) He shall specifically ensure that assets that are not in the working condition have been
accounted for as deletions.
(b) Rights and Obligations
(i) The auditor should verify that PPE additions have been approved by the responsible official
and such additions are as per the capital expenditure budget approved by the board for the
financial year concerned.
(ii) He shall also verify whether appropriate internal processes and procedures like inviting
competitive quotations or floating tenders were done before finalising the vendor.
(iii) The auditor shall check that PPE purchase invoices are in the name of the client that entails
the legal ownership. For land and building, the auditor shall verify the title deed of the property. In
case any charge is created on any immovable property due to any loan taken from a bank or
financial institution and hence the original title deed is with the lender, the auditor shall ask the
management to obtain a written confirmation from the lender in this respect.
(iv) In relation to all deletions, he shall verify management’s rationale for deletion. He may also
seek any report from the technical expert, if any, that led to such decision of deletion.
(v) He shall also verify whether such deletions are appropriately authorised, followed the
established internal procedures (like inviting tenders etc.) and properly recorded in the books of
accounts.

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(c) Cut-off
The auditor shall see that the Net Block of assets shown in the Balance Sheet comprises all assets existed
and under the ownership of the company on the reporting date and depreciation pertains to the current
period only.
(d) Completeness
(i) He shall also verify the PPE schedule (asset class wise) maintained by the management and
tally the closing balances to the entity’s books of accounts.
(ii) He should check the arithmetical accuracy of the movement in PPE schedule and reconcile the
opening balance with the closing balance of each class of asset by considering the additions and
disposals during the year.
(e) Valuation
(i) The auditor shall see that all items of PPE have been carried at cost less accumulated
depreciation less accumulated impairment1 loss. The cost, for this purpose, includes all costs
incurred to acquire or construct the PPE and all subsequent costs to replace part of it. However,
day-to-day servicing cost should not be included. They should be charged to profit and loss.
(ii) He shall also verify the installation certificate to know the date of installation of the asset. This
information will be important in calculating the pro-rata depreciation.
(iii) The auditor shall verify whether depreciation has been charged on all items except the
freehold land. He shall also see that the depreciation method reflects the pattern in which the
future economic benefits are expected to be derived from the assets. In case of company, the
auditor shall also ensure that depreciation has been calculated in compliance with Schedule II of
the Companies Act 2013.
(f) Presentation and Disclosure
(i) In case of a company, the auditor should ensure that the all items of PPE have been disclosed in
the balance sheet of the company under the head ‘Non-current Assets’ and subhead ‘Fixed Assets’
as ‘Tangible Asset’ as per Schedule III of the Companies Act 2013.
(ii) He shall also ensure that all the relevant information has also been disclosed in the ‘Notes to
Accounts’ section.

B. Patent and Copyright

 Audit Procedure to be followed to verify the assertions
(a) Existence
(i) A schedule of patents and copyright held by the company should be procured from the
management.
(ii) The document of each patent and contract paper of each copyright should be physically
verified by the auditor to ensure that it has been duly registered.

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 (iii) The auditor shall ensure that the patent is in active use in production of goods or rendering
services.
(b) Rights and Obligations
(i) The ownership of patents and copyrights should be verified by inspection of the certificate of
patent issued in the name of the client and the contract paper of copyright.
(ii) If it has been purchased, the agreement surrendering it in favour of the client should be
examined.
(iii) The last renewal receipt should be examined to ascertain that the patent has not lapsed.
(iv) The auditor has to verify that renewal fees have been paid on due dates by being charged to
revenue and not to the patent account.
(c) Cut-off
The auditor shall see that the value of these assets shown in the Balance Sheet comprises all assets existed
and under the ownership of the company on the reporting date and amortization pertains to the current
period only.
(d) Completeness
(i) The auditor should check the patent and copyright register carefully in order to verify that all
the items have been properly included therein. He must ensure that patents and copyrights
acquired during the year has been entered in the register and items lapsed during the year has been
removed properly.
(ii) He shall verify the arithmetical accuracy of the above movements in asset schedule.
(e) Valuation
(i) The auditor should ensure that patents and copyrights are being shown at cost less amortisation
charges.
(ii) He shall also see that the amortisation rate follows the pattern in which the benefits are
expected to be consumed.
(iii) In case it is purchased from a third party, the cost of the patent and copyright is the
acquisition cost. Also, the cost of registration of the same in the client’s name should be included
in the valuation, while the renewal fees for patents should be charged off to revenue. The auditor
should examine the same.
(iv) If the patent has been developed by the client in house, all development expenses, legal
charges, including registration fees and other direct costs incurred in creating it, should be
capitalized (as per Ind AS 38 or AS 26).
(v) The cost of patent should be written off over the legal term of its validity or over its useful
commercial life, whichever is shorter. The cost of the copyright should be written off over the
legal term of its validity.
(f) Presentation and Disclosure

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(i) In case of a company, the auditor should ensure that the patents and copyright have been disclosed in
the balance sheet of the company under the head ‘Non-current Assets’ and subhead ‘Other Intangible
Asset’ as per Schedule III of the Companies Act 2013.
(ii) He shall also ensure that all the relevant information has also been disclosed in the ‘Notes to
Accounts’ section.

C. Investments
 Audit procedure to be Followed
(a) Existence
(i) The auditor shall collect a schedule of all short and long-term investments from the
management with all possible details including their name, nature, investee entity, purchase
price, date of purchase, tenure, date of interest payment (for debt securities), rate of interest
(for debt securities), past year’s rate of dividend (for share and mutual funds).
(ii) He shall tally the aggregate figure of the schedule with the figure shown in the balance
sheet. He shall also examine the investment register and verify the amount shown in
schedule with the register. The auditor must ensure that only those investments which
belong to the client are shown in the balance sheet.
(b) Rights and Obligations
(i) The auditor shall verify the Memorandum and Article of the company to determine the
power of the company to invest the surplus funds outside.
(ii) By verifying all the certificates, he shall determine the rights of the company in respect
of the investments made, especially, the interest and dividend.
(iii) The auditor shall also see that all interest has been duly received and included in
income. Outstanding interest if any should be recalculated and verified with the figure
shown.
(c) Cut-off
The auditor shall see that the value of investments shown in the Balance Sheet comprises all
investments existed and under the ownership of the company on the reporting date.
(d) Completeness
(i) The auditor shall ensure that the schedule of investment is exhaustive.
(ii) He shall also ensure that all movements in the investment ledger have been appropriately
recorded.
(e) Valuation
(i) The auditor shall see that all costs incurred in connection with purchase of investments
have been capitalised. However, in case the investment is purchased at cum-interest price,
he shall see that cost doesn’t include the interest component.

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 (ii) He shall also see that bonus shares received by the company are recorded in the
investment ledger without attributing any cost to it. In case of right shares purchased by
purchasing the right also, the cost of right entitlement must also be capitalised.
(iii) He shall see that any pre-acquisition dividend is credited to the investment account
itself and not considered in the Statement of Profit and Loss.
(iv) The auditor shall also verify that the value of the investment has been determined
following the relevant accounting standards keeping in mind the nature of investments.
(f) Presentation and Disclosure
(i) In case of a company, the auditor should ensure that the investments have been disclosed in the
balance sheet of the company under the head ‘Non-current Assets’ and ‘Current Asset’ within the
subhead ‘Financial Assets’ as per Schedule III of the Companies Act 2013.
(ii) The auditor shall also ensure that all the relevant information has also been disclosed in the
‘Notes to Accounts’ section.

D. Inventories/Stock in Trade
 Audit Procedure to be Followed
(a) Existence
(i) The auditor should review the client’s plan to verify inventory physically. He shall see
that the process is properly supervised. He must ensure that all stock count sheets are signed
by a responsible official of the client.
(ii) Where the client follows periodic system stock count should be done at the end of the
period. On the other hand, where the client follows perpetual system, stock count should be
done at interim dates.
(iii) The auditor must satisfy himself about any inventory lying at public warehouses or with
third party.
(b) Rights and Obligations
(i) The auditor shall also vouch recorded purchases to underlying documentation such as
purchase invoice, purchase order, Goods Received Notes etc to determine that client is the
owner of such goods.
(ii) He shall evaluate consignment agreement and any collateral agreement and examine the
terms and conditions binding on the client.
(iii) He shall also obtain confirmation from the third parties for inventories lying with them.
(c) Cut-off
The auditor shall see that the value of investments shown in the Balance Sheet comprises all
investments existed and under the ownership of the company on the reporting date.
(d) Completeness
(i) The auditor should perform analytical procedure to identify any abnormality.
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 (ii) He should collect non-financial information such as weights and measures and check the
same with physical verification reports.
(iii) He shall also perform purchase and sale cut-off test to identify misappropriation near
the year end. He shall also ensure that no item is omitted from inventories and no invalid
item is included in inventories. For this purpose, information of all stock lying with
customers (under hire purchase system or sale on approval system), at branch and with
consignee must be procured and verified.
(e) Valuation
(i) The auditor must determine the appropriateness of the method of issuing inventory
(LIFO, FIFO, Weighted Average, etc.) for valuation purpose.
(ii) Value of raw materials must be examined based on the cost of purchase, carriage
inwards, duties paid, market price of raw materials and estimated cost of disposal. The
auditor shall see that lower of cost and NRV has been considered as the value. Relevant
documents for this purpose would be purchase invoice, voucher for transport cost, etc.
(iii) He shall also ensure that work-in-progress has been valued considering the completed
stage of production and all direct and relevant indirect costs (up to works cost).
(f) Presentation and Disclosure
(i) In case of companies, as per Part I of Schedule III of the Companies Act, 2013 all items of
inventories shall be included in the head ‘Current Assets’ under the subhead ‘Inventories’.
(ii) Additionally, in notes to accounts the following disclosures shall be made.
 Inventories shall be classified as – (a) Raw materials (b) Work-in-progress (c) Finished
goods (d) Stock in trade (in respect of goods acquired for trading) (e) Stores and spares (f)
Loose goods (g) Others (specify nature).
 Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
 Mode of valuation shall be stated.

E. Loans
 Audit Procedure to be Followed
(a) Existence
(i) At first, the auditor must obtain separate schedules of long-term and short-term loans and
advances. He should verify whether the balances shown in the schedule agree with the
respective ledger accounts.
(ii) He should also attempt to obtain written confirmation from those who have been granted
the loans and advances.
(iii) In case of claims made against insurance companies, railways, etc. the auditor should
verify that only claims that were admitted have been shown as loans and advances. For this
purpose, all the related correspondence has to be examined.
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(b) Rights and Obligations
(i) The auditor should see that loans and advances have been authorised by the
Memorandum and Articles of Association.
(ii) He shall be extra cautious in verifying the authorisation for related party loans and
advances.
(iii) In case loans and advances have been granted against any security, the auditor shall
verify the mortgage deed for the terms and conditions. For unsecured loans, he shall judge
the possibility of its recovery.
(c) Cut-off
The auditor shall see that the value of loans shown in the Balance Sheet comprises all loans given
by the company and outstanding on the reporting date.
(d) Completeness
(i) The auditor should see that all the loans and advances that are outstanding on the
reporting date have been recorded.
(ii) He should also see that all the money recovered against the advances have been
appropriately recorded against the respective advances.
(e) Valuation
(i) He shall obtain an aging schedule of different loans and a list of loans under litigations.
(ii) He should also verify the previous year’s estimate of doubtful loans and after a
discussion with the management verify the adequacy of the allowances for doubtful
accounts during the current year.
(f) Presentation and Disclosure
(i) In case of a company, the auditor must see that loans and advances have been shown
under Non-current Assets and Current Assets under subheads Loans as per Part I of
Schedule III of the Companies Act 2013.
(ii) He shall also ensure that all the relevant information has also been disclosed in the
‘Notes to Accounts’ section.

F. Trade Receivable
 Audit Procedure to be Followed
(a) Existence
(i) The auditor should obtain a schedule of debtors duly signed by a responsible officer and examine
it with reference to individual debtors’ accounts.
(ii) The auditor should carry out an examination of the relevant records himself about the validity,
accuracy and recoverability of the trade receivables balances.
(iii) The auditor should check the agreement of balances as shown in the schedules of trade
receivable with those in the ledger accounts.
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(b) Rights and Obligations
(i) The auditor must ensure that the company has valid claims in respect to the amount shown as
debtors.
(ii) He shall examine the bills and notes receivables to see whether those are legally held by the
company.
(c) Cut-off
The receivable balance must represent the sundry debtors and other receivables held by the
company on the reporting date only.
(d) Completeness
(i) The auditor should ensure that all debtors and receivables have been included in Trade
Receivables. In case of dispute, he must obtain confirmation from debtors in this respect.
(ii) Inspect relevant correspondence such as court order declaring insolvency of a debtor.
Correspondence between the client and his lawyer for bad debts written off.
(e) Valuation
(i) The provision for bad and doubtful debts is to be recomputed and compared it with past period
for assessing its reasonableness.
(ii) The calculation of discount on bills must be verified.
(iii) Rebates and discount allowed in excess of normal terms should be investigated.
(f) Presentation and Disclosure
The auditor must ensure the following reclosures as per Part I of Schedule III with respect to “Trade
Receivable” in notes to accounts:
(i) Trade receivables shall be sub-classified as:
(a) Secured, considered good
(b) Unsecured, considered good
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
(iii) Debts due by directors or other officers of the company or any of them either severally or
jointly with any other person or debts due by firms or private companies respectively in which any
director is a partner or a director or a member should be separately stated.
(iv) For trade receivables outstanding ageing schedule shall be given.

G. Cash and Cash Equivalents

 Audit Procedure to be Followed
(a) Existence
(i) The auditor shall exercise special care to verify cash balances. They shall be preferably checked
by surprise. Physical verification of cash in hand would be utmost essential in this context.
(ii) If the company maintains any rough Cash Book or details of daily balances, the auditor shall
perform test check to see that entries in the Cash Book are accurate. In case he finds any slip
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indicating temporary advance given to an employee which has been included in the cash balance, he
should have them initiated by responsible official.
(b) Rights and Obligations
The auditor shall verify that all the deposits are in the name of the client. For this purpose, the
confirmation of the banker and certificate of such deposits shall be examined.
(c) Cut-off
The cash balances must represent the amount of cash and cash equivalents on the reporting date.
(d) Completeness
The auditor shall ensure confirmation of 100% of the bank accounts. He shall also be careful to
include all items of cash in hand in the total balance.
(e) Valuation
In addition to performing the above steps, the auditor shall also see that all bank balances
representing holding of foreign currencies have been appropriately restated at the exchange rate
prevailing on the date of reporting.
(f) Presentation and Disclosure
The auditor shall ensure the disclosures as per the relevant Accounting Standards and Part 1 of
Schedule III of the Companies Act 2013.

H. Share Capital
 Audit Procedure to be Followed
(a) Existence
(i) The auditor must conduct a reconciliation between the opening and closing balance of
share capital to know whether there was any new issue, capitalisation or buyback of equity
shares or redemption of preference share.
(ii) In case of change he must ensure that the revised capital is within the limit of authorised
capital of the company.
(iii) He must examine that the transactions effecting the change in share capital are genuine
and properly authorised. He should examine the resolutions of meetings of the BOD and
shareholders for this purpose.
(b) Rights and Obligations
(i) He should ensure that the new issue satisfies all the regulatory requirements of
Companies Act, 2013, SEBI regulations and guidelines.
(ii) In specific, he shall see that no shares have been issued at discount. In case shares have
been issued at premium, he shall see that the balance of Share Premium has been utilised
only for the purposes permitted.
(iii) With respect to issue of sweat equity shares, right shares, bonus shares etc. he shall
ensure that the rules have been duly complied with.
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(c) Cut-off
The balance of Share Capital must represent the amount of share capital on the reporting date.
(d) Completeness
The auditor must ensure that all changes made in share capital have been duly given effect and
accounting entries are adequate.
(e) Valuation
The auditor must verify that the proceeds collected are correct. For this purpose, he shall verify the
calculation of total proceeds received, its allocation to various heads and also underwriter’s
commission payable and settlement of their accounts with liability.

I. Borrowings
 Audit Procedure to be Followed
(a) Existence
(i) The auditor should collect a schedule of all borrowings with details regarding the date of
procurement of the loan, period of loan, rate of interest, amount of loan and assets pledged against
the loan, if any.
(ii) He shall examine the loan agreements to ensure that the loans have been taken in name of the
client. He shall tally the loan recorded with the loan agreement.
(b) Rights and Obligations
(i) He must examine the Articles of Association and Memorandum of Association and take note of
the rules and regulations in this respect. He shall ensure that the loan agreement adheres to all such
rules.
(ii) He shall verify that the procurement of loan has been properly authorised. In case of a company,
such authorisation must be in the form of a resolution of the Board.
(c) Completeness
(i) The auditor shall ensure that information regarding all loans has been produced before him and
no loan that was paid earlier in full has been shown as outstanding. Also, he must ensure that
information about the assets pledged and the nature of charge is complete.
(ii) He shall verify all new loans taken during the year and check the minutes of the meetings of the
Board for authorisation of the same.
(d) Valuation
(i) The auditor shall check whether the accounting policies and methods of recording the loan are
appropriate and applied consistently.
(ii) He shall also examine whether the interest payable on such loan has been paid in due time and
the same has been accounted for accordingly. In case any interest is outstanding, the auditor shall
verify the same.

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K. Trade Payable
The term ‘Trade Payable’ comprises both trade creditors (i.e., sundry creditors) as well as bills
payable.
a. Sundry Creditors
 Audit Procedure to be followed to verify the assertions
(a) Existence
(i) At first, the auditor shall examine whether an effective internal control system exists in the
organisation relating to the transactions with creditors.
(ii) He shall collect a schedule of trade creditors from the management with all possible details
including the name of the creditor and amount payable. He shall verify the same with the balance of
individual creditor’s account in the ledger.
(b) Rights and Obligations
The auditor shall also examine that all the terms and conditions of the contract with the supplier
have been duly complied. He shall ensure that the goods purchased have actually been received
and/or services have been provided in due course. For this purpose, Goods Inward Book may be
examined.
(c) Cut-off
The balance of sundry creditors must represent only the balances outstanding on the date of
reporting.
(d) Completeness
(i) The auditor shall ensure that no trade creditor is excluded from the schedule. He may
collect a confirmation from the management in this respect.
(ii) He shall be extra cautious while verifying the transactions near the end of the year.
(e) Valuation
(i) The auditor shall see that the total of balances as per the schedule of creditors tallies with
the total of balances of all creditors’ account.
(ii) He may select a few sample credit sale transactions and shall verify the correctness of
recording the same based on invoice, Goods Received Note, Purchase Day Book and
respective ledger heads.
(iii) The auditor shall also verify the transactions relating to return of goods from Return
Outward Book and see that the same has been correctly posted to creditors’ accounts.

b. Bills Payable
 Audit Procedure to be followed to verify the assertions
(a) Existence
(i) The auditor shall collect a schedule of bills payable from the management with all
possible details including the name of the creditor and amount payable, date when the bill
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 will become due etc. He shall verify the same from Bills Payable Book and Bills Payable
Account. He shall specifically ensure that the bills are still outstanding and their due date
has not expired.
(ii) He shall also see that the acceptance and dishonour of bills have been recorded in the
respective creditors account.
(b) Rights and Obligations
(i) He shall examine the bills payable and identify the conditions therein. He shall see that
the conditions have been duly complied with. He must also see that they met the legal
requirements.
(ii) In case acceptance of a bill creates any charge on any asset, the auditor shall see that the
same has been reported in the Balance Sheet.
(c) Cut-off
The balance of Bills Payable must represent only the balances outstanding on the date of reporting.
(d) Completeness
(i) The auditor shall see that the schedule collective from the management is exhaustive and
no bills payable is excluded from it. He may collect a written confirmation from the
management in this respect.
(ii) The auditor shall be extra cautious to verify that no bill which has already expired has
been included in the above schedule.
(e) Valuation
(i) The auditor shall ensure that total of the schedule tallies with the balance of the bills
payable account.
(ii) To verify the dishonoured bills, the auditor shall examine the correspondence between
the client and the creditor. He shall also verify the notification issued by the notary public
and bank statement.

Audit of Some Special Transactions

A. Alteration of Share Capital
The audit procedure to be applied in this context are:
(i) The auditor must confirm that alteration was authorised by articles.
(ii) He shall verify the minutes of the Board meeting and ordinary resolution passed in the general
meeting in which the approval of members is obtained.
(iii) He shall verify that alteration had been effected in copies of Memorandum, Articles, etc.
(iv) He shall obtain the reasons for which the memorandum of the company is altered.
(v) He shall check whether there is any change in the voting percentage of shareholders due to
consolidate and divide all or any of its share capital into shares of a larger amount than its existing
shares.
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B. Issue of Bonus Shares
(i) The auditor must confirm that issue of Bonus Share was authorized by articles.
(ii) He shall verify the minutes of the Board meeting and ordinary resolution passed in the general
meeting in which the approval of members is obtained.
(iii) He shall check that the company has issue fully paid-up bonus shares to its members only.
(iv) He shall confirm that the issue of bonus shares shall not be made by capitalising reserves
created by the revaluation of assets.
(v) He shall check whether the company has made any default in payment of interest or principal in
respect of fixed deposits or debt securities issued by it.
C. Splitting of Shares
(i) The auditor shall confirm that alteration was authorised by articles.
(ii) He should verify the minutes of the Board meeting and ordinary resolution passed in the general
meeting in which the approval of members is obtained.
(iii) He should verify that alteration had been effected in copies of Memorandum, Articles, etc.
(iv) He should verify that proper accounting entries have been passed. Register of members may
also be checked to see that the necessary alterations have been effected therein.
D. Re-issue of Forfeited Shares
The audit procedure to be applied in this context are:
(i) The auditor should ascertain that the board of directors has the authority under the Articles of
Association of the company to reissue forfeited shares. Check the relevant resolution of the Board
of Directors.
(ii) He should vouch the amounts collected from persons to whom the shares have been allotted and
verify the entries recorded from re-allotment. The auditor should check the total amount received on
the shares including received prior to forfeiture, is not less than the par value of shares.
(iii) He should verify that computation of surplus amount arising on the reissue of shares credited to
Capital Reserve Account and
(iv) Where partly paid shares are forfeited for non-payment of call, and re-issued as fully paid, the
reissue is considered as an allotment at a discount and compliance of the provisions of Section 53 is
essential. The auditor needs to ensure the same.
E. Issue of Debentures
The audit procedure to be applied in this context are:
(i) The auditor should verify that the prospectus had been duly filed with the registrar before the
date of allotment of debentures.
(ii) He should check the amount collected in the cash book with the counterfoils of receipts issued
to the applicants and also cross check the amount into the application and allotment book.

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(iii) He should examine the debenture trust deed and note the conditions contained therein as to
issue and repayment.
(iv) If the debentures are covered by a mortgage of a charge, it should be verified that the charge
has been correctly recorded in the register of mortgage and charges and it has also been registered
with the registrar of the companies.
(v) Compliance with SEBI guidelines should also be ensured.
F. Redemption of Debentures
The audit procedure to be applied in this context are:
(i) The auditor should inspect the debentures or trust deed for the terms and conditions regarding
redemption of debentures.
(ii) He should see the Director’s minute book authorizing the redemption of debentures.
(iii) He should also vouch the redemption with the help of debenture bonds cancelled and the cash
book.
(iv) He should also examine the accounting treatment thoroughly.
G. Payment of Dividend
 Provisions of Companies Act, 2013 Regarding Payment of Dividend
I. Sources of Dividend:
As per Section 123(1), No dividend shall be declared or paid by a company for any financial year
except -
(a) out of the profits of the company for that year arrived at after providing for depreciation in
accordance with the provisions of sub-section (2), or out of the profits of the company for any
previous financial year or years arrived at after providing for depreciation in accordance with the
provisions of that sub-section and remaining undistributed, or out of both; or
(b) out of money provided by the Central Government or a State Government for the payment of
dividend by the company in pursuance of a guarantee given by that Government:
II. Transfer to Reserves:
A company may, before the declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider appropriate to the reserves of the
company.
III. Payment of Dividend out of Accumulated Profit:
Where, owing to inadequacy or absence of profits in any financial year, any company proposes to
declare dividend out of the accumulated profits earned by it in previous years and transferred by the
company to the free reserves, such declaration of dividend shall not be made except in accordance
with such rules as may be prescribed in this behalf.
In the event of inadequacy or absence of profits in any year, a company may declare dividend out of
free reserves subject to the fulfilment of the following conditions:

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(i) The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the three years immediately preceding that year: However, this rule will not be
applicable to a company, which has not declared any dividend in each of the three preceding
financial years.
(ii) The total amount to be drawn from such accumulated profits shall not exceed one-tenth of the
sum of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.
(iii) The amount so drawn shall first be utilised to set off the losses incurred in the financial year in
which dividend is declared before any dividend in respect of equity shares is declared.
(iv) The balance of reserves after such withdrawal shall not fall below fifteen per cent of its paid-up
share capital as appearing in the latest audited financial statement.
IV. Interim Dividend
The Board of Directors of a company may declare interim dividend during any financial year or at
any time during the period from closure of financial year till holding of the annual general meeting
out of the surplus in the profit and loss account or out of profits of the financial year for which such
interim dividend is sought to be declared or out of profits generated in the financial year till the
quarter preceding the date of declaration of the interim dividend.
V. Unpaid Dividend
Section 124 of the Companies Act, 2013 states that -
(1) Where a dividend has been declared by a company but has not been paid or claimed within
thirty days from the date of the declaration to any shareholder entitled to the payment of the
dividend, the company shall, within seven days from the date of expiry of the said period of thirty
days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account
to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend
Account.
(2) The company shall, within a period of ninety days of making any transfer of an amount under
sub-section (1) to the Unpaid Dividend Account, prepare a statement containing the names, their
last known addresses and the unpaid dividend to be paid to each person and place it on the web-site
of the company, if any, and also on any other web-site of the company, if any, and also on any other
web-site approved by the Central Government for this purpose, in such form, manner and other
particulars as may be prescribed.
(3) If any default is made in transferring the total amount referred to in sub-section (1) or any part
thereof to the Unpaid Dividend Account of the company, it shall pay, from the date of such default,
interest on so much of the amount as has not been transferred to the said account, at the rate of
twelve per cent per annum and the interest accruing on such amount shall ensure to the benefit of
the members of the company in proportion to the amount remaining unpaid to them.

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(4) Any person claiming to be entitled to any money transferred under sub-section (1) to the Unpaid
Dividend Account of the company may apply to the company for payment of the money claimed.

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