PROF.

CA TEJAS SHAH PDLC

CHAPTER 5 AUDIT OF ITEMS OF FINANCIAL

STATEMENTS

 INTRODUCTION
❖ Companies prepare their financial statements in accordance with the framework of generally
accepted accounting principles (Indian GAAP), also commonly referred to as accounting
standards (AS).
❖ A financial statement audit comprises the examination of an entity’s financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report
by the auditor, attesting to the truth and fairness of presentation of the financial statements and
related disclosures.
❖ In preparing financial statements, Company’s management makes implicit or explicit claims
(i.e. assertions) regarding:
• completeness;
• cut-off;
• existence/occurrence;
• valuation/measurement;
• rights and obligations; and
• presentation and disclosure
of assets, liabilities, equity, income, expenses and disclosures in accordance with the
applicable accounting standards.
❖ The auditor then needs to draw an audit programme to verify and obtain sufficient and
appropriate audit evidence for each of the above claims/ assertions made by the management.
 ASSERTIONS MAY BE BROADLY CLASSIFIED INTO THE
FOLLOWING TYPES
1. INCOME STATEMENT CAPTIONS COMPRISING REVENUE AND EXPENSE
BALANCES
Assertions Explanation Example: Employee benefit expenses
Occurrence Transactions recognized in the Employee benefit expense has been
financial statements have incurred during the period in respect of the

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occurred and relate to the entity. personnel employed by the entity.

Employee benefit expense does not
include the cost of any unauthorized
personnel.
Completeness All transactions that were Employee benefit expenses in respect of
supposed to be recorded have all personnel have been fully accounted
been recognized in the financial for.
statements.
Cut-off Whether all income and Employee benefit expenses recognized
expenses are reported in the during the period relates to the current
appropriate period. Cut-off is a accounting period only.
separate assertion because the
substantive procedures to verify
it are typically different from
those applied to the other
components of completeness.
Measurement Transactions have been recorded Employee benefit expense has been
accurately at their appropriate measured/ calculated accurately.
amounts in the financial Any adjustments such as tax deduction at
statements. source have been correctly reconciled and
accounted for.
Presentation and Transactions have been Employee benefit expense has been fairly
Disclosure classified and presented fairly in allocated between:
the financial statements. Operating expenses incurred in
Presentation and disclosure production activities;
assertions are considered during General and administrative expenses;
the course of the audit by and Cost of personnel relating to any
procedures to determine that self-constructed assets other than
disclosures are complete and inventory.
accurate.
The disclosures that are most
susceptible to material
misstatement are those that
require significant judgment and
qualitative assessments.

Audit teams assess the

completeness and accuracy of
disclosures by determining that
the disclosures p r o v id e
information in a manner that
does not materially omit,
distort or mislead the user.

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2. BALANCE SHEET CAPTIONS COMPRISING ASSETS, LIABILITIES AND EQUITY

BALANCES

Assertions Explanation Example: Inventory balance

Existence Assets, liabilities and equity Inventory recognized in the balance
balances exist as at the period end. sheet actually existed as at the period
end.
Completeness All assets, liabilities and equity All inventory units held by the entity
balances that were supposed to and that should have been recorded,
be recorded have been have been recognized in the financial
recognized in the financial statements. Any inventory held by a
statements. third party on behalf of the entity has
been included as part of the inventory
balance.
Cut-off Whether all assets and liabilities Inventory balance as at the year-
are reported in the appropriate end does not include any element of
period. next financial year.
Valuation Assets, liabilities and equity Inventory has been recognized at the
balances have been valued lower of cost and net realizable value
appropriately. in accordance with AS 2 - Inventories.
Any costs that could not be
reasonably allocated to the cost of
production (e.g. general and
administrative costs)
Rights & Entity has the right to assets i.e. The entity owns or controls the
Obligations (whether the entity has inventory recorded in the financial
ownership and title to assets) and statements. Any inventory held by the
the liabilities recognized in the entity on behalf of another entity has
financial statements represent all not been recognized as part of
the entity’s the obligations at a inventory of the entity.
given date.
Presentation and Whether particular items in the Example 1
Disclosure financial statements are properly Employee benefit expense has been
classified, described and fairly allocated between:
disclosed. Operating expenses incurred in
production activities;
Presentation and disclosure General and administrative expenses;
assertions are considered during and
the course of the audit by Cost of personnel relating to any self-
procedures to determine that constructed assets other than
disclosures are complete and inventory.
accurate.

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The disclosures that are most Example 2

susceptible to material Whether related party transactions
misstatement are those that have been disclosed appropriately as
require significant judgment and per the requirements of AS 18 –
qualitative assessments. Audit Related Party Disclosures.
teams assess the completeness
and accuracy of disclosures by
determining that the disclosures
provide information in a manner
that does not materially omit,
distort or mislead the user.

3. BALANCE SHEET CAPTIONS

3.1 Share Capital

Brief description

✓ AUDIT PROCEDURE
• Tally the period-end share capital balance - authorised, issued and paid up, to the previous
year audited financial statements.
• In case there in no change during the year, obtain a written confirmation/ representation from the
Company Secretary that there were no changes to entity’s capital structure during the year.
• In case there is any change, verify whether the paid up capital as at the period-end is within
the limits of authorised capital. Authorized capital should be verified by examining MOA.
• Obtain the certified copies of relevant resolutions passed at the meetings of board of directors,
shareholders authorising the increase/ decrease in authorised share capital, if required, or paid
up share capital.
• In case of Fresh issue made in the current year, check with compliance of Companies Act 2013
with regard to Return of Alloment, Minimum Subscription, minimum application money to
be collected, maintenance of separate Bank account, payment of underwriting commission as per
Sec 40 etc.
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• No shares have been issued at Discount (Sec. 53 of Companies Act)

• 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)
• Compliance with SEBI regulations and Guidelines.
• Also, obtain and verify copies of forms filed with Ministry of Corporate Affairs (MCA)
(Form SH 7 for increase in authorised share capital, Form PAS 3 for increase in paid up
capital)and with Reserve Bank of India (Form FCGPR in case of Foreign Direct Investment
(FDI) by a Non-resident shareholder) and verify the number of securities issued along with
the issue price.
• In case there was increase in share capital, verify whether the Company has accurately
calculated the required fee and stamp duty payable to MCA.
Shares Issued at Premium:
• In case a company has issued shares at a premium, that is, at amount in excess of the nominal
value of the shares, whether for cash or otherwise, Section 52 of the Companies Act, 2013
provides that a Company shall transfer the amount received as premium to securities premium
account and state the purpose for which the amount in the account can be applied.
• There is no restriction or conditions prescribed in the Act for issue of shares at premium.
• The provisions of this Act relating to reduction of share capital of a company shall apply as if
the securities premium account were the paid-up share capital of the company.
Application of securities premium account: The securities premium account may be applied by the
Company for the following purposes:
(a) towards the issue of unissued shares of the company to the members of the company as fully
paid bonus shares;
(b) in writing off the preliminary expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under Section 68. (Buyback)
✓ The auditor needs to verify
(i) whether the premium received on shares, if any, has been transferred to a “securities
premium account” and
(ii) whether the application of any amount out of the said “securities premium account”
is only for the purposes mentioned above.
Shares issued at a discount:
According to Section 53 of the Companies Act, 2013, a company shall not issue shares at a discount,
except in the case of an issue of sweat equity shares given under Section 54 of the Companies Act,
2013.
Any share issued by a company at a discounted price shall be void. Where a company

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contravenes the provisions of this section, the company shall be punishable with fine which may
extend to an amount equal to the amount raised through the issue of shares at a discount or five lakhs,
whichever is less. The company shall also be liable to refund all monies received along with interest at
the rate of 12%.p.a. from the date of issue of such shares to the persons to whom such shares have been
issued.
✓ The auditor needs to check
(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should verify that the Company has not issued any of its shares at a discount by reading
the minutes of meeting of its directors and shareholders authorizing issue of share capital
and the issue price.
Issue of Sweat Equity Shares:
According to Section 54 of the Companies Act, 2013, the employees may be compensated in the
form of ‘Sweat Equity Shares”. “Sweat Equity Shares” mean equity shares issued by the company
to employees or directors at a
(i) discount or
(ii) for consideration other than cash
for providing know-how or making available right in the nature of intellectual property rights or value
additions, by whatever name called.
✓ The auditor needs to verify that the Sweat Equity Shares issued by the company are of a class
of shares already issued and following conditions have been complied with (as per Section
54):
SR (a) the issue is authorized by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price, consideration,
Details of issue if any, and the class or classes of directors or employees to whom such equity shares
are to be issued;
(c) not less than one year has, at the date of such issue, elapsed since the date on which
the company had commenced business; and (OMITTED)
(d) where the equity shares of the company are listed on a recognised stock exchange, the
Listed - SEBI sweat equity shares are issued in accordance with the regulations made by the
Unlisted - Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity
co act & rules shares are issued in accordance with such rules as may be prescribed.
(e) The rights, limitations, restrictions and provisions as applicable to equity shares shall
Pari passu clause be applicable to the sweat equity shares issued under this section and the holders of
such shares shall rank pari passu with other equity shareholders.

✓ The auditor also needs to verify :

i. whether the fresh issue of shares was a rights issue or a preferential issue; and
ii. whether the relevant requirements for issue of share capital as per provisions of
Companies Act, 2013 have been complied with.

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✓ Reduction of Capital
For verifying reduction of capital, the auditor needs to examine whether the company has
followed the specific requirements as required by Sec 66 of the Companies Act, 2013. The
auditor shall undertake the following audit procedures:
(i) Verify that the meeting of the shareholders held to pass the special resolution was properly
convened and that the proposal was circularized in advance to all the shareholders;
(ii) Verify that the Articles of Association authorises reduction of capital;
(iii) Examine that there has been no default w.r.t repayment of deposits accepted by company
or payment of interest on such deposits. Reduction of capital shall not be affected if such
default exists.
(iv) Examine the order of the Tribunal confirming the reduction and verify that a copy of the
order and the minutes have been registered and filed with the Registrar of Companies;
(v) Check the Registrar’s Certificate as regards to reduction of capital;
(vi) Vouch the accounting entries recorded to reduce the capital and to write down the
assets by reference to the resolution of shareholders and other documentary evidence;
also check whether the requirements of Schedule III, Part I, have been complied with in
relation to presentation;
(vii) Confirm whether the revaluation of assets has been properly disclosed in the Balance Sheet;
(viii) The company may reduce the capital by reduction in unpaid capital or cancellation of lost
capital or paying off excess paid up capital. Verify the adjustment made in the members’
accounts in the Register of Members and confirm that either the paid up amount shown on
the old share certificates has been altered or new certificates have been issued in lieu of the
old, and the old ones have been cancelled;
(ix) Confirm that the words “and reduced”, if required by the order of the Tribunal, have been
added to the name of the company in the Balance Sheet.
(x) Check if the company have complied with all the terms and conditions imposed by the
tribunal while confirming reduction of share capital.
(xi) Verify that the Memorandum of Association of the company has been suitably
amended.
✓ If the Company has made any buyback of securities, ensure compliance of
specific requirements as given under sec 68 of Companies Act 2013.

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3.2 Reserves and Surplus

Brief Description:

✓ AUDIT PROCEDURE
Trace and tally the opening balance of reserves and surplus to the previous year audited financial
financial statements. For addition/utilization in current year, in case of:
1. 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.
• For adjustment related to dividend payment and the tax related thereto i.e.
dividend distribution tax, verify the resolution passed by the board of directors
regarding the recommendation of dividend, resolution passed by shareholders
declaring the dividend.
• Students should note that as per AS-4 (Revised)or IND AS 10, if dividends to
holders of equity instruments are proposed or declared after the balance sheet
date, an entity should not recognize those dividends as a liability as at the balance
sheet date.
• It should, however, disclose the amount of dividends that were proposed or
declared after the balance sheet date, but before the financial statements were
approved for issue.
2. 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 board of directors.
• As already discussed under the caption - ‘share capital’, the utilisation of
securities premium account could be done only for limited purposes; auditor needs
to ensure the same. (Sec 52 of Companies Act 2013).

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3.3 Borrowings

✓ AUDIT PROCEDURE
EXISTANCE
• Review board minutes for approval of new lending agreements. During review, ensure
that new loan agreements or bond issuances were authorized.
Ensure that significant debt commitments were approved by the board of directors.
• Agree details of loans recorded (interest rate, nature and repayment terms) to the loan
agreement. Verify that borrowing limits, if any, imposed by agreements are not
exceeded.
• Roll out and obtain independent balance confirmations (SA 505) in respect of all the
borrowings from the lender (banks/ financial institutions etc.).
• Agree details of leases and hire purchase creditors recorded to underlying
contracts/agreements.
• In case of Debentures, Examine trust deed for terms and dates of redemption,
borrowing restrictions and compliance with covenants.
• When debt is retired, ensure that a discharge is received on assets securing the debt.
COMPLETENESS
• Obtain Written Representation that all the liabilities which have been recorded
represent a valid claim by the lenders.
• Obtain a schedule of short term and long term borrowings (including debts
outstanding at the end of the previous year, as well as any new debt or renewal of debt)
showing beginning and ending balances and borrowings taken and repaid during the year,
and perform the following:
(a) Consider any evidence of additional debt obtained through examination of
minutes of the board of directors, significant contracts, confirmations from banks/
lenders, support for subsequent cash disbursements.
(b) Trace the closing balances as per the schedules to the general ledger.
• Review subsequent transactions after the end of the reporting period to determine if there
are unrecorded liabilities at year-end and the transactions are recorded in the correct
period. (Eg: Fresh loan taken near the balance sheet date)
• Perform Direct Confirmation Procedure as per SA 505.
VALUATION
• Determine that the accounting policies and methods of recording debt are appropriate
and applied consistently.
• Agree loan balance and loan payables to the loan agreement.
• For foreign currency loans, check the closing exchange rate(s) used and verify the
computations of the restatements of foreign currency balances outstanding at year end.

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(As per AS 11)

• Read the provisions in loan and debt agreements and perform the following:
(a) Test that the entity is in compliance with loan covenants and other significant
provisions of the agreements.
(b) If there are any provisions with which the entity is not in compliance,
determine whether the debt should be classified as current. If enforcement of the
provisions has been waived by the lender in case of breach of any covenant by
the entity, obtain confirmation of the waiver from the lender.
• Examine the due dates on loans for proper classification between long-term and short-
term.
• Where instalments of long-term loans falling due within the next twelve months have
been disclosed in the financial statements (e.g. in parentheses or by way of a footnote),
verify the correctness of the amount of such instalments.
• Examine the debt agreements for any restrictive covenants. Review restrictive
covenant and provisions relating to default and ensure disclosure thereof in the financial
statements.
• Examine the important terms in the loan agreements and the documents, if any,
evidencing charge in respect of such loans and advances. Examine whether the
requirements of the applicable statute regarding creation and registration of charges
have been complied with including disclosure of the same to the extent mandated by
statute and considered necessary for proper understanding of the user of financial
statements.
• In case the value of the security falls below the amount of the loan outstanding, examine
whether the loan is classified as secured only to the extent of the market value of the
security.
• Examine the hire purchase agreements for the purchase of assets by the entity and ensure
the correctness of the amounts shown as outstanding in the accounts, and also examine
the security aspect.
• He should carefully review the borrowings from related parties and ensure compliance
with AS 18 or IND AS 24.
• Verify whether liabilities towards bank in respect of bills discounted, bills negotiated,
cheques discounted, etc. are correctly reflected and disclosed in the financial statements.
• The auditor should also verify that the amount borrowed is within the borrowing powers
of the company as laid down by the Articles of Association and Memorandum of
Association.
• Verify that the company has not contravened the restrictions laid down by Section 180 of
the Companies Act, in respect of the borrowings of the company. Also, check
compliance of Sections 185 (Loan to Director) and 186(Loan and investment by
company) of the Companies Act, 2013.
• Examine the purpose for which the amount is borrowed and ensure that the amount is not

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used against the interest of the company.

• Where the entity has accepted deposits, examine whether the directives issued by the
Reserve Bank of India or other appropriate authority have been complied with.

3:4 Trade Receivables : Brief descriptions

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:
• 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.
• 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.

✓ AUDIT PROCEDURE
EXISTANCE
• Check whether there are controls in place to ensure that invoices cannot be recorded
more than once and receivable balances are automatically recorded in the general ledger
from the original invoice.
• Ask for a period-end accounts receivable aging report and trace the balance as per the
report to the general ledger.
• Check whether realization is recorded invoice-wise or not. If not, check that money
received from debtors is adjusted chronologically invoice-wise and on FIFO basis i.e.
previous bill is adjusted first. If realization is made on account, verify whether the
Company has obtained confirmations from debtors in respect of the same.
• If any large balance is due for a long time, auditor should ask for reasons and
justification for the same.
• Perform Direct confirmation procedures as per SA 505.

COMPLETENESS

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• 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.
• 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.
• Assess bill and hold sales
• Review the receiving log to see if the Company has recorded an inordinately 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;
• Review the process of giving discounts/ incentives and check whether the same were
given as per the Company’s policy/ general industry trends.
VALUATION
• Review the process followed by the Company to derive an allowance for doubtful
accounts. This will include a consistency comparison with the method used in the
last year, and a determination of whether the method is appropriate for the underlying
business environment.
• Obtain the ageing report of accounts receivable (both Dr/Cr balance), split between not
currently due, 30 days old, 30-60 days old, 60- 180 days old, 180- 365 days old and more
than 365 days old.
• Also, obtain the list of debtors under litigation and compare with previous year.
• 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. Perform further testing where any disputes exist.
• He should check if provisions are made at appropriate rates considering the
recoverability of amounts due.
• Check that write-offs of the receivable balances have been approved by an
appropriate authority.
• Check that the restatement of foreign currency trade receivables has been done properly
in accordance with AS 11.
• Proper disclosure of Related Party Transactions regarding receivables have been made
as per AS 18.
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3.5 CASH & CASH EQUIVALENTS

Brief Descriptions :

✓ AUDIT PROCEDURE
EXISTENCE & COMPLETENESS
• Special care is necessary in regard to verification of cash balances. Unless they are
checked by surprise, there can be no certainty that the cash produced for inspection
was in fact held by the custodian. For this reason, the cash should be checked not only
on the last day of the year, but also checked again sometime after the close of the year
without giving notice of the auditor’s visit either to the entity or to his staff (Surprise
check).
• If there are more than one cash balances, e.g., when there is a cashier, a petty cashier,
a branch cashier and, in addition, there are imprest balances with employees, all
of them should be checked simultaneously, as far as practicable so that the shortage in
one balance is not made good by transfer of amount from the others.
• It is desirable for the cashier to be present while cash is being counted and he should
be made to sign the statement prepared containing details of the cash balance counted
along with denomination of cash.. If he is absent at the time the cash is being verified, he
may hold the auditor responsible for the shortage, if any, in cash.
• If there is any rough Cash Book or details of daily balance are separately kept, the auditor
should test entries from the rough Cash Book with those in the Cash Book to prove that
entries in the Cash Book are correct.
• If the auditor finds any slip, chit or I.O.U.s in respect of temporary advances paid to the
employees included as part of the cash balance, he should check whether those are
approved by an authorized official and recorded in the appropriate accounts. The
auditor should also perform a cash sensitivity analysis by compiling a summary of total
cash receipts and payments each month and analyzing the trends to see if there have
been variations in any specific month and request brief descriptions from the

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management.
• The auditor needs to obtain bank reconciliation statements (BRS) for all bank
accounts maintained by the entity as at the reporting period and additionally need to
understand the client’s process and periodicity of making the BRS.
• The auditor should ensure that BRS is signed by the authorized personnel so that he is able
to assign responsibility in case of any errors.
• Verification of BRS shall entail the following:
- Tallying the balance as per bank book to the bank confirmation/ statement.
- Checking of all material reconciling items included under cheques issued but
presented for payment to the underlying bank book forming part of books of
account.
- Checking of all material reconciling items included under cheques deposited but
not credited by bank by requesting for bank deposit slips, duly acknowledged by
bank and verifying if the balances were credited by bank subsequently by tallying
to the bank statement of subsequent period.
- Checking of all material reconciling items included under amounts or charges
debited/ credited by bank but not accounted for by requesting for bank
statements for the period under audit and tallying the same.
• Perform Direct Confirmation Procedure as per SA 505. In addition to the procedures
performed above,
VALUATION
• The auditor should ensure that all bank accounts holding foreign currency have been
restated at the closing exchange rates as per applicable Financial Reporting Framework
(AS 11).

3.6 INVENTORIES

✓ AUDIT PROCEDURE
EXISTANCE
Review entity’s plan for performing inventory count.
• Ensure that consigned goods have been segregated.
• Auditor should participate in the inventory count with the management.
• Test counts of inventory by auditor should include:
- observing employees are adhering to the agreed plan.
- assuring that all items are properly tagged.
- Assuring that there is appropriate supervision on the count procedure.
- observing that proper amounts are shown on tags.
- determining that tags and summary sheets are controlled and reconciled.

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- reconciliation of test counts with tags and summary sheets and discrepancies noted,
if any, are summarized and agreed with client personnel.
- Staying alert at all times and specifically being cautious about empty boxes, etc.
and obsolete items.
- Performing cut-off testing by documenting last 5-10 receiving reports and
shipping documents as of the period end.
- Ensuring exclusion of third party stock and damaged or obsolete stock.
- Ensuring the accounting of all stock sheets.
- Investigating any significant differences between the physical stock take and the
stock records as per books. Further, the auditor should ask the entity’s personnel
to sign all stock count sheets and also agree the variances observed, if any, to avoid
any conflicts.
• When the entity uses periodic system for inventory count, it should be undertaken at the
end of the period. If the entity uses perpetual system with proper and adequate
records, inventory may be counted at interim dates.
• Confirm or investigate any inventory of the entity lying with a third party (specifically
relevant for cases where the entity gets job work done in its process of production).
• Only the inventories held by entity have been recorded in the financial statements 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
COMPLETENESS
• Perform analytical procedures as per SA 520 (comparison tests with industry
averages, budgets, prior years, trend analysis, etc.)
• Examine non financial information related to Inventories like weights & 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.
• Verify the clerical and arithmetical accuracy of inventory listings.
• Reconcile physical inventory amounts with perpetual records.
• 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.
RIGHTS
• 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.

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• 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 as per SA 501
• Auditor shall obtain confirmation for significant items of inventory as per SA 501.
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.
VALUED
❖ 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 financial statements.
• 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.

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3.7 TANGIBLE ASSETS COMPRISING LAND, BUILDINGS, PLANT & EQUIPMENT,

FURNITURE & FIXTURES, VEHICLES, OFFICE EQUIPMENT, COMPUTERS ETC.
REFERRED TO AS “PROPERTY, PLANT AND EQUIPMENT” (“PPE”)

✓ AUDIT PROCEDURES
EXISTANCE
• Review entity’s plan for performing physical verification of PPE i.e. whether
performed by own staff or by a third party and the policy regarding periodicity i.e. whether
physical verification shall be done on annual basis or once in two years/ three years.
• Evidence of appropriate supervision of those performing physical verification of PPE
should be examined.
• Obtain PPE physical verification report backed by the working sheets from the entity
and perform the following procedures:
- Assess if all items of PPE are properly tagged and carry identification
marks/ numbers and physical verification work papers do capture the asset
identification numbers for assets physically verified.
- Reconciliation of items of PPE as physically verified with the fixed asset
register maintained by the entity as at the date/ period of undertaking physical
verification. Specifically verify if the PPE additions up to the date of physical
verification have been updated in the fixed asset register.
- Verify the discrepancies noted, based on physical verification undertaken and the
manner in which such discrepancies have been dealt with in the entity’s books and
financial statements. For example, any identified shortages/ assets not in
working condition and/or active use should be accounted for as deletions in the
books of account post approvals by the entity’ the management an depreciation
should have ceased to be charged after the date of deletion.
COMPLETENESS
• 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. entity’s books of account.
• Check the arithmetical accuracy of the movement in PPE schedule. Verify and ensure
that items such as spare parts, stand-by equipment and servicing equipment are
recognised as property, plant and equipment only when they are held for more than one
period as per the requirements of AS 10.
• In relation to deletions to PPE, understand from the management the reason and rationale
for deletion.
VALUATION
• 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;

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• 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
• In addition to the procedures undertaken for verifying completeness of additions to PPE
during the period under audit, the auditor while performing testing of additions should also
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.

3.8 INTANGIBLE ASSETS (COMPRISING GOODWILL, BRAND/TRADEMARKS,

COMPUTER SOFTWARE ETC.):

✓ AUDIT PROCEDURES
EXISTENCE
• Since an intangible asset is an identifiable non-monetary asset, without physical
substance, for establishing the existence of such assets, the auditor should verify whether
such intangible asset is in active use in the production or supply of goods or services, for
rental to others or for administrative purposes.
• In case any intangible asset is not in active use, deletion should have been recorded
in the books of account post approvals by the entity’s management and amortization
charge should have ceased beyond the date of deletion.
COMPLETENESS
• 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.
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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 cost related to research (or from the research phase of an internal project)
gets recognized as intangible asset.
• 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.
VALUATION
• The value of intangible assets may diminish due to efflux of time, use and/ or
obsolescence. The diminution of the value represents cost to the entity for earning revenue
during a given period. Unless this cost in the form of amortization is charged to the
accounts, the profit or loss would not be correctly ascertained and the values of
intangible asset would be shown at higher amounts. The auditor should:
I. Verify that the entity has charged amortization on all intangible assets;
II. Verify that the amortization method
III. The auditor should also verify whether the management has done an impairment
assessment (AS 28).

RIGHTS AND OBLIGATION

• In addition to the procedures for verifying completeness of additions to intangible assets
during the period under audit, 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.

3.9 TRADE PAYABLES AND OTHER CURRENT LIABILITIES :

✓ AUDIT PROCEDURE
EXISTANCE
• Check whether there are controls in place to ensure that any purchase/ expense invoice
does not get recorded more than once and payable balances are automatically recorded
in the general ledger at the time of recording of expense.

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• Obtain the accounts payable ageing report and trace its balances to the general ledger.
If there are any differences, investigate reconciling items. Journal entries specially for
large amounts should be carefully examined.
• Perform Direct Confirmation Procedure as per SA 505.
• If there are any related party payables (SA 550), review whether they were properly
authorized and the value of such transactions were reasonable and at arm’s length.
• Review a trend line(SA 520) of purchases/ expenses and accounts payable, or a
comparison of the two over time, to see if there are any unusual trends. Make inquiries
about reasons for changes in trends from the management.
COMPLETENESS
• The auditor needs to perform the following cut off procedures.
• Test purchases/ expenses on a sample basis selecting the same from the accounts payable
ledgers and checking their supporting documents to ensure that the purchases were
recorded at the correct amounts and correct dates.
• Match purchase invoice dates to the gate entry (inward) dates to check whether the
purchases are being recorded in the correct accounting period.
• For advance received from customers/ revenue received in advance, obtain the
customer-wise listing along with its ageing and the nature.
• In relation to statutory dues liability like withholding tax (TDS) payable, GST
payable, luxury tax payable, professional tax payable, PF and ESI payable etc., prepare
a reasonability with respect to sales/ purchases/ employee benefit expenses.
• He shall prepare a complete list of all statutory dues and consider his reporting
requirements under CARO, 2016 (Now CARO,2020).
VALUATION
• Review the process followed by the Company to identify if any old creditor balance/
liability needs to be written back.
• Check that write backs in the liability balances assessed as no longer payable have been
approved by an appropriate and authorized member of senior management, for example
– CEO/MD.
• Check that the restatement of foreign currency trade payables has been done properly
In accordance with AS 11.
• Understand management’s process to identify the principal amount and the interest due
thereon (if any) remaining unpaid to any Micro, Small and Medium Sized Enterprises
suppliers at the end of accounting year. Test check the management process to assess if
the auditor could rely on the management process.

3.10 LOANS AND ADVANCES AND OTHER CURRENT ASSETS

✓ AUDIT PROCEDURE

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EXISTANCE
• For establishing existence of loans and advances, direct confirmation procedures, similar
to those performed for Accounts receivable balances are should be performed with the
only difference that while performing circularisation of direct confirmations, in addition
to the principal amount, interest receivable, if any, as per the agreed terms between the
parties, may also be included as part of the balance to be confirmed.
COMPLETENESS
• Obtain a list of all advances and other current assets and compare them with balances in the
ledger.
• Verify loan agreements and acknowledgements of parties in respect of outstanding loans.
A loan or an advance, if material, is granted only if authorized by the Memorandum and
Articles of Association in the case of Company.
• Inspect the minutes of meeting of board of directors to confirm if all material loans and
advances were approved by the board of directors.
• Verify that the loan has been acknowledged by the party and in addition, inspect if any
security has been deposited against due repayment of the loan. Ascertain if loans are being
recovered regularly as per agreed instalments.
• If there are any related party loans and advances(SA 550), review whether they were
properly authorized and the value of such transactions were reasonable and at arm’s
length.
• In relation to balances with statutory authorities like GST input credit, prepare a
reasonability with respect to purchases/ expenses by applying the applicable rate to the
purchases/ expenses and in case of any variance with the asset recorded by the entity,
reasons for variance should be requested from the entity.
• Further, the auditor should obtain statutory returns filed with the authorities like GST
returns and verify whether the amount recorded as per books of account tallies with
the claim made with the authorities.
• Obtain the ageing report of loans and advances.
• Scrutinize the analysis and identify those loans and advances that appear doubtful; discuss
with management about the reasons.
VALUATION
• Assess the allowance for doubtful accounts. Review the process followed by the
Company to derive an allowance for doubtful accounts.
• Obtain the ageing report of loans and advances. Also, obtain the list of loans and
advances under litigation and compare with previous year.
• Scrutinize the analysis and identify those loans and advances that appear doubtful;
discuss with management about the reasons as to why these loans/ advances are not
included in the provision for doubtful balances.
• Assess bad loans/ advances write-offs.

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• Check that write-offs or other reductions in the recoverable balances have been
approved by the authorsied and appropriate senior authority.
• Check that the restatement of foreign currency loans and advances/ other current assets
has been done properly in accordance with AS 11.

3.11 PROVISIONS AND CONTINGENT LIABILITIES :

Brief Description -

✓ AUDIT PROCEDURE
• Obtain a list of all provisions and compare them with balances in the ledger.
• Inspect the underlying agreements like agreement with customers to assess warranty
commitments, any legal and other claims on the entity i.e. litigations.
• Obtain the underlying working and the basis for each of the provisions made, from the
management and verify whether the same is complete and accurate.
• Wherever required, obtain expert’s report, calculation and underlying working for the
provision amount, example for warranty involving complex calculations, some entities
get that valued through an actuary. In such a case, the auditor may request the
management to share the actuarial valuation report and in case of any matter under legal
dispute, the auditor should request for assessment made by a legal expert in relation to
likelihood of a liability devolving on the entity.
• As per SA 500 – “Audit Evidence”, issued by ICAI, when using the work of a
management’s expert, audit evidence that the auditor should obtain include:
• Evaluate the competence, capabilities and objectivity of that expert:
a. Whether the expert is employed by the entity or is an outside party.
b. Whether the expert is independent in respect of the entity.
c. Auditor’s previous experience of the work of the expert.

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d. Knowledge of the expert, his qualification, membership of a professional body

or industry association, etc.
• Obtain an understanding of the work of that expert:
a. Whether the auditor has expertise to evaluate the work of the expert.
b. Evaluating the assumptions and methods used by the management.
c. Evaluating the nature of internal or external data used by the expert.
• The auditor shall obtain written representation from the management that it has made all
the provisions which were required to be made as per the recognized accounting
principles.

4. STATEMENT OF PROFIT AND LOSS CAPTIONS

4.1 SALE OF PRODUCTS AND SERVICES
Brief Description-

✓ Auditor needs to obtain a clear understanding about the organisation and its revenue centres.
• An auditor needs to obtain an understanding of the management control (internal control)
in respect of sales process.
• An auditor tests the controls the entity has set up for the sales cycle to determine how
strong and reliable they are. If they are strong and operating effectively, the auditor
can reduce the extent of substantive testing. Any deficiencies in the internal control shall
be communicated as per SA 265.
• The auditor selects a random sample of transactions and examines the related customer
purchase orders, invoices and customer statements to ensure that the control being tested
is a numbered sales invoices.
• Performing substantive audit procedures is a must. Substantive analytical procedures will
consist of sales trend analysis, comparison with previous accounting period, category-
wise sales analysis, any analysis the auditor may find relevant and most important of all,
building a sales expectation and comparing that with the client’s sales records.

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✓ AUDIT PROCEDURE
OCCURANCE
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.
• Test check few invoices with their relevant entries in sales journal.
• Obtain confirmation from few customers to ensure genuineness of sales transaction
• 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.
• 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.
• Check the sales return with sales invoice, challan, credit note, stock register, etc.
COMPLETENESS
• Perform cut-off procedures to ensure that revenues are recognised in the current
accounting period and sales were not tampered towards the period end.
• 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
• Trace a few transactions from inception to completion. (Examination in depth)
• 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, as well as whether they were properly authorized and the value of such

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transactions were reasonable and at arm’s length.

4.2 Other Income comprising interest income, dividend income, Gain/ Loss on sale of
investments etc.

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

4.3 PURCHASES
Brief Description -

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✓ AUDIT PROCEDURE
OCCURRENCE
a. Ensure purchases are not understated/ overstated by performing following audit
procedures:
• Whether any fictitious vendors have been booked or purchases have been recorded by
reviewing the vendor selection process followed by the entity and also performing
procedures to ensure existence of the vendors.
• Whether the goods were received at the factory gate and whether there exists an entry in
the security gate inward register.
• Whether quality inspection of goods was done.
• Whether a goods receipt note was prepared and signed by an appropriate client
personnel.
• Whether the purchase invoice was approved as per delegation of authority and whether
a 3 or 2-way match (as discussed above) was done.
• Whether stock record has been updated by the stores personnel.
b. Special considerations during audit of purchases
• The purchase invoice received should be the “Original” copy (and not photocopy/ carbon
copy) against which the entity has recorded the purchase in its books of account.
• Purchase invoice should have been booked only once risk and reward incidental to
ownership has been transferred to the entity. Specific consideration for cases where the
terms of delivery as agreed with vendor are F.O.B., C.I.F. etc.
• Purchase invoice should be in the name of entity. However, in case of different
branches, it should be addressed to the appropriate branch.
• Input tax component should have been booked in the input tax ledger. The auditor should
obtain tax returns filed with the authorities and tally the input tax as reflected in the
books to the amount disclosed in the returns.
• In case of purchases made from related parties or allied and associated concerns, the
auditor needs to verify if requisite approval from Board of Directors (appropriate authority)

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has been obtained and should verify the selected samples and perform analytical
procedures in relation to price of goods to confirm that the price charged is at arm’s length.
• The auditor should review whether purchases should be capitalized or expensed off in
Statement of Profit and loss according to his professional judgement.
• Review journal entries for unusual transactions.
COMPLENESS
In addition to the procedures for establishing occurrence of purchases as discussed above,
the auditor should:
• Perform cut-off test to ensure that purchases are recognised in the correct
accounting period.
• Ensure correct accounting treatment of goods – in – transit as per the agreed terms with the
vendor regarding transfer of risk and reward of ownership in goods.
• Obtain written representation from the management that all the purchases that took
place during the year have been properly recorded in the books.
• Perform analytical procedures to obtain audit evidence as to overall reasonableness of
purchase quantity and price which may include: a) Consumption Analysis; b) Stock
Composition Analysis.

4.4 EMPLOYEE BENEFITS EXPENSES :

Auditor needs to obtain a clear understanding about the organisation and its hiring, appraisal and
retirement process in the following manner:
• An auditor tests the controls the entity has set around employee benefit payment process to
determine how effective they are. If they are effective, the auditor can reduce the substantive
testing.
• The auditor selects a random sample of transactions and examines the related appointment
letters, appraisal letters, attendance records, HR policies, employee master etc
• Performing substantive audit (SA 520) procedures is must.

✓ AUDIT PROCEDURE
OCCURANCE, COMPLETENESS, MEASUREMENT
• 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.
Further, the auditor may choose to select a sample of employees and ask the payroll
department to share their bank details/ identity proofs of the employees.
• Obtain a list of employees as at the period- end along with a monthly movement split
between new hires, leavers and continuing employees.

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• For a sample (selected randomly) of new hires, obtain the appointment letter and verify
whether the salary for first month and subsequent months was processed as per the agreed
terms.
• For a sample (selected randomly) 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.
• Obtain the monthly salary registers for all 12 months.
• 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 on month 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 which may include production per employee analysis.
Auditor should analyse units produced per employee and compare the same with
previous years and prevent industry trends and ask for the reasons from the management,
if any significant variations are found.

4.5 DEPRECIATION AND AMORTISATION :

Auditor needs to consider the following attributes while verifying for depreciation and amortisation
expenses:
• Obtain the understanding of entity’s accounting policy related to depreciation and amortisation.
• Ensure the Company policy for charging depreciation and amortisation is as per the relevant
provisions of Companies Act/ applicable accounting standards.
• The accounting policy has been applied consistently year on year. Any change in the
accounting policy has been adequately disclosed.
• Whether the depreciation has been calculated after making adjustment of residual value from the
cost of the assets.
• Whether depreciation and amortisation charges are valid.
• Whether depreciation and amortisation charges are accurately calculated and recorded.
• Whether all depreciation and amortisation charges are recorded in the appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment that are to be
depreciated separately have been properly identified.
• Whether the most appropriate depreciation method for each separately depreciable component has

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been used.

✓ AUDIT PROCEDURE
OCCURANCE, COMPLETENESS, MEASUREMENT
• Obtain an understanding of entity’s process of charging depreciation and amortization.
• Obtain the fixed asset register maintained by the entity.
• Select the sample of assets from the Fixed Assets Register, on materiality considerations
and verify the rates of depreciation and depreciation calculations.
• Obtain the list of all the components identified by the management.
• Ensure Intangible assets like patents, goodwill, copy rights have been properly
amortized over the period.
• Ensure depreciation is charged on the assets from the date when it is ready to use and
not from the date of actual usage.
• Ensure depreciation on revalued amount has been properly accounted from revaluation
reserve.
• Depreciation computation as per Income tax Act, 1961.
• Perform analytical procedures to obtain audit evidence as to overall reasonableness of
depreciation and amortisation expense - check the arithmetical accuracy of records and
perform independent calculations. For ex-
• Re-compute the depreciation expense for the year.
• Ensure that the depreciation and amortization has been charged as per the useful lives
of PPE and intangible assets.
• Ensure that residual values have been properly verified as that impacts the computation
of depreciation.

4.6 Other Expenses like Power and Fuel, Rent, Repair to Building, Plant and Machinery,
Insurance, Travelling, Legal and Professional, Miscellaneous Expenses
Brief description -

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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 PROCEDURE
Rent expense-
• Obtain a month wise expense schedule along with the rent agreements.
• 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.
• 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.

Power and fuel expense -

• Obtain a month wise expense schedule along with the power bills.
• Verify if expense has been recorded for all 12 months.
• Also, compile a month wise summary of power units consumed and the applicable rate
and check the arithmetical accuracy of the bill raised on monthly basis.
• In relation to the units consumed, analyse the monthly power units consumed by linking
it to units of finished goods produced and investigate reasons for variance in monthly
trends.

Insurance expense -
• Obtain a summary of insurance policies taken along with their validity period.
• Verify whether the expense has been correctly classified between prepaid and expense
for the period based on number of days.
Legal and professional expenses -
• Obtain a month-wise and consultant-wise summary.
• In case of monthly retainership agreements, verify whether the expenditure for all 12
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months has been recorded correctly.

• For non- recurring expenses, select a sample and vouch for the attributes discussed above.
• The auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and the matter
may also not have been discussed/ highlighted to the auditor for his specific
consideration.

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

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

“One day these day-night studies

will make you a LEGEND”

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