Audit of Items of

Financial Statements
Auditing & Ethics ONE SHOT
Ankit Mundra Sir
 Topic: Introduction
Explicit Implicit

Assertion → Representation → By mgt. → used by Auditor

 
Embodied in F.S. To consider difference types of MM

That May Occur

Auditor → To draw → Audit Programme


To VERIFY assertions made by Mgt.
 CoT
by obtaining Suff. + Appro. A.E. → for claims A/c. Bal.
Disclosures
 Topic: Income Statement Captions
Comprising Revenue & Expense Balances
Assertions Explanations
Occurred
Occurrence Transactions
Relates to Entity
Completeness Transactions → supposed to be Recorded

Recognized Not Omitted

Cut-off Transactions → correct A/c period
Separate Assertion → Substantive Procedures

Different
 Topic: Income Statement Captions
Comprising Revenue & Expense Balances
Assertions Explanations
Accurately
Measurement Transactions → Recorded
Appro. Amt.

Error
No
Misstatement
Presentation Presented
Fairly
& Classified
Segregated
Disclosure Transactions Appro. Disaggregated
Complete
Disclosure
Accurate
 Topic: Balance Sheet Captions Comprising
Assets, Liabilities And Equity Balances
Assertions Explanations

Existence Balances → EXISTS

Completeness Balances → Supposed to be Recorded

Recognized Not Omitted

Cut-off Balances → Correct A/c. Period

Valuation Balances → Appro. Valued

 Overstatement
No Understatement
 Topic: Balance Sheet Captions Comprising
Assets, Liabilities And Equity Balances
Assertions Explanations
Ownership
Rights & Assets → Rights
Legal Title
Obligation
Liabilities → Entity’s Obligations

Presented
Fairly
Presentation Classified
Segregated
& Balances Appro. Disaggregated
Disclosure Complete
Disclosure
Accurate
Topic: Balance Sheet Captions
 Topic: Share Capital

Share Capital → Existence + Completeness + Valuation

(1) Tally → Period and Balance
(2) Yes → Verify → Limits → Authorised Capital → MoA
(3) No → Obtain W.R.  Company Secretary
(4) Obtain → Copies of Resolution
The Companies Act, 2013
(5) Compliance SEBI Regulations
MCA Guidelines
 Topic: Shares Issued @ Premium

(1) Compliance → Sec.52

(2) Transfer → Amount → Securities Premium A/c.
(3) State → Purpose → Amount to be applied

Unissued Writing off Premium on Sec.68

Shares Redemption 

Preliminary Commission / Buy Back
To Members
 Expenses Discount Paid
Fully Paid Pref. Shares Debentures
Bonus Shares
Auditor Needs to Verify
 Topic: Shares Issued @ Discount

(1) Compliance → Sec.53

(2) Shall Not Issue Shares @ Discount → EXCEPT

Sec. 54 Creditors

Sweat Equity
Shares Statutory Debt.
Resolution Restructuring
 Topic: Shares Issued @ Discount
Co.
(3) Co. → Fails to Comply Penalty
Every Officer

Amount Raised by LESSOR OF ₹ 5,00,000

issuing shares @ +
Discount Refund all Money
+
Interest @ 12% p.a.

Auditor to Check
 Topic: Issue of Sweat Equity Shares

Employee
Equity Shares → By Co. → To Director

at

Discount Consideration Other than Cash

For Providing

Know-how IPR Value Additions

 Topic: Issue of Sweat Equity Shares

→ Auditor needs to Verify

(1) Compliance → Sec. 54
(2) SR → Passed by Co.
(3) Specifies

No. of Shares CMP Consideration Class (s)

Listed → SEBI
(4) Regulations Unlisted → As prescribed Directors Employee
 Topic: Reduction of Capital

(1) Compliance → Sec. 66 Properly Convened

(2) Meeting of Share Holders S. R. Passed
(3) Verify → AoA
Repayment of Deposits
(4) No Defaults Payment of Interest on Deposits
Order of Tribunal
(5) Examine Filed with RoC
MoM
(6) RoC Certificate
(7) A/c. Entries
(8) Revaluation of Assets → Properly Disclosed
 Topic: Share Capital

Disclosure

Schedule III (Part-I) of The Companies Act, 2013

Share Capital → Additional Regulatory Info.


Sec. 143(3) (j) (d) [Ch.8 → Audit Report]

Disclose
 Topic: Share Capital

Disclose

Data + Amount Relevant Provisions

Fund
The FEMA, 1999 The Co. Act 2013

Advanced Loaned Invested

Intermediaries Intermediaries Ultimate

 Beneficiaries
To Other Intermediaries
 Topic: Reserves and Surplus
Amounts → Appropriated → Out of Profits

Not Intended to Meet any

Liability Contingency Commitment Diminution in

Value of Assets

Know to Exist → As at the B/s date

 Topic: Reserves and Surplus

Existence

Trace Opening Bal. → Previous Yr.
Tally

Profit & Loss → Completeness + valuation

 St. of P/L
Trace the Movement St. of  in Equity

Verify Boards Resolution
→ Disclosure

Schedule III (Part I) of The Companies Act, 2013
 Topic: Borrowings
Existence → (1) Review → Board MoM → Agreement

Authorised
(2) Agree → Details

Interest Nature Repayment Limits H.P Leasing

Rate Terms
SA 505
(3) Bal. Confirmation SA 580

(4) In Case of Debenture → Deb. Trust Deed

 Topic: Borrowings
Short Term
Completeness → (1) Sch. of Borrowings
Long Term
(2) Additional Debt.

Board MoM Contracts Confirmations Disbursements

(3) Trace → Cl. Bal.
(4) Unrecorded?
(5) Correct Period?
* Direct Confirmation Procedure
(1) Ascertain → Confirmation ask
(2) Reminders → Non-Replies
(3) Compare Bal. → Books → Confirmations
 Topic: Borrowings
A/c. Policies
Valuation → (1) Determine
Methods
Bal.
(2) Agree Loan to → Agreement
Payable
(3) Recompute Interest
Discount
Premium
(4) Computation → Amortisation of
Discount
(5) AS-11; AS-18
(6) Examine → Due Dates
(7) AOA & MOA
(8) Sec. 185 & 186
(9) Purpose
 Topic: Additional Regulatory Info. Disclosure
Banks
(1) Borrowing Basis of Current Assets
F.I.

Returns
Quarterly
Statements

Agreement with Books

Summary of Reconciliation
If Not
Reasons for Material Discrepancies
 Topic: Additional Regulatory Info. Disclosure

Bank
(2) Willful Defaulter → Declared by F.I
  Other Lender
As per guidelines Disclose
issued by RBI Date of Declaration Details of Default

Nature Amt.
 Topic: Additional Regulatory Info. Disclosure

(3) Charges / Satisfaction → Registration → Pending

 
RoC Beyond Statutory pd.

DISCLOSE

Details Reasons
Borrowed Funds
(4) Utilisation of Securities Premium

Sec 143 (3) (j) (d) [Ch. 8 ] → Audit Reports]

Disclose
 Topic: Additional Regulatory Info. Disclosure
Disclose

Relevant Provisions
Data + Amount
Fund The FEMA, 1999 The Co. Act 2013

Advanced Loaned Invested

Intermediaries Intermediaries Ultimate

 Beneficiaries
To Other Intermediaries
 Topic: Trade Receivables
Invoices not recorded twice
Existence → (1) Check Controls
Receivables Bal. → Automatically Recorded
(2) A/c. Receivable Ageing Report
(3) Realisation → Invoice wise?
(4) Reason
Justification Overdue → Large Bal.

* Direct Confirmation Procedure

(1) With the consent of the Entity With
(2) Form of Requesting Confirmation Bal.
Without
(3) Method of Selection
(4) Discrepancies → Revealed by the Confirmation
 Topic: Trade Receivables

(5) No Reply Received → Perform Alternate Procedure

Agreeing Bal. to Cash Preparing Detailed

Received Analysis of Bal.
(6) Related Party Receivables
* Completeness
(1) Invoices Issued → Last few days
(2) All Dispatched Goods → Invoiced
(3) Match Invoices → Shipping / Dispatch Log
Discount
(4) Review Process
Incentives
(5) Review → Credit Memos
 Topic: Trade Receivables

* Valuation
(1) Obtain → Ageing Report
(2) List of Debtors → Under Litigation
(3) Provisions → Made at appro. Rate
(4) Sch. Of Movements of Bad Debts
(5) Check → Write – Offs.
* Disclosure
(1) As 11
(2) As 18
(3) Sec. 189
(4) CARO, 2020
 Topic: Cash and Cash Equivalents

Existence + Completeness
(1) Checked by Surprise → Last Day of the year
+
Again after few days
(2) Desirable for the cashier to be present

Made to Sign
Slip
(3) Any Chit
I.O.U.

(4) Perform → Cash Sensitivity Analysis

 Topic: Cash and Cash Equivalents

(5) B.R.S → For all bank A/c.

Tally the Bal. as per Cheques issued but not Checking of all materials
Bank Book presented for payments Reconciling Items
* Direct Confirmation Procedure
Bank
(1) Contact Confirm → Amounts
F.I.

Current Deposit Exchange Earners Foreign CC A/c. Restrictive use A/c.

A/c. A/c. Currency (EEFC) A/c.
Dividend A/c. Escrow A/c.
 Topic: Cash and Cash Equivalents

(2) Investigate Discrepancies + Seek W.R.

Reconcile

(3) Emphasis on → 100% Bank A/c. Bal. Confirmation


No REPLY RECEIVED

Additional Procedures

Agree the Bal. Internet / Online Login Sending Audit team Member
  + Entity Personnel
Bank St. Auditor’s Personal 
Presence Bank Branch
 Topic: Cash and Cash Equivalents

Valuation → Bank A/c. → Holding F.C. → Cl. Exchange Rates

Disclosure

Schedule III (Part I) of The Companies Act, 2013
 Topic: Inventories

Held for Sale Process of Production Form of

 
Ordinary Course of Such Sale
Materials Supplies
of Business
To be Consumed

Existence → (1) Review → Entity’s Plan → Inventory Count

+
Participate
(2) Ensure → Consigned Goods → Segregated
 Topic: Inventories
(3) Test Count → Inventory

Observe Assuring All items Proper Amts.

Employees   

Appro. Supervision Properly tagged On Tags.
Adhering to
Agreed Plan
Completeness → (1) Perform → Analytical Procedure

Inventory T/o Ratio Vertical Analysis Budgetary Expectation


Actuals
 Topic: Inventories
(2) Examine → Non Financial Info.
(3) Purchase
Cut-off test
Sale
(4) Clerical
Arithmetical Accuracy
(5) Reconciliation

Rights
(1) Documentation
(2) Client Correspondence
(3) Collateral Agreements
(4) External Confirmation
 Topic: Inventories
Valuation → Raw Materials

Ascertain Compare Test Check Valuation

  
Elements of Cost Standard Cost Price Damaged Obsolete
 
Inventories
Actual Purchase Invoice
 Topic: Inventories
Work in Progress

Ascertain Ascertain Material Cost

  
Stages of Production Element of Cost Exclude

Abnormal Wastage Factor
 Topic: Inventories
→ Finished Goods → Ensure

Included Costs Valued @ N.R.V.


Reasonable
Disclosure

Schedule III (Part I) of The Companies Act, 2013.
 Topic: PPE
Revenue
Recognition Criteria Capital Nature Expenditure

Probability of future Cost → Measurement

Economic Benefits 
Reliable
 Topic: PPE

Existence → (1) Review → Entity’s Plan → Physical Ver.

Own Staff 3rd Party Annual 2/3 Years

(2) Evidence → Appro. Supervision

(3) Verification Report + Working Sheet

Property Tagged Reconciliation Discrepancies

 Topic: PPE
Completeness → (1) Movement in PPE Schedule

Opp. Bal. + Addition – Deletion = Cl. Bal.
(2) Arithmetical Accuracy
(3) As per As 10
(4) Rationale → For Deletion

Valuation → (1) Depreciation (Unless Non-Depreciable)

(2) Method
(3) Impairment → AS 28
 Topic: PPE

Rights & Obligation →

(1) Land / Bldg. → Conveyance / Sale Deed
(2) Original Title Deed
(3) Register of Charges

Disclosure

Schedule III (Part I) of The Companies Act, 2013
 Topic: PPE

Additional Regulatory Info.

(1) Title Deed → Not In The Name of Co.

Relevant Description Gross Title Deed in Holder Held Since Reason

Line Carrying the name of 
item in Value Promoter
B/s. 
Director

Relative
 Topic: I.A.
Identifiable → Non-Monetary Asset

Without → Physical Substance
 Production → G & S
Use in Rental → to others
Administrative Purpose
Yes
Existence → (1) Verify → Active in use
No

Deletion Recorded? Amortization Charges

 
Post Approval Stopped
 Topic: I.A.
Completeness → (1) Verify → Movement

Op. Bal. + Addition – Deletion = Cl. Bal.

(2) Check → Arithmetical Accuracy
(3) For Addition

As 26 Criteria Approved Internal Process


Appro. Personnel
Quotations Tenders
 Topic: I.A.
(4) For Deletion

Mgt. Manner of Mgt. Approval Disposal Note

Disposal
Reason Rationale

Valuation →
(1) Charged Amortization

(2) Method
(3) Impairment → AS 28
 Topic: I.A.

Rights & Obligation → Legal Title of Ownership → Entity

Disclosure

Schedule III (Part I) of The Companies Act, 2013

→ Additional Regulatory Info.

(1) Ageing Schedule
< 1 year 1 – 2 Year 2 – 3 Year > 3 year
 Topic: Trade Payables & Other Current Liabilities

Existence → (1) Controls → To Ensure

Purchase / Expense Payable Bal.

 
Not Recorded more Automatically Recorded
than once 
General Ledger
(2) Obtain → Ageing Report
(3) Related Party Payables
 Topic: Trade Payables & Other Current Liabilities

* Direct Confirmation Procedure

Directly
(1) Contact Vendors
Independently
(2) For → All Significant Account
(3) Consent of the Entity Date of B/s.
(4) Creditors → Confirm Bal. Any other Reasonably Close Date

Decided by Auditor  Consultation with Co.
(5) Method of Selection
(6) Investigate → Discrepancies
 Topic: Trade Payables & Other Current Liabilities

(7) No Reply Received

Testing Agreeing Detailed Analysis

 
Subsequent Balances
Payments 
Invoices
Completeness
(1) Last 5 Invoices
(2) Prior pd. Goods → Received → Booked
(3) Sample Basis
(4) Purchase Date  MATCH → Gate Entry Date
 Topic: Trade Payables & Other Current Liabilities
GST

TDS
(5) Statutory Dues
PF

ESI
Valuation
(1) Old Creditor → Written Back → Process
(2) Ageing of Payable
(3) Write Back → Approved → CEO / MD
(4) Foreign Currency → AS 11
Disclosure → Schedule III (Part I) of The Companies Act. 2013
 Topic: Loans & Advances & Other Current Assets
Existence
(1) Direct Confirmation Procedures
Completeness
(1) List of Advances
(2) Verify → Loan Agreement
MoA
(3) Authorized
AoA
(4) Inspect → Board’s MoM
(5) Related Party Loans
(6) Balance with Statutory Authorities
(7) Statutory Returns → Filed?
 Topic: Loans & Advances & Other Current Assets

Valuation
(1) Allowance for Doubtful A/c.
(2) Ageing Report
(3) Identify
A/c. → Appear doubtful
Analyse
(4) Write - offs
(5) Schedule of Movement
(6) Foreign Currency Loans → AS 11
Disclosure

Schedule III (Part – I) of The companies Act, 2013
 Topic: Loans & Advances & Other Current Assets

→ Additional Regulatory Info.

Promoter
Repayable on Demand
(1) Loans / Advances Director
KMP
Without Specifying
Related Party

Terms Period

Repayment
 Topic: Provisions and Contingent Liabilities

* Measured → Substantial degree of estimation

* Recognized

Present Obligation Probable Outflow of Reliable estimate

 resources 
Result  Amount of obligation
 Settle the obligation
Past event
 Topic: Provisions and Contingent Liabilities

Contingent Liabilities
Possible Obligation → Past Event

Existence will be confirmed But not recognised

Occurrence Non-Occurrence Not probable Amount

Uncertain Future Events  
 Outflow of Cannot be measured
Not in Control of Entity Resources 
 Suff. Reliability
To Settle Obligation
 Topic: Provisions and Contingent Liabilities

Existence →
(1) Obtain → List of all provision

Compare → Ledger Balances
(2) Inspect → Underlying Agreement

Warranty Legal / Other Claims

Commitments
 Topic: Provisions and Contingent Liabilities

Valuation →
(1) Working + Basis → Provisions mode
(2) Expert Report → Required

Evaluate Understanding
+
Appropriateness
Competence Capabilities Objectivity 
Work of Expert
Expert
(3) Obtain → W.R. → Mgt. → Made → All provisions which were required to be
made
 Topic: Provisions and Contingent Liabilities

Disclosure

Schedule III (Part I) of The Companies Act, 2013

→ Additional Regulatory Info.

(1) Details of Benami Property held

Disclose

Details of Year of Amount Details of Nature

Property Acquisition Beneficiaries Status Proceedings
Co.’s view
 Topic: Provisions and Contingent Liabilities

(2) Relation with struck-off Companies


Disclose

Name of Struck Nature of Bal. O/s. Relationship with

off Co. Transaction with struck off Co.
struck off Co.
Topic: Statement of Profit and Loss-Captions
 Topic: Sale of Products and Services

Sale of Products and Services

Organisation
(1) Understanding of Revenue Centres
I.C.
(2) ToC → Accordingly → Reduce Substantive Testing
(3) Select → Random Selection of Sample
(4) Perform → SAP
 Topic: Sale of Products and Services

Occurrence
(1) Revenue → Not overstated
(i) Single Invoice → Recorded Twice
Cancelled Invoice → Recorded
(ii) Test Check → Few Invoice → Entries
(iii) External Confirmation
Customer
(iv) Fictitious
Sale
(v) Uncertainty → Collectability
(vi) Customer’s Obligation → Contingent
(2) Sequence of Journal Entries
 Topic: Sale of Products and Services

(3) Entries for unusual transactions

(4) Sales Return to Sales Ratio

Completeness
(1) Verify → Credit Notes
(2) Trace → Shipping Docs.
Total Sales
(3) Reconciliation →
Goods Dispatched

Tax
(4) GST Returns
 Topic: Sale of Products and Services

Measurement
(1) Trace few transaction

Inception to Completion
(2) Export Sales → AS 11
Client Operation
(3) Understanding
GAAP
Disclosure

Schedule III (Part II) of The companies Act, 2013.
 Topic: Other Income comprising
interest income, dividend income,
Gain/ Loss on sale of investments etc.
Interest Income on FD
Occurrence + Completeness + Measurement
(1) Obtain → List of FD + App. Interest Rates + No. of Days
(2) Arithmetical Accuracy
(3) Deposits o/s as at pd. end
(4) Confirmation of Interest Income → from Bank
(5) Copy of Form 26 AS
 Topic: Other Income comprising
interest income, dividend income,
Gain/ Loss on sale of investments etc.
Dividends
(1) Recognized in → P/L
Only when Right To Receive → established
(2) Verify → Gain / (Loss) → Recorded as → Other Income
(3) Obtain → Mutual Fund st.
Disclosure

Schedule III (Part II) of The companies Act, 2013
 Topic: Other Income comprising
interest income, dividend income,
Gain/ Loss on sale of investments etc.
Additional Info
(1) Undisclosed Income
Co.

Give Details → Any transactions State → whether
 
NOT Recorded as Income Previously

Surrendered Disclosed Unrecorded income Related assets

Tax Assessment Properly Recorded
 
Unless Immunity → Any Scheme During the year
 Topic: Purchases

Organisation
(1) Understanding of Production Centres
I.C.
(2) Identify → Controls → Over Purchase Effective
(3) ToC → Purchase Cycle → Determine → Control Not
(4) Random Selection → Transactions
(5) Performing → SAP
 Topic: Purchases

Occurrence Under
(1) Purchase → Not Stated
Over
(i) Fictitious Vendors
(ii) Entry → Security Gate → Inward Register
(iii) Quality Inspection
Prepared
(iv) GRN Signed
(2) Original Purchase Invoice
(3) Invoice → Booked → Only ONCE

(4) Name of the Entity
 Topic: Purchases

(5) Input Tax

(6) Related Party Transactions

Completeness + Measurement
(1) Cutoff Test → Correct A/c. pd.
(2) Check → Last 5 transaction
(3) Correct → A/c. Treatment
(4) Obtain → W.R.
(5) Perform → Analytical Procedure

Consumption Stock Composition Ratio

Analysis
 Topic: Purchases

Disclosure

Schedule III (Pat II) of the Companies Act, 2013.
 Topic: Employee Benefits Expenses

Organisation
(1) Understanding of Hiring
Process
Appraisal
Effective
(2) ToC → Payment Process → Determine → Controls
Not
(3) Random Selection → Transactions
(4) Performing → SAP
 Topic: Employee Benefits Expenses

Occurrence + Completeness + Measurements

(1) Process of capturing attendance
(2) Fictitious Employees
Bank Details
(3) Sample of Employees
ID Proofs
(4) List of Employees

New Hires Continuous Leavers

  
Appointment Letters PF / ESI Full & Final Computation
(5) Perform → Analytical Procedure
Disclosure

Schedule III (Part II) of The Companies Act, 2013
 Topic: Depreciation and Amortisation

Depreciation
(1) Entity’s → A/c. Policy Amortisation

The Companies Act, 2013
(2) As per
As
Applied Consistently
(3) Policy
 → Adequately Disclosed
(4) Depreciation / Amortisation → CHARGES

Valid Accurately Calculated Appro. Pd.

(5) Obtain → F.A.R.
(6) Perform → Analytical Procedure
 Topic: Other Expenses like Power and Fuel,
Rent, Repair to Building, Plant and
Machinery, Insurance, Travelling, Legal and
Professional, Miscellaneous Expenses
Combined Question
Expenditure

C.Y Revenue Supporting Correct head Authorised Relation to Entity

 Docs
Not Capital
 Topic: Depreciation and Amortisation

* Rent Expense
(i) Month wise schedule + Rent Agreement
(ii) Recorded → For all 12 months
(iii) Escalation Clause
(iv) Agreement → Name of the Entity
* Power & Fuel Expense
(i) Month wise schedule + Power Bills
(ii) Recorded → For all 12 months
Power units Consumed
(iii) Summary Applicable Rate
+
Arithmetical Accuracy
(iv) Monthly Trends
 Topic: Depreciation and Amortisation

* Insurance Expense
(i) Summary of Policies
(ii) Validity pd. Prepaid
(iii) Classification Correct?
C.Y
* Legal & Professional Expense
(i) Month
Consultant Wise → Summary
(ii) Monthly Retainership Agreement
+
12 month Expenditure → Recorded Correctly
(iii) Sample → Non-recurring exp.
 Topic: Depreciation and Amortisation

(iv) May highlight → dispute → Entity

Not made any Provision Not have been discussed to Auditor

* Travel, Repair & Maintenance, Printing & Stationery, Misc. Exp.

(i) Sample Basis
(ii) Monthly Summary
(iii) Perform Analytical Procedure
P.Y
(iv) Compare trends + Significant Variation
Present Industry
 Topic: Depreciation and Amortisation

Additional Info.
(1) C.S.R. → Sec. 135 → Disclose → Amount

Required Expenditure Short fall at P.Y. Short fall Reason for

to be Incurred the end Short fall
disclosed
 Topic: Depreciation and Amortisation

Crypto
(2) Details of Currency
Virtual
Disclose

Profit / (loss) Amount of Deposit Advance

 Currency
On transactions 
@ Reporting From Any person
Date
Trading Investing