AUDIT OF INCOME STATEMENTS ITEMS

REVENUE FROM OPERATION

PURCHASES EMPLOYEE BENEFIT EXPENSES

OTHER EXPENSES
Audit of Balance Sheet Items: Key Areas
A. Property, Plant, and Equipment (PPE)

1. Definition: Tangible items like land, buildings, machinery, and o ice equipment used for over one period.

2. Audit Focus:

o Existence: Physically verify assets, check against asset registers, and explain any discrepancies.

o Rights & Obligations: Confirm ownership via purchase documents, approvals, title deeds, and any
lender confirmations.

o Cut-o : Ensure assets in the balance sheet exist on the reporting date; confirm only current period
depreciation is applied.

o Completeness: Check the PPE schedule for all assets, verifying additions and disposals.

o Valuation: Verify assets are recorded at cost, net of accumulated depreciation/impairment, ensuring
depreciation complies with legal guidelines.

o Presentation & Disclosure: Confirm all PPE assets are appropriately categorized as tangible assets and
fully disclosed in the notes to accounts.

B. Patents and Copyrights

1. Definition:

o Patents: Exclusive rights for inventions, generally granted for production processes or designs.

o Copyrights: Rights for creative works, like literature, music, or art, lasting for the author's life + 50 years.

2. Audit Focus:

o Existence: Verify active registration for each patent and copyright.

o Rights & Obligations: Check for valid ownership, renewal receipts, and compliance with legal renewal
requirements.

o Cut-o : Ensure all reported assets are held by the company as of the reporting date.

o Completeness: Review the register to verify all items, including recent acquisitions and disposals.

o Valuation: Confirm valuation at acquisition cost or production cost, adjusted for amortization over useful
life.

o Presentation & Disclosure: Confirm proper classification as intangible assets in the balance sheet, with
detailed notes to accounts.
C. Investments

Definition: Investments are assets held to earn income (like dividends, interest) or for capital growth. Examples
include government securities, shares, and mutual funds.

Audit Focus:

1. Existence:

o Get a detailed list of all investments and verify each one against the balance sheet.

o Physically check investment certificates or de-mat statements to confirm ownership.

o For investments not in custody, obtain third-party confirmation.

2. Rights & Obligations:

o Confirm the company’s right to earn from these investments (dividends or interest).

o Check that all due income (interest, dividends) is received and recorded.

3. Cut-o : Ensure only investments that existed and were owned by the company on the reporting date are
included.

4. Completeness: Ensure the investment list covers all holdings, including any recent changes.

5. Valuation:

o Verify purchase costs are recorded properly; exclude interest if bought at cum-interest price.

o Confirm that bonus shares are recorded with no extra cost and that pre-acquisition dividends are
recorded in the investment account.

o Check that investments are valued according to accounting standards.

6. Presentation & Disclosure:

o Ensure investments are split into "Current" and "Non-current" assets on the balance sheet, with
additional details in the Notes to Accounts.

D. Inventories (Stock)

Definition: Inventory includes raw materials, work-in-progress, finished goods, and other items ready for sale
or in transit.

Audit Focus:

1. Existence:

o Oversee physical stock counts and ensure supervision by responsible o icials.

o For stock stored outside (e.g., warehouses), obtain confirmation of its presence.

2. Rights & Obligations:

o Verify ownership documents for all recorded inventory.

o Obtain third-party confirmation for any inventory not in the company’s possession.

3. Cut-o : Ensure all recorded inventory existed and was owned by the company on the reporting date.

4. Completeness:

o Use analytics to spot unusual patterns or missing inventory.

5. Valuation:

o Check the appropriateness of valuation methods (FIFO, LIFO, etc.).

o Ensure raw materials, work-in-progress, and finished goods are valued at the lower of cost or net
realizable value (NRV).

o Ensure damaged or obsolete items are written down or o .

6. Presentation & Disclosure:

o Inventory should be listed under "Current Assets" on the balance sheet, with clear categorization (e.g.,
raw materials, finished goods) in the Notes to Accounts.

E. Loans

Definition: Loans represent money the company has loaned out or advanced to others, recorded as either
short-term or long-term.

Audit Focus:

1. Existence:

o Obtain and verify schedules of all loans and advances against the ledger.

o Confirm balances with loan recipients.

2. Rights & Obligations:

o Check that all loans follow company rules, especially those to related parties.

o Verify any collateral agreements, or, if unsecured, assess recovery prospects.

3. Cut-o : Verify that only outstanding loans on the reporting date are recorded.

4. Completeness:

o Ensure all loans are recorded and repayments logged accurately.

5. Valuation:

o Review aging schedules and list of loans under litigation.

o Ensure adequate provision for doubtful loans and authorized write-o s.

6. Presentation & Disclosure:

o Loans should be shown as "Non-current" or "Current Assets" on the balance sheet with additional details
in the Notes to Accounts.
Trade Receivables

 Definition: Trade receivables are amounts due from customers for goods and services sold during
regular business activities. They exclude loans or advances.

Audit Procedures

1. Existence:

o Get a signed schedule of all debtors and compare it with individual account balances.

o Carefully check each trade receivable’s validity, accuracy, and chances of recovery.

o Look at aging of debts and check overdue items or transfers for authenticity.

2. Rights and Obligations:

o Confirm that the company has legal claims on all receivables.

o Verify legal ownership of bills and notes receivable.

3. Cut-o :

o Ensure the receivables represent only those assets held on the reporting date.

4. Completeness:

o Confirm all receivables are listed, with attention to any disputed amounts or court cases.

o Examine supporting documents for debt write-o s and realizations after the period end.

5. Valuation:

o Check for reasonable provisions for doubtful debts.

o Review discounts, rebates, and investigate any excess allowances.

o Confirm bad debt write-o s and calculate them accurately.

6. Presentation and Disclosure:

o Ensure clear classification of:

 Secured and unsecured receivables.

 Receivables under credit risk or impairment.

o Confirm aging schedules and any allowances for bad debts are disclosed.
Cash and Cash Equivalents

 Definition: Cash and cash equivalents are highly liquid assets like cash in hand, bank balances,
cheques, and fixed deposits.

Audit Procedures

1. Existence:

o Surprise checks of cash balances and physical cash verification.

o Perform test checks on Cash Book entries for accuracy.

o Analyze monthly receipts and payments for unusual patterns.

2. Rights and Obligations:

o Verify all deposits and bank accounts are in the company’s name.

3. Cut-o :

o Ensure balances reflect only cash and cash equivalents on the reporting date.

4. Completeness:

o Obtain bank confirmations and verify all cash balances, including petty cash.

5. Valuation:

o Recalculate foreign currency balances using the correct exchange rate.

6. Presentation and Disclosure:

o Confirm disclosures align with Accounting Standards and Schedule III requirements.

Share Capital

 Definition: Share capital is the core funding raised from shareholders, including issued shares like equity or
preference shares.

Audit Procedures

1. Existence:

o Reconcile beginning and ending capital balances and verify any changes.

o Ensure transactions a ecting share capital are authorized and within legal limits.

2. Rights and Obligations:

o Check compliance with Companies Act, SEBI guidelines, and specific share issuance rules (e.g., for
bonus or rights shares).

3. Cut-o :

o Verify that share capital reflects the actual position on the reporting date.

4. Completeness:

o Confirm all changes in share capital are recorded and adequately accounted for.

5. Valuation:

o Review the accuracy of proceeds and allocations, including commissions paid to underwriters.
6. Presentation and Disclosure:

o Ensure detailed disclosures for each class of shares, including numbers, rights, and restrictions, are
provided as per Schedule III.

I. Other Equity

Definition: Includes diverse items like share application money, reserves, revaluation surplus, exchange
di erences, and more. Some items, like Securities Premium, must be used only for specific purposes.

Audit Procedures

1. Existence

o Trace Balances: Verify the opening and closing balances of reserves, checking for legitimate changes.

o Authorisation of Changes: Ensure additions (e.g., new share premiums, revaluation profits) and
reductions are genuine, supported by BOD/member resolutions.

2. Rights and Obligations

o Ensure the use of reserves follows legal guidelines (e.g., Securities Premium for specific purposes).

3. Cut-o

o Confirm Other Equity balances represent accurate values as of the reporting date.

4. Completeness

o Ensure all changes are fully reflected in financial entries.

5. Valuation

o Verify calculations for additions and utilizations, especially for dividend payments.

6. Presentation and Disclosure

o Disclose Other Equity in line with Schedule III requirements, breaking down each reserve (e.g., Capital
Redemption Reserve, Share Options Outstanding) and showing changes since the last balance sheet.

J. Borrowings

Definition: Loans for business expansion (long-term) or working capital (short-term). Proper authorisation and
compliance with loan agreements are critical.

Audit Procedures

1. Existence

o Verify Loans: Obtain a schedule of all loans with key details (dates, amounts, interest rates)
and confirm with loan agreements.

o Bank Confirmation: For bank loans, confirm outstanding balances with bank records.

2. Rights and Obligations

o Authorization: Ensure loan procurement complies with Articles and is backed by board
resolutions.

o Loan Conditions: Verify compliance with loan terms (e.g., pledged assets, usage limitations).

3. Completeness
 o Verify no outstanding loans are omitted or incorrectly recorded; confirm new loans are duly
authorised.

4. Valuation

o Interest Tracking: Check if interest payments are current and recorded. For amortizing loans,
confirm current maturities.

5. Presentation and Disclosure

o Disclose loans under Non-Current or Current Liabilities with current maturities, and detail
restrictive covenants in notes.

K. Trade Payables

Definition: Liabilities to suppliers, including sundry creditors and bills payable. Verification involves reconciling
creditor details and ensuring accurate reporting.

Sundry Creditors Audit Procedures

1. Existence

o Internal Controls: Check for e ective controls on creditor transactions.

o Creditor Confirmation: Reconcile creditor balances with external confirmations (if possible).

2. Rights and Obligations

o Ensure goods/services were received as agreed, cross-checking with the Goods Inward Book.

3. Cut-o

o Confirm trade payables only include balances outstanding as of the reporting date.

4. Completeness

o Verify no creditors are omitted, with extra attention to year-end transactions.

5. Valuation

o Balance Tallying: Ensure creditor schedule balances with ledgers, verify discounts, and
investigate unusual account activity.

6. Presentation and Disclosure

o Disclose creditors under Current Liabilities, dividing amounts for micro/small enterprises from
others, with additional information in notes.

Bills Payable Audit Procedures

1. Existence

o Bill Schedule: Verify bill details (due dates, amounts) and confirm that the bills are still valid.

2. Rights and Obligations

o Terms Verification: Ensure compliance with bill terms; report asset pledges as required.

3. Cut-o

o Ensure only outstanding bills are reported as of the reporting date.

4. Completeness
 o Verify the bills payable schedule is exhaustive and no expired bills are included.

5. Valuation

o Account Verification: Cross-check the schedule with ledger balances, review dishonored bills,
and check interest for renewed bills.

6. Presentation and Disclosure

o Disclose bills payable under Current Liabilities, segmenting micro/small enterprise dues
separately in the notes.

7.4.6 Audit of Special Transactions

A. Alteration of Share Capital [Section 61]

 Verify Authorisation: Confirm that alteration is authorised by the company’s articles.

 Minutes and Resolutions: Check the board meeting minutes and resolutions passed in the general
meeting.

 Memorandum Updates: Verify that the Memorandum and Articles are updated.

 Changes in Voting Rights: Assess changes in shareholder voting percentages.

 Share Denomination: Ensure the new share denomination exceeds one rupee.

 Entries and Register: Confirm appropriate accounting entries and register of members updates.

B. Issue of Bonus Shares [Section 63]

 Articles Authorisation: Check if articles permit bonus share issuance.

 Minutes and Resolutions: Verify board minutes and shareholder approval.

 Fully Paid-Up Shares: Ensure only fully paid-up shares are issued.

 Capitalisation Compliance: Confirm reserves from asset revaluation are not capitalised.

 Statutory Compliance: Check for compliance with statutory dues (e.g., PF, gratuity).

 Dividend Restriction: Confirm bonus shares aren't issued in lieu of dividends.

C. Splitting of Shares

 Authorisation: Verify articles permit share splitting.

 Documentation: Review board minutes and general meeting resolutions.

 Memorandum Updates: Ensure the Memorandum and Articles reflect the changes.

 Entries and Register: Check that accounting entries and member registers are updated.

D. Re-issue of Forfeited Shares

 Board Authority: Verify board authorisation for reissue in the Articles.

 Payments Verification: Vouch amounts collected from allottees.

 Capital Reserve Credit: Ensure surplus from reissue goes to Capital Reserve.

 Compliance: Confirm compliance if reissue is considered allotment at discount (Section 53).

 Prospectus Filing: Check that the prospectus was filed with the registrar before allotment.

 Cashbook Verification: Match cashbook entries with receipts issued.

 Trust Deed: Examine trust deed for issuance and repayment conditions.

 Charges and SEBI Guidelines: Verify mortgage records and SEBI compliance.

 Vendor Payments: If issued to vendors, verify contractual terms.

F. Redemption of Debentures

 Conditions of Redemption: Review debentures or trust deeds for redemption terms.

 Board Approval: Confirm board authorisation in meeting minutes.

 Cashbook and Bond Checks: Match redemption entries with cashbook and cancelled bonds.

 Accounting Treatment: Ensure correct accounting for redemption process.

Payment of Dividend: Key Provisions and Audit Procedures

1. Sources of Dividend (Section 123)

 Primary Sources: Profits for the current year, previous years’ profits (both after depreciation), or funds
provided by the Central/State Government.

 Not Permitted: Declaration of dividends from any reserve other than "free reserves."

2. Transfer to Reserves

 Companies may transfer part of their profits to reserves before declaring dividends, as deemed
appropriate.

3. Payment of Dividend from Accumulated Profits

 Conditions for Payment from Accumulated Profits:

1. Dividend rate should not exceed the average of the past three years.

2. Withdrawal from reserves should not surpass 10% of paid-up share capital and free reserves.

3. The remaining reserves should not fall below 15% of paid-up share capital.

4. Interim Dividend

 Declared by the Board anytime during the financial year or prior to the AGM.

 If the company has incurred losses in the current year, the interim dividend rate cannot exceed the
average of past three years.

5. Procedure for Dividend Payment

 Deposit the declared dividend into a separate bank account within five days.

 Mode of Payment: Only to registered shareholders, either by cheque, warrant, or electronic mode.

6. Restrictions on Dividend Declaration

 Companies failing to comply with Section 73 and 74 on deposits cannot declare dividends.
7. Unpaid Dividend (Section 124)

 Unpaid dividends after 30 days must be transferred to an “Unpaid Dividend Account” within seven days.

 After seven years, unpaid dividends and related shares must be moved to the Investor Education and
Protection Fund (IEPF).

8. Failure to Distribute Dividend (Section 127)

 Penalties: Default leads to fines, and directors may face up to two years’ imprisonment.

 Exceptions include legal restrictions, disputes over the right to receive the dividend, adjustments
against dues, etc.

Audit Procedures for Dividend

A. Final Dividend

1. Verify Articles of Association and minutes from directors’ and shareholders’ meetings.

2. Confirm accurate calculation and proper bank deposit within five days.

3. Ensure distribution is made only to rightful shareholders and reconcile unpaid warrants.

B. Interim Dividend

1. Check Articles of Association for permission on interim dividends.

2. Validate Board approval in directors' meeting minutes.

3. Evaluate justification for interim dividend using interim accounts.

C. Unpaid Dividend

1. Obtain a list of unpaid dividends and reasons.

2. Verify transfer to Unpaid Dividend Account within seven days of the 30-day expiration.

3. Confirm accurate unpaid dividend calculation and check for necessary disclosures on the company’s
website.

4. Check if unpaid dividends for more than seven years have been transferred to IEPF along with the
related shares.